CIC energy looks east for EPC solution

KABO MOKGOABONE
Staff Writer | Friday August 8, 2008 00:00

The minister and CIC Energy senior executives were then punching the air in jubilation that the construction of the project would finally kick off, pinning their hopes on the possible positive outcome from negotiations with preferred Engineering Procurement and Construction (EPC) contractor, which were ongoing.

Then suddenly, Kedikilwe received bad news that project promoters could not secure a turnkey contract due to a challenging and tight EPC market around the world since contractors are willing to enter underwritten deals by power off-takers.

'Strong demand in the EPC market for steam turbines has resulted in EPC contractors insisting on terms and conditions for project financed projects of the scale of the Mmamabula Energy Project that we don't believe will be acceptable to lenders without changes to risk allocations,' a statement by CIC Energy president, Gregory Kinross, stated.

As required by the EPC contractor, CIC Energy failed to reach an EPC agreement on risk allocations with the project off-takers, namely the Botswana Power Corporation (BPC) and Eskom of South Africa.

The risk allocation accord was crucial to enable sponsors and EPC contractors to secure manufacturing slots at a time when competent contractors were limited with a long queue for their services.

The project was estimated at P105 billion, if CIC Energy and International Power went ahead with the project under current specifications.

At conception, Mmamabula was to be a mega power station with two phases - integrated coalmine and power station. Phase One, initially, comprised a mine of producing approximately 10 million tons a year, supplying a power plant of approximately 2,400MW at a cost in excess of US$6 billion, or P37 billion.

Experts say because of high prices of steel on the global market, an initial smaller power station to accommodate costs would be ideal.

High commodity prices are a major concern to government at a time when the SADC region is experiencing a critical power shortage.

'I will go to the bank smiling on the BCL side, but since Botswana Power Corporation (BPC) and other energy projects use steel and other commodities, I will go to the bank crying,' says a concerned Kedikilwe of commodity prices.

The failure to secure an EPC deal was a blow looking at the progress made that far on the project in terms of understanding the geology.

Bon-Terra Mining's chief executive officer, Edward Scholtz, says by June, about 2, 370 holes had been drilled that produced 10, 000 samples, which by world standards, is a high density of coal.

Bon-Terra is a subsidiary of CIC Energy and it will oversee the company's coal mining operations, including the Mmamabula Energy Project.

This is the reality that this MEP faces so far, despite the fact that the geology up to this stage has shown that coal at the exploration site is of a high quality.

EPC market is tight and contractors are demanding different terms that are likely to delay the fast progression of the first phase of the US$9.5-billion project.

But it is a reality that those interested in Mmamabula will have to deal with. Costs for commodities internationally including steel used in the production of turbines, have risen tremendously prompting EPC contractors to sign contracts with those with cash in hand to secure manufacturing slots.

However, the company executives have not thrown in the towel as they have promised shareholders that they will look into other possibilities including downsizing the project to keep the dream alive.

In this regard, CIC Energy said this week that it is making progress with an Asian EPC solution for Phase One of the Mmamabula Energy Project (MEP).

'Based on recent discussions, CIC Energy anticipates being in a position to announce the selected EPC contractor for Phase One of the MEP power station before the end of 2008,' the company said in a communication to shareholders.

It said that the Phase One would be re-sized to an approximately 1,200 MW power station designed with provisions for expansion, as multiple phases are anticipated.

'The 1,200 MW (net capacity) power station design is expected to comprise two 600 MW units. CIC Energy continues to anticipate that Phase One of the MEP will be in commercial operation in late 2012 or early 2013.'

The latest developments will allay fears that CIC Energy might give up on a project they believe in so much. Rating agencies, like Moody's, have already hinted that sponsors might 'scrap' Mmamabula because of soaring costs of construction, equipment and project management.