Kuwait retenders Mina al-Ahmadi refinery deal

25 September 2009

Ongoing dispute with KNPC over $700m contract means original winner, SK Engineering, could lose out

Kuwait National Petroleum Company (KNPC) is to retender a $700m deal at its Mina al-Ahmadi refinery in December, almost two years after it cancelled the initial contract.

The state-owned refining company is asking seven international contractors to bid for the engineering, procurement and construction (EPC) contract by a deadline of 13 December.

KNPC has prequalified France’s Technip, the UK’s Petrofac, Italy’s Saipem and China’s Sinopec to bid on the deal, alongside GS Engineering & Construction, Hyundai Engineering & Construction, Hyundai Heavy Industries, and Daelim Industrial Company, all of South Korea.

The deal covers the construction of a fourth gas fractionation, or separating, facility at the plant, 45 kilometres south of Kuwait City.

KNPC will use the unit to process associated gas generated as a by-product of oil production from fields in the north and southeast of the country.

While Kuwait needs to increase its supplies of gas for power, petrochemicals and fuel production, much of it is currently flared.

The long delay in retendering the Mina al-Ahmadi project has made the new contract award “a matter of urgency”, according to one executive preparing to bid on the deal.

The winner in the original bidding round, South Korea’s SK Engineering & Construction, is currently excluded from bidding again under Kuwaiti tender laws as it is in arbitration with KNPC over the cancellation of the deal.

SK Engineering won the original contract in December 2007 on a convertible lump-sum basis, where the contractor charges the client directly for all of its manpower and materials costs. The two were meant to agree an additional fee at a later date. That fee constitutes the contractor’s profit on the job.

In early 2008, KNPC cancelled the contract after a dispute with SK Engineering over the size of the additional fee. SK subsequently submitted a request for compensation to cover the work it had done on the project.

Sources close to SK say the company has two months to resolve its dispute with KNPC or miss out.

“Unless they [the two parties] can resolve the claim before December, SK will not be not allowed to bid,” says one senior executive close to the dispute. “To bid, either SK has to drop its [arbitration case], or KNPC has to compensate SK.”

The executive says companies that won contracts on KNPC’s $15bn refinery project at Al-Zour, which were also subsequently cancelled, are also concerned they will be locked out from bidding on the retendered contracts for that refinery.

“It is the exact same theory and the exact same background,” says the executive.

KNPC awarded contracts on the Al-Zour refinery in April 2008, but political pressure on the country’s Supreme Petroleum Council (SPC), which is responsible for the state energy sector, resulted in KNPC cancelling the deals in March 2009.

The state refiner said at the time that one of the reasons it cancelled the Al-Zour deals was because they were all convertible lump-sum contracts, similar in structure to the Mina al-Ahmadi deal.

Farouk al-Zanki, chief executive officer of KNPC, visited the five South Korean and Japanese contractors who won the deals in April 2009 to discuss compensation, but executives at the firms say KNPC has failed to talk to them since then.

The five firms now want to know if KNPC will compensate them, if it will retender the project, and, if so, whether it will allow them to bid for the work.

“We are quite worried about the delays in the settlement,” says a senior executive at one of the South Korean firms.

“At the moment, it seems like KNPC is keen to push it through quickly, but it needs approval from the oil minister and the SPC.”

Kuwait’s Emir Sheikh Sabah al-Ahmed al-Sabah dissolved the Supreme Petroleum Council along with the country’s National Assembly (parliament) in March 2009. The council has yet to be reformed. The government will form a new council in October once the National Assembly returns to work. Some contractors hope the authorities allow KNPC to retender the Al-Zour refinery. Others, looking at the precedent set by SK and Kuwait’s recent history of parliamentary turmoil, are more negative.

“Once there is a decision [on the compensation], and there is a retender, we will know that things are getting better,” says the executive close to the dispute between KNPC and SK. “But Kuwait is not as attractive now as it was three or four years ago.”

KNPC declined to comment.

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