Yemen Gas To Power Options Report PDF

Yemen: Models to Develop the
Gas-to-Power Market
Options Report
February 2009
Submitted to the World Bank by:
Economic Consulting Associates
Parsons Brinckerhoff
Economic Consulting Associates Limited

41 Lonsdale Road, London NW6 6RA, UK
tel: +44 20 7604 4545, fax: +44 20 7604 4547
email: paul.lewington@eca-uk.com
hC:\A1 Files\Project\Yemen Gas\Docs\FirstReport\Yemen Options Report v2a.doc 11/2/09
Contents
Contents
1
Introduction
Availability of natural gas
2.1
Overview
2.2
Estimates of gas reserves accessible to NGP
2.3
Need for confirmation of the availability of gas
Technical issues
3.1
Introduction
3.2
Electricity demand and power investment plans
3.3
Comments on the distributed investment plan
3.4
Gas turbines in simple cycle or combined cycle
12
3.5
Gas demand
17
3.6
Size of the 1st stage of the NGP
19
3.7
Pipeline costs
23
3.8
Summary of conclusions on technical issues
25
Institutional options
27
4.1
Power sector reform
27
4.2
A framework favourable to competition in gas supply
28
4.3
Facilitating future private sector participation
30
4.4
Contractual arrangements between MPC and PEC
31
4.5
The price of gas to power, and the required subsidies
31
4.6
Summary of institutional options
33
Financing options
36
5.1
Regional experience of PSP in energy infrastructure
37
5.2
The financial sector in Yemen
40
5.3
Business environment in Yemen
40
Yemen: Models to develop the gas to power market

February 2009
C:\A1 Files\Project\Yemen Gas\Docs\FirstReport\Yemen Options Report v2a.doc 11/2/09
Contents
5.4
Financing of recent or planned energy investments
42
5.5
Carbon credits
43
5.6
Financing options
44
Summary of options and next steps
48
6.1
Summary of options
48
6.2
Next steps in the current study
50
Annexes
51
A1
PEC base case electricity demand projection
51
A2
Economic value of gas
52
Tables and Figures

Tables
Table 1 Reserves of sales gas indicated in the Ramboll study (tcf)
Table 2 Electricity demand forecast from the 2006 Fichtner study
Table 3 Derating of power plants with altitude and temperature
10
Table 4 PB CCGT/OCGT capital cost estimates
13
Table 5 Estimates of gas transmission costs from Safer (US$/mmbtu)
15
Table 6 Gas demand projections for power (CCGT scenario)
18
Table 7 Gas demand projections for power (OCGT scenario)
19
Table 8 Pipeline diameter options
22
Table 9 Indicative costs and capacity for larger diameter 1st stage NGP
24
Table 10 Risk allocation for BOOT schemes in Egypt
38
Table 11 Next steps
50
Table 12 Base case electricity demand projections (MW)
51

February 2009
ii
Contents
Figures
Figure 1 Energy map of Yemen
Figure 2 Yemen oil concession map
Figure 3 Planned pipeline route
20
Figure 4 Summary of institutional framework (who owns what?)
34
Figure 5 Access to credit Yemens world ranking
41
Figure 6 Protecting investors index
42
Figure 7 Border price of gas (LNG exports)
52

February 2009
iii
Contents
Abbreviations
bbl
barrel (of oil)
BOO
Build-own operate
BOOT
Build-own operate transfer
CCGT
Combined-cycle gas turbine
CDM
Clean Development Mechanism
DNA
Designated National Authority
ECA
Economic Consulting Associates
EIA
Energy Information Administration (US)
EPC
Engineering, procurement, construction
GoY
Government of Yemen
HFO
Heavy fuel oil
IEA
International Energy Agency
IFC
International Finance Corporation
IPP
Independent Power Producer
MPC
Mabar Power Company
MoE
Ministry of Electricity
MoF
Ministry of Finance
MOM
Ministry of Oil and Minerals
MWE
Ministry of Water and Environment
NGP
National Gas Pipeline
NGPC
National Gas Pipeline Company
OCGT
Open-cycle gas turbine
PB
PDD
Project Design Document (for carbon credits)
PEC
Public Electricity Corporation
PEPA
Petroleum Exploration and Production Authority
PIN
Project Idea Note (for carbon credits)
PPP
Public-private partnership
PPI
Private participation in infrastructure
PSP
Private sector participation
SPV
Special Purpose Vehicle
RFP
Request for Proposals
tcf
trillion (standard) cubic feet
TOR
Terms of Reference

February 2009
iv
Contents
UNFCCC
United Nations Framework Convention on Climate Change
WASP
Wien Automatic System Planning (generation planning software)
YGC
Yemen Gas Company
YLNG
Yemen LNG company
YPC
Yemen Petroleum Company
YR
Yemeni Rials
Currency equivalents
US$1.00 = 199 Yemeni Rials (YR)

February 2009
Introduction
Introduction
This Options Report has been prepared under contract to the World Bank for a
project to assist the Government of Yemen (GoY) to develop the policy framework
which best facilitates the development of the gas-to-power market in Yemen.
The work is being undertaken by a team comprising Economic Consulting
Associates Ltd (ECA) and Parsons Brinckerhoff (PB), both of the United Kingdom,
with legal support from Yemen Legal.
The primary purpose of the Options Report is to detail the specifications for the
technical, institutional and financing options that will be examined in the more
detailed analyses in the next phase of the project. These proposals have been
prepared after our initial assessment during the inception visit in December and a
second visit in January. We propose to discuss and agree our recommendations on
options with the Supervision Committee during a visit in February following the
submission of the 1st Report.
This Options Report is arranged as follows:
R
Section 2 discusses the availability of natural gas
Section 3 discusses technical options
Section 4 discusses institutional options
Section 5 discusses financing options
The last three of the above sections are concerned with both power and the national
gas pipeline (NGP).
Finally, Section 6 provides a summary of the options that we propose to examine in
greater detail.
To provide an overview of the projects under discussion, an energy sector map from
the World Banks Project Appraisal Document for the Power Sector Project, 2006, is
provided in Figure 1.

February 2009
Introduction
Figure 1 Energy map of Yemen

February 2009
2
2.1

Overview
There are approximately 17 tcf of proven gas reserves1 in Yemen. Of these proven
reserves, 9.15 tcf has been allocated to the Yemen LNG project (YLNG) from
specified fields in Block 182 in the Marib basin. The 9.15 tcf of gas has been
independently certified.
Figure 2 Yemen oil concession map
Source: www.al-bab.com
YLNG is committed to providing 1 tcf of its allocation of 9.15 tcf for use in the
domestic market in Yemen. According to YLNG there is another 0.7 tcf of probable
reserves available from Block 18.
Gas is supplied to YLNG by the state-owned company Safer E&P Operation
Company which took over the operation of Block 18 from the Hunt consortium
when the concession expired in 2005.
Project Appraisal Document, Power Sector Project, April 2006, Report No: 35030-YE. This gives the
proven reserves at 17.2 tcf.
1
YLNG website states that: The reserves within the Marib area which are currently dedicated to the project
include 9.15 trillion cubic feet (TCF) of proven reserves with 1 TCF allocated for use in the domestic market, and
an additional 0.7 TCF of probable reserves. The fields allocated to YLNG are specified in YLNGs Gas
Development Agreement.
2

February 2009
GoY has nominally allocated 5.2 tcf of gas for use in the domestic market but has not
indicated from which blocks or operators this gas will come. This allocation is
essentially a statement of intent to dedicate some gas to the domestic market.
Ramboll3 identified the main source of gas for the western part of Yemen and the
National Gas Pipeline (NGP) as coming from Blocks 18 (Marib/Al Jawf), 5 (Jannah),
S1 (Damis) and 20 (Al Sabatain or Upper Wadi al-Jawf), and, possibly, S2 (Uqla).
Concession agreements have, until now, been given exclusively for oil and the
operators have had no rights to the gas and no framework has existed for
developing and utilising the natural gas. This will change in future with eight
concessions that are currently being reviewed by Parliament that include terms
governing the development of natural gas4. However, the majority of the gas that is
likely to be used for the domestic market, other than Block 18, will come from
existing oil concessions but these concessions would need to be renegotiated to
allow the gas to be developed. However, each concession, including amendments,
needs to be approved by Parliament and amendments are likely to be slow.
The 1 tcf of certified gas from Block 18 would be sufficient to supply open-cycle gas
turbines at Marib-I, Marib-II and Mabar for about 12 years at a plant load factor of
90%. However, if the three plants are combined-cycle gas turbine (CCGT) plants
then the 1 tcf would last for approximately 17 years. A more realistic scenario,
would involve the commissioning of the three plants spread over a few years with
Mabar being commissioned in 2012 and perhaps Marib-II and Mabar being built
as CCGT. On this basis, the 1 tcf would supply the three plants until nearly 20255.
This should be a sufficient duration to provide assurance to developers of the power
plants that the assets would not be stranded without a gas supply. However, it
would not be sufficient for the developers of the NGP which, as discussed below,
will be designed to carry gas beyond Mabar.
2.2
Estimates of gas reserves accessible to NGP
Apart from Block 18, information on gas available to the NGP is limited (ie., from
Blocks 5, S1 and 20). Information on proven gas in Block 5 is noted in the Ramboll
study but the Report suggests that proven reserves of sales gas are only 0.54 tcf - see
Table 1 below. These estimates were based on previous studies by Gasunie (1992),
INTERA (1993), and DeGolyer & MacNaughton (1995). Ramboll noted that the latter
source provided the most detailed estimates of reserves in Blocks 18 and 5.
Gas Utilization and Pipeline Feasibility study, Natural Gas Reserves and Supply, Internal Memo, June
2005.
3
Including a price of gas with a floor price of US$1.5/mmbtu and a ceiling price of US$2.5/mmbtu.
The ceiling is reached when international oil prices reach US$45/bbl.
ECA estimates. If the plants are open-cycle gas turbines then the gas would last until nearly 2022.

February 2009
Table 1 Reserves of sales gas indicated in the Ramboll study (tcf)

Proven
Probable
Possible
Block 18
9.125
1.054
0.072
Block 5
0.544
0.108
0.23
Total block 5 and 18
9.669
1.162
0.302
Source: Ramboll, Natural Gas Reserves and Supply, Internal Memo, June 2005.
2.3
Need for confirmation of the availability of gas
Confirmation of the availability of natural gas for the power plants at Mabar and
proposed plants along the coast, as well as at Mareb, will be critical before
substantial financial commitments are made to invest in pipelines and power plant
projects downstream of the gas fields. Without this confirmation private sector
participation will be limited. Even regional and international funding institutions as
well as state-owned Yemen companies may be reluctant to take the risk of pipeline
and power assets that are stranded without a supply of natural gas.
There is also an urgent need to agree with the operators of Blocks 20, S1 and 5 and
potentially operators of other blocks the arrangements to access the available
natural gas and to make the investment (or enable the investment) in the natural gas
gathering and processing facilities to allow the collection, processing and delivery of
the gas to the NGP. Agreement will need to be reached on responsibility for
investment in the gas gathering and processing facilities, the mechanism for
recovery of the investment costs, the terms for delivery of the gas and the rights to
non-gas liquids. There is also a need for a framework for coordination among the
operators where multiple operators supply gas to common facilities. We understand
that discussions are underway with some operators for this purpose. However, even
when agreement is reached, concession amendments may need to be agreed at
Parliamentary level.
MOM confirmed in January 2009 that independent international consultants will be
contracted by MOM to certify the availability of natural gas from Blocks 20 and S1.
While the outcomes of this assessment will not be available ahead of the Final
Report for this study, MOM indicated that it is confident that at least 3 tcf of gas will
be certified from Blocks 18 (after taking account of the volumes allocated to YLNG),
5, S1, 20 or other blocks accessible to the NGP, and that for the purposes of
developing a framework for the Mabar power plant and for NGP, MOM proposed
that the Consultant should assume that at least 3 tcf will be certified in due course.

February 2009
Technical issues
Technical issues
3.1
Introduction
This Section addresses some technical options associated with the choice of power
plant and the size of the pipeline from Marib to Mabar which will be the first stage
of the NGP.
3.2
Electricity demand and power investment plans
Below we review the electricity demand projections, least-cost power sector

investments and the selection of Mabar as the location of the next generation
investment after Marib-II.
3.2.1
Electricity demand projections
Fichtners 2006 study6 updated the electricity demand forecast prepared in the 2001
Integrated gas and electricity masterplan (see below). The forecast aggregates
forecasts for the grid substations and applies a diversity factor of 80% to give an
aggregate peak demand before transmission losses. Losses are then added to give
the system peak demand. Fichtners 2006 forecast, updated from the 2001
masterplan is shown in Table 2 below. The forecast includes large consumers that
PEC anticipated would be connected to the unified grid once generation capacity is
adequate, but this has not yet been possible and demand continues to be
suppressed.
Recorded peak demand includes an estimate of disconnected load which, in 2008,
was 151 MW but does not reflect load that would have been supplied. Supply has
not kept pace with demand and therefore comparisons between the recorded peak
demand and the Fichtner forecast cannot be used to comment on whether the
Fichtner forecast remained accurate in 2008.
PEC continues to use this forecast for planning purposes. The year-by-year forecast
for the years 2009 to 2020 are shown in Annex A1.
Fichtner, Marib Power Project, 2nd Stage, Study Final Report, Volume 1, January 2006.

February 2009
Technical issues
Table 2 Electricity demand forecast from the 2006 Fichtner study
Ad. Low Case
Ad. High Case
Ad. Base Case
Year
Total regional peak
dem and [MW]
Sys tem dem and [MW]
(utilization factor 80 % )
Generation and trans m is s ion los s es [% ]
Sys tem peak dem and
(Generation) [MW]
Total regional peak
dem and [MW]
(Generation) [MW]
Total regional peak
dem and [MW]
(Generation) [MW]
2004
2005
2007
887.9
957.6 1269.3 1369.9 1804.2 2254.7 3081.8
710.3
766.1 1015.4 1095.9 1443.4 1803.8 2465.4

8.5
2008
8.5
2013
8.0
2018
2025
9.1
9.0
8.0
8.0
781.4
841.8
887.9
968.7 1310.5 1431.2 1970.9 2549.7 3658.3
710.3
775.0 1048.4 1145.0 1576.7 2039.8 2926.6
1109.8 1197.7 1568.9 1960.6 2679.8
9.1
9.0
8.5
8.5
8.0
8.0
8.0
781.4
851.6
887.9
924.7 1156.6 1204.1 1385.1 1559.8 1842.2
710.3
739.8
925.3
9.1
9.0
8.5
781.4
812.9
1145.8 1251.3 1713.8 2217.1 3181.1
963.3 1108.1 1247.8 1473.8

8.5
8.0
8.0
8.0
1011.2 1052.8 1204.4 1356.3 1601.9
Source: Fichtner, Marib Power Project, 2nd Stage, Study Final Report, Volume 1, January
2006.
3.2.2
Integrated gas and electricity masterplan (2001)
A comprehensive integrated gas and electricity masterplan was prepared by

Kennedy & Donkin (later Parsons Brinckerhoff) on behalf of the Ministry of
Electricity and Water and completed in November 2001.
At that time, natural gas was considered to have an economic value based on its
marginal production cost of around US$0.3/mmbtu at Marib and power plant
technologies using other fossil fuels (primarily coal-fired steam and oil-fired steam)
were ruled out through a preliminary screening analysis that shortlisted gas
turbines in either open-cycle or combined-cycle. The primary focus of the analysis
was therefore on the location of the power plants when considering the investment
cost of gas pipelines and the investment cost and losses associated with the power
transmission network.
After considering various alternative locations for gas-fired power plants and the
corresponding power transmission investment costs, the consultant recommended
that the least-cost integrated investment plan should comprise 2,900 MW of opencycle gas turbines concentrated in Marib to be developed over the period 2025. The
Report concluded that the development of power generation at Sanaa (at that time

February 2009
Technical issues
the Mabar site had not been identified) would increase the overall present-valued
costs by US$96 million7. The Report also concluded that a separate 10 pipeline to
supply non-power consumers in Sanaa appeared to be justified but they concluded
this did not justify constructing a larger pipeline and locating power generation at
Sanaa but recognised that this conclusion might be modified if more substantial gas
demand were identified in Sanaa.
3.2.3
Distributed generation investment plan (2005)
A new least-cost generation investment plan was prepared by PEC in 2003-04 which
recommended a distributed generation investment, with power plants located in
Marib, Mabar, Al Hodeidah, Al Mocha and Aden. (An associated transmission
investment plan was prepared for PEC by Fichtner in 2005). A short report was
prepared for PEC management in Arabic in 2004 which recommended this
generation investment plan and a WASP summary printout associated with the
optimal solution was attached to this report. The distributed power investment plan
is described in the World Banks Power Sector Project Appraisal Document of 11
April 2006 (Report 35030-Ye).
WASP is able to select the least-cost generation investment plan based on capital
and operating costs of power plants but cannot choose an investment plan that
simultaneously optimises the capital costs of electricity and gas transmission. The
WASP printout viewed by the Consultant indicated that gas transmission costs had
been included in the analysis by incorporating different gas costs at different power
plant locations (high costs for gas delivered to power plants in Aden, low costs for
gas delivered to the power plants at Marib, etc). However, power transmission
costs had not been incorporated. To choose between alternative power plant
location scenarios such as a distributed generation scenario and the Marib-only
generation scenario proposed in the 2001 Masterplan - would require that WASP be
run at least twice once with distributed generation scenario and once with the
concentrated generation scenario. The transmission capital costs associated with
these two scenarios would then need to be added to the present-valued generation
costs. Such an analysis may have been undertaken in 2004 or 2005 but is no longer
available to review.
3.3
Comments on the distributed investment plan
3.3.1
Transmission benefits from distributed investment
The electricity demand in Yemen is distributed among the three load centres of
Sanaa, Aden and Al Hodeidah, with these three representing approximately 75% of
the total demand on the intereconnected grid8. Load in Sanaa represents 35% of the
It also concluded that locating generation at Al Hodeidah would add US$150 million to the presentvalued costs compared with the least-cost solution of power concentrated at Marib.
Fichtner (2005): Transmission plan to 2025

February 2009
Technical issues
total, Aden consumes approximately 26% and Al Hodeidah consumes 14%. With
PECs major power plants located along the coast at Al Hodeidah, Al Mocha and
Aden, the main direction of flow of power has, until now, been from the coast
northward and eastward to Sanaa. However, with the commissioning of 180 MW of
diesel plants in Sanaa over the past three years, the expected commissioning of gasfired power plants at Marib-I and II and the planned closure of oil-fired power
plants at Al Hodeidah, Al Mocha and Aden, the primary flow of power will be from
Marib through Sanaa and on to the coastal load centres of Aden and Al Hodeidah.
Replacement gas-fired power stations on the coast will reduce the flow of power
through the central grid and minimise losses and may avoid future investment in
transmission reinforcement. However, a power station located at Mabar will add to
the flow of power from the centre to the coast and will not therefore benefit the
transmission network or avoid transmission investments on the main grid.
3.3.2
Derating of plants with altitude and temperature
Mabar is located south of Sanaa (see Figure 1 in Section 1) at an altitude of 2,333

metres above sea level9 with temperature ranges of between 0 and 35 degrees C.
Altitude and ambient temperature both have a negative impact on the maximum
output of gas turbines in simple or combined cycle and on their heat rates (fuel
efficiency). Kuljians Feasibility Study for Mabar provided an estimate of the
derated capacity based on an ambient temperature of 35 degrees C the maximum
for this location. The 2001 Masterplan estimated the derated capacity and heat rate
for plants located at Marib, Sanaa and the coast. Plants located on the coast benefit
from lower altitude but suffer from higher ambient temperatures while the inland
locations have higher altitudes and lower ambient temperatures. Mabar is slightly
higher than Sanaa (which is 2,200 meters above sea level compared with Mabars
2,333 metres but the two are broadly comparable). The Masterplan derating factors
for capacity and heat rates based on average ambient temperatures are shown in
Table 3.
Kuljian Feasibility Study and Engineering Report, 2008.

February 2009
Technical issues
Table 3 Derating of power plants with altitude and temperature

Relative to a plant on the coast
Sanaa (proxy for Mabar)
Marib
Capacity
Heat rate
Capacity
Heat rate
CCGT
-10.4%
+0.7%
-5.7%
+1.7%
OCGT
-12.3%
-3.5%
-4.8%
-2.0%
Altitude (m)
Avg. temperature (0C)
2,200
950
17
23
Source: Parsons Brinckerhoff Integrated Masterplan Study, 2001
Compared with a plant located on the coast, an OCGT plant at Mabar (or Sanaa)
would lose about 12% of its available capacity on average but, in its favour, its heat
rate would be 3.5% lower. The output from a CCGT plant at Mabar would be about
10% less than a CCGT plant on the coast and, additionally, its heat rate would be
slightly worse (by 0.7%).
A plant located at Marib also has lower output than a plant on the coast, but the
loss in output is less than that at Mabar. Similarly, an OCGT at Marib has a worse
heat rate than at Mabar or the coast, and a CCGT has an intermediate heat rate if
located at Marib.
System peak demands typically occur during the summer months10 when ambient
temperatures will tend to be above average, but between 18:30 and 21:00 in the
evening, when ambient temperatures will be below average. Unlike countries where
air conditioning load drives the peak demand, the peak demand in Yemen does not
coincide with the hottest times of the day.
3.3.3
Water supply constraints
As discussed later in this Section, water supply at Mabar is heavily constrained,

requiring that the power plant be designed for air cooling. This tends to add to the
capital and operating costs relative to a coastal location. Similar water supply
constraints arise at Marib.
3.3.4
Security considerations
Fichtners transmission study identified the need for a second double-circuit 400 kV
transmission line from Marib (in addition to the 400 kV transmission line that is
10 Fichtner, Marib Power Project, 2nd Stage, Study Final Report, Volume 1, January 2006. In 2004 the
peak occurred at the end of September.

February 2009
10
Technical issues
under construction) to provide additional security in the event of a failure of the

first double-circuit. This transmission line is expected to cost US$218.5 million by
2013 (US$176.1 million in the first phase and US$42.4 million in a second phase to be
commissioned in 2013)11. The investment in the second 400 kV transmission line is
not included in the funds approved12 for Marib-II. The absence of Marib-II
strengthens the need for new power plants directly connected to the national grid in
the central or coastal areas of Yemen (ie., such as Mabar).
3.3.5
Transmission costs or benefits associated with Mabar
The ongoing World Bank Power Sector Project includes investment in transmission
lines, new sub-stations and expansion of existing sub-stations in the Dhamar area
(south of Mabar) and, when complete, these investments will allow the power from
Marib and Mabar to flow south and west to Aden and Taiz. This is now committed
and considered a sunk cost.
Investment will be required in transmission to connect the Mabar power plant to
the network and this is incorporated in the project cost. PEC has confirmed that no
other transmission investment is needed to allow the output from the Mabar power
plant to be absorbed by the network.
3.3.6
Conclusions on the selection of Mabar
Concentrating the power plants at Marib, as proposed in the 2001 Integrated

Masterplan study, does risk security problems arising either from outages of the
power transmission line(s) from Marib or problems with gas supply to the power
plants. Coastal locations would allow the possibility of plants designed to run on
alternative base-load fuels13 (crude oil in gas-turbine plants or coal or heavy fuel oil
(HFO) in steam plants) or quickly converting them to burn alternative fuels once
problems arise with gas supply. Because of Maribs inland location, dual-fuel
options (other than distillate) are not feasible.
Coastal locations would:
R
maximise plant output and, for CCGT, minimise fuel consumption,
be beneficially located for the power transmission grid,
allow the possibility of dual fuel.
The main alternatives to a power plant at Mabar are, therefore, coastal locations.
11
Information updated by PEC in December 2009 from the Fichtner Transmission Plan.
12
Funds have been approved by the Arab Fund, the Saudi Fund and the Sultanate of Oman.
13 OCGT and CCGT will be able to burn distillate but it will not be feasible to burn distillate fuel in
base load for extended periods.

February 2009
11
Technical issues
The 2003-05 analyses that recommended locating a power plant at Mabar rather
than on the coast, was not clearly documented or, if it was documented, the
documentation was not retained, but the factors affecting this choice are as follows
one negative, one neutral and one positive:
R
Output will be between 10% and 12.5% lower at Mabar than at a coastal
location. These are significant losses in output. The lower ambient
temperature at Mabar outweighs the negative altitude affect such that
the heat rate of an OCGT at Mabar will be slightly better compared with
a plant on the coast, but the heat rate for a CCGT will be about 3.5%
worse.
A plant at Mabar will not cause additional transmission costs in the

near future, other than the costs of connection to the grid14, but neither
will it save on transmission costs on the main grid.
In favour of a central location, at least until a second 400 kV

transmission line is built from Marib, the Mabar plant will have
benefits in terms of system security to guard against an outage of the
one double-circuit 400 kV line connecting Marib to the main grid. Since
the cost of the second 400 kV transmission line is estimated at nearly
US$220 million, there could be a significant saving if the commissioning
of the Mabar power plant could avoid or delay the development of the
second 400 kV transmission line.
3.4
Gas turbines in simple cycle or combined cycle
As discussed in our Inception Report, the 2001 Integrated Masterplan and the 2005
distributed generation investment plan prepared by PEC, both concluded that gasfired power plants selected for Yemen should be open-cycle gas turbines (OCGT)
rather than gas turbines in combined-cycle (CCGT).
3.4.1
Factors affecting the choice
OCGT have lower capital costs than CCGT but burn gas less efficiently. For this
reason, OCGT may be chosen either because:
R
the plant is to be used for peaking or backup duties for a small number
of hours per year, and where the savings in fuel costs from investing in a
CCGT would be relatively small compared to the extra capital costs; or
the value of gas is so low that the fuel cost savings from a more efficient
CCGT do not outweigh the extra capital costs.
14 The transmission component of the project is US$65 million but this includes the cost of a
400/132 kV substation to connect to the proposed second 400 kV transmission line from Marib.

February 2009
12
Technical issues
Previous least-cost planning studies had selected OCGT because, at the time, the
value of gas was assumed to be below US$1/mmbtu and at these prices OCGT
would certainly be optimal.
3.4.2
Threshold value of gas for adopting CCGT
Various threshold levels have been suggested that would trigger a decision to adopt
CCGT rather than OCGT:
R
The 2001 Integrated Masterplan concluded that the threshold value for
gas at which CCGT would be selected is US$1.5/mmbtu.
Our own calculations suggest that the breakeven value is US$1.28 per
mmbtu at an economic discount rate of 12% and a plant load factor of
75%15. Even at a discount rate of 20% - for example, if major difficulties
in obtaining financing are factored into the calculation of the discount
rate the threshold for switching to CCGT is only US$2/mmbtu. This is
based on the assumption that the capital cost per kW for a CCGT plant is
47% greater than the capital cost of an OCGT.
We note that Kuljian provided advice to PEC which suggested that a) the capital
cost of a CCGT plant is three times the capital cost of an OCGT plant and,
consequently, that the threshold value of gas is US$6/mmbtu. We therefore
reviewed estimates of the relative capital costs of CCGT and OCGT plants.
3.4.3
Capital costs of CCGT and OCGT plants
Parsons Brinckerhoff, the technical experts for the current project, have prepared
their own estimates of the relative capital costs for similar sized plants to those
selected by Kuljian, similar manufacturer (based on 2 Siemens SGT5-2000E), and at
the same location (Mabar) and based on air cooling are shown in Table 4 below.
The calculations are based on PBs modelling software.
Table 4 PB CCGT/OCGT capital cost estimates
Kuljian
OCGT unit size (MW)
113.5
112.4
CCGT unit size (MW)
170.6
166.8
Ratio of CCGT to OCGT capital costs
2.94
1.27
15 75% is relatively low for the first gas-fired plants operating in base load but as more gas-fired plants
are added, the average plant load factor will fall. Higher plant load factors would favour CCGT still
further.

February 2009
13
Technical issues
PBs calculations indicate that the cost of a CCGT plant is only 27% greater than the
cost of an OCGT plant.
To confirm the capital cost ratio values indicated by PB above, we also reviewed
internationally published information on capital cost differences between CCGT
and OCGT. The US Energy Information Administration's (EIA) database gives the
cost of typical CCGT and OCGT plants in the US16. These indicate that the capital
cost per kW of CCGT plants is only 44% more than the capital cost of OCGT plants.
The International Energy Agency's (IEA) generation cost database gives the cost of
an average CCGT at 58% more than OCGT.
PB, EIA and IEA figures are taken from actual tenders, whereas Kuljian's figure was
taken from the GT World Handbook. We believe the PB, EIA and IEA figures to
reflect real-world prices.
Based on the capital cost ratios of between 1.27 (PB) and 1.58 (IEA), the threshold
gas value ranges from a low of US$0.65/mmbtu to a high of US$1.6/mmbtu based
on a discount rate of 12% and a 75% plant load factor.
3.4.4
The economic value of natural gas
In the period since the two least-cost planning studies were undertaken,
international energy prices have increased and, additionally, LNG will very soon be
exported from Yemen. The economic value of natural gas is no longer the marginal
cost, as used in the two previous least-cost planning studies, and instead, at least
initially, it is the international opportunity cost netted back to Yemen17.
A study18 undertaken under the World Banks ESMAP programme in 2006 confirms
that while gas reserves are relatively scarce compared to the potential demand, the
economic value of gas is the opportunity cost of selling that gas in international
markets (ie., as LNG)19. This is illustrated in Annex A2. The study estimated the
opportunity cost, based on international market prices, netted back to the Marib
wellhead. The international market prices for LNG were based on gas price
forecasts up to 2030 using EIA and IEA gas and crude oil price forecasts. Based on
those forecasts, the average US natural gas price between 2006 and 2030 was
estimated to be US$5.5/mmbtu. The economic value of gas when netted back to
Marib was estimated to average US$2.65/mmbtu over a 25-year period.
The economic value of gas delivered to users is the opportunity cost plus the
marginal cost of transmission to various points in Yemen. Implicit or explicit
16
Not necessarily air cooled plants.
The economic value might in future return to the marginal cost if, as reserves are depleted, the
marginal cost rises above the opportunity cost.
17
18
Gas Incentive Framework in Yemen, a Draft Report, World Bank, October 2006.
19 This is true until the marginal cost of production rises above the opportunity cost and then the
economic value is the marginal cost of production. This may happen soon given the terms for gas
development in new production sharing agreements.

February 2009
14
Technical issues
estimates of transmission costs have been given from various sources in Table 5
below.
Table 5 Estimates of gas transmission costs from Safer (US$/mmbtu)
Sanaa/Mabar
Al Hodeidah
Aden
Integrated
masterplan (2001)
0.14
0.80
n/a
PEC update of
masterplan (2003)
0.50
1.05
1.22
0.29 0.38
0.85
0.8520 0.91
World Bank Project

Appraisal Document
(2006)
Our own, preliminary estimates of transmission costs, based on a capital cost for a
22 first stage pipeline from Safer to Mabar, of US$240 million, and initial
utilisation of the pipeline only for gas to supply the CCGT plant at Mabar, is
US$2.6/mmbtu. This would fall to US$1.5/mmbtu when the plant at Al Hodeidah
is commissioned and to US$0.8/mmbtu when the plant at Aden is commissioned21.
Altogether, combining the opportunity cost at Marib and the cost of transmission,
the delivered value of gas would be at least US$3/mmbtu based on most estimates
of transmission costs.
We have also checked the threshold price (of gas) beyond which it would be
economic for PEC to build coal-fired plants rather than use natural gas in a CCGT
plant. The threshold price of gas, assuming a delivered coal price of US$60
US$70/tonne, is estimated at US$5.43/mmbtu. This would set the upper limit on
the value of gas (if the marginal cost of production plus transmission exceeds this
level then the gas should not be produced and, instead, PEC should build coal-fired
power plants).
Further support for the suggestion that the economic values are well above the
threshold that would trigger a switch to CCGT come from the prices that are
proposed to be offered to incentivise the development of gas reserves. MOM has
proposed that gas be purchased from the field operators in new concessions at
between US$1.5 and US2.5 per mmbtu (depending on the international oil price)
and sold to PEC at US$3.2/mmbtu (with transportation charges additional to this).
Though this has not yet been agreed by PEC or the Ministry of Electricity, it strongly
indicates that the value of gas is well above the threshold level of around
US$1.5/mmbtu that would be required to trigger the selection of CCGT in
preference to OCGT.
20
Assuming the pipeline is routed via Dhamar rather than along the coast as currently proposed.
21
This calculation refers only to the transmission charges for the Safer-Mabar section of the NGP.

February 2009
15
Technical issues
While the price of gas need not necessarily reflect the economic value of gas,
investment decisions should be made on the basis of the economic value and the
economic value is certainly above the level that would normally trigger the choice of
CCGT rather than OCGT. The pricing of gas to PEC is discussed in Section 4.5
below.
3.4.5
Other constraints to CCGT at Mabar
Water supply constraints are said to be severe at Mabar and consideration was
therefore given to whether this would constrain the choice of CCGT at Mabar if
there is insufficient make-up water for the boilers in the CCGT plant.
The teams technical experts note that the Al Qatrana CCGT power plant under
construction in Jordan has severe water supply limitations and that while the
normal water make-up requirements for the boiler would be about 120 tonnes per
day, water conservation measures might reduce the consumption to less than 40
tonnes per day (making supply by road tanker feasible). We note that Kuljian, who
prepared a feasibility study for the Mabar power plant, did not consider that water
supply constraints ruled out CCGT at Ma'bar.
3.4.6
Other factors affecting the choice of CCGT
Though the value of natural gas used in the least-cost planning analyses should be
increased and base-load power plants should be CCGT, it does not automatically
follow that all new power plants should be CCGT. Some plants are used for peaking
and this role is best suited to OCGT. A distinction between peaking plants and baseload plants was unnecessary in previous investment plans because all plant were
OCGT. However, a least-cost investment planning study undertaken with higher
economic values of gas today may choose some OCGT plants for peaking duties.
However, a preliminary review of the power plants that are expected to remain in
operation in the period from 2015 to 2019 shows that there is approximately 285
MW of capacity in smaller units that could be used in peaking roles which gradually
diminishes over time (255 MW from 2019 to 2022, dropping to 120 MW by 2025) but
probably sufficient to supply Yemens peaking requirements in the medium term.
It should also be noted that Marib-I has already been developed as an OCGT plant.
While it has been designed such that it could be converted to CCGT, and it probably
should be converted to CCGT, PEC might give consideration to retaining this as an
OCGT to operate as a peaking plant in the mid-term when other CCGT plants are
developed along the coast (as well as developing Marib-II and Mabar as CCGT
plants).
Another factor affecting the choice of CCGT is that CCGT plants may be eligible for
carbon credits under the clean development mechanism of UN Framework
Convention on Climate Change (UNFCCC). This is discussed in Section 5.

February 2009
16
Technical issues
3.4.7
Conclusions
The above implies that all new base-load power plants selected for Mabar and
elsewhere in Yemen should be CCGT rather than OCGT. It also suggests that
consideration should be given to converting Marib-I to CCGT and the plant
planned to be developed at Marib-II should also be changed to a CCGT as soon as
is feasible22.
Note, a switch to CCGT would reduce the required size of the NGP since less gas
would be needed to supply a given demand for power and this would reduce the
capital cost of the pipeline. Switching to a CCGT at Mabar would add up to 50% to
the capital cost of the plant. If the Kuljian capital cost estimates remain accurate
(capital costs may fall following the decline in investment activity worldwide) then
this would add approximately US$150 million to the investment cost of Mabar,
bringing the total to approximately US$535 million (excluding the pipeline costs but
including transmission costs, compared with the current figure of US$ 380 390
million).
3.5
Gas demand
3.5.1
Power sector gas demand CCGT scenario
We have estimated gas demand for the power sector based on the distributed
generation investment plan (Section 3.2) but assuming that, other than Marib-I, the
base-load power plants will be CCGT. Mabar (352 MW derated output) is assumed
to be commissioned in 2012, Aden (500 MW) in 2013 and Al Hodeidah (250 MW) in
201423. Gas is assumed to have a calorific value of 1,030 BTU/scf. The 2001
Integrated Masterplan and the summary WASP results from the 2003-04 PEC
distributed generation plan do not provide information on the plant-by-plant power
production24 and we have therefore made assumptions of the possible production
by each of the plants based on its likely position in the merit order.
Our indicative gas demand projections are shown in Table 6.
The Yemen power sector has a relatively low system load factor of approximately
65% with a peak occurring in the evening, driven primarily by residential demand.
When gas-fired plant is first introduced, these plants will have the highest ranking
in the merit order and will operate in base load, but as more and more gas-fired
capacity is introduced and the older HFO and diesel plant are retired, the gas-fired
22 Funding has already been identified, tender documents prepared and a shortlist selected for MaribII as an OCGT. PEC would need to consider whether it is feasible to switch to a CCGT at this stage, or
whether it would delay the project still further, which could result in even greater economic losses for
Yemen.
23 In practice, Al Hodeidah is likely to be commissioned before Aden but the current version of the
power development plan assumes the sequence is reversed.
24
Though this information would have been provided by WASP.

February 2009
17
Technical issues
units will potentially operate in all positions on the load curve base load, midmerit and peaking.
The gas demand projections measured in mmbtu and tcf in the first part of Table 6
assume that the gas-fired plants operate at high positions in the merit order without
constraint from gas supply. The lower part of Table 6 shows three power operation
and gas utilisation strategies or scenarios for operation of the gas-fired power plants
at peak times. The maximum NGP pipeline utilisation scenario is based on the
pessimistic assumption that unforeseen outages occur at the Marib plant coincident
with the time of the system maximum demand and that the other gas-fired power
plants on the system that are all served by NGP need to operate at maximum output
(other non-gas-fired plants are available but in this scenario they do not operate).
The normal scenario involves the Marib and other gas-fired plants sharing the peak
demand more-or-less equally. The third the managed power operation scenario would be used if there are constraints on the use of the NGP and PEC maximises the
use of the plants at Marib and the non-gas-fired plants at peak times in order to
minimise the use of the NGP. Further reductions in gas demand could be achieved
for short periods at peak times, if needed, through the use of distillate fuel in gas
plants and large users may also be able to switch fuels at peak times. Considerable
flexibility therefore exists on the demand-side.
Table 6 Gas demand projections for power (CCGT scenario)
2012
2013
2014
2015
Total (mn.
mmbtu/year)
55
61
69
68
..
88
..
111
Cumulative tcf
0.05
0.11
0.18
0.24
..
0.64
..
1.13
17
23
38
40
..
61
..
83
Stage 1 of NGP (mn.

mmbtu/year)
2020
2025
Peak gas demand on Stage 1 of NGP (maximum mmscfd)

Maximum if outages
occur at Marib plants
45
61
124
140
..
217
..
303
Normal production
of power plants
45
61
116
127
..
186
..
247
Managed power
production
10
12
..
70
..
190
3.5.2
Power sector gas demand OCGT scenario
If the power plants are simple cycle gas turbines or the plants along the coast are
steam plants (with similar efficiencies to OCGT) then the gas demand would be
higher. This alternative demand projection is shown in Table 7.
February 2009
18
Technical issues
Table 7 Gas demand projections for power (OCGT scenario)

2012
2013
2014
2015
Total (mn.
mmbtu/year)
78
87
98
97
..
126
..
159
Cumulative tcf
0.08
0.16
0.26
0.35
..
0.91
..
1.61
24
33
54
56
..
87
..
118
..
310
..
433
Stage 1 of NGP (mn.

mmbtu/year)
2020
2025
Peak gas demand on Stage 1 of NGP (maximum mmscfd)

Maximum if outages
occur at Marib plants
64
87
178
200
Normal production
of power plants
64
87
165
181
Managed power
production
14
17
..
..
266
100
..
..
353
271
If dual-fuel steam plants are developed along the coast then this would allow even
greater flexibility in the use of gas at peak times than those shown in Table 7 and
operating strategies could be adopted to optimise the size of the pipeline.
3.5.3
Non-power gas demand
Estimates have been made of potential demand from outside the power sector and
these are described in the Ramboll Gas Utilization and Pipeline Feasibility study in
2005 and, before that, in the 2001 Integrated Masterplan study. The primary
potential users of gas are cement plants. For the purpose of estimating the aggregate
demand for gas on the NGP, we assume that this would add a further 30 mmscfd in
2012, rising to 50 mmscfd by 2017 and staying constant thereafter. We note that this
is more pessimistic than the forecasts in Integrated Masterplan which indicate a
demand of 89 mmscfd by 202525.
3.6
Size of the 1st stage of the NGP
The planned route of the NGP is indicated in Figure 3. Eventually, the pipeline
should follow the route of the existing oil pipeline toward the coast and supply gas
to Al Hodeidah, from there it would follow the coast south to supply the power
plant at Al Mocha and the city of Taiz, and from there it would continue round the
25
Base case, Table 4.9.

February 2009
19
Technical issues
coast to Aden. The overall cost of this project was estimated by Ramboll in 2005 at
US$941 million26.
In the current study we are concerned with the first stage of the pipeline from Safer
to the power plant at Mabar.
Figure 3 Planned pipeline route
Source: Ramboll, Gas Utilization and Pipeline Feasibility study, 2005.
3.6.1
Sizing considerations
The 240 km first stage of the NGP, from Safer to Mabar, will take around three
years to build and must be completed at more-or-less the same time as the Mabar
power plant. It is therefore urgent to specify the main characteristics of the pipeline
in order to allow the preparation of front end engineering studies and tender
documents. However, crucial to the sizing and specification of the pipeline will be:
R
the level of demand for the gas over time,
the availability of gas,
This cost is for a larger capacity pipeline from Safer to Mabar than is currently proposed and
includes among other things spurs and local distribution networks. However, pipeline costs increased
after 2005. The Ramboll costs are therefore no longer strictly accurate but they provide an indication of
the overall levels of costs for the full network.
26

February 2009
20
Technical issues
the calorific value of the gas, and
the pressure and pressure depletion profile for the gas.
There are risks of both over-sizing a pipeline and under-sizing it.

An oversized pipeline with excess capacity will:
R
be expensive and will waste Yemens scarce capital resources,
lead to partially stranded assets that are underutilized, and/or
the transmission use-of-system charges will be unnecessarily high.
On the other hand, an undersized pipeline will:

R
constrain the utilisation of natural gas, and/or
require investment in compression to boost the capacity of the pipeline,

or
require investment in a second parallel pipeline.
Furthermore, as discussed below, it is much cheaper to add capacity by increasing

the design diameter of the pipeline than to build a second pipeline or add
compression.
3.6.2
Demand uncertainties
As estimated in the previous sub-section, the level of potential demand is large the
power development plan proposes 2,500 MW of gas-fired power plant by 2020 and
3,300 MW by 2025 and additional demand for non-power users. However, demand
forecasts are inevitably wrong27. Furthermore, financing constraints could delay the
development of the stage 2 pipeline to the coast and/or delay the construction of
gas-fired power plants; this uncertainty affects the realisable demand.
The analysis in Section 3.5 indicated that there is potentially a degree of flexibility in
the operation of gas fired plants in order to reduce gas demand if the size of the
pipeline that is chosen turns out to be too small to supply the potential peak
demand. A pipeline that is not sized to supply all gas-fired plants 100% of the time
throughout the year may be optimal.
3.6.3
Uncertainties over gas availability
MOM indicates that in addition to the 1 tcf certified from Block 18 another 2 tcf will
be certified from other blocks. Since the cumulative demand from the power sector
27 Demand forecasts are, of course, necessary, but it must be recognised that only by very good luck
does the outturn match previous forecasts.

February 2009
21
Technical issues
until 2025 is likely to be approximately 1.1 tcf (see Table 6) and another 0.2 tcf for
industry, supply is not likely to be a constraint in the mid-term.
3.6.4
Specification of the available gas
Table 8 below indicates how pipeline sizes would differ for different source
pressures and calorific values to approximately meet the normal 2025 demands
indicated in Table 6 above plus the non-power gas demand (50 mmscfd) assuming a
240 km pipeline and a minimum off-take pressure of 50 barg.
Table 8 Pipeline diameter options
Source pressure (barg)
Btu/scf
80
100
120
140
800
48
26
22
20
900
42
26
22
20
1,000
40
24
20
18
1,100
40
24
20
18
Source: PB estimates based on hydraulic studies. Demand of 283 mmscfd.
Table 8 indicates that gas supplied to the NGP should have a minimum source
pressure of approximately 100 barg if very large pipe diameters are to be avoided.
This will probably require compression at source to ensure a stable minimum source
pressure required by the power plants. The above Table also indicates the
importance of identifying the source pressure and calorific value before firm
decisions are taken on the pipeline sizing.
3.6.5
Flexibility of pipeline capacity and demand
Compression could increase the maximum flow on the NGP at peak times but an
average compressor would consume a substantial quantity of gas (approximately
0.1 tcf over 20 years if used continuously for base load operation), so the pipeline
should not be sized at a level that would require future compressors that have to be
operated continuously.
As indicated above, there is flexibility in the operation of the power system that
could reduce the maximum flow on the NGP. At peak times, some of the peaking oil
or diesel plants should be operating, so this would reduce the maximum gas flow
requirements. If necessary, gas-fired plants could use distillate fuel for short periods
and large industrial users could be asked to switch to alternative fuels temporarily
(or schedule their annual maintenance to coincide with periods of peak electricity
and gas demand). Also, if the plants at Al-Hodeidah and Aden are, as IFC proposes,
dual fuel, then these could switch to oil/coal at times of constraint on the gas
February 2009
22
Technical issues
pipeline (though this would also increase the consumption of gas since steam plant
is less efficient than CCGT).
Given that flexibility exists in the operation of the power system, that demand-side
measures can be used to limit peak demand, and compression can be used to
increase the capacity of the pipeline at times of peak demand, the pipeline need not
necessarily be sized to meet the absolute peak demand.
3.7
Pipeline costs
3.7.1
Review of previous cost estimates
Pipeline cost data from various sources has been reviewed:

R
YLNG allocated a sum of US$ 110 million to construct a 210 km pipeline

with a diameter of 12 from Marib to Sanaa. This implies a unit cost of
US$ 44 per inch-diameter /metre length of pipeline.
The Ramboll study carried out in 2005 proposed a network comprising

of 362 km of 32 pipeline, 496 km of 24 pipeline, 66 km of 16 pipeline
and 100 km of 14 pipeline at an estimated cost of US$ 855 million,
excluding design and project management. This implies a unit cost of
US$ 33 per inch-diameter /metre length of pipeline.
MOM reported that an estimate of US$ 260 million had been prepared
for laying a 240 km pipeline with a 24 diameter from Safer to Mabar.
This results in a unit cost of US$ 45 per inch-diameter /metre length of
pipeline.
UK data indicates current pipeline costs of US$ 50 per inch-diameter

/metre length of pipeline.
A review of current Middle East / North Africa ITT bids suggest a unit
cost of US$ 40 per inch-diameter /metre length of pipeline.
From the above, we conclude that the MOM estimate of US$ 45 per inch-diameter
/metre length of pipeline for a 24 pipeline from Safer to Mabar is likely to be
reasonable under recent market conditions.
3.7.2
Pipeline cost estimates
Using the above per-unit cost as a benchmark, indicative pipeline costs are provided
below.
Pipelines with a diameter of 12 or 14 that were originally proposed in
negotiations between GoY and YLNG would clearly be inadequate to meet demand

February 2009
23
Technical issues
unless the gas pipeline stops at Mabar which would not make economic sense28.
Such a pipeline, though costing only US$130 to US$150 million, would have a
capacity of only 100 to 140 mmscfd and would be unable to meet demand beyond
201329.
Table 9 shows indicative costs and approximate required pipeline diameters to
supply the gas demands indicated in Section 3.5 above and assuming a source
pressure of 130 barg and a terminal pressure at Mabarg of 75 bar (designed to allow
onward transmission to the coast). 30
Table 9 Indicative costs and capacity for larger diameter 1st stage NGP
Demand (mmscfd)
Pipeline
diameter31
Cost (US$ mn.)
Sufficient until
year32
200
16
175
2016
220
18
195
240
18
- -
260
18
- -
2022
280
20
215
300
20
- -
20
- -
> 2025
22
240
> 2025
..
350
..
400
This assumes a source pressure of 130 bar and a terminal pressure of 75 bar.
Table 9 indicates that an 18 pipeline would be sufficient to meet the normal

demand described in Section 3.5 until 2022 when demand, including industry,
would be 250 mmscfd. A 20 diameter pipeline could meet a demand of between
350 and 400 mmscfd and would be adequate to meet the normal demand shown in
28 It would then make sense to build the plant at Marib instead, as proposed in the Integrated
Masterplan.
Based on normal demand in Table 6. This assumes a calorific value of gas of 1030 Btu/scf, a source
pressure of 130 bar and terminal pressure of 50 bar. The latter would be inadequate for onward
transmission to Al Hodeidah.
29
Eventually pipe diameters should be specified more precisely having regard to most economic
standard.
30
31 Note, these estimates are very approximate and should be verified with hydraulic modelling at the
time the system parameters are known.
32
Based on normal demand in Table 6. Assumes calorific value of gas of 1030 Btu/scf.

February 2009
24
Technical issues
Section 3.5 until beyond 2025. Similarly, a 22 pipeline would have adequate
capacity to meet demand until well beyond 2025.
3.7.3
Initial conclusions on pipeline sizing
An 18 pipeline would cost approximately US$195 million and would allow

unconstrained operation of the gas-fired plants and industrial users until 2022;
thereafter some measures would need to be introduced to reduce peak demand for
gas or, alternatively, compression would need to be added. With managed power
plant operation (see Table 6), the 18 pipeline would be adequate until beyond 2025
(when the peak demand would be 240 mmscfd, including industrial demand,
compared with a pipeline capacity of between 260 and 280 mmscfd). With
compression the 18 pipeline would be adequate for even longer.
However, the incremental cost of a 22 pipeline rather than, say, an 18 pipeline is
relatively low. Whereas the investment in a 12 pipeline would have provided
capacity at a cost of US$0.77/mmscfd, the investment in capacity by adding
diameter to the pipeline at the time of construction (and changing the design from
an 18 pipeline to a 22 pipeline) would cost only US$0.32/mmscfd and would
ensure a virtually unconstrained supply of gas for peaking power as well as base
load for many years. It would, however, bring the capital cost from US$ 195 million
to US$ 240 million (adding US$45 million to the capital cost). A 20 pipeline would
also provide unconstrained capacity but would cost only US$215 million (US$20
million more than an 18 pipeline).
Subject to confirmation of the source pressure, pressure depletion profile and
calorific value of the gas, the primary choices of pipeline diameter are likely to be
between a 20 pipeline at a cost of US$215 million that will be adequate for baseload and mid-merit operation of gas-fired plants and unconstrained use by
industrial users at peak times, or a 22 pipeline at an extra cost of US$25 million that
will also allow unconstrained operation of power plants for many years and allow
the possibility of substantial expansion of supply to other gas users.
3.8
Summary of conclusions on technical issues
We conclude the following on the technical options to be assumed in the subsequent

analyses:
R
The power plant at Mabar should be a CCGT and we propose that the
subsequent financial analysis should be based primarily on this
assumption. The analysis will also consider an alternative option that
the plant is an OCGT.
Other new base-load gas-fired plants should not be OCGT. Instead they
should be CCGT unless they are to be peaking plants using distillate fuel
or steam plant located on the coast and able to burn natural gas as well
as coal/HFO. We suggest that the least-cost plan is updated to identify
the optimum combination of peaking and base load gas-fired plants. For

February 2009
25
Technical issues
the purposes of our subsequent financial analysis of the 1st stage of NGP,
and the gas transportation through the pipeline, we propose that the
primary assumption is that new power plants along the coast will be
CCGT. We will also consider an alternative scenario where they are
OCGT or steam plants (with similar efficiencies).
R
Clearly, gas availability needs to be certified and amendments to

production sharing agreements, and the arrangements for gathering and
processing the gas need to be identified before any major downstream
investment can take place33. However, for the purposes of subsequent
analyses we propose to assume that upstream gas supply from the gas
fields accessible to the NGP will be sufficient and will not constrain the
downstream choices (pipeline size and use of gas).
Decisions on the size of the 1st stage of the NGP require information on
the source pressure, source depletion profile and calorific value of the
gas. Subsequent financial analyses as part of the current study can
continue without finalizing the pipeline size but we note that a decision
is urgent to allow preparatory work to begin. This therefore requires
further analysis by MOM of upstream arrangements. For the purposes
of the financial analysis, we propose to assume that the primary option
is a 22 pipeline. We will also consider an alternative of an 20 pipeline.
Likewise, the arrangements downstream need to be identified before major upstream investments
can take place.
33

February 2009
26
This Section is concerned with some of the institutional options for the arrangement
of gas to power in Yemen. This addresses issues such as:
R
Which entity will own the Mabar power plant and what will be the role
of this entity?
Which entity will own the NGP and what is the role of this entity?
When considering these issues, we take account of the following important guiding
principles:
R
the arrangement should allow future competition to the extent that

this is feasible and should be consistent with planned power sector
reforms and with possible future competitive gas markets;
even though private sector participation (PSP) may not immediately be

feasible in power or for the gas pipeline, the arrangement that is
introduced should facilitate possible PSP in future;
the arrangement should be flexible in order to allow state ownership

initially but the possibility of a range of PSP options later.
4.1
Power sector reform
4.1.1
GoY policy
A power sector reform strategy, approved by GoY in 2001 (Cabinet Resolution

#112), consisting of the following:
R
Separation of generation and transmission from distribution (G+T, D)

initially followed eventually by full functional separation into
generation, transmission and distribution. This is designed to achieve
increased commercial focus, accountability, and clear definition and
lines of authority and responsibilities.
Creation of an independent regulatory agency.
Introduction of competition in generation initially via the procurement

of new generation capacity through a purchasing agent (a single buyer).
The Single Buyer will initially be a unit within the transmission business
unit of PEC, but eventually would be a fully independent agent of PEC.
Full corporatization of PEC to make it autonomous and accountable, and

commercialization of the operations and administration of PEC.
Ministerial responsibilities will be focused on policy-making.

February 2009
27
Introduction of unbundled tariffs for electricity into the functional

components generation, transmission and distribution with
appropriate commercial arrangements between the PEC businesses.
Eventually privatising one or more of the electricity businesses or

introduction of management contracts or joint venture arrangements.
The first version of an Electricity Law incorporating these policies was drafted and
presented to Cabinet in 2002. Subsequently, the draft went through several
revisions. The latest version is currently under review by GoY.
4.1.2
Implications of GoY policy for the gas to power project
While the detailed implementation of GoY policies on power sector reform may be
subject to some uncertainty, the policies themselves are clear and the institutional
arrangements proposed for the gas to power project should respect those policies. In
particular, the intent of the policies is to create an environment in which, to the
extent possible, competition is possible and this requires the separation of activities
that could potentially undermine competition. For this reason, GoY policy is to
separate generation, transmission and distribution so that the monopoly businesses
of transmission and distribution do not have incentives to restrict competition in the
two areas where competition is possible generation and supply (linked, initially at
least, with distribution).
While GoY policies do not say anything about separation of power and gas, it is
clear that arrangements that combine gas pipelines with power generation would
have the strong potential to restrict future competition. A Mabar power plant that
also owned the gas pipeline that would supply all future, potentially independent,
power plants along the coast would be in a very strong position to restrict
competition. Similarly, ownership of NGP by PEC would give PEC complete control
over the supply of gas and the potential to restrict competition. In the longer term it
would be possible to combine a fully independent power transmission company
with the NGP to create a gas and power transmission company (as in the UK), but
this is an option that could be considered later.
Recognising GoY policy to encourage competition in electricity generation,
combined ownership of the gas pipeline and of power generation businesses would
undermine this policy.
4.2
A framework favourable to competition in gas supply
4.2.1
Independence of gas transmission from power generation
The pipeline from Safer to Mabar is planned to be the first stage of a national
pipeline network. For the reasons described above, the ownership of NGP should be
independent of power:

February 2009
28
it must supply more than one power plant, including possible IPPs and
should also supply other gas users, and
common ownership of power generation and NGP would be an obstacle

to future competition in generation.
Although we are not aware of a GoY strategy with regard to competition in the
domestic gas market, it would be reasonable to assume that GoYs policy with
regard to power would be replicated in the gas sector. It would therefore be
reasonable to establish the institutional framework for the gas sector with a view to
creating the conditions for competition wherever possible. Common ownership of
the NGP and power generation would be an obstacle to competition in the gas
market just as it would be an obstacle to competition in power generation.
4.2.2
Independence of gas transmission
In the power sector, GoY has proposed the unbundling of transmission from
generation and distribution. This ensures that the owner of the power transmission
network is concerned solely with transporting electricity from generator to
consumer (or distribution company) and will not favour one generator over another
or one consumer over another in terms of access to the network or dispatch of
power plants on the system. The same argument would hold in the gas sector, with
separation of gas transmission from either upstream interests (producers) or
downstream (power plants or eligible consumers).
4.2.3
Independence of gas supply (trading) from transmission
In the electricity sector it has been proposed that a Single Buyer should be created as
an agent of the distribution company/eligible consumers34. In this case, the Single
Buyer is misnamed since it is not a trader of the gas but, instead, acts like a broker
with responsibility for arranging contracts that are signed between the actual buyers
the distribution company (or companies) and, possibly, eligible consumers.
Initially the electricity Single Buyer would be part of the electricity transmission
company but later it would be separated and become fully independent.
The arguments for the separation of the wholesale supply function
(buying/selling) from the transportation function in the power sector, also apply to
the gas sector. But in the gas sector there is the option of establishing a framework
from the start that is favourable to future competition in gas supply. This suggests
that the wholesale buying and selling function for gas should be separate from the
gas transportation business (NGP).
The natural responsibility for wholesale buying and selling of gas lies with the
Yemen Gas Company (YGC) since it is already responsible for trading LPG and the
buying and selling of gas is a natural extension of this activity.
Eligible consumers are those who are entitled to enter into direct contracts with generators for the
purchase of power and with third-party access to the transmission network.
34

February 2009
29
While Yemen has opted for the electricity Single Buyer as an agent rather than an
actual buyer/seller, other countries have chosen to create their single buyer as a true
buyer/seller. In the gas sector it is arguable whether there are benefits in making
YGC an agent of the power generators and other consumers for the purchase of gas
or whether YGC should actually own the gas that it on-sells to the gas consumers.
This is a level of detail to be discussed in the next Report.
4.3
Facilitating future private sector participation
To allow the greatest flexibility in future in attracting PSP in both the Mabar power
plant (and subsequent power plants) and in the NGP, we propose that two entities
be established, initially as 100% state-owned companies, which for the purposes of
discussion we have labelled:
R
the Mabar Power Company (MPC), and
the National Gas Pipeline Company (NGPC)
MPC would be 100% owned by PEC while NGPC would, probably, be 100% owned
by MOM.
This arrangement has no disadvantages compared with, say, creating the Mabar
power plant as a division within PEC. However, the advantages of this arrangement
are:
R
it is easier to invite simple PSP options at an early stage (for example,

operation contracts),
clearly defined contractual arrangements between the companies and

other parties and clean sets of accounts will demonstrate to potential
future investors in MPC or NGPC that the two entities are viable,
the two financially viable, state-owned companies, will demonstrate to

investors in other power plants and investors in subsequent sections of
the pipeline that infrastructure projects in Yemen can be financially
viable,
it is consistent with the spirit of the power sector reforms.
We note also that international funding agencies have been cautious about agreeing
to finance the Mabar power plant until the problems at Marib-I and II have been
sorted out. Creating the Mabar power plant as a company will signal to the funding
agencies that PEC and GoY are taking steps to reform and improve performance.

February 2009
30
4.4
Contractual arrangements between MPC and PEC
The power sector reforms propose that a Single Buyer be created to act as the agent
of the distribution company or companies and eligible consumers. The exact details
have not been finalised but the arrangement suggests that the Single Buyer will not
be a signatory to the power purchase and sale agreements and instead the contracts
will be between the generators and the distribution companies/eligible consumers.
PEC is not creditworthy at present and power purchase agreements signed between
PEC and MPC would not be bankable for private investors unless backed by
sovereign guarantees which, in turn, would need to be backed by escrow accounts
giving MPC access to secure revenue streams. However, bilateral power purchase
agreements between MPC and large, private eligible consumers of electricity could
potentially be bankable. Unfortunately, there are few large private power
consumers in Yemen that could individually or jointly contract with a power plant
of the size of Mabar. We understand that PECs largest customer, a state-owned
cement plant in Taiz, has a contracted capacity of only 14 MW.
The precise trading arrangements for power are currently uncertain and it is
therefore too early to consider bilateral contracting arrangements when analysing
the options in subsequent stages of the current study. We therefore propose to
assume that the agreements for the sale of power by MPC are signed with PEC. It is
possible that these agreements could be backed by the revenues from large
customers in virtual bilateral contracts and this will be considered later in the
study.
4.5
The price of gas to power, and the required subsidies
Section 3.4 above noted that the average economic value of natural gas over a 25
year period has been estimated at US$2.65/mmbtu at the wellhead at Marib and
the delivered price is likely to exceed US$4/mmbtu and downstream investment
decisions need to be taken on the basis of this economic value. However,
consideration needs to be given to the current subsidy framework and the rent
that will be earned from the sale of natural gas.
4.5.1
Subsidy framework
Average electricity tariffs to end-users are heavily subsidised and, unlike most
countries, bear little relation to the costs of supply. Subsidies take three forms:
R
GoY financing of PECs capital investment and relief from debt servicing
obligations.
Subsidies for HFO when the international market price rises above the
equivalent of YR 25/litre (approximately US$130/tonne). This is settled
directly between the Ministry of Finance (MOF) and the Yemen
Petroleum Company (YPC).

February 2009
31
Subsidies for diesel to supply the mobile plants contracted by PEC to fill
the capacity deficit until gas-fired power plants begin operating. A 2005
agreement between PEC and MOF states that PEC will be charged the
market price for diesel, PEC will be required to pay only YR17/litre and
the balance will be paid by MOF directly to YPC35. This subsidy will be
treated as equity contribution to PEC by GOY.
Fuel subsidies are estimated to cover approximately 60% of PECs operating costs36.
MOF plans that when the gas-fired plants begin to operate, the fuel subsidies would
cease. However, as long as end-user tariffs continue to be unrelated to actual costs
incurred by PEC, then the possibility of eliminating subsidies to PEC depends on
the price charged to PEC for gas consumed in its power plants.
MOM has proposed that gas be priced at US$3.2/mmbtu. When allowance is made
for the cost of transmission from Marib to PECs power plants, the delivered price
will probably exceed US$4/mmbtu.
The cost per kWh for electricity produced in a new CCGT plant, based on the capital
cost estimated by Kuljian for Mabar (but adjusted to a CCGT), and at a gas price of
US$4/mmbtu would be approximately US$0.057/kWh37. This compares with
US$0.045/kWh for the variable costs of electricity produced in the Al Mocha steam
plant using HFO priced at YR25/litre. Thus, PEC would actually lose from a switch
from subsidised HFO to unsubsidised natural gas.
On the other hand, Yemen will certainly gain from the introduction of natural gas.
The fuel cost of electricity produced at Al Mocha at an oil price of US$70/bbl and an
HFO price of YR63/litre (US$0.31/litre), is approximately US$0.114/kWh. MOFs
costs of subsidising PEC will therefore fall substantially when gas-fired plants are
introduced.
While total electricity production costs will fall when gas is used for power
generation, care must be taken in assuming that the introduction of natural gas will
mean that subsidies to PEC can end. Later in the project we will review the level of
subsidy necessary to make PEC financially viable after the introduction of gas-fired
plants and/or the amount by which the electricity tariff should be increased if the
subsidy is eliminated. We will also estimate the amount by which MOFs subsidy
costs will fall.
4.5.2
Rent from the production and sale of gas
We note also that while the economic value of gas delivered to users in Yemen is
likely to exceed US$4/mmbtu, there are likely to be substantial economic rents
35
World Bank Project Appraisal Document for the Power Supply Project, 2006.
36
World Bank Project Appraisal Document for the Power Supply Project, 2006.
37
The variable fuel and O&M cost would be US$0.031/kWh.

February 2009
32
from the production and sale of natural gas. Rent or surplus refers to the
difference between the cost of gas and the economic value of gas.
In Yemen, the initial supply of gas is likely to come from relatively low cost sources
in Blocks 18 where the infrastructure has already largely been developed to gather
the gas for use by YLNG. The 1 tcf of gas dedicated to the domestic market might,
for example, cost only US$0.5/mmbtu to produce38 and could be sold at, say,
US$3.0/mmbtu (at the entry to the pipeline at Marib). This would give a surplus or
rent to the seller of perhaps US$170 million per year. Depending on the fiscal terms
for the development of the gas, the rent or surplus should be captured and
transferred to MOF and then some of this could be distributed to PEC as a subsidy.
Ideally, of course, there should be no subsidy, and the surplus from the sale of gas
should be used for normal state budgetary activities such as schools, hospitals and
roads. But the current reality in Yemen is that electricity is subsidised and it is
recognised that the subsidy should be removed over a period of time rather than
instantaneously. The surplus from the sale of gas could therefore flow through to
MOF and from MOF to PEC.
Alternatively the gas could be sold to PEC at cost. In some respects this would be
equivalent but it runs a number of risks. The economic outcome would be the same
provided that:
R
PEC makes investment decisions (eg., in relation to CCGT plants) on the

assumption that the true value of the gas is, say, US$3/mmbtu, and
that end user prices for electricity, particularly to larger consumers, are
calculated on the assumption that the true cost of gas is, say
US$3/mmbtu (this discourages electricity users from using electricity
wastefully), and
crucially, it is recognised that gas prices to PEC will rise in the future to
encourage the development of gas reserves and the exploration for new
reserves.
There is a major and very serious risk with the second pricing strategy that potential
gas operators will see that prices paid for gas are low and will not take the risk of
investing in development and exploration. The first approach is therefore much
safer and the outcome for PEC should be the same provided that the existence of the
surpluses is recognised and they are transferred to PEC through MOF.
4.6
Summary of institutional options
In summary, we propose to base the subsequent analyses on the institutional

framework described in Figure 4.
38
In Block 10, where the gas would otherwise be flared, the operator virtually gives the gas away.

February 2009
33
Figure 4 Summary of institutional framework (who owns what?)

MoE
MOM
PEC
Ma'rib-I
Ma'rib-II
Ma'bar power
company
10km
Hodeidah
National gas pipeline company
gas
plants
150km
240km
Block 18
(> 1 tcf)
Key
Owner
YLNG
320km
gas
plants
Blocks 5, 20, S1,

.. (> 2 tcf)
PEC
YGC
SAFER
Oil companies
Planned, under construction
Balhaf
or under consideration
We propose to assume the following:

R
ownership of power plants will be independent of the ownership of the

NGP;
NGP will be a gas transportation company;
YGC will either:

R
buy gas from the gas producers and sell to the power generators
and gas consumers, or
act as a broker on behalf of the gas consumers for arranging

purchases of gas on behalf of gas consumers;
MPC39 will be established to own and operate the Mabar power plant
and will initially be 100% owned by PEC;
MPC will sign a contract with PEC for the sale of power40;
a National Gas Pipeline Company (NGPC)41 will be established, initially

100% state owned.
39
Or some other name.
40
Or other contractual arrangements - to be considered in the next Report.
41
Or some other name.

February 2009
34
Regarding the price for gas sold to PEC, MPC and other generators, we propose to
assume:
R
A price will be agreed by GoY that approximates to the economic value

of gas (the exact price is yet to be finalised).
Until such time as the average end-user tariff for electricity is set at a
level that allows PEC and the power sector to be financially viable, MOF
will continue to provide subsidies for power. The level of subsidy will,
however, fall dramatically once gas-fired power plants begin to operate
and purchases from diesel power plants and production from steam
plants burning HFO begin to be eliminated.
Revenues received by MOM for gas sold to PEC will, at least initially,
greatly exceed the actual cost of gas. These surpluses will flow into the
Treasury and from there may be used, indirectly, to provide subsidies to
PEC. MOF will therefore gain both from an increase in revenues from
the sale of gas and a fall in direct subsidies to PEC.

February 2009
35
Financing options
Financing options
The capital costs of the two components of the gas-to-power project that will require
financing are:
R
The Mabar power plant, as a CCGT (rather than as an OCGT), including

transmission, will cost approximately US$ 540 million.
The 1st stage of the NGP, if it has a 22 diameter, is estimated to cost

US$240 million. US$110 million has been committed by YLNG, leaving a
balance of US$130 million to be financed.
Upstream, there is also the cost of the gas gathering and gas processing to be
financed but our focus is on the mid-stream and down stream segments of the
chain. There are major constraints to private sector financing of these two
components of the gas-to-power project - national and international.
National factors affecting the feasibility of private financing include:
R
Difficulties of coordinating the simultaneous development of upstream

gas development, the mid-stream gas pipeline and the downstream gasfired power plants at Mabar and along the coast, and the need to
develop these projects simultaneously.
PEC is not creditworthy as buyer of power.
Security risks for international companies working in Yemen.
Limited experience of private sector participation in infrastructure

(though the LNG project is a good example of a successful private
project).
Possibly macroeconomic instability this was perceived by investors as

the top concern of firms that constrained investment in Yemen42.
International factors affecting possible private financing include:

R
There is limited appetite for risk by strategic investors in the current

international climate. Investors currently favour safer, low risk
investment opportunities.
Strategic investors have a wide choice of infrastructure projects

worldwide and can pick-and-choose the most favourable projects.
42 Draft Investment Climate Assessment, 2006, reported in the World Banks Country Assessment Report,
2005. This is based on a survey of 488 formal firms in manufacturing, services and commerce in four
locations of Yemen.

February 2009
36
Financing options
Though it is now widely accepted that because of the above constraints, it is

unlikely that private sector financing for the Mabar power plant and the 1st stage of
the NGP will be feasible in Yemen in the immediate future, nevertheless, in the
Section below we consider the broader options for financing the Mabar power plant
and the 1st stage of the NGP. First we begin by noting some regional experience of
PSP in gas to power projects and the investment environment in Yemen.
5.1
Regional experience of PSP in energy infrastructure
5.1.1
Egypt
Three privately developed build-own operate transfer (BOOT) plants in operation in

Egypt are:
R
Sidi Krir (InterGen) Thermal Power with 650 MW capacity (2 x 325 MW

units) began commercial operation in 2001,
Port Said East (Electricite de France, 2 x 325 MW units), began operation

in 2003, and
Port Suez (also Electricite de France, 2 x 325 MW) reached financial close
in April 2001 and began operation in 2003.
The three plants sell power to the single buyer (originally the Egyptian Electricity
Authority (EEA) but now the Egyptian Electricity Holding Company (EEHC)).
BOOTs were made possible in Egypt by Law 100 of 1996. The process began in June
1996 with a general invitation to companies to express interest and subsequently to
submit pre-qualification documents. In May 1997 EEA began to distribute a
Request for Proposal (RFP) to eleven pre-qualified bidders, from whom nine
consortiums submitted a bid in October 1997. After evaluation and contract
negotiation, the Sidi Krir project was awarded to InterGen in July 1998.
The RFP asked bidders to bid for terms of 20 and 25 years of operation. The form of
Power Purchase Agreement in the RFP provided for sales of energy and capacity
exclusively to EEA with the units fully dispatchable by EEA. Energy payments
were designed to pass through all fuel costs and variable operating costs, with a
ceiling on heat rate. Capacity payments were designed to cover capital and fixed
operating costs. The Central Bank of Egypt guaranteed the payment obligations of
EEA under the Power Purchase Agreement. Additionally, IFC provided
guarantees.
Fuel for the plant was specified in the RFP to be supplied by the state-owned
Egyptian General Petroleum Corporation (EGPC). The price of fuel was specified in
the RFP as a monthly spot rate set by EGPC.
For the second and third BOOT projects at Suez Gulf and Port-Said East (650 MW
plants, each with 2x325MW units), seven consortia submitted proposals in
February 2009
37
Financing options
November 1998. The tenders were evaluated by January 1999 and negotiations
completed and the agreement signed in October 1999. Both plants began
commercial operation in 2003.
Table 10 shows the risk allocation in the BOOT contracts.
Table 10 Risk allocation for BOOT schemes in Egypt
Phase
Risk
Risk allocation
Development
Financing
EEHC/Developer
Permitting
Developer (loss of
performance guarantee)
Cost
Developer
Schedule
Developer (liquidated
damages)
Change in law
EEHC
Dispatch
EEHC
Capacity and availability
Developer
Fuel price
EEHC
Heat rate
Developer
Fuel supply take-or-pay
EEHC
Construction
Operation
Force majeure
operation
interruption
of
EEHC
Force majeure - additional costs
EEHC/Developer
Change in law
EEHC
Condition of plant at time of transfer
Developer
Source: Adapted from a presentation made by Eng. Fawzia Abou Neima, EEHC Vice Chairman for Affiliated
Company Affairs in January 2001.
5.1.2
Oman - Manah gas fired power station
This first stage of this project, in 1994/1996, was the first PPP project in the Gulf
region and comprised a gas fired power station of 3 x 30 MW units on a site at
Manah adjacent to a gas pipeline from the gas field in the interior to the coast; the
project included a power transmission line from Manah to the coastal grid. This
replaced a number of expensive small diesel power units in the interior region. It
was extended by another 2 x 90MW units and another 125 km of transmission line,
completed in 2000. The total cost of the project was US$ 210 million.
5.1.3
Abu Dhabi
The Abu Dhabi Water and Electricity Company (ADWEC) is the single buyer and
seller of power and water in the Emirate of Abu Dhabi. ADWEC tenders and
February 2009
38
Financing options
procures new capacity from water and power producers and enters into sales
contracts with the electricity distribution companies and, through Power and Water
Purchase Agreements, with the generation companies. ADWEC also purchases fuel
(gas) for the use of licensed generators.
Some of the plants contracted by ADWEC are described below.
Al Taweelah A2 power and desalination plant
This project comprised a 710 MW power plant, to be increased to 763 MW by 2010,
and a 50 million gallon per day (MIGD) water plant. The company is owned 60% by
the Abu Dhabi National Energy Co. and the Abu Dhabi Water and Electricity
authority, with the balance owned by the private sector. The cost of the project was
US$ 750 million, financed by a US$ 596 million syndicated bank loan.
Al Taweelah A1 power and desalination plant
This project expanded an existing 255 MW power plant and a 29.2 MIGD
desalination plant to a total capacity of 1,350 MW and 84 MIGD water plant. The
total cost was US$ 1,473 million. The company is owned 60% by two local
government utilities and 20% each by Total Fina Elf and Tractebel.
Shuweihat S1 power and desalination plant
This desalination plant generates up to 1,500 MW of power and 450,000 m3 of water
per day. It is owned 60% by the Abu Dhabi Water and Electricity Authority and
20% each by International Power and CMS. The total cost of the project was US$ 1.6
billion financed by a US$ 1.285 billion syndicated bank loan.
5.1.4
Saudi Arabia
Marafiq IWPP Jubail project

Marafiq is a proposed integrated water and power plant (IWPP) at Jubail will add
2,745 MW of power and 800,000 m3 per day of desalinated water to the city and the
Eastern Province of the Kingdom. This is to be developed on a build, own, operate
and transfer (BOOT) basis and will be implemented by a joint venture of Marafiq,
SEC and PIF of Saudi Arabia and a consortium of international investors including
Suez Energy International (Belgium), Gulf Investment Corporation (Kuwait) and
ACWA Power Projects (Saudi Arabia). Completion of the project was scheduled for
2010.
Marafiq IWPP Yanbu plant
The IWPP plant in the city of Yanbu on the north-western (Red Sea) coast of Saudi
Arabia will be developed by Marafiq on a similar basis as the Jubail IWPP plant
described above. The plant will have a power generating capacity of 1,700 MW and
February 2009
39
Financing options
a desalination capacity of 150,000 m3 per day. The plant will use cracked heavy fuel
oil (HFO) as the primary fuel.
A Request for Qualification issued in 2007 attracted interest from 23 companies from
12 countries. From these 12 consortia were shortlisted and invited to bid before
August 2008.
5.2
The financial sector in Yemen
The banking system in Yemen currently consists of the Central Bank of Yemen,
sixteen commercial banks (nine private domestic banks, four of which are Islamic
banks; five private foreign banks; and two state-owned banks), and two specialised
state-owned development banks. The largest commercial bank, the National Bank of
Yemen, which is fully state-owned, and the Yemen Bank for Reconstruction and
Development, which is majority state-owned, are currently being restructured with
the goal of eventual privatisation. Because of fiscal difficulties in both banks, in 2004
GoY approved a plan to merge them, but no action has been taken.
The large volume of non-performing loans, low capitalisation, and weak
enforcement of regulatory standards hamper Yemens banking sector as a whole.
Numerous banks are technically insolvent. Because many debtors are in default,
Yemens banks limit their lending activities to a select group of consumers and
businesses; as a result, the entire banking system holds less than 60 percent of the
money supply and the bulk of the economy operates with cash. Legislation adopted
in 2000 gave the Central Bank the authority to enforce tougher lending
requirements, and in mid-2005 the Central Bank promulgated several new capital
requirements for commercial banks aimed at curtailing currency speculation and
protecting deposits. In 2007 Yemens banking law was amended to ease entry
conditions for foreign banks and strengthen the oversight of Islamic banks. In
March 2008, Yemens parliament approved legislation establishing an independent
deposit insurance agency to protect depositors with assets of US$10,000 or less.
There is no medium or long term bank finance available for the financing of
infrastructure projects, nor any project finance skills or experience available in local
banks. Such projects will have to be financed offshore, probably in US$, by
international banks, the multilateral financial institutions, export credits (if
available), Arab funds and donor agencies. If the revenue of the project is in local
currency, then there is an additional currency risk for investors.
Yemen has no public stock exchange, although the government intends to establish
one by 2011.
5.3
Business environment in Yemen
Yemen is not an easy business environment but has jumped from an overall
international ranking of 123rd out of 181 in 2008 to 98th in 2009. In terms of the ease
of starting a business it has jumped even more dramatically from 178th in 2008 to
February 2009
40
Financing options
50th in 2009. This improvement was attributed by the World Bank to the
introduction of a one-stop shop and a cut the paid-in minimum capital
requirements. The new one-stop shop makes it possible to complete business startup at a single location and easier to obtain a license from the municipality and to
register with the chamber of commerce and the tax office43. However, in the areas
relating to financing, Yemen scores less well.
Firms consistently rated access to credit as among the greatest barriers to their
operation and growth. Yemens world ranking in this category was a poor 172 out
of 181, as shown in Figure 5.
Figure 5 Access to credit Yemens world ranking
The ranking is based on two sets of indicators of how well credit markets function:
one on credit registries and the other on legal rights of borrowers and lenders. The
strength of legal rights index measures the degree to which collateral and
bankruptcy laws protect the rights of borrowers and lenders and thus facilitate
lending.
Yemen also ranks relatively badly internationally in terms of protecting investors,
with an international ranking of 125 out of 181. Yemens position on protecting
investors on a scale from 1 to 10, with 1 as the worst position, is illustrated in Figure
6. This suggests that by international standards Yemen does not protect its
investors, but by regional standards it is reasonably competitive.
43 Doing Business in 2009: Country Profile for Yemen, International Bank for Reconstruction &
Development/World Bank, 2008.

February 2009
41
Financing options
Figure 6 Protecting investors index
5.4
Financing of recent or planned energy investments
The financing of recent or planned energy projects in Yemen described below shows
that Yemen relies heavily on donor funds for capital investments in power, but oil
sector and LNG developments have relied primarily on the private sector:
R
Marib-I, 341 MW open-cycle gas turbine power plant (the plant is

operational but the transmission line is not yet completed). This project
cost just over US$ 159 million. It was jointly financed by the Arab Fund,
the Saudi Fund and GoY. We would expect that the finance from the
Arab Fund and the Saudi Fund to be lent to the Ministry of Finance,
with the total finance package then on-lent to PEC.
Marib-II, 420 MW open-cycle gas turbine power plant (tender

documents have been prepared and a shortlist of bidders is being
finalised). The cost is estimated at US$ 347 million with finance of
US$ 217 million provided by the Arab Fund, Saudi Fund and the
Government of Oman. The balance is to be provided by GoY. We would
expect the same arrangement as for Marib-II.
Mabar, currently planned to be a 420 MW open-cycle gas turbine plant.

The total cost for an OCGT is expected to be US$ 400 million44, including
44 Kuljians estimate was US$380 million. The latest estimate is provided by PEC and includes an extra
US$10 million each for the power plant and transmission works.

February 2009
42
Financing options
US$ 90 million for transmission. Finance has not yet been arranged. The
Arab funds, the multilateral financial institutions and the donors are
currently reluctant to confirm financing of this project until the delays
with the Marib-I and II power plants are resolved.
R
YLNG This project which is on schedule to begin commercial

operation in May 2009. With a cost of US$ 2.6 billion, the project was
financed by a consortium of Total (40%), YGC (17%), Hunt Oil (17%), SK
of South Korea (10%), Hyundai (6%), Kogas (6%) and GASS&P (5%)45.
Yemens oil sector developments are all privately financed or financed as joint
ventures.
5.5
Carbon credits
PECs generation investment plans are all based on open-cycle gas turbines (OCGT)
which burn more gas per kWh of electricity produced than the more efficient
combined-cycle gas turbine (CCGT) plants. OCGT produce more CO2 than CCGT
and a switch to CCGT might make PEC, or the owner of the plant if it is not PEC,
eligible for carbon credits under the clean development mechanism (CDM) of
UNFCCC.
To be eligible for carbon credits, a country is required to demonstrate that the CDM
credits are necessary to make the low carbon option (eg., CCGT) financially viable.
In Yemen, strictly speaking, CDM credits are not required to make CCGT viable
since CCGT is the cheaper option based on both economic values for gas and on the
expected price of gas. However, UNFCCC provides a Methodological Tool giving
guidance on demonstrating the additionality of a project to prove that without the
CDM credits the project would not normally be adopted, and this gives the option
of demonstrating additionality using a barrier approach. Since PECs investment
plans and its feasibility studies for Mareb-I and II and Mabar are all based on
OCGT, a reasonably strong case could possibly be made that CCGT plant would not
otherwise be selected and that PEC requires carbon credits to overcome the barriers
to investment in CCGT. This would need to be verified by a CDM expert.
A 400 MW CCGT power plant would emit approximately 420,000 less tonnes of CO2
than an OCGT plant and, at a value of US$20/tonne, PEC (or the plants owner)
could earn approximately US$8.4 million per year from the sale of carbon credits. In
present value terms, at a discount rate of 12%, this would be worth over US$60
million as a lump sum and would partially offset the additional capital costs of a
CCGT compared with an OCGT.
Yemen has ratified the Kyoto Protocol in 2004 and developed the relevant legal
framework, including the creation of a Designated National Authority (DNA) which
45
Due to rounding, the total shares add to 101%.

February 2009
43
Financing options
is necessary for CDM registration46. However, a review of the UNFCCC website

shows that no CDM projects have yet been registered by Yemen and no project
design documents have been submitted. We note that the DNA website lists Project
Idea Notes (PINs) for several projects including the Marib-II power plant which is
claiming emission reductions of 680,000 tonnes per year. We have not had sight of
the PIN but we assume this is based on avoidance of emissions from steam plant
burning HFO and the temporary diesel plants contracted by PEC. At US$20/tonne,
the emission reductions would be worth US$13.6 million per year or, equivalent to
over US$100 million as a lump sum. Whether this registration will be successful
with UNFCCC should be confirmed by a CDM expert.
If the Mabar power plant can register credits for gas flaring reductions and avoided
production from steam/diesel plants as well as credits from choosing CCGT rather
than OCGT then the financial benefits from CDM would be considerably greater.
The CDM credits will provide dependable revenue streams for any potential
investor in the power plants and will help make the investment more attractive to
potential investors, but will not itself provide the up-front financing required.
5.6
Financing options
Possible sources for financing of the Mabar power plant and the 1st stage of the
NGP include, among others:
R
Public financing from savings on subsidies when Ma'rib-I and II start

operating (loans or equity)
Treasury backed bonds
Regional financing institutions Saudi Fund, Qatar Fund, etc. (loans)
International financing institutions - World Bank, etc. (loans)
Yemen pension funds (equity)
Yemeni private investors (equity)
Regional private investors (equity)
International strategic investors (equity)
In this sub-section we review in general terms all the available options for financing.
These options range from 100% public financing, through public-private
partnerships (PPP), to 100% private financing, the latter in the form of an IPP for the
power station. The benefits and drawbacks of each option plus possible mitigating
arrangements are discussed.
46
The DNA is the Environmental Protection Authority: www.cdm-yemen.org.

February 2009
44
Financing options
5.6.1
100% public financing of MPC and NGPC
One of the benefits of public financing is that Government can normally finance
projects at a lower cost than the private sector.
The drawbacks with public financing of MPC and NGPC are:
R
GoY finances are extremely stretched currently and for the foreseeable
future, so that sufficient funds are not available.
Because of the perceived absence of a fully coordinated power and gas

development plan, the multilateral lending institutions, Arab funds and
other donors may not be willing at present to consider providing funds
to GoY for the development of the two projects.
PEC has insufficient funds from tariff revenues to fully or partially

finance the Mabar power plant from retained profits.
However, substantial savings from closing down a number of the current expensive
HFO and temporary diesel plants once Marib-I, II and Mabar power plants are
operational, could be utilised in providing the finance for MPC and NGPC.
5.6.2
Mabar Power Company PPP or IPP
The advantages of PPP financing for the Mabar power plant are:
R
With the private sector taking a share of the project risks and costs, the
financial resources provided by GoY could be substantially reduced.
MPC would be fully responsible for operations and maintenance of the

plant and PEC would have a contract monitoring role.
GoY would retain control of the assets.
MPC and the private sector would take the majority of the project risks,
including the design, construction price and delivery risks.
Yemen would gain from more efficient and lower cost operating and
maintenance by the private sector and would gain from lower overall
costs of the project in comparison to a publicly procured project.
There would be strict minimum operating performance standards,

backed up by a penalty regime for non performance.
GoY at all times would have the option to sell all or part of its
shareholding in MPC, and conversely, subject to paying off all
outstanding debt and dividend obligations, can exercise rights to early
termination of the contract.

February 2009
45
Financing options
The additional benefits of creating MPC as an IPP rather than as a PPP arrangement
are:
R
There will be a minimum financial participation by the Government.
Maximum be benefit will be obtained from the more efficient private

sector management and operations.
The result should be the lowest cost power generation.
The drawbacks of a PPP or IPP approach for the Mabar power plant are:
R
It will be necessary for all power purchase payment obligations of PEC

to be guaranteed by GoY, backed by an offshore US$ escrow account,
and probably with a minimum balance of one years purchase
obligations.
If NGPC remains in public ownership, it will be necessary for GoY to

guarantee the contractual obligations of NGPC.
To obtain foreign debt financing, it will be necessary for MPC to

establish from its revenue an offshore US$ escrow account, with a
minimum balance of at least six months debt service.
Possible mitigation factors include the following:

R
Once the Mabar and Marib power plants are operational, savings from
closing down a number of the expensive HFO and temporary diesel
units could be utilised in financing GoYs equity contribution in MPC
and/or in financing the offshore US$ escrow account to back PEC
payment obligations.
The cost of the gas supplied, including transmission charges, should be a

pass-through in the power purchase agreement, provided that MPC
guarantees the heat rate.
5.6.3
NGPC private financing options
It is unlikely that private investors, whether through a PPP financial structure or a

100% ownership of the SPV, would be interested in investing in this project, as there
is only one purchaser of the gas ie., the Mabar Power Company.
NGPC would have the option at any time of sub-contracting the operation and
maintenance of the gas pipeline to a suitably experienced private sector operator.
When the pipeline is extended beyond Mabar to the coast then this could change
the private investment potential. With the sale of gas to new power stations as well
as other gas consumers, there could be more interest by the private sector to
consider participating in the investment and financing of this extended gas pipeline
project.
February 2009
46
Financing options
5.6.4
Conclusions on financing options
There are severe constraints on public sector financing including:

R
declining oil revenues will mean very limited funding possibilities from
the state budget, and
PEC cannot finance capital investment from its own revenues
But public sector funding is the only feasible and dependable option in the first
stage of the gas-to-power project. This is likely to imply financing primarily from
regional multi-lateral funds, sovereign funds or bilateral donors. To raise financing
from this source, Yemen needs to present a credible and coordinated plan for the
development of upstream (gas gathering and processing), mid-stream (gas pipeline
network to Mabar and beyond) and downstream infrastructure (power plants at
Mabar and along the coast).
The commissioning of the gas-fired plants at Marib-I and II will reduce subsidies
for PEC and release state funds for other purposes, including partial capital funding
of Mabar power plant and the 1st stage of the NGP.
Though private investment may be constrained, there is, however, a role for the
private sector in EPC contracts and a possible role as operators of the power plant
and/or gas pipeline.
In the mid-term, once the basic gas-to-power infrastructure is underway (either
under construction or in operation) there will be greater opportunities for private
sector involvement. Sales of shares in the Mabar power plant and the NGP would:
R
raise capital for subsequent stages of the project the 2nd stage of the
NGP or power plants along the coast,
allow partial repayment of loans
facilitate negotiation of loans for future power plants and gas pipeline
investments
demonstrate a commitment to PSP and encourage private interest in

future investments in power plants and gas pipeline investments

February 2009
47
6.1
Summary of options
In the next stage of the project we will analyse a limited number of options in
greater detail. The analysis will include:
R
financial analysis of the two entities Mabar plant and the 1st stage of
the NGP
analysis of the impacts of the gas-to-power project on electricity tariffs

and/or subsidy requirements for PEC
risk allocation among the parties and contractual arrangements
Before going ahead with the detailed analysis we would seek general approval for
the shortlist of technical, institutional and financing options proposed above. In
summary, we propose to analyse the following:
Technical
R
The primary analysis will be based on a CCGT at Mabar. Alternative

analyses will consider an OCGT at Mabar.
Demand projections for gas and the analysis of PECs subsidy

requirements and/or required tariff levels will assume that new baseload gas-fired plants along the coast and at Marib-II will be CCGT. We
propose to assume that Marib-I remains as an OCGT. We will also
consider an alternative scenario where the new plants are OCGT or, for
new coastal plants, steam (with similar efficiencies to OCGT).
Gas availability needs to be certified and the arrangements for gathering

and processing the gas need to be identified before any major
downstream investment can take place. However, for the purposes of
subsequent analyses we propose to assume that upstream gas supply
from the gas fields accessible to the NGP will be sufficient and will not
constrain the downstream choices (pipeline size and use of gas).
Decisions on the size of the 1st stage of the NGP require information on
the source pressure, source depletion profile and calorific value of the
gas available from upstream. Subsequent financial analyses as part of
the current study can continue without finalizing the pipeline size but
we note that a decision is urgent to allow preparatory work on the
pipeline design to begin. For the purposes of the financial analysis, we
propose to assume that the primary option is a 22 pipeline. We will also
consider an alternative of a 20 pipeline.

February 2009
48
Institutional
The primary analysis will assume:
R
Ownership of the power plants will be independent of the ownership of

the NGP.
A National Gas Pipeline Company (NGPC)47 will be established, initially

100% state owned, to be a gas transportation company.
YGC will either:

R
buy gas from the gas producers and sell to the power generators
and gas consumers, or
act as a broker on behalf of the gas consumers for arranging

purchases of gas on behalf of gas consumers.
The Mabar Power Company will be established to own and operate the
Mabar power plant and will, at least initially, be 100% owned by PEC.
The Mabar Power Company will sign a contract with PEC for the sale of
power48.
Financing
R
The capital costs of the two components of the gas-to-power project that
will require financing are approximately US$ 540 million for the Mabar
power plant49, and the balance of investment in the 1st stage of the NGP
is estimated at US$130 million50 yet to be financed. Upstream, there is
also the cost of the gas gathering and gas processing to be financed but
our focus is on the mid-stream and downstream segments of the chain.
There are major constraints to private sector financing of these two

components of the gas-to-power project. Despite constraints on public
sector funding, this is the only feasible and dependable option in the
first stage of the gas-to-power project. This is likely to imply financing
primarily from regional multi-lateral funds, sovereign funds or bilateral
donors.
To raise financing from regional funding agencies, Yemen needs to

present a credible and coordinated plan for the development of
47
Or some other name.
48
Or other contractual arrangements - to be considered in the next Report.
49
This is as a CCGT (rather than as an OCGT), including transmission costs.
50 Assuming a 22 diameter. Total cost of US$240 million but US$110 million has been committed by
YLNG, leaving a balance of US$130 million.

February 2009
49
upstream (gas gathering and processing), mid-stream (gas pipeline

network to Mabar and beyond) and downstream infrastructure (power
plants at Mabar and along the coast).
R
The commissioning of the gas-fired plants at Marib-I and II will reduce

subsidies for PEC and release state funds for other purposes, including
partial capital funding of Mabar power plant and the 1st stage of the
NGP. Carbon credits may also be a source of future revenue from the
gas-fired power plants.
Though private investment may be constrained, there is, however, a role

for the private sector in EPC contracts and a possible role as operators of
the power plant and/or gas pipeline.
6.2
Next steps in the current study
The next milestones in the current study are summarised below:

Table 11 Next steps
Activity milestone
Options Report
Mission to discuss the Options Report
Timing
End January
w/c 13 February
Follow-up mission and seminar
March 2009
Draft Final Report
April 2009
Dissemination Workshop
May 2009
Final Report
June 2009
In addition to the Dissemination Workshop to be held in May, we also propose to

deliver seminars on topics that remain to be decided. Possible topics include:
R
the gas to power development chain,
gas pricing for power,
gas-to-power investment planning under conditions of uncertainty.

February 2009
50
Annexes
Annexes
A1
PEC base case electricity demand projection

Table 12 Base case electricity demand projections (MW)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
1,198
1,285
1,387
1,435
1,501
1,569
1,640
1,726
1,793
1,875
1,961
2,050
2,144
Source: Fichtner, Marib Power Project, 2nd Stage, Study Final Report, Volume 1, January 2006.

February 2009
51
A2
The economic cost of gas when used for domestic consumption is normally51
determined by the border price as illustrated in Figure 7 showing the export parity
value for natural gas based on LNG.
Figure 7 Border price of gas (LNG exports)
Gas field G
(a)
Entry to
transmission
system
Domestic
market
(b)
Export
market
(c)
Liquefaction
Cost (f)
The economic value of gas from field G (in, say, Marib) when measured at the
entry to the transmission system (point A) would be the international market price
(P) plus the net difference in costs between delivering gas from the wellhead to the
export market (point P) and delivering gas to the main transmission network (A).
The economic value of gas into the domestic network would be the market price at
P minus the shipping (c) and liquefaction (f) costs minus the transport costs to the
liquefaction plant (b) plus the cost a from the wellhead to the transmission network
(A). Algebraically, this is:
VA = P c f b + a
where:
VA
51
Economic value of gas from field G measured at point A
Except when trade is not economically feasible.

February 2009
52
International benchmark price of LNG (cif at the destination

market)
shipping and insurance (or cif) costs
Cost of liquefaction
cost of transportation of natural gas from the wellhead to

point B for liquefaction
avoided cost of transport of natural gas from the wellhead to

the national transmission grid

February 2009
53

Yemen Gas To Power Options Report PDF

Încărcat de

Informații document

Descriere originală:

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Yemen Gas To Power Options Report PDF

Încărcat de

Drepturi de autor:

Formate disponibile

Yemen: Models to Develop the

Economic Consulting Associates Limited

Availability of natural gas

Estimates of gas reserves accessible to NGP

Need for confirmation of the availability of gas

Electricity demand and power investment plans

Comments on the distributed investment plan

Gas turbines in simple cycle or combined cycle

Size of the 1st stage of the NGP

Summary of conclusions on technical issues

Power sector reform

A framework favourable to competition in gas supply

Facilitating future private sector participation

Contractual arrangements between MPC and PEC

The price of gas to power, and the required subsidies

Summary of institutional options

Regional experience of PSP in energy infrastructure

The financial sector in Yemen

Business environment in Yemen

Yemen: Models to develop the gas to power market

C:\A1 Files\Project\Yemen Gas\Docs\FirstReport\Yemen Options Report v2a.doc 11/2/09

Financing of recent or planned energy investments

Summary of options and next steps

Next steps in the current study

PEC base case electricity demand projection

Economic value of gas

Tables and Figures

Table 2 Electricity demand forecast from the 2006 Fichtner study

Table 3 Derating of power plants with altitude and temperature

Table 4 PB CCGT/OCGT capital cost estimates

Table 5 Estimates of gas transmission costs from Safer (US$/mmbtu)

Table 6 Gas demand projections for power (CCGT scenario)

Table 7 Gas demand projections for power (OCGT scenario)

Table 8 Pipeline diameter options

Table 10 Risk allocation for BOOT schemes in Egypt

Table 11 Next steps

Table 12 Base case electricity demand projections (MW)

Yemen: Models to develop the gas to power market

Figure 2 Yemen oil concession map

Figure 3 Planned pipeline route

Figure 4 Summary of institutional framework (who owns what?)

Figure 5 Access to credit Yemens world ranking

Figure 6 Protecting investors index

Figure 7 Border price of gas (LNG exports)

Yemen: Models to develop the gas to power market

barrel (of oil)

Build-own operate transfer

Combined-cycle gas turbine

Clean Development Mechanism

Designated National Authority

Economic Consulting Associates

Energy Information Administration (US)

Engineering, procurement, construction

Heavy fuel oil

International Energy Agency

International Finance Corporation

Independent Power Producer

Mabar Power Company

Ministry of Oil and Minerals

Ministry of Water and Environment

National Gas Pipeline

National Gas Pipeline Company