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Kuwait: Refining the Bids

As the seventh largest oil producer in the world, and tenth in terms of proven reserves, Kuwait is already a major player in the oil industry. When Al-Zour oil refinery comes on line, and if its plans to expand in China come into being, it will hold a very good hand indeed.

On September 30, the Kuwait National Petroleum Company (KNPC) announced it had short-listed 17 companies, cutting 13 firms from the list of potential bidders for the construction of the refinery, a $14bn project to be located in the Neutral Zone close to the border with Saudi Arabia.

Rather than put all its eggs in one basket, Kuwait has decided to split up the tender into four sections. The first part of the tender covers crude distillation units, sulphur removal and units to treat naphtha, kerosene and diesel; the second hydrogen production and recovery, sulphur industrialisation, and units to treat diesel; the third for the provision of storage tanks; and the last for the construction of marine export facilities.

If completed as scheduled in 2012, the Al-Zour facility will be the largest refinery in the Middle East, capable of processing 615,000 barrel per day (bpd), dwarfing the Ras Tanura plant in neighbouring Saudi Arabia, which has a 550,000bpd capacity.

While the Al-Zour refinery will be the largest single project in the country, it will still only represent less than half of the country's refining capacity when it comes on line. At present, Kuwait can process 930,000 bpd through its Mina Abdullah, Mina Ahmadi and Shuaiba refineries. Though the aging Shuaiba, which has a capacity of 200,000 bpd, is to be decommissioned, upgrades to the other two facilities will see them account for 800,000 bpd of production. This, combined with the Al-Zour facility, will give Kuwait 1.415m bpd day of refining resources. KNPC has allocated $872M for the first stage of the upgrade process at the two refineries.

The Al-Zour project has a long history, having been on the drawing board for a number of years, well before the need to close the Shuaiba refinery became a matter of urgency following repeated shut downs due to equipment failures and at times spectacular, and occasionally fatal, accidents.

The original tender for the project had been called last year, but was cancelled in February as none of the bidders came close to the then-projected budget, which had been set at half of the revised figure.

The massive cost blowout had been caused, to a large extent, by the sharp rise in costs in refinery projects, combined with a shortage of both materials and brought on by a boom in refinery construction around the world.

There may be another fly in the ointment, with reports in the media that a potential dispute could arise between Kuwait and Saudi Arabia over some of the land earmarked for the refinery project. Saudi Arabian Chevron , the Saudi arm of US oil producer Chevron Corporation , holds a lease on some of the land KNPC intends to use for the project.

Though not currently using the land in question, Saudi Arabian Chevron is active in the area, testing a scheme to increase yields from its wells using steam injection, a programme it may want to extend into the leased zone if successful.

Sami Al Rushaid, KNPC 's chief executive, said he believed the obstacle could be overcome.

"I'm not in charge of this issue but I can say that I'm convinced we will hopefully find a solution," Al Rushaid told the media on September 27.

Kuwait is also looking to expand further afield. Kuwait Petroleum International (KPI) , the international arm of the country's state-owned oil operations, has held initial talks with Chinese officials about buying a stake in a 1.9m barrel oil storage facility planned for the southern province of Guangdong to be built by China National Aviation Fuel Holdings (CNAF).

If KPI 's overtures are accepted, the project will further serve to boost Kuwait's presence in the lucrative Chinese market. Together with Chinese refiner Sinopec Corp, KPI is already involved in a $5bn development to build a refinery and petrochemical complex, to be located next to the CNAF storage facility.

Having a piece of one of China's largest refineries and storage facilities would give Kuwait the inside running as the lead supplier to the Chinese market, a market that it currently supplies with just 2% of requirements.

© Oxford Business Group 2007