Korean builders face risk of losing $755 mil. in unpaid Iraq refinery project

Hyundai Engineering & Construction (E&C) and three other local builders are at risk of losing more than 1 trillion won ($755 million) tied up in a major Iraqi refinery project, according to documents obtained by a ruling party lawmaker Friday.

Hyundai E&C, GS Engineering & Construction, SK ecoplant and Hyundai Engineering have yet to collect 625.4 billion won in outstanding payments and are facing the possible forfeiture of another 420.2 billion won in performance guarantees. The builders have been seeking payment for work on the $6.8 billion Karbala Refinery Project, commissioned by Iraq’s state-owned State Company for Oil Projects (SCOP).

Company materials provided to Rep. Lee Jae-gang of the ruling Democratic Party of Korea showed the construction of a refinery capable of processing 140,000 barrels of crude oil per day was delayed by factors including Iraq’s internal conflict and the COVID-19 pandemic. The companies handed over the refinery’s facilities to the Iraqi side in December 2023.

However, SCOP has withheld payments, citing outstanding defects and missing tax-related documentation. The unpaid amount includes 209.3 billion won withheld for alleged defects and related issues, 277.7 billion won in tax-related payments and 138.4 billion won for refinery operations and maintenance. The Iraqi firm had agreed in April last year to pay about 33.5 billion won of the outstanding operations and maintenance fees, but the payment has yet to be made.

The Korean companies are also facing the possible forfeiture of 420.2 billion won in performance guarantees submitted to ensure they fulfilled their contractual obligations, pushing up the total sum to 1.04 trillion won.

The two sides began negotiations in May to settle the outstanding payments, but the talks were effectively reset following a change in Iraq’s oil minister and the arrest of a deputy minister.

In September, the Iraqi side rejected settlement terms proposed by the South Korean companies. The builders are preparing plans to address the reported defects, but progress has been hampered by limited cooperation from Iraqi authorities on site access permits, visas for essential personnel and the scheduling of refinery shutdowns needed to carry out repairs.

Of the 162 reported defects, 120 cannot be addressed until the refinery is shut down or the causes of the problems have been determined.

The Iraqi government has recently suggested that the companies accept crude oil instead of cash as payment for the outstanding amounts. In the past, some Korean builders had recovered part of their payments through a subsidiary in the oil sector that took delivery of and sold crude. However, companies without facilities to store or sell crude oil would find it difficult to use the same arrangement.

The lawmaker called on the Korean government to intervene in the dispute.

“The Iraqi side changes its position whenever ministries or officials change, while our companies are left fighting on their own. It is time for the government to get involved to help them.” Lee said. “I will urge the relevant government agencies to establish a coordinated, interagency support mechanism for recovering the unpaid payments during the National Assembly audit of the Ministry of Foreign Affairs on Monday.”