Joining the Nuclear Club

[This is an interesting perspective on the UAE project and it even discusses the economic indifference line with respect to oil exports vs nuclear construction costs]

http://online.wsj.com/article/SB10001424052748704187204575101542782683412.html

Despite an embarrassment of hydrocarbon riches, the U.A.E. is having trouble meeting domestic energy demands

By OLIVER KLAUS
It may seem odd for a country sitting on one of the world's largest oil and gas reserves, but the United Arab Emirates has an energy problem—one that it hopes to solve by building nuclear power plants.

Most of the power stations in the U.A.E. run on natural gas at present. But the country is running short of this commodity. Much of the gas that the country produces has already been sold through long-term export contracts or is being used to help extract oil or produce petrochemicals. The U.A.E. is already importing gas from neighboring Qatar, the only country in the region that doesn't face a gas shortage.

On top of this, every barrel of oil or cubic meter of natural gas that the country burns to meet its own energy needs is a barrel or cubic meter that it can't sell. With oil prices hovering around $70 to $80 a barrel, that adds up to quite an opportunity cost. Far better to export the country's hydrocarbon wealth and use some of the proceeds to invest in new energy sources to meet growing domestic demand.

Eckart Woertz, chief economist at the Dubai-based Gulf Research Center, says: "The idea behind developing nuclear energy is to have nuclear power for the base load [the minimum level of demand on an electrical supply system over 24 hours] and save gas, which is needed for petrochemicals, reinjection into oil fields and peak load generation."

The recently formed Emirates Nuclear Energy Corp., or Enec, the government body in charge of implementing the U.A.E.'s nuclear plans, predicts that domestic energy demand will rise by 9% a year between 2007 and 2020 to reach 40,858 megawatts (see accompanying chart). That is more than double the installed capacity now.

In recent years, the U.A.E., like its Gulf neighbors, has spent billions of dollars on developing infrastructure and industries such as aluminum, steel and petrochemicals to diversify the local economy and create jobs. This has increased energy demand. A growing population, combined with the region's harsh climate, where temperatures can easily exceed 50 degrees Celsius in the summer, has led to a surge in the use of air conditioning and water desalination plants.

This has prompted the U.A.E. to review its energy. In 2006, Abu Dhabi launched the Masdar green initiative to establish the emirate as a hub for alternative-energy resources and sustainable technologies. The aim is to generate 7% of Abu Dhabi's energy needs from renewables by 2020. However, this won't be sufficient to address the shortfall the country is facing in base load power.

Other options were studied but not considered feasible. Coal-fired power plants were ruled out because of their impact on the environment and the supply risks created by having to ship large amounts of coal through the narrow Strait of Hormuz. Another option, burning liquid fuels such as diesel or crude oil, was also rejected.

"Running power plants on fuel oil or crude oil is expensive and environmentally damaging," says Mr. Woertz of the Gulf Research Center. "The opportunity costs are considerable. It's more profitable to sell the oil on international markets."

According to Hans-Holger Rogner, head of the planning and economic studies section at the International Atomic Energy Agency, the U.A.E.'s nuclear-power plans will be economically feasible despite the high construction cost if crude prices stay above the $70-a-barrel mark. The price tag for the country's first complex of four nuclear reactors, each with 1,400 megawatts of capacity, is $20.4 billion.

"If they sell the oil that they don't use on the world market for $70 a barrel, then a nuclear reactor is feasible," says Mr. Rogner. "It's clear, however, that if oil drops below $30 or $40, then it won't be as economical."

The country's nuclear-energy aspirations come at a critical time. Tensions in the region have been heightened by the controversial nuclear program in Iran, which is believed to harbor ambitions to develop atomic-weapon capabilities.

Unlike the Islamic republic, the U.A.E. has gone a long way to allay fears over nuclear security. The government has ruled out any fuel enrichment or reprocessing in the country, the two activities that could lead to the weaponization of nuclear fuel. The policy is enshrined in the U.A.E. Nuclear Law signed in October 2009.

"They don't have any fuel-cycle ambition, which is important for proliferation, and of course reduces anxieties in the whole region," says Mr. Rogner.

Last year, the U.A.E. and the IAEA signed the Additional Protocol to the Comprehensive Safeguards Agreement, which establishes a procedure for inspecting nuclear facilities and operations. Bilateral nuclear cooperation pacts were signed with the U.S. and France. Separately, the government has set up a regulatory body headed by William Travers, the former executive director for operations of the U.S. Nuclear Regulatory Commission. Last month, the U.A.E. also announced that it had appointed former U.N. chief weapons inspector Hans Blix as the head of the country's new nuclear advisory board of experts.

Late last year, Enec awarded the contract to build the four nuclear plants to a team comprising Korea Electric Power Co., units of Samsung and Hyundai, and Westinghouse. The group beat off competition from U.S. and French companies. The first reactor, based on existing Korean plants, is due to be operational in 2017.

"These are leading companies that have construction experience with the design, and as such we look at it confidently," Mr. Rogner says.

Still, some questions remain, notably where the fuel for the nuclear plants will come from, especially in the long term.

"Just as countries in the West mull over where to get their crude from, people here will have to think about where to get the uranium from 20 to 30 years from now," says Mr. Woertz. "Uranium supplies are short, only 60% of world-wide demand is satisfied by mine production. The rest comes from dwindling stockpiles. If reprocessing facilities are not expanded rapidly, there is a problem."

The U.A.E. is seeking to conclude long-term arrangements with "reliable and responsible governments and contractors" for the secure supply of fuel. And Padraic Riley, Enec's director of external affairs and communications, says the government body is "developing fuel strategies and will have a robust supply chain."

If it fails, the U.A.E. may find itself searching for new electricity sources once again.

— Mr. Klaus is assistant managing editor, Middle East, for Dow Jones Newswires in Dubai. He can be reached at oliver.klaus@dowjones.com.