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New board says it’s saddled with sloppy contract

Sunday, December 22, 2013
Petrotrin’s billions in cost overruns on Gas Optimisation Project...

A slipshod contract signed by a previous board tied state-owned Petrotrin to the billion-dollar cost overruns of its Gas Optimisation Project (GOP). The project, almost a decade in the making, is finally nearing completion and is expected to end at the end of the year. After years of delays and missed deadlines, the protracted project cost the state-owned enterprises some $1.43 billion since it began in 2004. 


Though the current board, headed by former energy minister Lindsey Gillette and company president Khalid Hassanali, was before the Public Accounts (Enterprises) Committee earlier this month to explain the high cost overruns, the company is now saying that they were saddled with the slipshod contract signed by previous boards. 



In a response to questions by the Sunday Guardian, Petrotrin said the five years of cost overruns was due to problems with the contracts, design and engineering shortcomings, project delays, scope growth, increases in labour cost and lower than expected productivity. “The 2004 original estimate was US$350 million, by Petrotrin, (and) was a preliminary estimate at the conceptual stage of the project,” the company said.


By November 2005 an international contractor (name called) was brought in and that estimate shot to US$650 million,” based on different definition and development stages of the project with no detailed engineering being done except for the Isomerisation Complex,” the company said. It was bumped up again by the mid-2006 lump-sum bids received for the CC (continuous catalyst regeneration) Complex, Alkylation and Acid Units and FCCU (fluid catalytic cracking unit) Phase II Upgrade. 


“In October 2006 the budget was revised at an estimated US$850 million and the award of major contracts, the schedule for mechanical completion was extended to January 2009. In June 2008 the project budget was increased to US$1.3 billion, and the time for mechanical completion was further extended to November 2009 as a result of the continued unprecedented escalation of market increase in material prices and fuel, project delays, scope growth, increases in labour cost and lower than expected productivity,” the company said.


“The budget was maintained until June 2010 at which time the schedule for mechanical completion was February 2011,” they said. But by June 2010 a risk-adjusted budget of US$1.48 billion was developed, taking into account all pending change orders, contractors’ claims for schedule delays and costs associated with risks for completing the remaining portions of the project. The coming on stream of the Acid/Alkylation Unit in December 2013 marked the completion of this project at a total cost of US$1.43 billion.


“It is important to note, however, that this project was initiated by the previous administration and by the time the board changed in 2010, elements of the GOP were already suffering from massive cost escalations and schedule slippages as a result of ill-advised contracting strategies,” the company said.


“When a post mortem was done, the primary lesson learnt is that the EPC (engineering, procurement, and construction) cost reimbursable—hybrid contract model—is not always the best choice. The exercise also revealed enormous variations, errors in design and the international company’s actual contract limited actions that could be taken by Petrotrin,” the company noted.


“We are currently faced with diminishing returns from our domestic market—freight costs, pricing etc. Over the next few years, we will have to work at reduced capacity to ensure that we do not operate at a loss,” Petrotrin said. Despite the massive overruns, Petrotrin is still the country’s largest producer of oil and operator of the sole petroleum refinery contributing over $7.6 billion to the treasury.


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