The giant Mmamabula Energy Project in Botswana has suffered a major setback that is likely to result in further delays. The latest problems emanate from the difficulties the developers of the project are facing in reaching an engineering, procurement and construction (EPC) contract.

TSX- and BSE-listed CIC Energy, which is progressing the Mmamabula project as a 50:50 venture with International Power Plc, is warning that the global EPC market is tight and contractors are demanding different terms that are likely to delay the fast progression of the first phase of the US$9.5-billion project.

The project includes a coal mine, two 2,500-megawatt power stations, a coal export unit and coal-to-hydrocarbons plant at Mmamabula, in southeast Botswana on the border with South Africa.

CIC Energy says the project's sponsors have concluded that it will be difficult to enter into a turnkey EPC contract for the project on terms and conditions that, until recently, were accepted by EPC contractors and would have enabled this project to be financed on a non-recourse project finance basis, according to a statement posted on the Botswana and Toronto bourses.

Strong demand in the EPC market for steam turbines has resulted in EPC contractors insisting on terms and conditions for project financed projects of the scale of the Mmamabula Energy Project that we don't believe will be acceptable to lenders without changes to risk allocations, says Gregory Kinross, President of CIC Energy.

CIC has since turned to its offtakers, South Africa's power utility Eskom and the Botswana Power Corporation, to see if they will assume the construction and capital cost risks required to fund the project in the debt markets.

The company is also bracing itself for further increases in the costs of developing the gigantic Mmamabula Energy Complex. It cautions that negotiations to facilitate the financing of the project on a limited recourse basis may impact on its schedule.

Even should the offtakers accept, approval will take time, which will create delays and expose the project to further capital cost creep, Desjardins Securities analyst Daniel Shteyn wrote in a note to clients quoted by Canadian Press on Tuesday.

Shteyn, who downgraded his ratings on CIC Energy's stock from buy to hold, said the delays created a critical confidence crisis in the project.

In January, engineering delays saw the costs of developing the project ballooning to US$9.5 billion, more than $3 billion above previous estimates, partly due to engineering delays.

In February, CIC Energy was to announce that the Mmamabula project's schedule would be delayed by about six months, which it attributed to the strong demand for power plant builds and the prevailing engineering resource constraints, saying these continued to increase lead times for power plant equipment and construction services.

It said at that time that finances for the first phase of the project would only be made available in the fourth quarter of 2008, followed immediately with the start of construction in the same quarter, but pushing the commercial operation of the first unit of the power station to late 2012, or early 2013.

The second and third units would come on-line at six-month intervals following the first unit.

The company is currently considering exporting seaborne traded A grade thermal coal from the Mmamabula Coal Field to Namibia and is looking at being part of a transport consortium that is planning a 1,500-kilometre rail line linking the landlocked Botswana to its neighbour's west coast.