The rapid rise in engineering, procurement and construction costs has again been thrown into the spotlight after bids submitted for Kuwait’s largest upstream development came in far above the projected budget.

Italian group Snamprogetti is in pole position to win the contract after submitting the lowest offer of KD319m ($1.18bn) to build effluent and seawater injection facilities at the northern Rawdhatain and Sabriya oil fields.

However, the client on the project, state upstream operator Kuwait Oil Company (KOC), is understood to have set a budget of up to $750m for the work before it issued the tender in October 2007. Snamprogetti’s bid exceeds this by 57 per cent.

The Italian offer is only KD5m lower than the next best offer of KD324m submitted by UAE-based Petrofac International. However, the two contractors priced the work much lower than the three other bidding contractors, all of which are South Korean. Hyundai Heavy Industries, Daelim Industrial Company and SK Engineering & Construction submitted offers of KD378m, KD399m and KD415m respectively.

While the lowest bids so far exceed KOC’s anticipated budget, this is not likely to force a retender of the scheme, but it does demonstrate how difficult it is to effectively measure the overall costs of projects and the massive increases in material and construction costs.

“This is not a case of contractors inflating their bids,” says one source close to the project.

“In fact, the lowest two offers are seen as being very competitive. What is happening is that budgets are being set too far in advance so that material price rises are not taken into account. This is not an isolated case. It is happening in practically every project, everywhere.”

The scope of the work involves the expansion of gathering centres 15, 23 and 25 and their associated transfer pipelines to each handle 200,000 barrels a day (b/d) of effluent water. The contractor will also expand capacity at the sea-water treatment plant at Subiya to 500,000 b/d of water from 300,000 b/d, expand the central injection pumping facility, and link the tie-in of the gathering centre 24 effluent pipeline with the pumping facility (MEED 14:4:08).

Oil, associated gas and water output from the fields will be separated at each gathering centre, with the gas sent for compression and the oil transferred to desalting units. The effluent water will be transferred to the central pumping facility, treated and mixed with seawater before being reinjected back into the wells.

KOC says it will be able to process 640,000 b/d of effluent water once the project is completed.