Project Costs Could Fall as KBR Obtains South African Refinery FEED Contract

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Researched by Industrial Info Resources (Sugar Land, Texas)--Sipho Mkhize, CEO of PetroSA (Parow, South Africa), recently announced the award of the $98 million feasibility and front-end engineering and design (FEED) study services for South Africa's Mthombo oil refinery to KBR Incorporated (NYSE:KBR) (Houston, Texas). Mkhize said that the recent fall in steel prices, a major project input, could lead to a significant reduction on the latest estimates of the cost of the project. Originally estimated to require a total investment of $5.85 billion, the project escalated through estimates of $8 billion to the most recent estimate of $11 billion. Steel prices have fallen as much as 50% in 2008. The fall in price of other project resources could also contribute to cutting costs.

KBR completed the prefeasibility study on the proposed 400,000-barrel-per-day (BBL/d) refinery earlier this year, and the next phase of work is expected to begin this month and will primarily be conducted from the KBR offices in Houston and Johannesburg. The feasibility study is expected to be completed by September 2009, with construction starting after 2010.The refinery will be built at the Coega Industrial Development Zone (CIDZ) on the Indian Ocean coast of South Africa, just north of Port Elizabeth. Coega has a newly constructed deep water port, the Port of Ngqura.

Mkhize said that the new refinery, which will have a captive power station, was expected to address the shortfall in locally produced fuel for the next 20 years. Without Coega's additional refining capacity, South Africa would need to import about 200,000 BBL/d by 2015, equivalent to 20% of national consumption.

The project is expected to create 25,000 direct and indirect jobs and assist in bringing the Eastern Cape region into the country's mainstream economy. During the development phase, the project will contribute about $380 million a year to the national gross domestic product and this will increase to $1.26 billion after the refinery has been commissioned in 2014. PetroSA has indicated that it plans to export about half the refinery's fuel output to countries in sub-Saharan Africa. Coega Development Corporation's CEO, Pepi Silinga, said that KBR's involvement in the project would focus world attention on the CIDZ.

Project Mthombo has been selected as one of PetroSA's first major projects to be governed by the principles and ideals of the Competitive Supplier Development Program (CSDP). During the feasibility stage, KBR will work closely with PetroSA to develop a CSDP plan to maximize the project's impact on increasing local economic growth, employment creation and skills development in line with the country's Industry Liquid Fuels Charter. A Black Economic Empowerment partner will be brought into the project structure.

PetroSA plans to raise some finance through the debt market with financial adviser HSBC (NYSE:HBC) and is also looking for export credit agencies to be major players in project finance. The company will also contribute cash and expects the government, as the main shareholder, to play a role in financing the project.

John Quinn, KBR's President for Downstream, said that working on the fast-tracked project would give the company the opportunity to build on its mega-refining expertise and continue the development of KBR's Johannesburg office as a service provider within the sub-Saharan region.

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