Kuwait plans to present a new proposal to retender its much-delayed Al Zour refinery project on a lump-sum turnkey, or LSTK, basis to the country's top oil decision-making body once it is formed, a senior Kuwaiti oil official said.

The board of Kuwait Petroleum Corp., the project's sponsor, has approved the retendering process and is waiting for the formation of the Supreme Petroleum Council, or SPC, in order to go ahead with the tender, the Kuwait-based official told Zawya Dow Jones.

The council's current term ended in October and the new formation has yet to be announced.

Under the new proposal to be presented to the SPC, the project will be tendered on a fixed-price, LSTK rather than cost-plus basis, under which a contractor is paid for all expenses plus a profit.

Kuwait's government in March canceled contracts worth more than $10 billion awarded to one U.S. firm and four South Korean-led groups to build the refinery following parliamentary objection to the tendering process for the refinery, to be the country's fourth.

"We expect it (the new contracts for the fourth refinery) to be less expensive because prices are coming down," the official said.

"Although lump-sum turnkey projects put much more burden on contractors, they do define more definitively the budget and scope of work," he added.

The refinery will have the same specifications and capacity of 615,000 barrels a day of crude oil as under the original tender, the source said.

It is the second time for the project to be retendered. KNPC in 2007 decided to reevaluate its plans for the refinery after bids came in at more than double the original $6.3 billion budget.

SCRUTINY

The project came under intense scrutiny in 2008 after members of parliament alleged that contracts awarded by state refiner 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 was then referred to the State Audit Bureau, the country's accounting watchdog, which made its remarks in a report.

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

"The cost-plus form was one of the issues because it doesn't put a cap on prices and if this issue is addressed it will help resolve any problems over the project," Imad Al Atiqi, a former member of the Supreme Petroleum Council said.

"If the State Audit Bureau's remarks about the project are addressed, I don't see a problem in retendering the project," he added.

The Al Zour refinery, which would be the country's largest, was supposed to produce low-sulfur fuel oil starting 2012 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 combined capacity to process about 930,000 barrels of crude a day.

Al Zour's start up was supposed to coincide also with KNPC's Clean Fuels Project that involves the upgrade of Mina Abdulla and Mina Al Ahmadi refineries, the country's two largest, to produce low-sulfur products.

The project aims to make Kuwait's aging refineries more competitive and compliant with international environmental standards. Kuwait's refining industry has been plagued by shutdowns and accidents at its major facilities due to the age of the plants.

"Hopefully, with the same timing as the fourth refinery, it (the clean fuels project) will be presented to the Supreme Petroleum Council," the oil official said.

Copyright (c) 2009 Dow Jones & Co.