Cost jumps nearly three times for Eastern Refinery's delayed 2nd unit

Infograph: TBS

Summary:

• ERL-2 could save Bangladesh millions by reducing refined oil import dependency.
• Project costs surged from Tk13,000 crore in 2013 to Tk36,410 crore.
• Political transitions and geopolitical influences have repeatedly stalled ERL-2's implementation.
• Bangladesh imports 7.5 million tonnes of oil, but ERL refines only 1.5M.
• Experts blame lack of political will and vested interests for delays.

The second unit of Eastern Refinery Limited (ERL) could save Bangladesh millions of dollars annually by reducing reliance on expensive refined oil imports. Yet, more than five decades after the country's first refinery was built, the question remains—why the project is yet to be implemented?

Plans for ERL-2 date back to 2010, and the government proposed Tk13,000 crore for the project in 2013. But it failed to move forward. A fresh initiative by Bangladesh Petroleum Corporation (BPC) in 2022 to self-finance the project saw costs surge to Tk23,000 crore, and that too remained stalled.

In early 2024, the controversial business conglomerate S Alam Group expressed interest in building ERL-2 at a cost of Tk25,000 crore, receiving positive signal from the energy division on 9 July 2024. 

However, the political transition in August—marking the end of Sheikh Hasina's tenure—thwarted those plans. After the interim government took over, BPC revived the project once again, but this time, the estimated cost soared to Tk36,410 crore.

According to the preliminary project profile done by BPC, the modernisation and expansion of ERL will significantly benefit the economy by cutting crude oil import costs and saving substantial foreign currency.

Preference for import

Experts question why Bangladesh has failed to establish a second refinery despite its first unit being operational since 1968. 

The existing plant, built before the country's independence, refines only 1.5 million tonnes of crude oil annually. Yet, Bangladesh's demand has grown fivefold to 7.5 million tonnes per year, forcing the country to import costly refined fuel instead of processing cheaper crude oil domestically.

According to Dr Muinul Islam, a former professor of economics at the University of Chittagong, the second unit of Eastern Refinery has never been a government priority despite spending around Tk10,000 crore annually as additional spending for refined oil imports. 

For years, Bangladesh has imported 7.5 million tonnes of petroleum products, while ERL refines only 1.5 million tonnes, he told The Business Standard.

"We need a refinery with at least a 6 million tonne capacity. But even after 60 years, we haven't been able to build it. This shows a lack of political will," he added.

More to do with politics?

Dr Islam also pointed to geopolitical influences, alleging that a French firm, which had built ERL's first unit, was sidelined for the second phase following recommendations from an Indian consultancy firm. 

"There's a lot of politics involved, which is why we never got the second unit. Now, the question is whether the new government will take concrete steps to finally make it happen."

M Shamsul Alam, energy adviser to the Consumers Association of Bangladesh (CAB), believes the country had ample opportunity to build ERL-2 long ago, which could have ensured energy security at a much lower cost.

"Those responsible for delaying ERL-2 have cost the country billions. Their assets should be confiscated to recover the losses," he said.

He also called for legal action against those who obstructed the project. "Prosecuting these individuals is essential. To ensure transparency and good governance in the energy sector, identifying those responsible and making them accountable is the only way forward."

Financing issues of the new BPC plans?

The total cost of ERL-2 construction is estimated at Tk 36,410 crore. Of which, the government plans to secure Tk25,500 crore in foreign loans from various development partners. BPC will bear the remaining expenses. 

To facilitate foreign financing, BPC has submitted a new Preliminary Development Project Proposal (PDPP) to the Economic Relations Division (ERD) after receiving policy approval from the Planning Commission.

The project has also been renamed from "Installation of ERL Unit-2" to "Modernisation and Expansion of Eastern Refinery Limited (ERL)."

In January, BPC Chairman Amin Ul Ahsan told The Business Standard that loans or equity capital would be sought from countries with significant investments in the refining sector, particularly in the Middle East.

"We will prioritise securing loans. If loans are not available, we will offer equity capital investment, ensuring that 51% ownership remains with the Bangladesh government," he said.

A senior ERD official, requesting anonymity, said that Aramco, a Saudi energy company, had expressed interest in constructing ERL-2, but Bangladesh was unable to confirm the arrangement.

The government is currently in discussions with the Islamic Development Bank (IDB) and other Middle Eastern countries and organisations.

Following BPC's revised proposal, these discussions are expected to gain momentum.

Expansion to meet demand

To reduce the dependence on imported oil, BPC has planned this significant expansion which will increase ERL's refining capacity from 1.5 million tonnes per annum to 4.5 million tonnes.

The ERL-2 expansion aims to enhance energy security and reduce dependency on costly refined oil imports.

Additionally, it will serve as a "Forward Linkage" for the "Installation of Single Point Mooring (SPM) with Double Pipeline" project, which has already been commissioned.

Furthermore, the project will enable the production of Euro-5 standard fuels, improving energy efficiency and environmental sustainability by reducing emissions and enhancing air quality.

Officials noted that this will have a ripple effect, decreasing overall transportation costs, reducing commodity prices, and making essential goods more affordable, particularly for lower-income communities.

Bangladesh's only oil refinery, Eastern Refinery in Chattogram, was established in 1968 by French engineering company Technip.

At the time, ownership was split among the East Pakistan Industrial Development Corporation (35%), private businessmen from West Pakistan led by former commerce secretary Abbas Khalili (35%), and Burmah Oil Company of the UK (30%).

Now, ERL operates as a state-owned subsidiary of BPC.