KUWAIT - The Kuwaiti Oil Refining Sector.

Kuwait's refining sector is to be expanded. But a fourth plant to be built for a capacity of 615,000 b/d is in doubt due to phenomenally high project costs. The sector has had a major upgrade programme improving as well as increasing its range of products. The programme cost more than $2.25 bn and was completed in early 2005.

Kuwait National Petroleum Co. (KNPC), the refining arm of the state-owned Kuwait Petroleum Corp (KPC), has been negotiating with Asian and Western companies about taking a stake of up to 40% in the proposed fourth refinery. But the plant's cost estimates have escalated rapidly in the past five years. In 2002, the project, proposed to be built at a power generating zone in al-Zour, was estimated at $2-2.5 bn. By early May 2007, the estimate for this plant by one of the international contractors was put at $17.2 bn - reflecting a phenomenal rise in project costs around the world in recent years. This has made KNPC hesitate on the project.

Despite the state company doubling the budget for the refinery to $12 bn in early May, the project could still prove uneconomical. KNPC has since signed a memorandum of understanding (MoU) with Xenesys of Japan to look into development of discharged thermal energy conversion technology at its three existing oil refineries which have a nominal capacity of 930,000 b/d. If implemented, this will be the first time innovative waste-heat technology has been used in the Middle East.

Kuwait has major environmental issues because of its oil-burning power plants. The 615,000 b/d refinery at al-Zour planned by KNPC was intended to provide clean fuel for power generation. However, rising development costs have forced KNPC to look at other technologies.

Discharged thermal energy conversion technology uses the heat generated from the cooling processes at power and oil installations to create electricity. It is a modification of ocean thermal energy conversion technology, which is based on the temperature differences between deep and shallow seawater.

Instead of seawater, discharged thermal energy conversion, which has been pioneered by Xenesys, uses the wasted heat and warm effluent wastewater to evaporate ammonia, the vapours of which can power turbines to generate electricity at very little cost and without pollution. The ammonia gas is then cooled using cold deep seawater to allow the ammonia to be re-used.

KNPC has also been looking at using integrated gasification combined cycle technology as a substitute for the new refinery project. Energy Minister Shaikh Ali al-Jarrah al-Sabah on May 8 said KNPC had revised its budget estimates for the al-Zour refinery to $12 bn, from $6.3 bn in 2005/06. However, with the original prices coming in at more than $17 bn, the re-tender could still end up above budget. If this happens, KNPC says it will abandon the project entirely and look at other options.

The original tenders for the refinery's four main process packages were issued in 2006 on an lump sum turnkey basis, but when the bids came in they were more than two-and-a-half times the budgeted cost. Another change considered in early May 2007 was to split the fourth main process package, covering the storage tanks and marine works, into offshore and onshore portions to make a total of five process packages in place of the original four. The new contracting strategy was aimed at lowering the overall cost and increasing competition among pre-qualified companies.

However, under the state's strict tender regulations, nearly all major contracts had to be lump sum turnkey. KNPC in early May was said to be negotiating with the Central Tenders Committee (CTC) to allow a more flexible strategy.

KNPC had already said in early May that if the re-tender failed to produce a suitable result, it will abandon plans for the refinery and instead opt for the integrated gasification combined-cycle project. This is to supply clean-burning gas fuel for the state's heavily polluting oil-fired power plants. Yet the mother group, KPC, is still hoping project costs might come down and that the refinery project could be revived. But the 2010 target date for the refinery would then have to be changed to 2011 or 2012.

Many companies around the world have already cancelled plans to build new oil refineries and other petroleum-related ventures because of the high project costs. For example on Feb. 20, 2007, the state-owned Qatar Petroleum (QP) and ExxonMobil dropped plans to build a multi-billion dollar GTL plant to convert natural gas to ultra-clear fuels, blaming their decision on cost inflation.

KNPC Project Manager Ahmad al-Jemaz on Feb. 12 said: "KNPC has found that some of the firms bidding in the [original] tender...exceeded double the initial [cost] estimate it had made. An independent foreign consultant...has concluded that there were exaggerations by the firms". KNPC had received nine offers in January for the project's four packages. They came from US, French, South Korean, Japanese and UAE firms.

The planned 615,000 b/d complex was to produce low sulphur fuel oil for the state's electricity plants. The new refinery, coupled with planned further upgrade works on two of three existing refineries, was to boost Kuwait's overall refining capacity to 1.545m b/d.

Accidents: Kuwait has a bad record in plant safety and electric power cuts. There have been fires at the oilfields (see omt23KuwtFieldsJun4-07). A power failure on Feb. 18, 2007, forced KNPC's three oil refineries to shut down. AFP on Feb. 19, quoted KNPC spokesman Ahmad Muzail as saying later that the problem had been fixed and operations were being gradually restored, adding: "We hope this will not take more than one day". He said operations "are being restored unit-by-unit".

Muzail said the shutdown was caused "after a power substation feeding the three refineries suddenly stopped". He said exports were not affected "since we have enough reserves". About 80% of the three refineries' output is for export. Muzail said the power failure was "a result of a short circuit".

Only a month earlier, a fire sparked by a gas pipeline blast caused a partial disruption at the Shu'aiba refinery, which has a capacity of 190,000 b/d. A similar explosion and fire hit the same refinery in November 2006, which rendered it out of operation for two weeks. In June 2000, a gas leak explosion at al-Ahmadi - the country's largest refinery - killed seven people and injured 50. In the same month, two technicians were killed and four injured by a gas leak at Shu'aiba.