• Four packages of the New Refinery Project were awarded on 28 July after years of delays
  • However, internal disagreement as well as dispute over Divided Zone stand in the way of progress
  • Political problems between Kuwait and Saudi Arabia, and dispute between Al-Omair and Al-Adsani have both yet to be solved completely

On 28 July, Kuwait announced the winners of four engineering, procurement and construction (EPC) contracts worth a total of $11.5bn for the Al-Zour New Refinery Project (NRP), a flagship scheme to build the Middle East’s biggest refinery.

It is hoped the project will ultimately see a 615,000 barrel-a-day (b/d) facility constructed near Kuwait’s border with Saudi Arabia, but the multibillion-dollar plan has been dogged with problems and setbacks since it was first announced in 2005, and contractors fear history will repeat itself.

The NRP 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.

Critical timing

Kuwait’s rapid progress on the NRP over recent weeks has come at a crucial time for the oil sector, sending a clear message to those who doubted whether the country could muster the required political support to push the scheme through.

“Symbolically, the announcement about contract awards is very important,” says a senior official from a Kuwaiti public energy company. “It shows that Kuwait’s oil officials can follow through on their promises, even in the face of challenging circumstances.”

These challenging circumstances include the repercussions of the collapse in global oil prices, an ongoing dispute between senior Kuwaiti oil officials, and a dispute with Saudi Arabia over land use in the Divided Zone, the shared border region where the Al-Zour refinery is due to be constructed.

Divided Zone

In the second half of 2014 and the first half of 2015, Kuwait saw a dramatic escalation in its long-running dispute with Saudi Arabia over activities in the Divided Zone – increasing concerns that the NRP could be derailed.

The quarrel is thought to date back to 2007, when Kuwait outlined plans to build the Al-Zour refinery on land that included a site under lease by Saudi Arabian Chevron, which operates shared oil fields in the Divided Zone on behalf of Saudi Arabia.

The New Refinery Project packages

Awarded

Package one (process plant)

  • Winner: Tecnicas Reunidas (Spain) / Sinopec Engineering (China) / Hanwha Engineering (South Korea)
  • Price: KD1,283bn ($4.3bn)

Packages two and three (process plant, utilities and offsites)

Package five (marine package)

  • Winner: Hyundai Engineering & Construction (South Korea) / SK Engineering & Construction (South Korea) / Saipem (Italy)
  • Price: KD454m

Still to be awarded

Package four (tankage package; retendered in June)

  • Low bidder: Hyundai Engineering & Construction (South Korea) / Saipem (Italy) / Essar (India)
  • Low bid: KD475m

 

The dispute flared again in 2009, when Saudi Arabia renewed the lease for Chevron’s site near Al-Zour and Kuwaiti sources complained to the media that there had not been proper consultation with the Kuwaiti government over the 30-year extension.

The latest flare-up has forced the closure of the Divided Zone’s two remaining operational oil fields, reducing production in the region from more than 500,000 b/d to zero in a matter of months.

In the past two years, the dispute has been blamed by contractors for derailing three oil and gas projects in the region with a total value of almost $10bn.

Budget anxiety

Another factor that has increased anxiety about the future of the NRP is the collapse in oil prices that occurred over the second half of 2014.

The drop in prices decimated Kuwait’s government income, which relies on oil exports for more than 95 per cent of its total revenues.

In the fiscal year that ended on 28 March, Kuwait reported an estimated budget deficit of $2.3bn (after contributions to its Future Generations Fund) – its first deficit in 15 years.

The decline in income due to persistently low oil prices increased pressure on the government to cut spending on capital projects and heightened fears the NRP would see delays as officials became reluctant to release funds.

Political problems

The NRP’s budget problems were compounded in July this year, when bids were published after the retendering of the project’s tankage package, known as package four.

State-owned downstream operator Kuwait National Petroleum Company (KNPC) retendered the package in May seeking a lower price, but the attempt to cut costs backfired, with the low bid coming in KD68m ($224m) more than the original low bid of KD407m.

This led to a scenario where the scheme would not be able to see progress unless it could gain approval for a KD871m budget expansion from the board of Kuwait Petroleum Corporation (KPC), Kuwait’s national oil company.

Internal dispute

A disagreement between oil minister Ali Saleh al-Omair and the CEO of KPC, Nizar Mohammad al-Adsani, both of whom sit on the board of KPC, added an extra dimension to the project’s difficulties.

The dispute stemmed from attempts by Al-Omair to secure more control over the state-owned energy companies by personally appointing figures to the KPC board as well as other key positions in the country’s publically owned energy companies.

This was resisted by Al-Adsani and the disagreement rapidly escalated in to a public mud-slinging match played out in the nation’s newspapers.

At the dispute’s peak, Al-Omair made allegations about corruption at KPC. These have yet to be backed up with any evidence and are slated to be the subject of a parliamentary hearing later this year.

The bad relations between these two key figures within Kuwait’s oil sector led to decreased cooperation between the oil ministry and factions of KPC, and added to concerns that KPC’s board would fail to find a way to push through approval for the NRP’s budget expansion.

Improved relations

Kuwait’s National Assembly speaker, Marzouq Ali al-Ghanem, was a key figure in creating an environment where both figures could cooperate over the refinery project without losing face.

“There was significant pressure from above to resolve the dispute and get the [NRP] moving,” says one Kuwait-based political source.

“Al-Ghanem is a very savvy political operator. He was the one that managed to bring both men together and engineer an environment where the key decisions could be made.”

In a carefully judged diplomatic move, the size of the KPC board was expanded to make room for nominations by Al-Omair as well as figures nominated by Al-Adsani.

“The compromise was enough to satisfy both sides to a point where decisions could be made,” says the source.

Approval from KPC was then given by the board during a meeting on 14 July.

This was swiftly followed by approval from the SPC and the announcement about contract awards was made the day after a meeting by Kuwait’s Central Tenders Committee (CTC) on 28 July.

Problems ahead

The progress over recent weeks has been swift and actions by public sector officials have been effective, but the NRP’s history of delays and cancellations means doubts remain about whether it will reach the execution phase without further setbacks.

Central to these doubts are concerns over just how long the uneasy truce between Al-Omair and Al-Adsani will last.

Although the winners of four of the Al-Zour EPC contracts were only announced recently, relations between the oil minister and the KPC CEO are already showing signs of fraying.

On 28 July, local media printed excerpts of a letter from Al-Omair to his counterpart in Saudi Arabia, Ali al-Naimi, asking Saudi Arabia to resume production at the Khafji oil field, which is located in the Divided Zone and was shut in October last year.

According to the leaked letter, Al-Omair accused Al-Naimi of breaking a 50-year-old agreement and said that failure to restart production at the field “will inflict heavy losses on Kuwait, which will be borne by the Saudi government”.

Leak impact

In the wake of the news reports, public oil company officials were shocked.

“The leak has been very damaging,” says one senior official, speaking to MEED on the condition of anonymity. “This was private correspondence between two oil ministers and it has caused huge embarrassment for Al-Omair.”

According to industry sources, only a small circle of officials were in a position to leak the letter and many suspect that a figure allied with Al-Adsani may have given the press access to the oil minister’s private correspondence.

“Whoever leaked the letter – there is no doubt it has done significant damage to the relationship between KPC and the oil ministry,” says one industry source.

Divided dispute

The leaked letter has also confirmed suspicions about the political nature of the Divided Zone dispute.

Until the letter was leaked, both Kuwaiti and Saudi officials had officially maintained there was no dispute between the two countries, and claimed the Khafji field had been shut due to environmental reasons.

The publication of the excerpts from the letter, which clearly reveal the disagreement exists and has a political aspect, may well make it more difficult for the spat to be resolved.

“The dispute is complex and the revelations made through the leaked letter could make it much more difficult for the two sides to reach a compromise without losing face,” says a Kuwait-based political source.

Absolute harmony

Any further deterioration in relations between Saudi Arabia and Kuwait could have severe ramifications for the NRP.

“To be completely honest, absolute harmony is needed for the project to progress,” says the senior figure from a Kuwaiti public oil company. “Not only does KPC need to have settled its differences with the oil ministry, but Kuwait needs to completely resolve its problems with Saudi Arabia concerning land use in the Divided Zone.”

Sources say that for the NRP to proceed, permission will be needed from Saudi Arabian Chevron for infrastructure such as cables and pipes that will cross Chevron’s land.

“Saudi Arabian Chevron’s site is next to the site slated for the construction of the [NRP],” the source added.  “If it refuses to engage in a dialogue, it will be extremely problematic.”

Challenges remain

Amid the many problems that complicate the refinery project, the announcement made on 28 July was a significant achievement.

However, the political problems between Kuwait and Saudi Arabia and the dispute between Al-Omair and Al-Adsani have both yet to be solved completely, and contractors remain wary.

“I’m watching with a sense of deja vu,” says an industry source who has been based in Kuwait for the past 15 years. “Contracts have been awarded for this project before. Last time, we even saw downpayments made.

“This project has already proven that in Kuwait, anything can derail a project at any time. Nothing will be certain until the refinery is constructed and the money is in the bank.”

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