Sri Lanka seeks to resolve trade imbalances by expanding oil-refining capabilities

In an effort to meet rising energy demand and achieve economic objectives, the state-owned oil company Ceylon Petroleum Corporation (CPC) has invited bids to both build a new refinery and modernise existing facilities at the Sapugaskanda plant.

Capacity

Following a legacy of limited infrastructure investment, Sri Lanka’s sole refinery and primary port-to-refinery pipeline require development. While the government has made attempts to build new infrastructure in the past, attracting the necessary investment to expand capacity has been a challenge. Notwithstanding the previous setbacks, the CPC aims to increase the country’s overall refining capacity from 50,000 barrels per day (bpd) to 100,000. In addition, the oil firm is evaluating bids for a new oil pipeline to complement the existing 5.8-km pipeline.

While the restoration and expansion of Sri Lanka’s refining capabilities is a step in the right direction, further negotiations around financing will be the determining factor in ensuring the projects’ successful implementation. “Given current market dynamics, would-be investors are unable to hedge the local currency,” Paul Callebaut, country manager of construction company BESIX, told OBG. “Infrastructure investment and project execution are hindered by the existing macroeconomic fundamentals and a slow bureaucratic process. If the authorities can reduce red tape and speed up project approval it would aid investment inflows.”

Sapugaskanda

Built by Iran in 1969, the Sapugaskanda facility is Sri Lanka’s only refinery. Initially used to refine Iranian light crude, the country was forced to seek out other light crude sources after economic sanctions were imposed on Iran in 2012.

In early 2018 the Ministry of Petroleum Resources Development (MPRD) began drafting a tender to expand Sapugaskanda. It aimed to maintain ownership of the facility while taking on debt to finance the planned expansion. As of January 2019 the MPRD was also considering proposals for a new private sector-owned refinery that could serve both domestic demand and export markets. According to state officials, bids will only be considered if companies can secure requisite financing, after which the ministry will seek Cabinet approval on vetted, viable projects.

In May 2018 the Iranian government announced plans to help Sri Lanka construct a new oil refinery and refurbish Sapugaskanda. The development came shortly after President Maithripala Sirisena became the first international leader to visit Tehran after sanctions were re-imposed. While Iranian support bodes well for the country’s oil refinery capacity, obstacles may arise during project development, particularly regarding financial transactions resulting from sanctions.

Nonetheless, modifications to the existing refinery are critical, as rapid urbanisation and continued industrialisation have led to surging fuel demands and a worsening current account balance. At present rates of production, output from Sapugaskanda supplies between 30% and 40% of local refined fuel demand, with the remainder imported by the government. According to the central bank, the import bill for refined fuels reached $3.43bn in 2017.

Preliminary Talks

According to local press reports, in the second quarter of 2018 companies from China, the Middle East and Russia were in preliminary discussions to develop a 100,000-bpd refinery with the CPC. The successful bidder would be permitted to construct a facility with a capacity exceeding 100,00 bpd and export any excess refined fuels.

The Chinese bid, which was submitted jointly by two unnamed companies, was for a refinery near the Chinese-controlled Hambantota Port. Expected to cost approximately $2.7bn, the facility would have an annual output of some 5m tonnes and – coupled with the expansion of the Sapugaskanda facility – increase Sri Lanka’s total refining capacity by more than double. If implemented, the projects stand to reduce the national import bill for refined fuels by some $500m per year.