Obstacles stack up for Al-Zour refinery

16 June 2015

Kuwait’s New Refinery Project faces a challenging future, after initial bids exceeded budget expectations and a land dispute threatens the scheme

The New Refinery Project (NRP) is the cornerstone of Kuwait’s downstream strategy and is scheduled to see packages worth $10bn-$14bn awarded this year. Just how and when the contracts will be signed, however, has become increasingly uncertain over the first half of 2015.

Bids for the project’s five unawarded packages all came in hundreds of millions of dollars overbudget with the total difference between the low bids and the budgets coming to $3.7bn.

Key fact

Kuwait aims to lift its refining capacity from 930,000 b/d to 1.4 million b/d by the end of 2020

b/d=Barrels a day. Source: MEED

This has forced state downstream operator Kuwait National Petroleum Company (KNPC) to closely consider its options causing a lengthy delay in the tendering process.

Since the bids for the project’s process packages were submitted in March, KNPC has retendered the fourth package.

According to the state news agency, in April, the company’s deputy CEO for support services, Khaled al-Asousi, said KNPC would be seeking additional budget for the project’s first, second, third and fifth packages.

So far, this budget expansion has yet to be approved and there is speculation amongst contractors over whether bidders will be asked to resubmit prices for some or all of the packages.

History of delays

The higher-than-expected bids are the latest in a long line of problems to hit plans to build a 615,000 barrel-a-day (b/d) refinery near the town of Al-Zour in the Divided Zone, territory that Kuwait shares with Saudi Arabia.

Since the project was first announced in 2005, the scheme has been tendered three times. Contracts were awarded on the second occasion, but were cancelled before construction could start due to actions taken by the Supreme Petroleum Council (SPC), a government agency charged with overseeing the country’s energy sector.

If more of the Al-Zour refinery’s unawarded packages are retendered, it will be a further setback for Kuwait’s plans to overhaul its refining sector.

Kuwait is aiming to slash the sulphur content in its fuels and lift its refining capacity from 930,000 b/d to 1.4 million b/d by the end of 2020, after failing to keep to a schedule that targeted reaching the same capacity in 2017.

Key to hitting this target is the country’s two refining megaprojects: the NRP and the Clean Fuels Project (CFP). Three packages worth $12bn were awarded in 2014 for the CFP and construction is expected to start over the next two months.

The CFP will upgrade and expand the Mina al-Ahmadi and Mina Abdullah refineries, while Shuaiba, the country’s third existing refinery, will be shut down. Although the CFP is seeing good progress towards construction, Kuwait will not be able to hit its 2020 refining capacity target if there are further delays to the NRP and the

Al-Zour refinery does not come online in time.

As well as causing further damage to Kuwait’s reputation for project delivery, it will also restrict the export destinations for the fuel the country produces, as the sulphur content of much of the gasoline and diesel is too high to meet European standards.

On top of the budget issues, several other factors are increasing speculation that the scheme will encounter significant delays, including project delivery capacity issues, the collapse in global oil prices and political problems related to the facility’s location.

The 50 per cent drop in oil prices in the second half of 2014 has slashed revenues for Gulf nations and had sweeping ramifications for downstream projects in the Middle East, playing a role in the cancellation of the $6.4bn

Al-Karaana petrochemicals project and the $7.4bn Al-Sejeel scheme, both of which were due to be built in Qatar.

Speaking to MEED in November, Mohammad Ghazi al-Mutairi, CEO of KNPC, said categorically that while the viability of some KNPC projects would be reviewed, strategic projects, including the Al-Zour refinery would still go ahead as planned.

Despite these reassurances, there is speculation among contractors that KNPC will intentionally drag its feet while it waits for oil prices to recover, creating a more favourable environment for the project.

Petrochemicals integration

Delays may also stem from plans to integrate the facility with a petrochemicals plant. A study looking at the viability of combining a petrochemicals facility with the refinery is currently being carried out by the UK-based consultancy KBC Advanced Technologies and is expected to be completed before the end of 2015.

The possibility of adding a petrochemicals element at such a late stage has concerned some parties close the NRP, who worry that alterations to the project’s scope could cause extra expense and delays.

The fact that, after years of setbacks and inaction, both the CFP and the Al-Zour refinery saw significant progress in 2014 has been welcomed by those with a stake in the projects. But the rapid escalation in downstream activity has also heightened concerns that Kuwait lacks the capacity to execute both schemes at once.

The fact that we have seen so many large projects derailed in the Divided Zone is a cause for concern

Source connected to projects in the Divided Zone

Kuwait’s existing regulations that govern imported workers are already onerous and contractors are worried the legislation could become even more restrictive in the future. This would make it more difficult for companies to ship in workers and potentially delay labour-intensive capital projects, such as the NRP.

In April, Kuwait’s cabinet announced it would freeze the number of expatriates living in the country. The news came in the wake of several other initiatives that were designed to reduce the flow of foreign workers into the country, but were never implemented.

Although it is not yet clear whether the new ruling will be enforced, it has exacerbated worries that contractors will struggle to secure the workers they need.

In January 2015, Kuwait Petroleum Corporation (KPC) told MEED the country would need to bring in an extra 100,000 labourers before 2020 after contract awards hit a record level in 2014.

Saudi relations

An ongoing spat with Saudi Arabia over land use in the Divided Zone poses another threat to the timely delivery of the refinery project.

Since October last year, hydrocarbon production in the region has declined from 560,000 b/d to zero as a result of the dispute, which is said to be focused on division of oil and gas produced in the area, as well as land use issues.

Three major projects have been derailed in the Divided Zone over the past two years, raising serious concerns about the way the region is managed by Saudi Arabia and Kuwait and the future of other facilities due to be constructed there, including the Al-Zour refinery.

Whether or not the new refinery will be affected by the problems in the region remains unclear. “The disagreement over the Divided Zone is about the extraction of hydrocarbons and how the proceeds are divided. It’s not about downstream activities, so we do not expect it to impact the Al-Zour refinery project,” says an employee of a large contractor active in the area.

Other contractors are more worried by the emerging pattern of project disruptions and oilfield shutdowns.

“The fact that we have seen so many large projects derailed in the Divided Zone is a cause for concern. We believe that political factors pose a much greater risk to the Al-Zour project than 12 months ago,” says another source connected to several oil and gas projects in the Divided Zone.

Al-Zour outlook

With so many economic and political pitfalls to navigate around, KNPC has signalled that it is not going to rush into decisions about the NRP.

“KNPC has made it clear to contractors that it is going to consider all of its options in order to ensure it makes the right choice,” says one source close to the project.

However, analysts warn that KNPC must be careful not to take too long. Kuwait is in a secure financial position after years of healthy surpluses and high oil prices. Currently, its fiscal reserves stand at about $34bn and its main sovereign wealth fund, the Kuwait Investment Authority, is estimated to be worth $548bn.

Thanks to these funds, Kuwait can afford to pay a premium to kick-start work on the NRP, putting an end to the delays, and winning back some credibility from international investors and contractors.

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