Saudi Aramco has decided to terminate the contract of South Korea’s SK Engineering & Construction (E&C) on its $7bn-plus Jizan refinery project, which is under construction in the southwest of Saudi Arabia.

The news follows a MEED report on 20 November that said the Jizan scheme was facing massive delays and a spiralling budget that could rise to more than $9bn.

SK E&C was awarded the package to build the crude distillation/vacuum distillation unit in October 2012, in a deal that was worth about $1bn. However, due to delays and changes in the scope, the contractor requested an increase in the budget of $1.2bn. This figure has been rejected by Aramco and the state-owned oil company will now instead terminate SK E&C from the project.

“This is an extremely surprising and unusual move, and one I am sure will shock other contractors working at Jizan,” says an oil and gas source based in Saudi Arabia. “I am not sure what the next step will be and how Aramco is going to manage the completion of the package.”

Sources in the kingdom indicate Aramco was prepared to pay an initial $750m extra to SK E&C. This figure would then rise to $925m. However, SK E&C rejected this figure and requested $1.2bn. The contractor is not alone in requesting more money and all other contractors are also expected to apply for an increase in their respective budgets.

The exact timeline for SK E&C’s withdrawal from the Jizan refinery scheme is not yet clear. The company is currently handing over three onshore packages to Aramco as part of the Wasit gas development scheme, which it was awarded in January 2011, and it is likely that this will be completed first.

SK E&C was requesting the extra budget for Jizan to cover delays in the scheme as well as to construct an interconnecting pipeline network between the refinery and the 2,400MW integrated gasification combined-cycle (IGCC) power scheme being built as part of the complex.

SK was not available for comment when contacted by MEED, but has spoken out in the international media insisting that negotiations with Aramco are ongoing. There is still the outside possibility that SK could accept the lower figure and stay onsite, although it is not clear whether the offer is still on the table from Aramco.

However, if this is the case then it would leave the company open to questions about why it was ready to accept a figure $450m lower than what it had requested from Aramco and whether it was now facing massive losses on the scheme.

How Aramco will proceed with the crude distillation/vacuum distillation unit has not yet been disclosed. It could request the US’ KBR, the company carrying out the project management consultancy (PMC) on the Jizan scheme, to take over the package on an engineering, procurement and construction management (EPCM) basis. Other options include one of the other contractors on the project taking over the package, or even a retender open to contractors that have already mobilised to the Jizan site.  

The other contractors working on the Jizan refinery and adjacent IGCC power plant are:

Refinery

• Hanwha Engineering & Construction (South Korea): marine facilities
• Hitachi Plant Technologies (Japan): utilities
• Hyundai Heavy Industries (South Korea): sour water stripper unit and amine regeneration unit
• JGC Corporation (Japan): naphtha and aromatics
• Petrofac (UK): tank farms
• Tecnicas Reunidas (Spain): hydrocracker/diesel hydrotreater

IGCC power plant

• China Harbour Engineering Arabia (local/China): water intake pipeline/water treatment facility
• Saipem (Italy): gasification and sulphur recovery units
• Shandong Electric Power Construction Corporation (China): power plant package
• Tecnicas Reunidas (Spain): offsites and utilities

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 also under construction.

There have been reports of severe logistical difficulties in 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.

Aramco declined to comment when contacted by MEED.