Kuwait says it is committed to expanding its refining capacity. A stirring of activity at end of last year confirms this, but final approval is still lacking
$54bn: The total cost of projects to be implemented by Kuwait Petroleum Corporation
$14bn: The estimated cost in 2008 of the fourth refinery project
A recent flurry of project announcements has led to excitement in Kuwait’s downstream oil and gas sector, but doubts remains over the country’s ability to deliver two giant and long-delayed schemes.
Kuwait needs to increase its refining capacity to meet rising domestic fuel demand for power generation and water desalination. The country has three refineries with a combined capacity of 930,000 barrels a day (b/d), the second-largest capacity among the Opec countries after Saudi Arabia.
Although substantial, the capacity is insufficient and needs to be expanded and modernised.
Launching its 2020 strategy in 2008, Kuwait Petroleum Corporation (KPC) outlined its ambition to expand its refining capacity to as much as 1.5 million b/d by 2010. This target date has already come and gone and its plan remains on the drawing board.
Kuwait clean fuels project
The two delayed projects are part of KPC’s wider plans which will see it implement schemes worth a total of $54bn over the next few years.
The first is the long-awaited Clean Fuels Project (CFP) to integrate and expand two of Kuwait’s existing refineries – at Mina al-Ahmadi and Mina Abdullah – while retiring the older Shuaiba refinery. Under the scheme, a new 264,000 b/d crude distillation unit will be built to replace the older units.
The biggest doubt is …whether Kuwait [can] handle two massive engineering projects at the same time
With its ageing refining infrastructure, Kuwait has increasingly found itself locked out of advanced fuel markets because its products do not meet the latest environmental standards. When complete, the combined Mina al-Ahmadi and Mina Abdullah refinery will be a fully integrated export focused refinery complex, with minimal fuel oil production.
The delay to the fourth refinery has been a big blow to the credibility of Kuwait on the global investment market”
Kristien Ulrichsen, London School of Economics
With lighter refined products presenting higher value, the CFP scheme will reduce Kuwait’s fuel oil production to 5 per cent of the total refined product mix, from the current 20 per cent. Sulphur content will be reduced from 5,000 parts a million to 10 parts a million.
A final investment decision on the CFP will be made by the Supreme Petroleum Council (SPC), the highest policy body in Kuwait’s hydrocarbon sector. Abdullah al-Ajmi, manager of the CFP, told MEED’s Kuwait Projects conference in December 2010 that tenders would be floated six months after final approval.
|Kuwait refinining capacity|
|Existing||barrels a day|
|Post-clean fuels project||barrels a day|
|New Refinery Project||600,000|
With the decision still pending, KPC had hoped to float tenders for the CFP in the first half of 2011, but this is looking increasingly unlikely.
The SPC is also due to make a final decision on retendering the second delayed project, the 615,000 b/d New Refinery at Al-Zour in the south of the country, which would lift refining capacity to 1.4 million b/d. The refinery, which would be the largest ever built in a single phase, has been stalled for two years.
Cancelled refinery building contracts
The original five contracts to build the refinery were awarded in 2008 by state refiner Kuwait National Petroleum Company (KNPC), but concerns were raised in parliament over the manner in which the contracts were awarded.
After MPs challenged the awards, the SPC instructed KNPC to cancel the contracts in 2009, before construction had begun KNPC cannot retender the deals without SPC approval.
At the December conference, Kuwaiti officials and many delegates were confident that KPC could soon end years of delay. But the opacity of decision-making has left potential engineering and construction contractors more sceptical.
The biggest doubt is logistical. Does Kuwait have the ability to handle two massive engineering projects, one across three sites, at the same time? Both schemes will require between 60,000-100,000 labourers during peak construction. The CFP was originally meant to move ahead only when the fourth refinery was under construction, so as not to exhaust the local labour market.
KPC has yet to finalise its tendering strategy as it prepares to launch the two projects. KNPC, a subsidiary of KPC, is now considering breaking the estimated $16bn-plus CFP into eight separate engineering, procurement and construction (EPC) packages, instead of the three originally planned, sources close to the scheme told MEED at the end of February.
The first package was meant to cover the upgrade and expansion of the Mina al-Ahmadi refinery, while the second would cover the Mina Abdullah refinery. The third would have covered the retiring of the older Shuaiba refinery. Shuaiba’s tank farm, and offsite and marine facilities will be kept intact and integrated into the CFP to reduce costs. It remains unclear how this will now be broken down.
The overall equipment count for the CFP is enormous. It will require more than 4,000 individual pieces, including 117 columns, more than 1,200 heat exchangers, 90 compressors, 96 storage tanks, 36 steam turbines and 61 electrical substations.
Kuwait fully committed to schemes
Despite the doubters, Kuwait is committed to the schemes, say officials at KPC. It has already purchased several long-lead time items and has even taken delivery of 14 reactors from India and Italy. The remaining 64 reactors will be procured by the EPC contractors.
Process licensors and consultants are already in place and the front-end engineering and design work, including the preparation of tender documents, has been completed by the US’ Fluor since December 2009. But KPC has still to select a project management consultant and to prequalify engineering firms before it floats the tender.
When an EPC contractor is finally selected, the project is expected to take 45 months to complete, including 30 months of engineering and 35 months of construction.
The new KPC leadership also looks like it will plough a more independent furrow. Farouk al-Zanki, the former CEO of the state refiner was appointed CEO of KPC in October for a fixed term of three years by Kuwait’s Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah.
He takes over from Saad al-Shuwaib, who was appointed in 2007 and endured three long years in which parliamentary disputes put a block on delivering any of the company’s main strategic projects.
Kuwait’s parliamentarians have often distrusted the KPC leadership, seeing them as hand-picked by the government. Given Al-Zanki’s long experience as head of KNPC and previously at state-upstream operator, Kuwait Oil Company (KOC), he may be able to present the country’s refining needs to parliament from a technocratic perspective. A seemingly more independent KPC would boost its case.
The planned fourth refinery at Al-Zour has faced criticism because of its cost, which was estimated at up to $14bn in 2008.
In June last year, a technical panel at the SPC gave its approval for the project. This was welcomed as a sign that Kuwait was ready to move ahead with expanding and investing in its oil industry. But there are lingering doubts about the country’s ability to deliver on major projects, and not just in the hydrocarbons sector. Considering the political wrangling of the past few years, this project is seen as the litmus test that will show if anything has really changed.
“The delay to the fourth refinery has been a big blow to the credibility of Kuwait on the international investment market. For years, Kuwaiti projects have been deadlocked by the tug-of-war between the government and the parliament”, says Kristien Coates Ulrichsen, research fellow at the London School of Economics.
While most sectors of the Kuwaiti economy have suffered from the general political deadlock during the past decade, the oil sector in particular been targeted by parliamentarians trying to extend their power over an industry in which they have little say.
Kuwait parliamentary power
“Parliament has often used its oversight abilities, such as anti-corruption investigative powers or transparency initiatives, to put a spanner in the works and to make sure they have a say,” says a source based in Kuwait.
“This has created an environment where the managers of KPC subsidiaries do not want to take ownership and you have a standstill. No one wants to commit to $20bn in spending if it will be picked apart by parliament.”
Much of the opposition to the project stems from Kuwait’s decision to use KNPC’s own internal tender committee for the contract awards, rather than the Central Tenders Committee (CTC). Retendering the fourth refinery, stalled by parliament over alleged irregular contracting practices, through the stricter mechanisms of the CTC would give parliament a voice, suggests the source.
KPC has taken this on board and plans to execute the CFP on a lump-sum, turnkey basis through the CTC. It is yet to reveal its strategy for the new refinery.
There are signs that the political situation has improved, with parliamentarians keen not to appear to be holding the country’s economy hostage to gain political power.
So 2011 may well see some concrete progress on the projects, and sceptical contractors could be proved wrong.
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.