DKRW Advanced Fuels terminates deal with Chinese contractor

2014-03-30T12:00:00Z DKRW Advanced Fuels terminates deal with Chinese contractorBy BENJAMIN STORROW Casper Star-Tribune The Billings Gazette
March 30, 2014 12:00 pm  • 

CASPER — DKRW Advanced Fuels severed ties last month with the contractor it hired to build its proposed $2 billion coal-to-liquids plant near Medicine Bow. The move was announced by the contractor, Sinopec Engineering Group, in a statement to investors. DKRW initiated arbitration, claiming an undisclosed award for breach of contract, Sinopec said.

The announcement represented the latest in a series of setbacks for the planned plant, which would turn coal into liquid petroleum products. The two sides signed a deal in 2012 that would have had the Chinese firm, an arm of the state-owned oil company, engineer, procure and construct the facility. The deal was valued about $1.6 billion, financial analysts said.

Work was delayed in 2013 after DKRW said it was unsure of when Sinopec could begin construction. The postponement prompted DKRW to seek an extension of its state siting permit, which the Wyoming Industrial Siting Council narrowly approved in December. The extension gave DKRW 30 months to develop a construction schedule and housing plan for employees, among other requirements.

Attempts to reach Sinopec for comment were unsuccessful. The company said in its statement it received written notice from Medicine Fuel & Power LLC, a DKRW subsidiary, on Feb. 25 "purporting to terminate three agreements from 2012 relating to the engineering, procurement and construction of a coal gasification and liquefaction facility."

The company denied allegations it owed DRKW damages and said it planned to vigorously defend itself in arbitration.

It was not entirely clear why DKRW canceled the contract. Robert Kelly, DKRW chief executive officer, confirmed the Houston-based company initiated the termination. DKRW needed to move forward with the project and engage other engineering firms, he said. When asked if Sinopec had not lived up to its contract, Kelly didn't elaborate.

The contract’s termination does not mean the plant’s engineering will not be starting from square one, Kelly said. DKRW already did a significant amount of engineering for the project and the work done by Sinopec before the cancellation of the contract belongs to the Houston firm, he said.

“We have no major concerns that the ISC permit timeline will be an impediment to securing the financing and finalizing the EPC (engineering, procurement and construction) arrangements,” Kelly said.

Financial analysts said the termination could be a “blessing in disguise” for Sinopec.

The Chinese company could have been exposed to cost overruns and construction delays had it fulfilled the terms of its contract, J.P. Morgan analysts wrote. In conversations with Sinopec executives, J.P. Morgan reported the Chinese firm had not received prepayment for the contract, no work had yet to be made. Sinopec’s attorney did not believe the company would be found liable for damages claimed by DKRW, the analysts said.

They noted other hydrocarbon projects taken on by engineering firms had resulted in “painful experiences” following “inappropriate” risk assessments on the part of the engineering firms.

“From this regard, termination of this likely unprofitable project at an early stage might better mitigate the potential downside risk,” the analysts wrote.

Moody’s, a rating agency, called the termination “credit negative” for Sinopec, saying the cancelled contract showed the difficulty of building coal gasification and liquefaction facilities outside China.

Kelly said such comments were not a reflection of the Medicine Bow project’s economic viability, but of the profitability of Sinopec’s contract. Engineering firms make their best estimate of a project’s cost. If they guess right, they stand to make a lot of money. If they guess wrong, they can lose a lot of money, he said.

DKRW’s focus is now on securing financing and finding a new engineering firm to move the project forward, Kelly said.

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