No decision on Al-Zour six months after first bid

17 June 2015

Uncertainty on Kuwait projects increases contractor anxiety

It has now been six months since bids were submitted for the marine package of Kuwait National Petroleum Compnay’s (KNPC) Al-Zour refinery and there has still been no decision made on whether key contracts will be awarded or retendered.

The refinery was intended to have a capacity of 600,000 barrels a day and form a key part of the country’s oil and gas strategy, but due to low-bids coming in $3.7bn overbudget there have been significant delays.

The scheme’s tankage package, known as package four, was retendered in May and contractors fear that other packages may follow.

Efforts to gain approval for an increased budget for packages one, two, three and five have yet to see concrete results and there is no timetable for awarding contracts.

The uncertainty surrounding the project is casting a long shadow over Kuwait’s downstream sector.

Insiders say contractors are becoming increasingly anxious about the project for several reasons, including a lack of clear communication about how the tender process is developing and fluctuating materials costs.

Contractors submitted their bids for the marine package, known as package five, in January 2015 and, with Ramadan fast approaching, it now looks like contracts will not be awarded for months to come.

The longer the tender process is delayed, the more inaccurate the prices submitted in January become and the more likely a retender becomes.

While the price of steel has declined since January, contractors are increasingly worried about the cost of labour, as well as the availability of plant and equipment.

“The delays and uncertainty we’re seeing on the Al-Zour project will have an impact on other Kuwaiti projects,” said one Kuwait-based source.

Sources say contractors are worried the prices they submit for other projects in Kuwait will have to be accurate for long periods of time, rather than just three months, increasing their exposure to markets that have seen increased volatlity since the collapse in oil prices over the second half of 2014.

The Al-Zour Refinery’s delays may also cause problems related to project sequencing.

Already, sources close to Kuwaiti oil and gas projects have raised concerns that the lack of a decision on the Al-Zour refinery could necessitate alterations to the scope of the liquified natural gas (LNG) terminal that is due to be constructed nearby.

Under the original plans, the gas terminal was going to use some facilities that would have been constructed as part of the Al-Zour Refinery project, but these facilities may now have to be constructed as part of the LNG terminal project.

As contractors wrestle with ever-more uncertainty regarding the Al-Zour refinery, KNPC could see higher prices submitted for other projects as companies try to factor in increased risk.

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