Spiralling costs have hit downstream energy projects throughout the region as the oil and gas industry strains to bring new capacity online.

"It"s about $12 billion," Shaikh Ali Al Jarrah Al Sabah said when asked about the planned budget, double the around $6 billion officials last put the costs of the plant in March.

"We have to be realistic. We have to cope with what"s going on in the market," he said.

Kuwait cancelled a previous tender for the plant in February after bids came in far above the budget. According to reports, offers from international companies reached $15 billion.

The new budget has been approved by the board of state-run Kuwait Petroleum Company and is still pending approval by the supreme council that formulates Kuwait"s oil policy, Shaikh Ali said.

State refining arm Kuwait National Petroleum Company (KNPC) hopes that the supreme council will approve the budget in May so that it could launch a new tender for the refinery in July, its head Sami Al Rushaid said.

He said KPC planned to launch the project on a cost-plus basis for companies, with construction of the plant being completed by end 2011, a year later than previously planned.

The cost-plus basis would require companies to submit detailed cost estimates for the refinery, plus their required profit margin, industry sources said. Under the terms of the first tender, companies bid with a lumpsum estimate for the whole project.

The planned Al Zour refinery is due to replace the ageing 200,000-bpd Shuaiba refinery.

Rushaid also confirmed Kuwait, which controls a tenth of the world"s proven reserves, was still planning to upgrade its two other Mina Abdullah and Mina Al Ahmadi refineries but said costs would be only known after studies had been conducted.

KNPC officials have said the new refinery and the upgrade of the two other plants would increase Kuwait"s downstream capacity to 1.2 million bpd.

The Gulf state was stepping up security at oil installations, Rushaid said, although he gave no details.

PIN/REUTERS