Sunday, Jan 17, 2010

(Adds details, background.)

By Dania Saadi

Of ZAWYA DOW JONES

DUBAI (Zawya Dow Jones)--State refiner Kuwait National Petroleum Co., or KNPC, plans to pay claims for South Korean-led companies for the cancellation of contracts worth more than $10 billion to build the country's fourth refinery, a company spokesperson said Sunday.

"Compensation agreements were signed with the four South Korean firms and an agreement with U.S. engineering firm Fluor Corp. (FLR) will be signed also," Mohammed Ajmi told Zawya Dow Jones.

"The percentage of claims is different from one contractor to another," he added, without giving a total figure for the compensation to be paid.

Kuwait's government canceled in March 2009 the contracts for the new refinery, including $2 billion to Fluor following parliamentary objection to the tendering process for the refinery and its spiraling cost.

Kuwait's Al Rai newspaper reported Sunday, citing unidentified sources, that KNPC would pay 2% of the claims, which exceed $300 million. Ajmi told Zawya Dow Jones that the report was inaccurate because the percentage of claims for each company is different.

The South Korean firms include Hyundai Engineering & Construction (000720.SE), Daelim Industrial Co. (000210.SE), and unlisted SK Engineering & Construction, JGC Corp.

South Korea's GS Engineering & Construction (006360.SE) won a contract for the project in partnership with Japan's JGC Corporation (1963.TO).

A Fluor official declined to comment. A Hyundai official couldn't be reached for comment.

KNPC signed in 2008 four letters of intent for project work worth $8.3 billion to the Japanese-South Korean consortium to build the 615,000-barrels-a-day refinery.

The project came under intense scrutiny in 2008 after members of Kuwait's outspoken parliament alleged that contracts awarded by KNPC didn't comply with the tender procedures set out by Kuwait's Central Tenders Committee, which handles all public sector contracts.

The refinery project, which had a cost of $15 billion, was then referred to the State Audit Bureau, the country's accounting watchdog, which made its remarks in a report.

COST-PLUS

KNPC is waiting for the formation of the country's new top oil-decision making body, Supreme Petroleum Council, before re-tendering the refinery project, Ajmi said.

"We expect the new council to be formed before the end of the first quarter," Ajmi said. The council's current term ended in October and the new formation has yet to be announced.

Ahmad Al Fahd Al Sabah, the deputy premier for economic affairs, told Kuwait's official news agency in October that previous disagreements over the refinery didn't revolve around the project but issues such as the "cost-plus contracts".

Under a cost-plus contract, a contractor is paid for all expenses plus a profit.

KNPC is expected to re-tender the refinery on a fixed-price, lump-sum turnkey basis rather than cost-plus. The Al Zour refinery, which would be the country's largest, was supposed to produce low-sulfur fuel oil to help feed Kuwait's power stations, which are struggling to meet rising demand for electricity.

The new refinery is also needed in order to shut down the country's oldest and smallest refinery, the 200,000-barrel-a-day Al Shuaiba plant. Kuwait's existing three refineries have a combined capacity to process about 930,000 barrels of crude a day.

(Tahani Karrar contributed to this story)

-By Dania Saadi, Dow Jones Newswires, +9714-446-1681,dania.saadi@dowjones.com

Copyright (c) 2010 Dow Jones & Co.

(END) Dow Jones Newswires

17-01-10 1344GMT