Contractors seek compensation amid shutdown

13 May 2015

Sources say Punj Lloyd and SK Engineering & Construction among those seeking damages

  • SK Engineering & Construction saw construction stop on $200m project in November 2014
  • Punj Lloyd was building pipeline in Divided Zone
  • Shutdown may become permanent

Foreign engineering, procurement and construction (EPC) contractors are seeking compensation as work shuts down at the Wafra oil field in the Divided Zone, which is shared by Kuwait and Saudi Arabia.

“Contractors are trying to finalise their payment…. Each has its own case and will be seeking compensation to some degree,” says one source connected to oil and gas activities in the Divided Zone.

“If, for instance, a contractor has ordered materials in advance for a later phase of a project then this strengthens its case for increased compensation.”

South Korea’s SK Engineering & Construction (E&C) and India’s Punj Lloyd are among those seeking compensation payments, according to the source.

Neither SK E&C nor Punj Lloyd responded to enquiries from MEED requesting details on their compensation claims.

Until late 2014, SK E&C was carrying out a $200m project to upgrade the Wafra field’s main gathering centre on behalf of Kuwait Gulf Oil Company (KGOC).

Construction stopped in November 2014, after the company was issued a suspension notice. Before the notice was issued, the project was on course to be completed in September 2015.

Punj Lloyd won a $57.8m EPC contract to design, build and install 40 kilometres of 20-inch-diameter crude transmission line in the Divided Zone. The work also included modifications to the Ratawi gathering centre.

The project was originally scheduled to be completed in September 2014, but due to delays it remains only partially complete.

The client for the project is Al-Khafji Joint Operations (KJO), which is a joint venture between Saudi Aramco subsidiary Aramco Gulf Operations Company (AGOC) and KGOC.

On 11 May, the US’ Chevron issued a statement to US news agency Bloomberg confirming reports that it was shutting down operations at the Wafra field.

Chevron’s exit from Wafra, the Divided Zone’s last operational oil field, comes after months of struggling with uncooperative Kuwaiti authorities, which have denied visas for the company’s staff and blocked shipments of equipment and materials

Wafra is the third major project in the Divided Zone to be derailed in less than two years.

In August 2013, the Dorra gas field development project, which had an estimated budget of more than $2bn, was shelved.

The second project to be derailed was the operational 310,000-barrel-a-day (b/d) Al-Khafji oil field, which was unexpectedly taken offline on 16 October 2014 on the orders of Saudi Arabia.

The closures mean that since October 2014, oil and gas production from the region has plunged from about 550,000 b/d to an expected zero during May 2015.

On 12 May, Kuwait’s Oil Minister Ali al-Omair told Bloomberg the ministry was looking to try and find a way to continue production at Wafra, but warned that the closure may prove to be permanent. “We will decide to either halt production or continue,” he said. “We are searching for a comprehensive solution with Saudi Arabia and Chevron to overcome challenges to continuing production.”

Resolving the issue “requires an understanding with Chevron, and I think we will have a decision in two weeks”, he added

Saudi and Kuwaiti officials have failed to give a satisfactory explanation for the series of shutdowns.

Contractors have blamed a political spat over land use in the Divided Zone for the problems.

The project failures in the region mark a significant step backwards in Kuwait’s efforts to boost domestic hydrocarbons production, with UK oil and gas research company Energy Aspects predicting that total Kuwaiti production will decline in the short term as it lacks spare capacity to compensate for the lost barrels.

Ahead of the closure of the Al-Khafji and Wafra oil fields, Kuwait was already struggling to raise oil production from 2.8 million b/d to hit its 2020 production target of 4 million b/d.

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