Saudi Arabia Goes Nuclear

The world may soon see hourglass-shaped structures of cooling towers rising from the Middle East dessert floor as Saudi Arabia signals its intention to move ahead with plans to building nuclear reactors.  The Saudi government recently announced plans to prequalify construction companies for a bidding process that will begin before the end of 2018 and result in the signing of contracts sometime in 2019. 

Saudi’s nuclear power plan is unfolding at the end of a lengthy deliberation process.  The Gulf Cooperation Council, which is composed of six of the Middle East monarchies, began a study of nuclear power in 2006.   Subsequently, the group teamed up with the International Atomic Energy Agency (IAEA), an international cooperative body seeking to promote peaceful use of nuclear technology, for a feasibility study on regional nuclear power and desalination.  An important factor in electricity requirements in the Middle East is the dependency on desalination plants that are powered by fossil fueled generators.  Finally, in July 2017, Saudi Arabia’s cabinet approved the National Project for Atomic Energy and armed its King Abdullah City for Atomic and Renewable Energy agency with new financial and administrative regulations.

Never to undertake anything with moderation, Saudi Arabia plans to build 17.8 gigawatts of nuclear capacity by 2032, requiring about sixteen reactors.  It is an ambitious plan and one that could have a significant impact on the nuclear power construction industry.  There are otherwise as many as fifty nuclear power plants under construction scattered among at least a dozen countries.  China has eighteen plans in various stages of construction.

Which companies are hoping for a call from King Salman’s representative and a chance to submit bids?   

The AP1000 power plant produced by Westinghouse Electric Company is favored by China.  Featuring a pressurized water reactor, Westinghouse touts the AP1000 as the most economical nuclear power plant in the world.  Westinghouse could use the business.  China is not alone in its enthusiasm for Westinghouse technology.  Over 50% of the world’s operating commercial nuclear power plants in the world today feature Westinghouse technology.  Despite this success Westinghouse has experienced difficult times and particularly rough going with the AP1000

Westinghouse filed for bankruptcy in March 2017, after suffering significant losses on contracts in the U.S.  There has been much finger pointing as to the causes of the financial debacle.  Top of the list is Westinghouse’s acquisition of CB&I Stone & Webster, a construction company once owned by Chicago Bridge and Iron.  Many cited the purchase price of $229 million as egregiously high given cost overruns and delays in Stone & Webster’s construction project portfolio. 

However, others lay blame on the use of prefabrication methods in construction of two Westinghouse AP1000 power plants in Georgia and South Carolina.  The methods were untested and resulted in what appeared to many as nothing more than poor execution on a construction method untested in the nuclear industry.  Southern Company (SO:  NYSE) has opted to move forward with its AP1000 power plant in Georgia, but in July 2017, SCANA Corporation (SCG:  NYSE) voiced its intention to abandon construction of its two reactors in South Carolina.  SCANA claims the final bill could have been as much as 75% higher than originally estimated and that compensation from Westinghouse of up to $2.2 billion would not be enough to complete construction.   

Westinghouse itself is owned by Toshiba, which has also been criticized for paying too much in that 2006 deal.  Toshiba has reportedly been trying to divest its Westinghouse problems, talking to various private equity firms.  No sale will go through easily.  Westinghouse is a party to numerous legal battles besides the bankruptcy proceeding.  The Nuclear Regulatory Commission has commenced thirteen investigations against Westinghouse, which could result in penalties up to $4.7 million.

Despite its many successes and clear leadership in nuclear technology, Westinghouse may not fare well in beauty pageant Saudi style.

Next post features alternative bidders who might be lined up at the Saudi palace gates.    

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.