KUWAIT DEVELOPING FOURTH REFINERY AT AL-ZOUR AMID

UNCLAS SECTION 01 OF 02 KUWAIT 000814

SIPDIS

E.O. 12958: N/A
TAGS: ENRG EPET
SUBJECT: KUWAIT DEVELOPING FOURTH REFINERY AT AL-ZOUR AMID
ALLEGED BIDDING CONTROVERSY

Summary
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1. (U) Kuwait National Petroleum Company (KNPC) is moving
forward with plans to build the $15 billion Al-Zour oil
refinery in southern Kuwait despite concerns from the
National Assembly's Petitions and Complaints Committee. In
May 2008, KNPC awarded $10.4 billion in contracts to four
South Korean companies, one Japanese firm, and one American
company. According to the Petitions and Complaints Committee,
there are alleged financial irregularities with at least one
of the contracts. The Committee is requesting a freeze on
all future deals and a review of "questionable" past
contracts. The addition of Al-Zour coupled with upgrades to
two additional Kuwaiti refineries -- Mina Abdullah and Mina
Ahmadi -- aims to increase Kuwaiti refining capabilities from
930,000 barrels per day (bpd) to 1.415 million bpd by 2012.
End summary.

Background on Al-Zour
--------------


2. (U) KNPC announced in August 2006 that it was looking for
foreign partners to participate in the establishment of a
fourth refinery in Al-Zour. The refinery will be one of the
world's largest (615,000 bpd) and will replace the aging
Shuaiba plant (capacity 200,000 bpd.) The addition of Al-Zour
coupled with upgrades to two additional Kuwaiti refineries --
Mina Abdullah and Mina Ahmadi -- aims to increase Kuwaiti
refining capabilities from 930,000 bpd to 1.415 million bpd
by 2012. The Kuwaiti budget for the project grew from $6.3
billion in May 2007 to $15 billion in July 2008. According to
GOK officials, the rising budget costs reflected the
increased cost of construction materials resulting from
growing oil sector investments globally. The change in budget
will also delay the completion of the project from 2010 to

2012.


3. (U) In December 2007, a variety of international companies
from the U.S. (Foster Wheeler and Fluor Corporation),
Australia, France, Italy, Japan, Saudi Arabia, Singapore,
South Korea, and the UAE submitted tenders for the six
proposed projects covering engineering, procurement, tank
farms, marine works, and utilities. In May 2008, the
contracts were awarded to Japan's JGC Corporation and South
Korea's GS Engineering and Construction ($4 billion),South
Korea's SK Engineering and Construction ($2 billion),South
Korea's Daelim Industrial Company ($1.2 billion),and South
Korea's Hyundai Engineering and Construction ($1.1 billion).
In addition, the U.S. Fluor Corporation was awarded an
off-site and utility contract ($2 billion.)

Controversy Surrounding Bidding Process
--------------


4. (U) The National Assembly's Petitions and Complaints
Committee in July 2008 urged the Oil Ministry to freeze all
future contracts due to alleged financial irregularities
connected with the current bidding process. The Committee
raised concerns following meetings with the Kuwaiti agent of
one of the international firms that did not receive a
contract. The agent alleged that his company was
pre-qualified for the bid and submitting a tender $78 million
lower than the winning South Korean bids for $2.3 billion in
contracts. KNPC argued that cost was not the sole criteria
used in decision making and that the contracts were also
awarded due to "other technical considerations."


5. (U) Press reporting as of July 16 suggests that despite
continued controversy, the National Assembly supports the
development of the Al-Zour refinery. The Petitions and
Complaints Committee continues to call for additional
scrutiny, including submitting the $2.3 billion tender to the
Audit Committee, but supports the selection process and
outcomes of the remaining contracts.


6. (SBU) Embassy comment: It is difficult to tell at this
time if this is indeed a case of foul play or if Kuwaiti
wasta (influence and connections) is attempting to alter the
outcome of an unfavorable decision. At present, it seems as
if the Petitions and Complaints Committee will continue to
pursue this issue publicly until they "attain clarity on the
process." Embassy will continue to follow this issue and
report septel. End comment.


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