Kuwait picks winners for Al-Zour refinery

18 April 2008

Kuwait National Petroleum Company (KNPC) has finalised the winners of the five main packages on the long-delayed $15bn grassroots refinery project at Al-Zour and will make the awards in the near future.

The decisions follow a final technical and commercial eval-uation of the bids and the suc-cessful conclusion of a land dispute that had threatened to derail the scheme.

While KNPC has yet to announce the results for each of the multi-billion-dollar engineering, procurement and construction contracts, the identity of the winners is now clear, according to well-placed industry sources.

A Japanese/South Korean joint venture of JGC Corporation and GS Engineering & Construction is set to take the first process package, the largest contract on the scheme. It covers the installation of the six distillation and atmospheric residue desulphurisation units, and diesel, naphtha and kerosene hydrotreating plants.

South Korea's SK Engineering & Construction remains the favourite for process package two. The work covers the hydrogen plants as well as compression and sulphur recovery units.

Another South Korean firm, Daelim Industrial Company, is believed to be ahead for package four, which covers the storage tanks. The contractor is understood to have edged ahead of two of its compatriots, Hyundai Heavy Industries (HHI) and Daewoo Engineering & Construction, the latter of which was low bidder after bids were submitted in late December.

Seoul-based Hyundai Engineering & Construction Company is in pole position for package five, covering the marine works, after fending off bids from HHI and Australia's Leighton.

As expected, the US' Fluor Corporation will take package three, following direct negotiations with the client. Its contract covers offsites and utilities. Contrary to industry speculation, the contract has not yet been signed, but it is likely to be formally awarded at the same time as the other packages.

Each of the contracts will be awarded on a convertible lump-sum basis, with engineering carried out at an agreed hourly rate. Once the majority of engineering is completed and a better idea of the overall cost is known, the client and contractor will agree on a final lump-sum price and convert the contract.

As a result, the overall cost of the project, and whether it will exceed its budget, will not be known until it is almost complete.

The project has already been delayed by more than a year since KNPC decided to retender it after bids for the original lump-sum turnkey contract were submitted in late 2006 at more than $15bn, two and half times the initial estimated budget.

KNPC is understood to have received notification from the Oil Ministry that a recent disagreement over the refinery's location has now been resolved, ensuring there should be no further legal hurdles to the scheme proceeding.

Saudi Arabian Chevron, operator of the onshore portion of Saudi Arabia's part of the Divided Zone, had complained that the refinery was to be built on land that was reserved for its exclusive use under a long-term treaty between Saudi Arabia and Kuwait.

Following a final agreement between the two parties, KNPC is believed to have agreed to move the project site 600-700 metres inland from its original coastal location. Some of the new plot has been taken from the land earmarked for the planned Al-Zour North power and desalination plant.

In a further sign that the refinery project will now go ahead, the local ABJ Engineering, a sub-sidiary of Kharafi National, is expected to start work soon on the early works element. ABJ was first awarded the KD33m ($122m) contract two years ago, but was unable to proceed because of the land dispute.

One source close to the project dismisses local press speculation that moving the refinery's location will cost KNPC an additional KD100m ($370m). "This is a grassroots project, not a brownfield development, so moving the location a few hundred metres will not cost much at all," says the source.

KNPC's original plan was to locate the refinery at the Shuaiba industrial area, alongside its three existing refineries. The decision three years ago to move the project to Al-Zour, in the far south of the state, has already cost the client $400m because of the increased pipeline and utility costs, and the absence of any synergies.

The 615,000-barrel-a-day (b/d) Al-Zour refinery is the largest refining facility ever built in a single phase, and will be the biggest in the region when it comes on stream in 2012. It is primarily being developed to supply low-sulphur fuel-oil to the state's power plants, although some refined products will also be exported (MEED 4:1:08).

The scheme is being carried out at the same time as the state's other main downstream devel-opment, the Clean Fuels Project, which is aimed at upgrading the Mina al-Ahmadi and Mina Abdulla refineries.

Prequalification applications for the $6-8bn scheme are due in mid-May, although contractors have been reluctant to submit their applications until they know the results of the Al-Zour job (MEED 15:2:08).

Once both megaprojects have been completed, Kuwait's refining capacity will increase to more than 1.4 million b/d.

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