Finance and nuclear energy in the Middle East

Middle East ArmsControl

Chen Kane

The decision to pursue a domestic nuclear energy program is typically motivated by a myriad of political, economic and strategic factors. But financial considerations seem to top the nuclear agendas of some Middle Eastern countries and divide them into two groups: the “Haves” and the “Have-Nots.”


There are those who have plentiful oil and gas resources but choose to generate power for their own people using nuclear energy so as to be able to maximize their carbon-base production and exports for profit. The other group is operating in a radically different reality. They are resource poor Middle East nations who have limited capital and know-how, and desperately need affordable electricity and power to fuel their societies. Possible safety and security implications for these programs stem from the financial choices made by leaders.

The countries in the Middle East that have abundant indigenous energy resources of oil and natural gas prefer to sell them abroad for profit rather than consume and use them to generate electricity for domestic consumption. For these countries, their nuclear energy programs are intended to provide for their growing domestic energy needs in order to free up fossil fuels for export and significant profit. This group of “haves” includes states like Saudi Arabia, the United Arab Emirates (UAE), and, potentially, Iran.

Historically, only one other country has made such an economic election and developed nuclear energy for similar reasons – – the Soviet Union. In the 1980s, the Soviet Union prioritized the development of nuclear power and a nuclear grid in order to free up more oil reserves for export. This was necessitated by higher production costs and the loss of convertible currency that had resulted from the significant drop in the global oil prices. By way of contrast, the UAE and Saudi Arabia started their latest pursue for nuclear energy in 2006 as a result of the peak in oil prices. There is great profit to be generated in selling oil rather than consuming it domestically for electricity and gasoline.

This economic dynamic is fostered in no small part by the availability of financial resources to fund nuclear programs, and the enormous latent energy resources that lay in reserve awaiting production and sale on the global markets. This economic dynamic as a motivation for developing nuclear energy is one that is generally unique to the Middle East region.

The second group of “have-not” Middle Eastern states pursuing nuclear energy programs includes Egypt, Jordan, and Turkey – – countries that desperately need additional energy sources due to insufficient domestic resources. Jordan, for example, imports 95% of the energy it consumes at a cost to its economy of more than 25% of its GDP. Due to their weak economies, have-not countries in this group cannot afford to pursue nuclear energy programs without significant financing primarily by external debt funding.

However, the financing of nuclear power plants differs from other infrastructure or mega-projects in a number of ways.

First, the initial phase of a program to construct nuclear reactors entails high capital costs and considerable technical complexity. The estimated cost of constructing nuclear power plants in a “new nuclear state” range from $2 billion to $9 billion for each 1,100MW plant. Aside from the massive cost arising from potential overruns and delays, the widely varying interest rates available to particular countries on the global financial market significantly affect the final cost of these projects. For example, Ashok Pasricha, a senior technical adviser at the U.S. Export-Import Bank, estimates that because of Jordan’s lack of financial resources, it would have to pay significantly more compared to the UAE to finance a reactor. While the UAE would pay an “all-in cost” of 2.91 percent under a hypothetical 18-year, US$5 billion loan, Jordan would have to pay 4.13 percent. Jordan’s classification as “high risk country” (with a 5 out of 7 rating in the OECD classification on its risk-scale) could further increase the financing costs, especially following political events in Jordan and in the region of late, that have led to the downgrading by Moody’s of the country’s risk profile and credit worthiness.

Second, it takes a long time before returns can be generated, the investment recouped, and the loans repaid. According to the International Atomic Energy Agency (IAEA), bringing a nuclear power program online entails a commitment and investment lifetime of at least 100-years, with a planning phase – before inviting vendors to compete for the supply contract – of between 10-15 years, and an additional five to seven years for the plant to come online. In comparison, large coal plants can be built in half that time and the construction period of plants powered by natural gas can be as little as two years.

Third, nuclear energy projects are generally sensitive to public reactions and politically controversial. Public safety fears and political controversy have typically accompanied any recent nuclear energy program; which adds political and financial risk to such ventures.  For example, Jordan moved its nuclear reactor site three times – – once due to active seismicity and earthquake risk of the selected area and twice due to local tribe’s resistance to having a nuclear power plant in their proximity. There is still no agreed site today for the planned Jordanian reactor.  

Last, some aspects, such as financing schemes and radioactive waste management and disposal can only be decided by a government itself.

Past experience shows that there are two basic types of financing schemes for the construction of nuclear power plants: debt and equity. Most infrastructure projects involve a combination of these two, in different proportions. The key difference among them is the ownership pattern they establish, which in turn, governs the degree to which such deals seek to protect the interest of investors and creditors, and the ways in which they allocate risk. So far, each of the three Middle Eastern countries that recently launched new nuclear bids has chosen a different structure for ownership and financing.

The UAE adopted a version of a build-operate-and-transfer (“BOT”) model. In 2009, the UAE selected a consortium led by Korea Electric Power Corporation (KEPCO) to build and jointly operate four APR-1400 reactors (Generation III+ design) in Barakah. Of the $20 billion contract, Abu Dhabi will provide $10bn in equity, and another $10bn is likely to come as debt from export-credit agencies. In August 2012, the Export-Import (Ex-Im) Bank, the U.S. official export credit agency, approved a $2 billion direct loan to underwrite the export of American equipment and service expertise for the construction of the first unit. KEPCO was invited to purchase shares in the Emirati government affiliated company that will operate the power plants.

Jordan has been negotiating with two potential nuclear suppliers. Russia’s Atomstroyexport is offering the AES-92, a Generation III reactor, while a French-Japanese consortium is offering a Generation III+ reactor, the Atmea1. Constrained by limited government funding, IMF restrictions for additional borrowing and providing sovereign guarantees (which are likely to be required), Jordan has adopted a Public Private Partnership (PPP) model. Under this model, the strategic partner helps defray up-front capital costs and profits from the sales of electricity. Jordan is looking for a strategic partner that will provide equity funding for the project (49%-74%), mobilize financing, manage the project, and operate the reactor in its initial phase. Jordan would retain a minimum of 26% of the equity and will provide a Power Purchase Agreement. The supplier, equity share and identity of the ultimate owners is still being negotiated.

Turkey chose a build-own-operate (“BOO”) model, the first ever to be used in the nuclear industry. Russia and Turkey signed an agreement in May 2010 for the Russian firm, Rosatom, to lead a consortium to build-own-operate four 1200 MWe VVER (AES-2006) units at a cost of $20 billion. The reactors, which are Generation III design, will be 100 percent Russian owned, though Rosatom has indicated that it may sell a 49 percent stake in the managing company to a local Turkish company. Turkey will buy 70 percent of the energy from the first two reactors for 15-years and 30 percent of the output from reactors three and four for 15- years at a very low price ($12.35 cent per kWh). Russia will be free to sell the excess energy at market rates. After the contract expires, and Rosatom recoups its initial investment, the firm will pay the Turkish government 20 percent of the profits made from the Akkuyu site. Rosatom has agreed to go ahead with construction without receiving financial guarantees from Ankara, and, backed by the Russian government, has assumed all of the financial risk in the project.

Based on statements by the Turkish minister for energy, China is a front-runner to build the second nuclear site in Turkey – – a very surprising choice for a number of reasons, if it materializes. First, it would bring China to the nuclear export market years earlier than experts have predicted. Second, the deal may involve a reactor design that is relatively old today (Generation II+). Finally, China may be the second state that agrees to construct nuclear reactors based on a BOO scheme, without government guarantees, and providing its own financing.

So far, Turkey’s decision on design and supplier has been heavily influenced by financing constraints. While in the short-run such a move may offer a fast-track to achieving energy security, it also comes with a significant long-term safety and security cost. China can only export older models developed domestically. It is barred from exporting the most modern reactors currently built in the country which are copyrighted by Westinghouse and Areva. If indeed Turkey chooses the Generation II+ model, it will not only violate Ankara’s promise to acquire the safest and most advanced technology but will also introduce greater safety risks into the region. The more advanced Chinese design, the CAP1400 is still under construction in China itself, never been tested and may require Westinghouse approval for export.

So far, Jordan and Egypt have avoided a BOO scheme despite the economic temptation. It also opted for Generation III and III+ designs with more advanced safety and security features. Turkey should know that there are no real, painless shortcuts in developing nuclear energy and avoid at all costs old or untested designs. It should also reconsider whether its planned BOO model will actually bring it into partnership with the safest and most reliable nuclear suppliers and operators. Lastly, Jordan and Egypt should make a clear commitment to using the safest available technology when move forward with their nuclear programs.



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