SRI LANKA: EMBASSY HELPS GLOBAL ENERGY REVIVE ITS OIL

UNCLAS SECTION 01 OF 03 COLOMBO 001050 SIPDIS SENSITIVE, SIPDIS STATE FOR SCA/INS, EEB/CBA, AND EEB/ESC/IEC STATE PASS USTR FOR ADINA ADLER COMMERCE FOR JONATHAN STONE MCC FOR S. GROFF, D. TETER, D. NASSIRY AND E. BURKE TREASURY FOR LESLIE HULL E.O 12958: N/A TAGS: EINV ENRG PREL CE SUBJECT: SRI LANKA: EMBASSY HELPS GLOBAL ENERGY REVIVE ITS OIL REFINERY BID REF: 2006 COLOMBO 2086 ¶1. (SBU) SUMMARY: Embassy continues advocacy for U.S. firm Global Energy and Industrial Operations, Inc., which seeks to build and operate an $800 million oil refinery near Colombo. The project has been stalled since 2004, when Global Energy thought it had a deal upon signing a memorandum of understanding with the state-owned Ceylon Petroleum Corporation. Currently Ceylon Petroleum seeks aid or financing to build its own refinery along the lines of the Global Energy project. However, a May 2007 letter from then-Under Secretary of Commerce Lavin to President Rajapaksa, along with SIPDIS Embassy advocacy, has prompted the government to again consider the Global Energy proposal if it cannot finance its own project. End Summary. GLOBAL ENERGY'S REFINERY WOULD JOIN EXISTING PLANT -------------- --- ¶2. (SBU) Global Energy and Industrial Operations, Inc., (Global Energy) aims to build, own, operate, and transfer (BOOT) an $800 million, 100,000 barrel per day oil refinery adjacent to Sri Lanka's sole existing refinery at Sapagaskunda outside Colombo. Global Energy initiated the project in 2002 when the government invited expressions of interest for infrastructure projects. The proposed refinery would use similar technology and some existing facilities of the current Ceylon Petroleum Corporation (CPC) refinery, and would upgrade systems at that refinery as well. ¶3. (SBU) Global Energy had secured financing for the project from a consortium of lenders including CitiCapital Asia, Standard Chartered Bank, Mitsubishi Bank, and Kuwait Petroleum, as well as a number of local companies. CitiCapital dropped out recently because it could not maintain its funding commitment indefinitely. A Citi rep told Econoff, however, that with a projected internal rate of return approaching 40%, the project would remain attractive for investors and lenders. The value of U.S. technology and services involved is estimated at $200 million with projected royalty fees of $15 million annually for the project life. The project would be transferred to the CPC for $1 at the completion of a 20-25 year BOOT agreement. Global Energy reports it has spent approximately $7 million in developing the draft BOOT agreements and refinery designs. 2004 DEAL FELL INTO LIMBO -------------- ¶4. (SBU) Following Cabinet approval for its proposal, Global Energy in December 2004 signed a memorandum of understanding with the Ceylon Petroleum Corporation, a state-owned enterprise under the auspices of the Ministry of Petroleum and Petroleum Resources, for the establishment of the refinery. However, subsequent to the Presidential elections of November 2005, CPC suspended discussions with Global Energy as the new government of Mahinda Rajapaksa preferred to locate a refinery in the undeveloped Hambantota area (reftel). In 2007, the government secured a commitment from Star Petro Energy, is a division of Dubai-based Al-Ghurair group to construct the Hambantota refinery, which would refine for re-export. By mid-2007, Embassy learned that the CPC was again interested in expanding its existing refinery at Sapagaskunda for domestic market operations. ¶5. (SBU) CPC Chairman Ashanta de Mel told EconOffs that current high oil prices make refining very profitable, and that he thought it made sense for CPC to expand its own refining capacity rather than let a private company do a BOOT project. He stated that he had authorization to engage a consultant to conduct a feasibility study on the expansion of the refinery. De Mel explained that the government lacked the funds to invest in a new refinery, however, so it would seek a donor to either grant or lend at concessionary rates the money to do so. He considered the Kuwait Fund, the Asian Development Bank and the "International Monetary Fund" (he may have meant the World Bank International Finance Corporation) to be possible lenders. USG ADVOCACY REVIVES GLOBAL ENERGY'S BID -------------- COLOMBO 00001050 002 OF 003 ¶6. (SBU) Post conveyed to Global Energy news of the CPC's renewed interest in a Sapagaskunda project. Ambassador and EconOffs urged both the CPC Chairman and the Minister of Petroleum and Petroleum Resources to again consider the Global Energy proposal. The latter told EconOff he welcomed Global Energy to return to Sri Lanka for discussions. U.S. Department of Commerce's then-Under Secretary Lavin also wrote to President Rajapaksa, urging the government to seriously consider the Global Energy project. In late June, Embassy arranged appointments for Global Energy with the Petroleum Minister, the Enterprise Development and Investment Promotion Minister, the CPC Chairman, and the Board of Investment Chairman. These meetings enabled Global Energy Chairman Lakdhasa Wijetilleke to understand the current positions of the relevant GSL agencies, revived government interest in the project, and underscored USG support for Global Energy. Following are the key points that emerged from the discussions. CEYLON PETROLEUM CORPORATION (CPC) WANTS TO BUILD ITS OWN REFINERY -------------- ¶7. (SBU) POSITION: CPC will seek funds for three months; if unsuccessful, it will negotiate with Global Energy. ¶8. (SBU) Ashantha De Mel, Chairman of the CPC, told Wijetilleke that the CPC would seek funds to conduct its own refinery expansion as a first option. If funding did not materialize, CPC would consider the Global Energy project. De Mel and other CPC officials present estimated that the CPC would require three months to determine if funding would be available. De Mel also stated that the CPC would need to be fully involved in the operation of any eventual Global Energy project in order to ensure "transparency." Wijetilleke assured the group that the draft BOOT agreement envisioned the Chairman of the CPC serving as Co-Chairman of the project, with access to all records of the enterprise. CPC officials also stressed that union endorsement would be required for the project to succeed. Global Energy and CPC officials agreed to stay in contact while CPC pursues its own funding sources, and to decide in October whether to recommence negotiations. MINISTRY OF PETROLEUM WORRIED ABOUT UNIONS -------------- ¶9. (SBU) POSITION: The Ministry and CPC will seek funds for six months; union assent will be required before negotiating with Global Energy. ¶10. (SBU) M.H. Fowzie, Minister of Petroleum and Petroleum Resources Development, told EconOffs and Wijetilleke that CPC union leaders must be convinced that the Global Energy project is necessary and beneficial to their members. Ministry Secretary Gunawardena suggested that Wijetilleke meet with union leaders to brief them on the project and its benefits. Two conditions would be needed for serious movement on the project: union endorsement and final determination that CPC could not source funding for its own expansion program. Fowzie reckoned it would take no less than six months to determine whether funding could be obtained for CPC's own expansion program. (Note: During this meeting, Fowzie mentioned that President Rajapaksa had recently referred the Global Energy project to him for review, evidently as a result of Under Secretary Lavin's letter to the president.) BOARD OF INVESTMENT DISTRACTED, BUT SUPPORTIVE -------------- ¶11. (SBU) POSITION: The Board of Investment would support the project, but only after it signs a final agreement to construct the Hambantota refinery. ¶12. (SBU) Dhammika Perera, Chairman of the Board of Investment, told EconOffs and Wijetilleke that his office is currently focused on concluding negotiations on the proposed refinery project to be built in Hambantota. He promised to focus on the Global Energy project after the conclusion of the Hambantota deal. Perera affirmed that COLOMBO 00001050 003 OF 003 Sri Lanka needed large investments, such as Global Energy's proposed project, for its economic advancement and enhancement of its reputation as an investment destination. MINISTRY OF ENTERPRISE DEVELOPMENT AND INVESTMENT PROMOTION EQUALLY DISTRACTED BUT SUPPORTIVE -------------- -------------- ¶13. (SBU) POSITION: The Hambantota refinery negotiations must conclude before moving forward with Global Energy's proposal. ¶14. (SBU) Sarath Amunugama, Minister of Enterprise Development and Investment Promotion, reminded Wijetilleke that he had supported the Global Energy project several years ago when he was Minister of Finance, and said he continued to do so. Amunugama told Wijetilleke and EconOffs that he would seriously consider the Global Energy project and that he would endorse it to the president, but only after conclusion of the Hambantota refinery negotiations with a Middle Eastern consortium. Amunugama likewise averred that Sri Lanka needs large projects such as Global Energy's refinery, and expressed the need to brand the country as an attractive investment location. ¶15. (SBU) COMMENT: The government's failure to honor its MOU with Global Energy typifies the investment environment under the Rajapaksa administration, whose preference for state-led enterprise has caused it to resist private infrastructure projects. This orientation does not readily attract investment cash, so we think it unlikely that CPC will be able to fund its expansion plan. As such, these recent meetings give the brightest hope for Global Energy since the current government took power twenty months ago. Nevertheless, USG advocacy will remain essential for Global Energy, as the government and the CPC union will likely cling to their hope of building their own refinery. MOORE