Kuwait needs Al-Zour, despite high bids for tender

According to oil industry officials, Kuwait National Petroleum Company (KNPC) plans on re-introducing its cancelled tender for a proposed fourth refinery sometime next month, with additional options being considered to ensure a feasible selection of bids.

The initial round of bids, received in October 2006, came in on average at over twice the expected cost of $6.3 billion. Nine companies, from Italy, South Korea and the US, submitted bids valued at nearly $15 billion for the four main projects included in the tender.

However, Oil Minister Sheikh Ali Al Jarrah Al Sabah told journalists at an OPEC meeting last month in Vienna that the bids were quite high. "We will reconsider the project but there is no question that we need a fourth refinery," the minister said. "The prices we received were unbelievable," he added.

Still, the minister said KNPC would continue searching for a feasible proposal. According to KNPC Chairman Sami al-Rushaid, among the options being discussed is a cost-plus basis tender or a scaled-down version of the existing proposal.

The tender is expected to be re-issued in May, pending government approval.

The refinery, as currently proposed, will be located near the Al-Zour port facilities south of Kuwait City, and has been in the pipeline for over two years. Originally scheduled for completion in 2010, the Al-Zour refinery, as it will be known, will eventually provide electricity generation and desalination capabilities for the domestic sector. It will also produce petroleum products in accordance with international environmental standards. The refinery has a planned capacity of 615,000 barrels-per-day (bpd), which would make it the largest refinery in Kuwait and one of the largest in the world. KNPC's largest refinery at the moment is its Mina Al-Ahmadi facility, which processes around 442,000 bpd.

The proposed refinery is part of a larger plan that includes boosting the country's oil production from 2.4 million bpd to 4 million bpd by 2020. Although a number of options are being considered - such as the massive Project Kuwait, a development scheme for Kuwait's northern oilfields - it has become clear that, to ensure the sustainability of the value chain, an increase in crude output must be complemented by a substantial increase in downstream capacity. Currently, Kuwait processes around 940,000 bpd with plans to increase capacity to 1.5 million bpd. Additional downstream projects include a proposed 20,000 bpd jet fuel plant at Mina Al-Ahmadi and a number of technical enhancements for the existing refineries.

In conversations with Oxford Business Group, oil sector experts said that the higher-than-expected costs are due in large part to the recent global infrastructure boom in the energy sector, which is putting enormous strains on existing project capacity. As oil revenues rocket, governments are spending record amounts on strengthening and expanding their industrial and energy sectors, which increases pressure on contractors, labour, equipment and materials.

Earlier this year, Qatar Petroleum and ExxonMobil dropped plans for a gas conversion plant due to cost inflation, while Russia's Lukoil and Austria's OMV scaled back their plans for refineries in Turkey.

The cancellations and delays follow years of rebounding refinery profit margins driven by accelerating transport fuel demand in countries such as China and the US. That strained refiners' capacity to supply sufficient volumes of oil products such as diesel, gasoline and jet fuel, prompting a wave of expansion plans to meet the shortfall.

(C) Oxford Business Group - www.oxfordbusinessgroup.com

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