Scrapped Kuwait refinery project could be saved

A few days ago, Kuwait announced it was halting all works related to Al Zour refinery project, which was supposed to be the largest refinery in the region at 615,000 barrels a day (bpd).

The reason given for this decision is that an "independent watchdog had decided it was not feasible" and that the procedure of awards was not in complete adherence to tender regulations. Apparently there were even some questions by members of parliament about the viability of the project and the procedures as well.

The project was originally announced in 2005 and at that time Kuwait's refining capacity was close to 900,000 bpd, ample for its modest domestic requirement with a large surplus for export.

Building such a large and complex refinery in one go was for me too good to be true as the task was enormous in cost and logistics. However, planners must have been encouraged at the time because of the severe shortage of refining capacity worldwide, which was one of the main reasons for the rise in crude oil prices and the appreciation of refinery profit margins in the last few years.

Much work was put into this project including initial studies and the refinery was supposed to cost over $6 billion and to start operations by 2012.

But the rush everywhere for oil and gas expansion and refining projects regionally and worldwide has driven the cost madly upward to the unwarranted level of about $15 billion.

Even so, Kuwait went ahead with front end engineering design (Feed), appointment of project management, shortlisting of contactors and award of all the packages of the refinery by the middle of 2008.

The cancellation therefore is an unavoidable shock to the Kuwait National Petroleum Company (KNPC) and to all the contractors involved after a substantial amount of money, around $1 billion, was spent on the project.

Cancellation charges may raise the number higher and brings to the forefront the difficulties involved in decision-making for such large projects.

In retrospect, one would ask, why such a large capacity in one go? Why could the refinery not be built in stages to reduce the risk of rising cost and delays?

Why didn't the government stop the process in time when there were reports back in 2007 saying that the project was infeasible and that it would bring negative returns?

In my view there may be a way back to the project in one form or another after reconsideration of the size and process configuration, especially now that KNPC wants somehow to phase out Shauiba Refinery, the oldest in Kuwait. This may take some time but KNPC must be longing to salvage some of its expenditure by using some of the work already completed and the process licences already paid for. Lower prices for engineering contracts are now expected due to the curtailment of investment and the world recession. Contractors may soon be hungry for work and offer Kuwait a better deal.

In the meantime the world has moved on as the refining capacity increased by about 3 million bpd between 2005 and the end of 2008 even though a lot of small and old refineries were phased out.

Some additional capacity will undoubtedly come on stream in Saudi Arabia where some two grassroots refineries are under construction or design in addition to the expansion and modernisation of the older refineries.

Other regions in Asia are also witnessing expansion to cater for future demand and to improve products' quality for environmental and efficiency reasons.

The cancellation of the Kuwait project may turn out to be advantageous to its competitors and may somehow be a support for the future refinery margins.

- The writer is a former Head of Energy Studies Department at the Opec Secretariat.