Saudi Aramco agrees $900m deal with SK E&C

23 February 2015

South Korean contractor agree to lower pay-out after termination notice issued on Jizan project

  • Deal agreed after termination notice was issued
  • Disputed work to be descoped
  • Other contractors expected to also ask for additional funds

Saudi Aramco has agreed a refinancing deal with South Korea’s SK Engineering & Construction (E&C) at the $10bn Jizan Refinery Project in the southwest of Saudi Arabia.

The agreement comes despite SK E&C being issued with a termination order by Aramco after requesting a $1.2bn increase in the budget for the crude distillation/vacuum distillation unit at the Jizan scheme.

MEED has learnt that under the revised deal SK E&C will receive in the region of $900m for the package, which is $300m lower than the figure they requested, but about $200m higher than Aramco’s initial offer.

However, some of the disputed additional works will now be descoped and offered on a cost-reimbursable basis to either SK E&C or another contractor. The initial budget for the package was about $1bn, but that will now rise to $1.9bn with additional funds required to also complete the extra work.

SK E&C was requesting the extra budget for Jizan to cover delays in the scheme as well as to construct an interconnecting pipeline network between the refinery and the 2,400MW integrated gasification combined-cycle (IGCC) power scheme being built as part of the complex.

 “An agreement has been reached and both parties were keen to come to some sort of an arrangement despite the termination order being issued,” says an oil and gas source familiar with the Jizan scheme. “This means that the refinery can be completed without any more significant delays.”

The agreement also leaves the door open for the other contractors on the project to ask for additional funds to cover losses caused by delays and changes caused by the IGCC power plant.

This could result in a massive spiralling of costs to well over $10bn from the original budget of $7bn. MEED reported in November that costs at Jizan were expected to climb by at least $2bn, but this now could be a conservative estimate.

“No other contractor will be claiming anywhere near the figure being paid to [SK E&C] but it could still add up to well over $2bn,” says the oil and gas source. “Everyone will feel encouraged now that the problems between Aramco and SK have been sorted out.”

The other contractors working on the Jizan Refinery and adjacent IGCC power plant are:


IGCC power plant

  • China Harbour Engineering Arabia (local/China): water intake pipeline/water treatment facility
  • Saipem (Italy): gasification and sulphur recovery units
  • Shandong Electric Power Construction Corporation (China): power plant package
  • Tecnicas Reunidas (Spain): offsites and utilities

The Jizan refinery will have a capacity of 400,000 barrels a day (b/d) when completed in late 2018, and will be wholly owned by Aramco. Crude oil and refined products will be shipped in and out through a marine terminal that is also under construction.

There have been reports of severe logistical difficulties in transporting manpower, equipment and materials to such a remote location. Others have said the inclusion of such a major power plant at a late stage in the project timeline has also caused some problems.

However, there has been an acknowledgement that mega projects in the more remote areas of Saudi Arabia would prove to be far more challenging that in more established industrial areas such as Jubail and Yanbu.

This means that there will be additional costs associated with building world class facilities in parts of the kingdom with no significant infrastructure in place.

Aramco and SK E&C were unavailable for comment when contacted by MEED.

Stay informed with the latest in the Middle East
Download the MEED app today, available on Apple and Android devices

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications