Al-Zour winners express fears over parliamentary probe

29 August 2008
State Audit Bureau to look into project’s tendering process after criticism from National Assembly members.

Contractors with multi-billion-dollar deals on Kuwait’s Al-Zour refinery are concerned over the fate of their contracts, after the project was thrown into confusion by a political dispute.

Oil & Gas Minister Mohammed al-Olaim referred the project’s tendering process to the State Audit Bureau in late August, after members of the National Assembly (parliament) criticised the award of the contracts for being opaque.

The contractors tell MEED they fear the parliamentary probe could undermine the contract awards. “We are worried by the whole political thing because it is out of our hands,” says one.

The contract awards to South Korean, US and Japanese contractors in cost-reimbursable deals worth more than $9bn in total were confirmed in July.

Members of the nationalist Popular Action Bloc, headed by Ahmed al-Sadoon, are threatening to grill Al-Olaim and other cabinet members about the Al-Zour awards.

Al-Sadoon complains that the contracts were not tendered through the Central Tenders Committee (CTC), the body entrusted with evaluating and approving public sector contracts. Instead, they went through the internal tendering committee of Kuwait National Petroleum Company (KNPC) and were subsequently approved by the Supreme Petroleum Council.

It is not unusual for major projects in the hydrocarbons sector to be tendered outside the CTC. However, the contracts were originally tendered by the CTC in 2006, only to be cancelled after the lump-sum bids came in at $15bn, well above budget (MEED 24:12:06).

Critics of the CTC rules say they are too inflexible and require lump-sum bids at a time when many contractors prefer cost-reimbursable deals.

“This was a situation we wanted to avoid on Al-Zour,” says one senior KNPC executive. “We wanted the flexibility to evaluate bids on the quality of the proposal rather than be compelled to award it to the low bidder. We took the cost-reimbursable approach to ensure that we got the right price.”

Sources close to the project say parliament is most concerned by the award of packages 4 and 5, which did not go to the lowest bidders. The local partners of some unsuccessful foreign contractors are thought to have raised concerns with parliament. Many of these agents have
strong business ties with MPs.

“The process is now totally political,” says another of the winning contractors. “It is a battle among the agents that has crossed over into the political arena.”

The $2bn contract for package 3, which was awarded to the US’ Fluor Corporation, is also likely to come in for criticism as it was awarded without competition.

The other four packages on the refinery were won by Daelim Industrial Company, Hyundai Engineering & Construction Company and SK Engineering & Construction, all of South Korea, and a Japanese/South Korean consortium of JGC Corporation and GS Engineering & Construction.

It is unclear what will happen next. The Popular Action Bloc has complained that the terms of reference for the State Audit Bureau’s probe are not stringent enough.

Any decision to retender the 615,000-barrel-a-day facility for a second time will be complicated. Although the contracts have not been formally signed, the contracting groups have already started engineering work and stand to lose substantial amounts of money if the work is cancelled (MEED 25:7:08).

“The letters of intent provide us with some protection contractually,” says the first contractor. “It would be a different matter if they had not yet come through. We feel confident that we will be able to keep the work because the contracts were awarded cleanly on the basis of quality and pricing.”

Table: Al-Zour in numbers

Total value of disputed deals awarded to firms in 2008$9bn-plus
Value of bids in 2006, forcing original tender to be withdrawn$15bn
Proposed capacity of the planned refinery615,000b/d
b/d = barrels-a-day
Source: MEED

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