Kuwait to Review $30 Billion Al Zour Refinery and Clean Fuels Projects

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Researched by Industrial Info Resources (Sugar Land, Texas)--Kuwait plans to review two major oil refining projects, worth a total of $30 billion, which have so far been stalled by political disputes. The $15 billion Al Zour refinery project, which has a capacity of 615,000 barrels per day (BBL/d), and proposed upgrades to two of three existing refineries, which entail another $15 billion in costs under the Clean Fuels Project, will be referred to the Supreme Petroleum Council (SPC) for reexamination.

The Al Zour refinery project was cancelled in March last year, after opposition members of the Kuwaiti Parliament argued that the five contracts awarded by Kuwait National Petroleum Company (KNPC) (Safat, Kuwait) to six South Korean, Japanese and U.S.-based firms were not in line with the transparent tender processes of Kuwait's Central Tenders Committee (CTC), which handles all contracts in the public sector.

JGC Corporation (TYO:1963) (Tokyo, Japan), GS Engineering & Construction Corporation (SEO:006360) (Seoul, South Korea), Daelim Industrial Company Limited (SEO:000210) (Seoul), Hyundai Engineering & Construction Company (SEO:000720) (Seoul), SK Engineering & Construction Limited (Seoul), and Fluor Corporation (NYSE:FLR) (Irving, Texas) had secured contracts for the project.

The contracts were awarded on a convertible lump sum turnkey basis, also known as the "cost plus" basis, under which services provided during the engineering design phase of the project are charged at an hourly rate until most of the engineering work is concluded, following which the contractor and the client agree upon a final lump sum price and convert the contract.

In May 2009, KNPC said that tenders for the project might be reissued, following the election of a new and more moderate parliament in the country, when members opposed to the project lost ground.

Last month, KNPC said that it has signed agreements to compensate the South Korean and Japanese contractors for work done from April 2008, when the Letters of Intent were signed, until March 2009, when the contracts were cancelled. The firm is expected to reach a similar understanding with Fluor shortly.

The Kuwaiti Parliament recently passed a four-year, $104 billion investment plan to boost the oil and gas, power and infrastructure sectors. An unnamed official of KNPC was reported to have confirmed the inclusion of funds for the Al Zour refinery project in this plan.

The cabinet also recently approved the formation of a new SPC, a move that KNPC said was prerequisite to inviting bids for the project. The SPC now comprises seven members from the government headed by the prime minister, and 10 non-government members appointed for terms of three years each.

With this discernible change in the political scenario, it is now hoped that construction contracts for the project would be awarded sometime this year. The government's move to compensate the contractors affected by the cancellation has revived international interest in the project. However, no specific schedule has been put forth for the project.

Government officials have said that the disputes over the project had not so much to do with the refinery itself as with the mechanism of the cost plus contracts that were awarded. KNPC is expected to reissue the tenders on a lump sum turnkey basis, which could see some of the original contractors exiting the tendering process. The firm is also expected to split up project work into 10 contract packages, as opposed to five, to reduce costs and financial risks for the contractors.

The Al Zour refinery will replace Kuwait's smallest and oldest refinery, the 200,000-BBL/d Al Shuaiba plant, which will be shut down. The other two refineries in the country--the 270,000-BBL/d Mina Abdulla and the 460,000-BBL/d Mina Al-Ahmadi refineries-- will be upgraded and augmented to 800,000 BBL/d of refining capacity under the Clean Fuels Project. The project also entails upgrades to the Al Shuaiba plant ahead of its planned decommissioning, which originally was scheduled for sometime this year but is now delayed.

It was reported in June 2008 that nine firms had submitted prequalification applications for the proposed initiative, and that KNPC would award the contracts on a cost reimbursable basis. However, following delays and disputes over the Al Zour refinery project, KNPC reopened the prequalification process in January 2009. But the project saw little progress thereafter and will now be reexamined by the SPC.

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