Govt to self-fund 2nd Eastern Refinery unit to boost petroleum refining

Infographic: TBS

The government is set to embark on its second-largest self-financed project following the completion of the Padma Bridge.

The upcoming venture is Eastern Refinery Limited, Unit 2 (ERL 2), at an estimated cost of Tk23,746 crore. The project will be implemented from July 2022 to June 2027. 

The finance ministry will contribute Tk16,142 crore in loans, while the implementing agency, Bangladesh Petroleum Corporation (BPC), will provide the remaining Tk7,100 crore.

In 2012, when the World Bank withdrew its funding of $1.2 billion for the Padma Bridge project, the government made a commitment to finance it independently, and successfully fulfilled that promise. 

Similarly, facing difficulties in securing funds from foreign sources for the ERL 2 project, the government has resolved to finance the project with its own resources.

A BPC official, requesting anonymity, told The Business Standard that ERL 2 will be set up using state-of-the-art technology to refine various types of crude oil, including Russian crude oil.

The country's only state-owned refinery currently does not have the capacity to refine Russian crude oil at a time when global fuel oil prices have soared as a result of the Russia-Ukraine war.

Once the project is implemented, Bangladesh will be able to import and refine an additional three million tonnes of eco-friendly Euro 5 fuel oil per year, saving $9-10 per barrel in refined fuel considering current international market prices.

The project's original feasibility study report showed annual savings of $237 million with about $11 in savings per barrel.

The second unit of ERL will be able to meet 100% of the current demand for jet fuel and gasoline. Fuel oil can be exported after meeting local demand.

In addition, the production of two new petroleum products — lube base oil and sulfur — will be possible, which are now completely import dependent. Among these, lube base oil will be used as raw material for the production of lubricants.

Established in 1968, the ERL at Patenga in Chattogram can currently refine 1.5 million tonnes of crude oil per annum.

At present, ERL is meeting only 20% of the country's demand for petroleum products. The rest of the demand has to be met by importing refined oil at a higher price.

To meet the increasing demand for fuel oil in the domestic market, the government took up the "Installation of ERL Unit 2" project a decade ago. 

The BPC tried to get funding from foreign countries and organisations, including Saudi Arabia's Aramco, to implement the project but failed. Later, the BPC decided to implement the project with its own finance.

According to BPC projections, the country's demand for petroleum products will stand at 8.03 million tonnes in the fiscal year 2026-27. In contrast, the total production of ERL and ERL-2 will be 4.5 million metric tonnes. As a result, there will be a shortfall of around 3.53 million tonnes with the demand for petroleum products.

A crucial project for Bangladesh

After the Ukraine-Russia war broke out last year, fuel oil prices soared in the international market. Bangladesh, like India and China, took the initiative to import crude oil from Russia at a low price and refine it. But that initiative did not work due to a lack of refining capacity.

At such a time, the Ministry of Finance has agreed to lend Tk16,142 crore for the implementation of the project, which the BPC will pay back within seven years. 

The BPC will finance Tk7,100 crore and will seek the remaining Tk493 crore from the Ministry of Finance. If the ministry does not provide the money, the BPC will fund it itself.

A meeting of the ERL Unit 2 Project Evaluation Committee, chaired by Planning Commission Member Abdul Baki, was held in the commission in April. In that meeting, the BPC was asked to make several changes to the Development Project Proposal (DPP) and send the proposal to the Commission again.

According to the minutes of the meeting, 123 acres of BPC's own and leased lands will be used for its implementation. Another 50 acres of land will be leased for a temporary site facility.

A senior official of the Planning Commission, on condition of anonymity, said the Finance Division has consented to this project. Moreover, the implementation will not require much money at the beginning. 

In view of this, the PEC meeting recommended in favour of the project. However, the final decision will be taken by the Executive Committee of the National Economic Council (Ecnec).

Project background

The project was sanctioned by the prime minister in 2014 under the Quick Enhancement of Electricity and Energy Supply (Special Provision) Act, 2010. In 2013, the cost of the project was estimated at Tk13,000 crore.

Last year, the BPC sent the proposal to the Planning Commission to get approval for implementation with its own funding. The project expenditure was then proposed at Tk19,769 crore which has now increased further to Tk23,746 crore. 

When asked about the cost increase, ERL 2 Design Project Director Masud Alam told TBS that the additional cost has been estimated owing to a rise in the dollar rate and prices of construction materials.

He also said that the design work of ERL 2 is almost completed.