Aramco sees Jizan refinery costs soar by $2bn

20 November 2014

Contractors claiming more funds due to delays and scope changes in huge refinery scheme

Saudi Aramco is facing major delays and significant budget overruns at its $7bn crude oil refinery project at Jizan in the southwest of the kingdom.

Engineering, procurement and construction (EPC) contracts were awarded at the scheme in October 2012 with completion expected in late 2015. However, sources now say the refinery will not be completed until late 2017 at the very earliest and could even overrun into 2018.

Even more worrying is the rising budget, which could increase by anything up to $2bn. One contractor is asking for more than $1bn due to ongoing delays to the scheme and changes in the scope to accommodate the 2,400MW integrated gasification combined-cycle (IGCC) power project being built as part of the complex.

“Late 2017 is looking more and more optimistic, as each month of the construction period passes,” says a Saudi-based oil-refining source familiar with the project. “Aramco will have no choice but to sink a lot more money into this project. It is just a matter of how much.”

The largest claim for additional funds has been made by South Korea’s SK Engineering & Construction. The contractor was awarded the crude distillation/vacuum distillation unit at the scheme and has asked for upwards of $1bn of additional funds. Talks are believed to be ongoing between the two parties.

If SK manages to secure the extra funds, then a large percentage will be used to construct an interconnecting pipeline network between the refinery and the IGCC plant. If Aramco refuses to budge on the budget, then it will be left with several options, one of which could be to terminate SK’s contract and bring in another contractor to finish the work.

“All the contractors working onsite are hoping this issue can be resolved and that the extra funds will be released,” says a contracting source familiar with the project.

Some sources cite severe logistical difficulties of transporting manpower, equipment and materials to such a remote location. Others have said the inclusion of such a major power plant at a late stage in the project timeline has also caused some problems.

The Jizan Refinery will have a capacity of 400,000 barrels a day (b/d) when completed in 2017 and will be wholly owned by Aramco. Crude oil and refined products will be shipped in and out through a marine terminal that is under construction.

Jizan has always been a controversial location, due to the vast distance between the region and Saudi Arabia’s oil fields. The initial plan was for the scheme to become the kingdom’s first independent refinery, but after a lack of interest from potential investors, Aramco took 100 per cent ownership of the scheme.

The Jizan Economic City (JEC), the industrial area where the refinery is under construction, has also been plagued by problems since its inception in 2006. With a budget of $27bn, the JEC was devised to bring prosperity to one of the kingdom’s most underdeveloped and impoverished regions. However, before Aramco decided to take over the construction of the refinery, barely any investment was made in the area aside from a small steel plant.

In March 2012, MEED reported that Saudi Aramco had also decided to take ownership of a power plant from the Saudi Electricity Company and the port facilities from the original developers, the Saudi Binladin Group, together with Malaysia’s MMC Corporation. 

A vital aspect of the port works is the dredging of a channel to the port. The port dredging and reclamation works package is a vital component of the Jizan project, because it needs to be completed by mid-2015 to take delivery of much of the heavy machinery needed for the refinery and the IGCC. China Harbour Engineering Arabia is carrying out the dredging work.

Saudi Aramco declined to comment and SK Engineering & Construction was unavailable for comment when contacted by MEED.

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