IRANIAN REFINERY DEAL THAT WOULD BURN THE ECONOMY

sandman

ARTICLE FROM THE SUNDAY LEADER BY RANJITH JAYASUNDERA AND RUWAN PETHIYAGODA :

Further to The Sunday Leader's exposure of the government's plan to pump US$1.7 billion of borrowed money into a massive, overpriced infrastructure project to expand the CPC's Sapugaskanda oil refinery, financial studies commissioned by the Central Bank have emerged showing that the project will drive the CPC and Sri Lanka into a phenomenal spiral of debt.

The total cost of the project, already cleared by the cabinet of ministers following the cabinet paper presented by Minister A.H.M. Fowzie on August 19, is US$ 1.7 billion. CPC Chairman Asantha de Mel previously told The Sunday Leader that the project cost will be limited to US$ 1.58 billion, but given that cabinet has already approved the higher price, there is little to hold him to that promise.

Whilst successive governments have spurned many a private project proposal to put up new oil refineries in Sri Lanka at much lower prices, the sudden decision to allow Iran to expand the existing refinery at an exorbitant cost has raised many an eyebrow.

The proposal was first publicly mooted after President Rajapakse's visit to Iran in November 2007. After this visit, it was revealed in state media such as the Sunday Observer of April 27, 2008 that the government was obtaining a 'grant' of US$ 700 million towards the refinery expansion.

Borrow a massive sum

The plan approved by cabinet however was to borrow a massive sum of up to US$ 1.7 billion from Iranian and international banks on long term loans at commercial rates of interest. Iranian banks are to put in 70% of the cost of the project (US$ 1.19 billion) at an interest rate of LIBOR + 0.5% whilst the remainder of over US$ 500 million has to be raised by the Sri Lanka government through commercial banks.

Ironically, the idea was first officially presented to cabinet as Item 12 in a Memorandum submitted by President Rajapakse dated May 28, titled "Economic Transformation to Face the Rising Energy Cost." The 'transformation' of the Sapugaskanda refinery, instead of helping to face any 'rising energy costs' will take the Petroleum Corporation 14 years to pay off the dues in full, according to a study commissioned by the Central Bank and acquired by The Sunday Leader.

On top of the $1.7 billion cost of the project, the study says that the government would have to pay over US$ 200 million in interest alone to the Iranian banks during a four year grace period on the loan allowed for the construction of the refinery.

The study was conducted before the CPC revealed that the grace period would actually be five years, thus costing the government US$ 250 million in interest before the government starts paying back the loan.

Interest to the commercial banks

The government may similarly have to pay over US$ 122 million in interest to the commercial banks who provide the rest of the funding for the project over a five year grace period, although the Central Bank study, based on a four year grace period, estimates US$ 150 million for the shorter period.

Thus the Iranian proposal will cost the government over US$ 370 million (twelve times the full loss incurred to date by Mihin Lanka) in interest alone before the government starts paying back its dues. The money paid for the project, whether in capital or interest, will largely flow in the 'circle of life.'

The cash will originate from Iranian and commercial banks, and be lent to the Sri Lankan government, who will in turn use the money to pay Iranian companies to do the construction work, and pay the majority of the interest to the lending Iranian banks. The project would refurbish the CPC's existing 50,000 barrels per day refinery so that it can refine 100,000 barrels of crude oil per day.

The most shocking thing about the project is the government's determination to go ahead with it without soliciting any other proposals, despite the fact that it is phenomenally over-priced - by around US$ 1 billion.

Turned down several proposals

This government itself has turned down several proposals that would have cost the government nothing, to build brand new, larger refineries that would be privately operated and handed over after a period of time. Petroleum Resources Minister A.H.M. Fowzie went so far as to verbally attack one of the projects, by US based Global Energy, at a press conference he addressed on September 5, 2007.

Global Energy has since written to Minister Fowzie and rebuffed his claims that their $800 million proposal for constructing a new 100,000 barrel per day refinery would have used "old equipment" that would have been dumped on Sri Lanka after 25 years. Global Energy reminded the Minister that 'he was aware' that the project was a BoI-approved one, and thus could not have imported anything other than brand new top of the line equipment.

The fact that the government's case against other proposals being inferior has thus fallen apart, makes it all the more alarming that they are pursuing the Iranian proposal with such vigour. It is learnt that President Mahinda Rajapakse has gone so far as to give his personal assurance to his Iranian counterpart, Mahmoud Ahmedinajad, that the project agreement will be signed.

Argument flawed

CPC Chairman Asantha de Mel told The Sunday Leader that the benchmark cost for such a project around the world was around US$ 30,000 per barrel per day, and that thus the cost of this project was in line with international norms. This argument is flawed because the previous proposals presented to the government (albeit unsolicited) were at a cost of between US$ 8,000 and US$ 11,000 barrels per day.

Even adjusting for the skyrocketing costs produced by the weak US dollar and a shaky global economy, US$ 30,000 per barrel per day is an exorbitant cost increase. Indexes maintained by the Information Handling Group (IHS), which is the parent company of the Jane's Defence and Intelligence Group, show that the average cost of refinery construction has increased by 16% in 2006 and 14% in 2007.

This cannot justify the 300% increase in what it is going to cost Sri Lanka to get its refining industry in order, by paying over US$ 30,000 per barrel per day for the expansion of its existing refinery. Industry analysts have highlighted the fact that choosing to 'expand' the existing Sapugaskanda refinery instead of building a new one is one of the reasons for the phenomenal project cost.

"You can compare this to buying or repairing a car," one industry professional said. "If you are buying a brand new car, the prices around the world and in the local market are well known and competitive, so you know how much you have to pay. But if you try to repair an old car, the workshop can charge you anything they like, and no one will know how much the repair is actually costing."

No tender procedure

The allegation is that when only one company is approached, and the project is based on modifications to the existing facility (which was built nearly 40 years ago in 1969) there is a lot of scope for costs to be inflated by the contractor without any suitable benchmark to which these costs can be compared.

Without any tender procedure therefore, the President and Minister Fowzie have coaxed cabinet into a deal that will cost Sri Lanka over US$ 2.3 billion in capital and loan interest, which paid over a period of 10 years would amount to Rs. 23 billion per year.

To put this figure into context, it would be two fifths of our wartime annual defence budget - which should decrease dramatically if the war is finished this year as the government predicts - and would be Rs. 253 billion in total. That is 84 Mihin Lankas, or over 3,000 'Helping Hambantotas' worth of money spent by Sri Lanka.

The refinery's operations alone would not be able to service the Iranian and commercial loans according to the Central Bank commissioned financial study, and the CPC will incur a loss of US$ 80 million (or Rs. 8.8 billion) which the government would have to somehow find, in order to service the loans taken to build the refinery.

Financial losses

This loss does not take into consideration the other losses the CPC may occur through brainstorms such as going into oil hedging while prices are at world all time highs. It is a result of this hedging that has left the CPC with stockpiles of oil bought at high prices, and hasn't supposedly allowed them to reduce petroleum product prices conveniently until the onset of the 2009 budget debate in parliament.

Apart from the financial losses incurred by the refinery project, the most frightening aspect of the handling of the state petroleum "resources development" sector is the stance taken by CPC Chairman Asantha de Mel on the demand for petroleum products in Sri Lanka.

The CPC Chairman claims that 100,000 barrels per day would be adequate for Sri Lanka until 2025. Demand in 2007 was 88,000 barrels per day, and this figure doubled in just 14 years from 1994, when our oil consumption was 45,000 barrels per day. According to de Mel, the CPC has calculated that Sri Lanka's oil consumption will not pass 100,000 barrels per day until the year 2035.

His prediction is a bamboozling variation from the country's consumption trend over the past 28 years. The chart on this page shows how our fuel consumption has skyrocketed during this period, yet De Mel is gambling over Rs. 253 billion in state funds on our fuel consumption somehow 'peaking out' at under 100,000 barrels per day.

100,000 barrels per day

At the current exponential rate of consumption expansion, Sri Lanka will be consuming 100,000 barrels per day just three years from now in 2011, barely a year after the refinery construction is slated to be completed.

The CPC's debt as a result will continue to increase over the span of two governments, and in that period further losses will be incurred as is the case today, by the corporation being forced to import refined petrol and diesel if its production cannot keep up with increasing demand.

Despite the reality of this situation being readily known to the government, there has been not a voice of protest from any sector to this attempt by the CPC to commit financial Hara Kiri. Amidst zero protests from any parliamentary opposition parties, the CPC is planning to conclude its negotiations and sign a loan agreement with an Iranian state bank for over US$ 1 billion, by the end of this month.

The CPC Chairman said that "we can sign this agreement and one other engineering agreement" in order to begin construction of the refinery by December 2008. Asked about the US$ 500 million that needs to be raised by the government, De Mel said that "we can start the project and then look for this money," knowing that there is no way at the moment for the government to provide this remainder of the funding.

Possible hiccups

The government will also have to brace itself for possible hiccups along the ride with Iran, with the EU, US and UN all chastising that country for failing to halt its nuclear uranium enrichment programme. Both the UN and US have applied sanctions against Iran, and the woes faced by the Mullah state can only worsen in the coming years.

Whoever wins the coming presidential election, Iran will face insurmountable difficulties if it fails to halt its nuclear programme. The US government has so far turned a blind eye to Sri Lanka's dealings with Iran and has adopted a 'wait and see approach.'

"We can't see how this will benefit Sri Lanka," a person close to the US State Department said on condition of anonymity. "Iran can't even support its own refining needs and is importing gasoline and diesel to keep its economy going. Our sanctions have proven effective in stopping foreign expertise from getting into their petroleum sector. Building a refinery in Sri Lanka would be quite a learning experience for Iran."

Thus yet again, with big grins from everyone from the President to the Foreign Minister and the line minister concerned - and barely a whimper from an oblivious opposition - Sri Lanka is set to be used as a pawn in another country's foreign policy games, whilst paying the full economic and political price, at a commercial rate of interest to boot!

I AM BRAINLESS, SO PLEASE EXCUSE ME !!!!!!

elada

This is not only deal which will ruin our economy,

We are a stupid nation and "Api loketa Kade yanawa"

elada
lankaculture

shihancj

ela thmai

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