Thursday, April 23, 2009

Soma Thermal Power Plant for Sale

Dear Energy Professional, Dear Colleagues

Our new job is to figure out its proper procedures and the face value of the plant, plus terms and conditions of the scheme. That is the question to estimate how much to pay in order to buy Soma Thermal Power Plant in Privatization.

In our country, we have a rule-of-thumb expectation that an investment should repay itself within next three years. That may be extended to four years at most.

If we have a thermal power plant with 1034 MWe electricity output capacity, at annual 7000 hours of average working availability, at average 10 US cents per kwh prevailing electricity market prices, you come up with a figure to earn approximately 350 million US Dollars per year after deducting your coal and operation costs. In years of repayment period, that is accumulated to be not less than 1 billion US Dollars. This is the gross price of privatization.

Now we have to deduct necessary rehabilitation expenses from 1 billion US Dollar. Rehabilitation expenses should cover expenses to pay 6 (six) new FGD installations. That is approximately 25 million US dollars per FGD unit. That figure is derived from past tenders of Kemerkoy, Yatagan and Orhaneli thermal power plant FGD installations.

The next is new E/P installations for the remaining 4 units. We know that plant has already paid 9 million Euros for the 1st and 2nd units of Soma-B plant. You need to renew boiler pressure tubes, safety valves, soot blowers, coal mills.

In the end we come up a rough figure of 300 million US Dollars for rehabilitation. That is to be deducted from the gross price of 1 billion US Dollars.

One should keep in mind that in privatization period, new owners normally prefer to keep the existing qualified experienced engineering staff to be active in operation. The technical staff gets better monthly salaries provided that they continue to generate value added contribution to the organization. However senior labor force is requested to get retired. That is the natural outcome of privatization process.

The most important risk in operation is in the quality of the incoming coal to feed the thermal power plant. In the past low and fluctuating quality of incoming coal was the most apparent critical risk as foreseen by the interested foreign parties in year 2000.

The new investors would like to purchase the nearby coal reserves in order to keep themselves free from risk of incoming coal quality fluctuations. Constant coal quality is to be secured with selective mining. Unburnable materials are to be screened and removed.

So we need to estimate the prevailing price of the available coal reserves. That is again three years payback of the current annual income of the reserves. Coal is sold to plant at 2.50 US Dollars per million BTU heating capacity. That is a reasonable global price for lignite reserves. For 1034 MWe electricity generation, you have to pay 60 million US Dollars per year for coal. That is accumulated approximately 180 million US dollars in three years.

After privatization of the existing coal reserves, investor should enforce selective mining operation for better coal quality. That needs more mechanization in open pit mining, and reduced labor force in underground mining. That is the nasty reality of the privatization. These realities should be foreseen and evaluated in the long term prior to full enforcement of privatization decision.

All interested parties should get prepared for the outcome. Treasury is certainly in hesitation of spending public funds in power plant rehabilitations. They feel that the public spending is not in proper control. Public tenders take long evaluation periods and they are completed in long terms. In the end most of them are not operated effectively, and properly. Treasury is also in hesitation of possible corruption in public spending.

In the end, the prevailing political administration may prefer to privatize the entire plant rather than spending in rehabilitation. After privatization, the public authority could enforce the buyers to agree on the necessary rehabilitation spending from their private sources. It is proven that private spending in rehabilitation is faster, cheaper and more effective in the end.

Human cost impact of the privatization is that labor force is reduced in time. Hiring and firing will be easier. Those senior staff will get retired. Better educated and qualified new staff will be recruited. The existing technical staff will be kept unchanged for a while since they are the most important human capital of the establishment as long as they keep their contribution to the operation. They normally get paid more that they get earlier. Their material satisfaction is fulfilled by the new private owners. On the other hand the technical staff will get more freedom in their spending for rehabilitation and programmed maintenance.

More plant availability and higher capacity output are expected in the long run. Electricity generation will be sold in the local national Markey at prevailing rates and more income generation will be created. That is more taxable income for the public funds.

There is also a new investment potential to construct 2x300 MWe capacity new coal fired thermal power plant in future. That new investment could also be integrated with the privatization package to encourage and attract more attention to the project.

In the end we may find that a proper private ownership may also bring better operation, better rehabilitation, and better environment under strict public scrutiny, and generate more income to the workers. Moreover they should make more funds available to scientific research in the nearby universities for better coal firing, better utilization of coal reserves. New scientific research institutes are to be established. More academic research funds need to be allocated to the local nearby university engineering and technical departments.

They can sponsor upgrading of the living standards of the nearby settlement. They can sponsor cultural and historical sites/ activities in nearby ancient sites, which are Bergama/ Pergamon and Truva/ Troy.

We have been informed that Turkey has picked McKinsey & Company as advisor to help shape up sale strategy for the privatisation of the state-owned electricity producer EUAS, a government source told Reuters on last Friday.

We have lignite coal as our biggest fuel source and we all agree that we should use that coal

with maximum efficiency and availability,
with maximum contribution to the society,
with minimum harm to the mother nature,
with minimum impact on global warming.

We hope that this report although needs a continuous updating, will provide the interested reader a frank view of the Soma Thermal Power Plant for future operation.

This article is an independent and humble work which is prepared with the available information as received at the Soma Thermal Power Plant site in year 2009, trying to advise a candid picture of the existing situation. It is free from any public interpretation.

We believe that the Seminar in Soma will create a great chance for all interested local parties to enable them to learn from past mistakes, to investigate the possible/ applicable technologies, to assess the new investment opportunities, to investigate the available intellectual capability of the local human resources.

We were very pleased to join/ support/ contribute to the event, hope to organize similar events in the international platforms in the future.

Your comments are always welcome. With Deepest Regards,

Haluk Direskeneli, Ankara based Energy Analyst

Monday, April 20, 2009

Soma Basin Coal Reserves in Energy Generation Seminar Follow-up, TurkishWeekly

Dear Energy Professional, Dear Colleagues

On 16-17-18 April 2009, we were in Soma coal mine and thermal power plant premises to participate "Soma Basin Coal Reserves in Energy Generation" Seminar, which was organized by Chambers of Mining, Mechanical, Chemical and Electrical Engineers of Turkey.

Our workshop agenda covered the following key subjects

- Coal, its importance in Turkish Energy Politics,
- Turkish Local energy resources, renewable potentials
- Coal mine regional site planning
- Economics of Soma Coal Reserves,
- Coal preparation, Enhancing, Selective Mining,
- Recultivation of coal fields, Plant Recovery
- Coal gasification at site, underground in the mine field
- Coal gasification and liquefaction, above ground
- Applicable Coal firing technologies,
- Assessment of existing indirect pulverized coal firing
- New Coal firing technologies, Circulating Fluidized Bed,
- Integrated gasification combined cycle, applications
- Flue gas desulphurization, e/p dust collectors,
- New High Voltage Power transmission applications,

We had also a site tour on the last day for the interested parties.

We all know that one of the most important electric power generation projects are in Soma Lignite region where one of the largest lignite mines are located in Turkey. Available coal in various coal mines in the Soma basin has a challenging content with relatively poor low calorific value at ranging about average 3335 and 1500 kcal per kg LHV respectively. Sulphur content is around 1% in both coal mines.

Soma plant has a comfortable and safe design. It has proven its design in the last 20 years of difficult operation. But due to low, uncontrolled and fluctuating incoming coal quality for long period of public mining, plant has signs of high level of degrading, aging, wear and tear.

On the other hand, Plant has insufficient dust emission equipment. Existing E/Ps (Electrostatic Precipitators) are not capable of collecting outgoing dust.

There is also no FGD (Flue Gas Desulphurization) unit to collect the sulphur in exit gas. Gas emissions are intolerable levels at exit, based on EU norms and Kyoto regulations.

Water consumption in water cooling systems is very high compared to prevailing norms. That reduces the water needed for the nearby agricultural activities. High level of water pollution is apparent in the outgoing creeks which are used as the natural sewage of the plant.

Although humble writer is not so comfortable with the concept due to high level of the human cost and sacrifice, nevertheless privatization seems to be the only viable solution to the current rehabilitation financing and environmental problems in the long term.

Your writer fees quite qualified to evaluate the current situation since he participated to early consultations at the buyer side of the negotiation table in year 2000. That year, plant was in TOR (Transfer of Operational Rights) scheme which was a sort of leasing the plant operation for next 49 years. Winning price was 255 million US Dollars plus commitment to make additional expenses for necessary plant upgrading, adding new E/Ps and FGDs.

Local winning party had invited international operator companies including but not limited to CSWI and AEP of USA, Tractebel of Belgium, Enron UK. They came to the plant in big teams and inspected the site as well as the legal and commercial terms to assess the risks. Since the apparent risks were too high they turned down the partnership invitations. Later in time governing body decided to cancel the scheme. The local private party applied to international arbitration and won the compensation to receive 35 million US Dollars.

Your writer feels obliged to share his past experience in risk assessment of the project with the interested readers. Local financial institutes as well as local investors are advised to get better positioned for possible privatization of the plant in future.

We were very pleased to join/ support/ contribute to the event, hope to organize similar events in the international platforms in the future.

Haluk Direskeneli, Ankara based Energy Analyst

Monday, April 06, 2009

Nabucco Pipeline Project in METU Alumni Society

MIDDLE EAST Technical University Alumni Society Energy Commission organized a panel on Nabucco Project on March 28, 2009 in Alumni Vişnelik Premises by participation of Ministry of Energy and Natural Resources (MENR) Former Undersecretary Yurdakul Yiğitgüden and BOTAŞ Director General H. Saltuk Düzyol in the course of which the issues such as Turkey’s role as an energy corridor in transporting natural gas to Europe, Nabucco Project’s effect on Turkey’s role to this effect, the details of the project and other alternative pipeline projects were dwelt upon.

BOTAŞ Director General Saltuk Düzyol, “It is an important opportunity that Europe is in need of new suppliers other than Russia. Agencies such as EIB, ERD are expected to make contribution to the investment of the project to be financed from abroad by 70%.”

MENR former Undersecretary Yurdakul Yiğitgüden, “Turkey could not use the favorable atmosphere in 2002 towards Nabucco. It is required to maintain the security in Iraq and handle the heavy working bureaucracy in Iran for the investment as soon as possible. Turkey’s initiatives were not sufficient in respect of Turkmenistan.”

BOTAŞ Director General Düzyol, “Nabucco is a locomotive project for Europe”
BOTAŞ Director General H. Saltuk Düzyol, stated that major part of the European countries were dependent on Russia, Norway, Algeria on the natural gas and there were disputes towards covering the gradually increased supply deficit. Noting the importance of having new suppliers other than Russia of Europe, Düzyol said that Turkey was the fourth corridor having an important potential in respect of transporting the Caspian and Middle Eastern sources.

Düzyol further stated that there were many alternative projects to Nabucco however, these projects such as Blue Current, White Current could not provide the diversity required by Europe. Düzyol went on to say that Nabucco would be a locomotive project. Furthermore, through IPC Project, 750 million m3 gas was being transported to Greece and there existed a larger potential here, said Düzyol, Russia considered Turkey as a transit line and Blue Stream 2 Pipeline Project could be taken into agenda as well.

Furnishing information on the current status of Nabucco Project, Düzyol noted that signing stage was reached with the local engineering companies, HSBC acted as the financial consultant, works were being conducted in the fields of Intergovernmental Agreement, Hosting Country Agreement and Transportation Agreement. Noting the draft of the Intergovernmental Agreement Draft prepared by the Turkish Side was already forwarded to the party involved, Düzyol reported that negotiations were underway on the draft by the governments and the European Commission.

The estimated cost of the project was €7.9 billion, 70% of which would be financed by foreign sources, Düzyol said that contribution of the agencies such as EIB, ERD were awaited for the investment financing. Noting the final investment decision was planned be reached at the end of 2009 and the construction of the pipeline was planned to be started in 2011, Düzyol stated that the pipeline was expected to be commissioned in 2014 with the initial amount of 8 billion m3.

BOTAŞ Director General Düzyol, “Nabucco Project will efficiently cover the cost of main transmission pipelines of higher capacity in respect of Turkey”
Director General Düzyol who listed the advantages of Nabucco Project for European countries, stated that reliable access would be provided through cost based transportation tariffs in the Project, an investment potential would be secured in the region for European gas companies, commercial and political relations would be developed between Middle East-Caspian region and Turkey-EU and it would contribute to the supply security issue.

Düzyol further noted that Turkey would have advantages such as acquiring the costs of main transportation lines of high capacity efficiently, forming new infrastructures for acquiring additional amounts from the suppliers, decreasing the prices in the long run, acquiring gains in the transit transportation. Director General Düzyol stated that the obstacles on the way of project were the difficulties in finding supply sources, lack of legal infrastructure towards generation and transit transportation, lack of joint energy policy of the European Union (EU) and conflict of interest, uncertainty caused by the global crisis and the gas deficit experienced in the transit countries.

MENR former Undersecretary Yiğitgüden, “Europe considers the issue not only from Nabucco’s perspective but also from Southern Line”

MENR Former Undersecretary Yurdakul Yiğitgüden dwelt upon the process of Turkey’s being the energy corridor, and noted that EU approached Baku-Tbilisi -Ceyhan (BTC) Project and Turkey being the transit country negatively at that time and under the influence of German policies, the pipelines passing through Russia were preferred. However, said Yiğitgüden, as the result of non-approval of energy condition agreement in the Russian Parliament in 1999, the idea of transporting the Central Asian and Caspian sources to Europe via Russia, and then BTC became the focus of the interest and necessary agreements to this effect were signed.

As from 2000, Turkey will liberalize the markets, will constitute a transparent transit regime and will be an important actor in the field of natural gas and electricity. He stressed the importance of the agreement reached with Greece on July 7, 2000 and noted that an era started in Europe when the necessity of having Turkey beside was started to be felt. Noting the Southern Europe Gas Ring Project was started in this environment, Yiğitgüden said that Europe considered the issue not only as Nabucco but also as Southern Line.

MENR former Undersecretary Yiğitgüden, “Gas supply is not easy as it was 6-7 years earlier”

Informing on the developments of Nabucco Project, Yiğitgüden reported that first proposal of cooperation in the field of natural gas was made to Austria in 1998 as the distribution point of the gas coming from Russia and the proposal was accepted in 2001. Noting as from 2002, a positive atmosphere prevailed in EU towards Turkey, Yiğitgüden said, “unfortunately, Turkey could not take benefit of the positive atmosphere”. Dwelling upon the problems faced in respect of the gas supply, Yiğitgüden said that the gas supply was not easy as it was 6-7 years earlier, the gas sources are tied to other parties within the context of the agreements.

Mentioning various supply sources around Turkey, Yiğitgüden noted that gas could be brought at suitable prices from Iraq, for this reason, security should be maintained and investment should be started as soon as possible and the heavy working bureaucracy should be solved in Iran. Yiğitgüden stated that Turkey did not take sufficient initiatives towards Turkmenistan and for this reason directed its sources to the East.

BOTAŞ GM Düzyol: “Turkey will, for the sake of privatization, rapidly advance towards a market dominated by seller countries as long as she does not change her legal arrangements”

MENR Former Undersecretary Yiğitgüden: “Turkey should have an intelligible and applicable strategy and render her transit regime operational”

BOTAŞ General Manager Mr.Düzyol criticized the neo-liberal arrangements aiming to reduce to 20% level the market share of BOTAŞ that has created a significant market with its investments in 5-6 years in Turkey, and stated that BOTAŞ is unable to establish affiliates and encounters restrictions, that efforts are being made to surmount the problem of inability to transfer contracts by amending the Law and introducing a tender regulation, but that the seller countries have designated their own companies and that these companies would be taken over by Gazprom after a while. “Turkey will, for the sake of privatizing the market, rapidly advance towards a market dominated by seller countries as long as she does not change her legal arrangements”, he said.

BOTAŞ GM Düzyol: “Turkey cannot make such a big investment with a small company”
“Those expecting that prices will come down with privatization and liberalization and that the economy and the energy sector will develop are mistaken”, Mr. Düzyol said. Asserting that BOTAŞ has been turned into a company with a deteriorated financial condition due to the energy SEEs owing monies to it for 5-6 years and that this has been done deliberately by the government, Mr. Düzyol said: “Turkey cannot make such a big investment with a small company”.

Noting that they have very good candidate partners such as Gaz De France (France) and Total (France) for Nabucco Project, Mr. Düzyol said that merely commercial evaluation could not be made when making the preferences, and that, if BOTAŞ is given a leeway and rendered autonomous, it could be in a leader position in the Project, and went on as follows: “The Law issued in the year 2001 is the reason why Turkey does not have a strategy at present”.

MENR Former Undersecretary Yiğitgüden: “Turkey has neglected her relations with supplier countries”.

MENR Former Undersecretary Yurdakul Yiğitgüden said that a working group has been established within the body of BOTAŞ to determine Turkey’s gas strategy, and that this group should be so established within the body of MENR as to be able to implement Turkey’s strategy and to take top-level decisions.

Noting that Turkey’s strategic goal is to ensure that the pipeline passes over Turkey, Mr. Yiğitgüden said that Turkey aimed to become a transit country, not a seller country, but that her transit regime which should be encouraged by laws has not been published in a transparent fashion, that the problems related with the producer countries have become a weakness from the standpoint of Turkey, that relations with the supplier countries have been neglected, and that valid gas purchase agreements could not be made until now.

Mr. Yiğitgüden asserted that Nabucco Company structure was inadequate, that Austrian OMV was not strong enough to execute a worldwide project and did not consider the Project sufficiently strategic, that French Gaz De France, a strong candidate partner, should be designated by Turkey as a partner, and that RWE which is financially strong but not politically strong has been chosen instead.

Mr. Yiğitgüden said that it was important for the Project to be completed by the year 2010, the original completion target, and that postponement of the Project’s completion date would lead the European countries to renew their expiring contracts. Summarizing what is incumbent on Turkey to realize Nabucco Project, Mr. Yiğitgüden voiced them as follows: To have an intelligible and applicable strategy, to ensure inter-agency cooperation, to render the transit regime operational, to make periodic contacts with parties, and to sign the agreements required for the pipeline.

ODTU Alumni Energy Working Group weekly meeting on 12th May 2009
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