Construction of 615,000-Barrel-per-Day Kuwaiti Refinery Uncertain

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Researched by Industrial Info Resources (Sugar Land, Texas)--According to reports published by the Arabic daily newspaper Al-Watan, state-run Kuwait National Petroleum Company (KNPC) (Safat, Kuwait) may retender contracts to set up the Al Zour refinery near the Kuwait-Saudi Arabia border, after canceling the earlier tender issued in March 2009 because of parliamentary opposition. The paper mentions that the retendering process is likely to start after Kuwait's Supreme Petroleum Council makes an announcement about the project. A consultancy firm is likely to be hired to assess the project under the supervision of the Central Tenders Committee. However, most sources view the project as cancelled.

The 615,000-barrel-per-day (BBL/d) project was first announced in 2005 when Kuwait's refining capacity was 900,000 BBL/d. The original cost estimate of the project was about $6 billion, but this soon increased to an unexpectedly high $15 billion following the rapid increase in demand and refining capacity worldwide. The refinery was scheduled to begin operations in 2012 and would have increased the country's refining capacity to 1.4 million BBL/d combined with upgrades to two other refineries. The Al Zour refinery, when completed, would have been the world's fourth-largest refinery and would have supplied low-sulfur fuel oil to the nation's power plants.

KNPC proceeded with front-end engineering and design (FEED) work and the selection of project managers and contractors. Five companies were awarded engineering, procurement and construction (EPC) contracts worth $8.4 billion in May 2008. However, the project faced a great deal of political opposition. Lawmakers alleged several tender violations, including the award of a $2 billion project management contract to Fluor Corporation (NYSE:FLR) (Irving, Texas) without a tender. A few members of parliament are believed to have questioned the feasibility of the project and the procedures that were followed in awarding the contracts. In March 2009, KNPC informed the companies that had secured contracts that the tender had been cancelled, although the decision to set up the project had not been cancelled. KNPC cited the fact that an independent body had declared that the project was unfeasible as reason for the cancellation of the tender.

The cancellation of the tender came as a shock to all concerned parties, especially as $1 billion had already been spent on the project. Cancellation charges could raise this amount, bringing to prominence the immense difficulties in making decisions about such large-scale projects.

In May 2008, EPC contracts were awarded to a consortium of JGC Corporation (TYO:1963) (Tokyo, Japan) and GS Engineering and Construction Corporation (SEO:006360) (Seoul, South Korea), which was awarded a $4 billion contract to provide the main manufacturing units of the refinery. SK Energy Company Limited (SEO:096770) (Seoul) was awarded a $2 billion contract to provide the refinery's subsidiary units. Daelim Industrial Company Limited (SEO:000210) (Seoul) was awarded a $1.184 billion contract to provide the refinery project with tanks. Hyundai Engineering and Construction Company (SEO:000720) (Seoul) was awarded a $1.12 billion contract to equip the project with the necessary offshore facilities. All of these contracts remain cancelled.

Income from oil accounts for 95% of the public revenues of Kuwait. According to 2008 estimates, Kuwait had a refining capacity of about 2.2 million BBL/d and about 100 billion barrels of oil reserves. There appears to be numerous doubts about the accuracy of the quantity of oil reserves in the country.

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