Challenges in Contractor Financed, Built, Owned & Operated Oil & Gas Processing Facilities in Kuwait

Abstract

Abstract This paper presents authors upfront experiences on challenges faced by contractors in Kuwait in the project segment dealing with fast track oil and gas processing facilities designed, built, financed, operated and maintained by contractors. Discovery of New Jurassic Reservoir and drilling of the Sabriya Structure (SA-153) prompted Kuwait Oil Company ("KOC") to have a fast track test plant as an Early Production Facility to process (18 MMCFD gas & 5 MBOPD crude oil). This was a contractor financed, built and operated facility commissioned in 2003 and had 3 years of operations. Encouraged by expedient project implementation and a short gestation period, KOC employed similar contracts for several crude oil and gas processing facilities of larger scale. In these contracts, during the 1st phase contractor finances project investments, builds and commissions facility, and in the 2nd phase contractor operates facility and earns revenue. All investments, incurred costs and financial gains are recouped through revenues spread over operations phase. After the end of contract, owner has an option to extend operation phase for an agreed period, or purchase facility, or discontinue. Implementation of contractor financed, built and operated facilities in Kuwait abounds in challenges and has validated that financing can be key to success of such projects particularly in today's financial markets which is very volatile and operates under a cautious atmosphere. KOC's experience underlines that before implementing a new project it is important that contractors conduct a comprehensive appraisal of project, accurately ascertains costs, evaluate and address all risks, have in place a financing arrangement to cover all costs, inflations and contingencies and assurance of return through revenue. Corporate finance normally used for traditional EPC contracts, sustained by progress payment from owners, can be used for such projects to some extent if level of investment is low. With increase in projects cost and quantum of investment, corporate financing has fallen short to meet needs of such projects and project financing has emerged as the preferred alternative. Project finance is a method of raising long-term debt financing for major projects through "financial engineering," based on lending against the cash flow generated by the project alone; it depends on a detailed evaluation of a project's construction, operating and revenue risks, and their allocation between lenders and contractor /project sponsor through contractual and other arrangements.