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Cablegate: Sri Lanka: Iran Refinery Offer Complicates Picture for Us

VZCZCXRO2132
RR RUEHDE RUEHLMC
DE RUEHLM #1707/01 3650833
ZNR UUUUU ZZH
R 310833Z DEC 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 7414
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1676
RUEHKA/AMEMBASSY DHAKA 0608
RUEHIL/AMEMBASSY ISLAMABAD 7595
RUEHKT/AMEMBASSY KATHMANDU 5771
RUEHLO/AMEMBASSY LONDON 4196
RUEHKB/AMEMBASSY BAKU 0011
RUEHKP/AMCONSUL KARACHI 2263
RUEHCG/AMCONSUL CHENNAI 8197
RUEHDE/AMCONSUL DUBAI 0134
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 001707

SIPDIS

SIPDIS
SENSITIVE

STATE FOR SCA/INS, EEB/CBA, AND EEB/ESC/IEC
STATE PASS USTR FOR D BROWN AND USTDA FOR J NAGY
COMMERCE FOR JONATHAN STONE

E.O. 12958: N/A
TAGS: EINV ENRG PREL CE IR
SUBJECT: SRI LANKA: IRAN REFINERY OFFER COMPLICATES PICTURE FOR US
BIDDERS; EMBASSY CONTINUES ADVOCACY

REF: A. COLOMBO 1050 B. COLOMBO 1639 C. 2006 COLOMBO 2086

1. (SBU) Summary: Iran's recent promise to finance a $750 million
expansion of Sri Lanka's sole oil refinery complicates the ambitions
of U.S. firms Global Energy and ENGlobal to secure contracts for
similar refinery investments. The head of the state-owned Ceylon
Petroleum Corporation doubts Iran's offer will pan out, however. He
and others told us Iran only reluctantly agreed to this deliverable
during President Rajapaksa's recent visit and was unwilling to
commit to specifics. The Iran offer follows similar expressions of
interest by other Middle Eastern countries in building a refinery in
Sri Lanka, none of which have progressed. Post is therefore
continuing its ongoing advocacy for Global Energy's bid to build,
own, operate, and transfer the refinery expansion. Post is also
staying in close contact with ENGlobal, which won a tender (but has
not yet received a contract) to conduct a feasibility study for
Ceylon Petroleum to do the refinery expansion itself. End summary.

GLOBAL ENERGY'S REFINERY WOULD JOIN EXISTING PLANT
--------------------------------------------- -----

2. (SBU) Sri Lanka's sole oil refinery, at Sapugaskunda outside
Colombo, is owned and operated by the state-owned Ceylon Petroleum
Corporation (CPC). The refinery, built in 1969, can process about
50,000 barrels of oil per day to produce gasoline, diesel, and jet
fuel. However, it can only refine light sweet crude because its
non-pressurized ship-to-shore transfer pipeline cannot handle
heavier forms of crude. When the refinery was built, light sweet
crude was widely available, but currently Iran is one of only a few
suppliers; for this reason, Sri Lanka purchases about 70% of its
crude supply from Iran. Another liability of the old technology in
the existing facility is its high sulfur emissions -- ten times
higher than the internationally recommended level which Sri Lanka
has committed to meet.

3. (SBU) The CPC plans to double Sapugaskunda production capacity to
100,000 barrels per day, which would satisfy Sri Lanka's entire
near-term demand for refined petroleum products. It envisions doing
this by building a twin of the existing refinery, using similar
technology and sharing much of the existing infrastructure at
Sapugaskunda. The CPC would like an expansion project also to
include a long-overdue renovation and upgrade of the existing
facilities to make them cleaner and more efficient. This is exactly
what U.S. firm Global Energy and Industrial Operations, Inc.,
(Global Energy) has proposed to do on a build, own, operate, and
transfer (BOOT) basis valued at $800 million (ref A).

CEYLON PETROLEUM CORP WANTS TO GO IT ALONE;
CHOSE ENGLOBAL FOR FEASIBILITY STUDY
------------------------------------------

4. (SBU) However, because refining is one of the few activities that
any Sri Lankan state-owned entity has ever been able to do
profitably, the CPC prefers to do the expansion ad upgrade itself,
rather than bringing in a foregn investor. As an initial step
toward this, inJuly the CPC tendered for an outside company to
conduct a feasibility study on the refinery upgrade and expansion.
In early September, U.S. company ENGlobal won the bidding for this
work, and expected to have a signed contract by the middle of the
month.

5. (SBU) Advocacy note: In 2006, both Global Energy and ENGlobal
sought USG advocacy for their efforts to construct the Sapugaskunda
refinery upgrade and expansion. In September 2006, the Department
of Commerce Advocacy Center judged, on national interest grounds,
that USG advocacy should be for the Global Energy bid. Since then,
Embassy Colombo has advocated solely for Global Energy in
discussions involving Sri Lanka's plans to commission new refinery
construction. In discussions involving the feasibility study for
the proposed project, Embassy has told the GSL that it welcomed the
selection of ENGlobal for the work. We have maintained this

COLOMBO 00001707 002 OF 003


distinction in light of the separate scopes of work being considered
and in the view that a U.S.-led feasibility study would ultimately
benefit Global Energy's bid for a BOOT contract. We are confident
this distinction has been clear to Sri Lankan officials. End
advocacy note.

IRAN OFFER LEAVES ENGLOBAL CONTRACT HANGING,
GLOBAL ENERGY WAITING FOR IT TO FALL THROUGH
--------------------------------------------

6. (SBU) Both Global Energy's proposed BOOT project and ENGlobal's
contract for the feasibility study for the CPC-led project have been
set back by Iran's November offer to finance both the refinery
expansion and feasibility study (ref B). Although neither the
Minister of Petroleum Resources nor the chairman of the Ceylon
Petroleum Corp thinks Iran will actually deliver on its offer, they
are deferring their preferred plan for a CPC-led project while
waiting to see if Iran's offer is serious. CPC Chairman Asantha de
Mel told Econoff that he would prefer to have ENGlobal conduct the
feasibility study, because he recognized the conflict of interest in
Iran doing both the study and the project. He implied, however,
that he was under pressure from the Finance Ministry to go along
with the Iran study because it would be free; and with the Iran
financing for the overall project, if it materializes, because it
would ostensibly be cheaper than private sector financing. (He
noted that Iran had sought to place a value of $1.2 billion on the
proposed refinery expansion, which Sri Lanka had resisted.)

SIMILAR OFFERS HAVE ALL COME TO NAUGHT
--------------------------------------

7. (SBU) Iran's offer is not the first of its kind. Previous
presidential and ministerial visits to Middle Eastern countries in
2007 generated similar offers or expressions of interest. In April,
Sri Lanka asked Saudi Arabia for a $500 million loan to finance the
refinery expansion. Also in April, Petroleum Minister Fowzie
reported that Egypt would conduct the feasibility study for free.
In May, Kuwait officials made a similar promise to visiting
President Rajapaska. None of these are actually being pursued.

8. (SBU) There also have been multiple reports of possible private
refinery investments in other parts of the country. These have
focused mainly on a proposed export-oriented refinery in the
president's home district of Hambantota (ref A and C). The
UAE-based ETA Aston Group and the Dubai-based Al Ghurair Group had
proposed a joint venture to invest $1.2 billion to build 100,000
barrel per day refinery that would compete with Singapore's
refineries. Sri Lanka's Board of Investment gave initial approval
to the project, but it has since stalled. Prior to this, there had
been reports of a possible Chinese refinery investment in
Hambantota. There are also periodic reports of a possible private
Indian refinery investment in Trincomalee.

COMMENT: AFTER IRAN FLAKES AND CPC STRIKES OUT,
GLOBAL ENERGY BID COULD ADVANCE
--------------------------------------------- --

9. (SBU) Aside from the complicating and delaying effect of the Iran
offer, and of the similar offers that preceded it, the Ceylon
Petroleum Corp's effort to do the expansion on its own also appears
to have made little progress in nine months of trying. The CPC has
not found a serious private financing source, probably due to the
fact that its overall balance sheet is weak and its loan service
prospects are dimmed by its state ownership, which often dictates
that it sell fuel below cost. (For example, during the first nine
months of 2007, the CPC made about $35 million in profit on refining
after the government allowed it to sell gasoline at market rates.
However, as oil prices continued to rise, the government decided in
October to defer further fuel price increases until early 2008.
This left the CPC selling gas and diesel at a loss. The CPC
chairman told Econoff that he simply hoped to finish up the year by

COLOMBO 00001707 003 OF 003


breaking even.)

10. (SBU) Meanwhile, the Finance Ministry seems determined to avoid
spending Sri Lankan money on a refinery expansion. The ministry
fails to see that the best solution would be a BOOT project like
Global Energy's, rather than one financed by a donor with no track
record and possible conflicts of interest. Post will continue to
advance this point in close coordination with Global Energy.
BLAKE

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