Newbuild: US-Kepco Clash Over IP Rights in Saudi Bidding

Copyright © 2021 Energy Intelligence Group

Ever since US-based Combustion Engineering agreed in the 1980s to almost but not entirely transfer its reactor technology to them, South Korea's nuclear developers have worked toward offering a 100% Korean-designed reactor for export. This didn't happen in Seoul's first nuclear export deal with the United Arab Emirates, but as it tries to win a second deal with Saudi Arabia, a consortium led by Korea Electric Power Co. (Kepco) is taking a shot over the bow: it is planning to offer a modified version of the APR1400 it says is sufficiently free of US content that it needs no authorizations from the US government. This has raised hackles in Washington, where Energy Secretary Rick Perry has argued that the so-called APR1400+ still contains US intellectual property (IP) and has demanded that the Korean developers abandon their plan. South Korea's nuclear developers aren't backing down, and the resulting conflict is straining Seoul's relationship with Washington and with Westinghouse, which acquired Combustion Engineering's nuclear business in 2000. It's not clear precisely when Westinghouse and Kepco, currently working together on four APR1400s at Barakah in the UAE, had a parting of the ways over the Korean bid to supply the nascent Saudi nuclear market, but without an amicable solution, the US and Korean vendors face enormous commercial risks. An industry source in Washington even went so far as to suggest to Energy Intelligence that criminal charges could be leveled if the Koreans proceed with a Saudi deal over US objections and are subsequently determined to be in violation of the US government's Part 810 export approval process. Saudi Arabia's formally launched plans to build two large-scale reactors with a request for information (RFI) from the King Abdullah City for Atomic and Renewable Energy (Ka-Care) in October 2017 that yielded replies from five vendor consortiums -- led by Kepco, Westinghouse, France's EDF, Russia's Rosatom and China National Nuclear Corp. But Ka-Care's plans to go out for formal bids have stalled over the past year thanks at least in part to Riyadh's difficulties securing a bilateral Saudi-US nuclear cooperation agreement (NCA). Without that agreement, US suppliers would be cut off from any Saudi newbuild program, as would Korean suppliers -- if they agree that their reactor contains US IP and needs sign-off from Washington to export. This likely prompted Korean developers to launch their "indigenous" APR1400+. What galls officials in Washington is that Kepco evidently never sought agreement with Washington -- or Westinghouse -- on this approach, and the South Korean government, lukewarm on nuclear at best, has so far taken no official position. "Some factions in their government really want to resolve this, and there are others who are trying to ignore it," said a former senior US Department of Energy (DOE) official. This appears to be a particularly sensitive matter within Seoul's nuclear circles, however. Asked in an interview last month whether a US-Saudi NCA was needed for South Korea to supply the Saudi newbuild program, the otherwise freewheeling CEO of Kepco subsidiary Korea Hydro & Nuclear Power declined to comment. "It's very dangerous," Chung Jae Hoon told Energy Intelligence (NIW Mar.8'19). Conflict between the US and South Korean sides opened up almost immediately after the RFI process was launched, according to the aforementioned US industry source. Kepco consortium officials told Ka-Care officials around that time that they could offer a reactor free of US obligations, he said. Within the US government, officials with the Departments of Energy and State, and possibly other agencies and even the White House, became aware of this either in late 2017 or early 2018. Energy Intelligence understands that concerns about the IP issue first surfaced in written US government documents within one agency as far back as May 2018 and culminated in what the former senior DOE official described as a verbal "demarche" from Perry to a Korean delegation at the International Atomic Energy Agency's general conference last September. "It was a tense meeting," said the source, who was at the conference but not the Perry sit-down. Replicating Barakah Cooperation? One major cause of this tension is the apparent lack of any formal process for agreeing when exported US reactor designs are effectively free of US IP content. Westinghouse, if it doesn't win its own bid to supply the Saudis, would be eager to replicate the solution both sides came up with a decade ago, as bids were being prepared for the Abu Dhabi newbuilds. Rather than contest the US-origin IP in the APR1400, the Kepco-led consortium agreed to give Westinghouse project scope should it win, and that included the reactors' instrumentation and control systems and reactor coolant pumps (NIW Sep.14'12). The deal was seen "largely as a concession to this [IP] issue," according to another industry source. "They [the Koreans] were in such a hurry to actualize that contract, they didn't piss around with it too much. That's why they awarded Westinghouse a very healthy scope ... the margins were huge." The UAE deal became one of Westinghouse's most profitable projects in recent memory, and it's likely not an exaggeration to say that the company and its owners at Brookfield Business Partners are looking for similar, if not better, low-risk profitability in Saudi Arabia, either as head of a winning consortium with Fluor and Exelon Nuclear Partners for building AP1000s, or as a project participant with Kepco, with significant scope (NIW Sep.7'18). An indigenous Korean design throws a wrinkle in that plan. What's not clear is how much its "APR1400+" differs from the generic APR1400 and to what extent it incorporates the indigenous technology solutions achieved for the unbuilt 1,500 megawatt APR+. A goal behind the latter design was "to enhance technical competitiveness in the global market and to have an intellectual property-free reactor design," according to a KHNP detailed design document (NIW Jun.2'17; NIW Aug.22'14). That APR+ development involved creating Korean designs and supply chains to replace APR1400 components with US-origin IP; Kepco subsidiaries Kepco E&C and Korea Nuclear Fuel worked for years with the Korea Atomic Energy Research Institute on the codes and computer models behind the reactor safety analysis systems, while Doosan Heavy Industries developed its own reactor coolant pumps and Man Machine Interface System. However, as part of its domestic nuclear phase-down, the current South Korean government canceled plans for the construction of the APR+ (NIW Jun.2'17; NIW Aug.22'14). Meanwhile, Riyadh has been clear that it's not interested in building a first-of-a-kind design in Saudi Arabia, and a huge part of the Kepco consortium's pitch to Ka-Care was that it could effectively replicate both the reactors and the workforce from Barakah. Each deviation from those APR1400s represents a possible cost increase, but the more substantive the deviation the better the case can be made that the Korean technology is free of US content. In short, Korea's nuclear suppliers are trying to thread a thin needle while simultaneously avoiding a bruising fight with the US government and Westinghouse. The former DOE official warned that if the two sides don't reach an amicable solution "this could end up being a pyrrhic victory. By the time these two guys have beat each other up and one has declared victory, the VVER could have won the bid." Stephanie Cooke, Washington, and Phil Chaffee, London;

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