After more than a decade of false starts and setbacks, Kuwait’s refining sector saw a boom in project activity over 2014. A total of $13.2bn in downstream contracts were awarded, more than 10 times the sum of the deals awarded in the preceding nine years.

The momentum is set to carry on into 2015, with $7.6bn in downstream contracts due to be signed this year, according to regional projects tracker MEED Projects. The surge in downstream project activity is mainly due to the $16bn Clean Fuels Project (CFP) and the $14bn Al-Zour New Refinery Project (NRP) finally moving ahead, two megaprojects that are set to overhaul the country’s refining sector.

“We’ve hit a sweet spot politically in that parliament isn’t attacking the government in the ways that it has in the past,” says an executive from an engineering, procurement and construction (EPC) company.

“Officials are taking advantage of this to push through as many big projects as possible. It’s what everyone has been waiting for, but knowing Kuwait, this won’t be plain sailing. I’m certain we’ll see more delays to some of the key refinery packages at some point.”

Critical overhaul

The overhaul of the refining sector is critical to Kuwait meeting its 2020 downstream targets and satisfying domestic demand for refined products and electricity, but the surge in project activity also comes with risks. Some contractors are worried that Kuwait does not have the capacity to execute both schemes at the same time. The impact of lower oil prices on the projects is also a concern.

In 2014, $12bn in contracts were awarded on the CFP. The scheme will upgrade and expand Kuwait’s Mina al-Ahmadi and Mina Abdullah refineries, increasing capacity and lowering the sulphur content of output. It will also see Kuwait’s third refinery, Shuaiba, decommissioned.

This year, it is expected that the NRP will be the main driver of project awards, with five packages worth a total of $11.5bn due to be signed. The NRP will see a 615,000 barrel-a-day refinery constructed on a greenfield site in the Divided Zone Kuwait shares with Saudi Arabia, and was first announced in 2005.

Important refiner

Although Kuwait has seen little expansion to its refining capacity over the past decade, it is the second-largest refiner in the Middle East after Saudi Arabia, with a total capacity of 936,000 b/d.

Mina al-Ahmadi is the country’s biggest refinery, with a capacity of 466,000 b/d. Mina Abdulla has a capacity of 270,000 b/d and Shuaiba has a capacity of 200,000 b/d. If the CFP and the NRP are executed successfully, total refining capacity will be increased to 1.42 million b/d by 2020.

The 60 per cent collapse in oil prices between June 2014 and January 2015 is restricting government revenues and has added to contractor concerns that there could be further delays to the downstream projects.

“The cancellation of [the $6.4bn] Al-Karaana [petrochemicals project in Qatar] is unsettling and shows that big downstream projects in the GCC are at risk in the current environment, but the CFP and the NRP are both hugely important to Kuwait’s future,” says a senior executive at an EPC contractor that is bidding for packages on the Al-Zour refinery project. “These are long-term projects that shouldn’t be affected by short-term fluctuations in energy prices.”

Speaking to MEED in November, Mohammad Ghazi al-Mutairi, CEO of downstream operator Kuwait National Petroleum Company (KNPC), said oil price volatility was the biggest challenge for his company in the short term.

Megaprojects guaranteed

Al-Mutairi said the viability of some oil and gas projects would be reviewed in light of lower oil prices, but stressed strategic megaprojects such as the CFP and the NRP would not be affected.

Even if Kuwait pushes ahead with the two schemes as planned, it may still be difficult to complete both projects by 2020 due to capacity problems. EPC contractors are worried that Kuwait is not prepared for the surge in demand for materials and labour.

“Delays could be created by issues as simple as a lack of capacity to process visas for imported labour,” says one EPC contractor. “The current process is intensely bureaucratic. If it isn’t streamlined, there may be problems getting foreign labourers onto the site on time.”

In January, Mohammad al-Farhoud, managing director for planning at Kuwait Petroleum Company (KPC), told MEED that arrangements were being made to handle an influx of 100,000 extra labourers to work on construction projects within the next five years.

Divided Zone

A fresh political spat over activities in the Divided Zone is also causing concern among some EPC contractors who fear it could disrupt work on the NRP. The dispute dates back to 2007, when Kuwait outlined plans to build the refinery on land that included a site that was under lease by Saudi Arabian Chevron.

The dispute flared up in 2009, when Saudi Arabia renewed Chevron’s Divided Zone concession and Kuwaiti sources complained to the media that there had not been proper consultation.
The exact chain of events that led to the latest escalation in tensions is uncertain, but some say Kuwait’s plans to build a $680m liquefied natural gas (LNG) import and regasification terminal in the Divided Zone are to blame.

Several oil and gas operations in the area have been disrupted by the dispute. In late October, Kuwaiti officials were reported as saying Saudi Chevron had been ordered to move out of its offices in Al-Zour because of the dispute, and said Kuwait had stopped issuing work permits for Chevron staff.

Chevron operates the Saudi half of the Wafra oil field and has warned that failure to resolve the disagreement could lead to production from the site ceasing.

Al-Khafji shutdown

Insiders also claim the unexpected shutdown of the Al-Khafji offshore fields on 16 October is a result of the rising tensions, although this was later denied by Khaled al-Jarallah, Kuwait’s Foreign Ministry undersecretary.

“For me, the land dispute is the biggest political risk that the NRP faces,” says a country manager for a foreign firm that is involved in EPC activities within the Divided Zone. “Whether or not it will cause delays remains to be seen. The main packages haven’t been awarded yet, so Saudi Arabia and Kuwait have plenty of time to resolve their differences and I believe Kuwait will be willing to make big sacrifices to get the project pushed through.”

The possible integration of the NRP with a multibillion-dollar petrochemicals project is another source of uncertainty.

Kuwait’s Petrochemical Industries Company (PIC) said in October that a study was being carried out to integrate its long-planned Olefins 3 scheme with the Al-Zour refinery.

At the time, contractors bidding on packages for the NRP were warned by KNPC that plans may change in the execution phase due to the integration of the petrochemicals facility. This has prompted concerns about the project’s scope and timeframe, with firms warning that the addition of a chemicals plant at such a late stage will lead to problems in the execution phase.

Challenging environment

The award of the CFP packages last year was a breakthrough for Kuwait’s refining sector. With the EPC contracts for the NRP due to be inked this year, the downstream momentum looks set to continue in 2015. But the environment remains challenging.

Lower government revenues due to the drop in oil prices could well give the authorities an incentive, or an excuse, to slow spending on the oil and gas megaprojects. Equally, political disputes between the government and parliament could return in the coming months, which has hindered projects in the past.

However, if Kuwait keeps to its contract award schedule, managing demand for materials and labour as projects ramp up will be the main challenge in the years ahead.