IsDB offers $1b loan for Eastern Refinery’s second unit

Highlights

• IsDB offers up to $1bn to finance Eastern Refinery Limited-2 refinery expansion.
• Government begins talks, targets loan signing by June.
• Eastern Refinery Limited-2 approved at Tk35,465 crore, funding to be revised.
• Project to boost refining capacity and cut fuel imports.

The Islamic Development Bank (IsDB) has expressed interest in financing part of Bangladesh's long-delayed Eastern Refinery Limited expansion, offering up to $1 billion in loans for the ERL-2 project.

The ERL-2 project will expand the country's only oil refinery in Chattogram. It aims to increase domestic refining capacity and produce cleaner fuels, reducing reliance on imports.

The proposal was conveyed in a letter sent on Monday to the Economic Relations Division (ERD) and Bangladesh has responded positively, according to officials from the division.

Officials added that formal discussions with IsDB on the proposal began on Wednesday.

Infograph: TBS

Mohammad Mizanur Rahman, additional secretary and wing chief for the Middle East at ERD, said the meeting agreed on a plan to sign the loan agreement by June.

"An IsDB technical committee will visit Bangladesh in January to finalise the loan's terms," he added.

He further said that although IsDB had proposed a $1 billion loan, the lender had indicated it could provide additional funding if necessary.

"The proposal is welcome news, as the government has long been trying to secure foreign financing for the second unit of Eastern Refinery," he said, adding that they were keen to proceed with the loan.

ERL-2 already approved at Ecnec

A day after the proposal was received, the government approved the ERL-2 project. In the absence of external financing, the project was approved under government funding at a meeting of the Executive Committee of the National Economic Council (Ecnec) on Tuesday.

Ecnec approved the project at a cost of Tk35,465 crore, with Tk21,278 crore from government funds and Tk14,188 crore from Eastern Refinery's own resources.

However, Planning Commission and ERD sources said the Ecnec meeting also decided that the financing structure would be revised once IsDB's loan is formally confirmed.

They said project activities will begin using government and internal funds, with the financing structure to be updated after the IsDB loan agreement and resubmitted to Ecnec.

Largest loan offer by IsDB

ERD officials said the IsDB letter was addressed to ERD Secretary Md Shahriar Kader Siddiky by Muhammad Nassi Bulaiman, head of the IsDB Regional Hub for Bangladesh and the Maldives in Dhaka.

IsDB estimates the total project cost at around $2.894 billion, equivalent to about Tk35,465 crore.

The IsDB Dhaka Regional Hub expressed interest in supporting part of the project cost, tentatively up to $1 billion, with scope for additional co-financing.

The letter noted that the expression of interest is non-binding and subject to an official request, due diligence, project readiness and agreement on financing terms.

ERD officials said, once finalised, this would be among the largest loans ever extended by IsDB, not only for Bangladesh but for any country.

Long-delayed project

Eastern Refinery was established in 1968 under the French contractor Technip. Plans for a second unit (ERL-2) were first drawn up in 2010, and the government approved Tk13,000 crore for the project in 2013. 

However, no progress was made. In 2022, Bangladesh Petroleum Corporation (BPC) attempted to proceed using its own funds, raising the estimated cost to Tk23,000 crore, but work still did not start.

In early 2024, the controversial S Alam Group expressed interest in constructing ERL-2 at a cost of Tk25,000 crore, and the energy division approved the proposal on 9 July. However, the project was suspended in August following the mass uprising that led to the fall of Sheikh Hasina's government.

After taking office, the interim government revived the project. At that stage, the project cost was estimated at Tk36,410 crore, with Tk25,500.77 crore proposed from development partners and Tk10,909.32 crore from BPC's own funds.

When foreign loans could not be secured, the interim government revised the plan to use state funds and BPC's internal resources. The project's initial cost had been set at Tk42,973.70 crore, including Tk30,499.80 crore from government funding and Tk12,473.90 crore from BPC, before the Planning Commission reduced it after review.

ERL-2 to boost crude oil transport and reduce imports

Energy Division sources said Eastern Refinery currently meets only 20% of Bangladesh's petroleum demand, with the remainder fulfilled through imports.

Officials from BPC said the proposed ERL-2 will produce environmentally friendly Euro-5 gasoline and diesel and upgrade the existing refinery's diesel, motor spirit and octane to Euro-5 standards.

BPC has already implemented a new "Installation of Single Point Mooring (SPM) with Double Pipeline" project, which will allow the transport of up to 4.5 million tonnes of crude oil annually.

High dependence on imported refined fuel has necessitated significant government subsidies. Under the proposed "Modernisation and Expansion of Eastern Refinery Limited" project, three million tonnes of crude oil will be refined each year, substantially reducing petroleum imports.

Officials said the project could produce 400,000 tonnes of furnace oil, 60,000 tonnes of LPG, 600,000 tonnes of Euro-5 gasoline, 1.1 million tonnes of Euro-5 diesel, 200,000 tonnes of lube base oil, and 500,000 tonnes of jet fuel annually.

BPC data show that in FY24, Bangladesh consumed 6.73 million tonnes of petroleum products, of which ERL produced only 1.25 million tonnes, leaving 5.05 million tonnes to be imported.

Fuel demand has grown at an average annual rate of 5.5% in recent years. BPC projects that by FY30, demand could reach 10.79 million tonnes, while domestic production would peak at just 4.5 million.

If the ERL expansion is not implemented, the shortfall could rise to 9.29 million tonnes, placing significant pressure on import costs and the country's energy security, officials said.