US delays new Iraq oil infrastructure contracts; KBR work continues

Oct. 30, 2003
The US Army Corps of Engineers Wednesday said it expects as long as a 2-month delay in awarding two new Iraq oil infrastructure contracts because it plans to expand the value of the original tender.

Maureen Lorenzetti
Washington Editor

WASHINGTON, DC, Oct. 30-- The US Army Corps of Engineers Wednesday said it expects as long as a 2-month delay in awarding two new Iraq oil infrastructure contracts because it plans to expand the value of the original tender.

The two new contracts each still have a minimum value of $500,000 but as amended, the contract could reach as much as $800 million for the northern oil fields and $1.2 billion in the south, which includes Baghdad. The new estimates reflect revised expectations on the pace and scope of repairs needed. More money is needed in the south because the region has more oil wells, processing plants, and has experienced greater looting and damage, USACE said. The original contracts had a maximum value of $500 million each.

The new contracts will still be awarded through "full and open" competition and will eventually replace the controversial noncompetitive contract awarded last March to Halliburton Co. subsidiary KBR. But as yet it remains unclear how much work the new contractors will perform.

USACE said the current KBR contract will continue until an undetermined time in which the "effective transition to the competitively awarded contract occurs." Further, USACE said they anticipate "KBR will complete most activities now under way."

KBR is currently authorized to perform as much as $1.6 billion worth of work under the prewar contract, but that amount could increase depending on future federal appropriation levels. Wall Street analysts estimate that Halliburton's KBR contract translated to $34 million in earnings during the third quarter.

USACE proposal calls on companies to restore the Iraqi oil infrastructure to prewar production levels and covers a full range of services. These include, but are not limited to, extinguishing oil well fires; environmental assessments and cleanup at oil sites; oil infrastructure condition assessments; engineering design and construction necessary to restore the infrastructure to a safe operating condition; oil field, pipeline, and refinery maintenance; procurements and importation of fuel products within Iraq; technical assistance in marketing and sales and exports; and technical and consulting services to Iraqi oil companies (OGJ, July 28, 2003, p. 28).

Companies can resubmit their bids through Nov. 5; contracts will likely be awarded in December, officials said. Further, companies that did not submit bids on the original tender issued last July are eligible to submit a new bid, USACE said.

Bidders
USACE would not reveal who is being considered for the new contracts although industry sources say Halliburton is expected to be among those vying for the new competitive contracts. Also in the running is said to be Parson Corp. and a Fluor Corp. consortium that includes UK firm AMEC PLC. USACE said the new Iraq contracts will be priced on a formula that reflects a cost plus award fee for a 2-year period with three 1-year options. Under that arrangement, the contractor is guaranteed a 2% fee but can earn as much as a 7% profit margin, depending on performance.

Political considerations
KBR's current contract has proved to be an explosive political target. Most recently US congressional Democrats have taken aim at the company's fuel procurement costs in Iraq, calling them "grossly excessive." Responding to those charges, Halliburton defended its methods saying it obtained and sold the fuel in a fair and competitive manner that reflected the challenging logistics of shipping fuel in a hostile environment.

Under a pending White House request to Congress for Iraq reconstruction, $900 million is earmarked for Iraqi fuel purchases, about $200 million more than what should be needed according to a recent Congressional Research Service report. Yet despite the CRS report, congressional negotiators are expected to approve those funds as part of an overall $2.1 billion estimate for infrastructure repairs.

But the spotlight on the existing fuel contract is strong enough that US military officials are looking to reduce KBR's involvement in obtaining fuel imports. US officials speaking on condition of anonymity said the Pentagon is strongly considering turning over much of future Iraq fuel procurement to the US Defense Fuel Supply Center. A USACE spokesman stressed that no decision has been made on the issue.

Production targets
It's unclear how long the US military will have to worry about importing fuel for Iraq's own domestic needs. Crude oil production is now slightly more than 2 million b/d, but looting and security issues have created other logistical issues that have hampered domestic refining and distribution.

Oil exports are now about 1.1 million b/d; prewar exports were about 2.2 million b/d. USACE said it hopes to see production reach 2.5 million b/d by next April, and reach 3 million b/d by January 2005.

Contact Maureen Lorenzetti at [email protected].