Development of an Integrated Energy Market in Saudi Arabia

1. Development of an Integrated EnergyMarket in Saudi Arabia Saudi Arabia Global Super Project Conference 13 - 15 November 2000 Rick Bergsieker President and COO Enron Middle East

2. Overview • Gas, water and electricity infrastructure challenges • The Saudi Gas Initiative - an integrated approach • Key considerations • What others have done • Managing the transition

3. The Challenge • $200 billion of capital investments required over the next 20 years for water, power and gas infrastructure • Peak electricity generation capacity expected to grow 4% per year, from 25 GW in 2000 to 55 GW in 2020 • Water desalination capacity to increase by 4.1 million cubic meters/ day (MMCMD), from 6.3 MMCMD in 2000 to 10.4 MMCMD in 2020 • Massive development of gas infrastructure needed to fuel this growth and to replace existing liquid fuels

4. Natural Gas is the Kingdom’s fuel of choice to meet power demand growth. By 2020, more than 5 BCFD will be needed just to supply power generation requirements. MW Information obtained from “Investing in Saudi Arabia”, 20/21 June 2000 Conference, Four Season Hotel, London Power generated using Natural gas a fuel source Peak Load Demand

5. Challenges in the Water Sector • To meet future growth needs of 4.1 million cubic meters per day will require a combination of water desalination, wastewater recycling and enhanced conservation Water Consumption m3 Source: Saline Water Conversion Corporation

6. Challenges in the Gas Sector • The Kingdom is blessed with plentiful gas reserves that can fuel electric power and water production growth • Gas can also displace higher value liquids currently being used for fuel • more than 2 BCFD equivalent of liquid fuels is currently being burned in the Western Province • Gas reserves are not close to some markets, and most known reserves are associated gas • Massive gas infrastructure development is needed

7. The Saudi Gas Initiative • A major “First Step” to develop gas resources and infrastructure • integrated concept to define the best way to convert gas in the ground in one area to electricity and water in another area • reliance on private sector and competition to optimize the system • Key benefits: • can provide optimum solutions on a “fast track” basis • attracts state-of-the-art technology • attracts foreign capital • creates opportunities for local investors, contractors, and employees

8. Key Considerations • Power, water and gas development are inter-related • should be planned and developed on an “integrated” basis rather than as separate “components” • What’s the right balance between energy distributed by pipeline vs. energy distributed by wire? • i.e., large centralized power plants supplied by large gas pipelines vs. a broader gas distribution network to smaller flexible power plants • How to optimize power, water, co-generation and combined cycle requirements? • What is the correct balance between efficiency, reliability and cost? • How much backup (spare capacity, alternative fuels, etc.) is justified?

9. Incheon LNG Receiving Termainal Pyongtaek LNG Receiving Terminal Tongyong Receiving Terminal (under construction) 1987 2000 1986 1993 1996 2001 Second LNG R/T & Further pipelines Northern & Southern Korean pipeline Third LNG R/T First Gas pipeline Central Korean pipeline First LNG R/T The Korean Approach • Government developed initial infrastructure SEOUL • Government developed expansions to connect additional end-users • Privatization to proceed, now that basic infrastructure is in place

10. The Florida Gas Approach • Started with need for electricity and clean fuels in Florida • Private investors build an initial pipeline and marketed gas • Existing base-load line made incremental development and gas conversion possible • Markets and supplies continue to expand • Today 8000 km of pipeline supplying 1.5 BCFD • Will reach 2 BCFD by 2002 Need for electric power Gas supply Surplus

11. Enron-developed “Peaker” power plants: Timeline for 1999 Peakers July 1998 June 1999 May 1999 September 1998 February 1999 Commercial Operation Gas Turbines Delivered Identified Market Opportunity Sites Permitted and Began Construction Testing Once basic infrastructure is in place, the market can quickly respond to supply/demand changes 1999: 1300 MW 2000: 1500 MW

12. Managing the Transition • Market systems work - end users and suppliers can determine the optimum allocation of resources and infrastructure • An optimal market-driven system needs transparent and predictable regulations that allow private industry to work • Pricing disparities will occur but can be managed • for example, subsidy programs can be targeted to solve specific end-user problems while minimizing the impact on infrastructure developers and investors

13. Conclusions • Tremendous challenges are ahead • Saudi Gas Initiative is a great “First Step” • Many decisions are needed to optimize the system • Markets, acting within a clear regulatory environment, can and will optimize the system • Tough, but manageable, transition issues lie ahead • Substantial international experience is available and is ready to help as needed

14. Thank You