Refining crude oil into crude debt at the CPC

A.H.M. Fowzie and Asantha de Mel

CPC commits to $1.7 billion Iranian refinery

Borrows US$ 1 bn from Iran
at commercial interest

Govt. to raise $500mn through bank bonds

Central Bank investigation buried

Output won't keep up with demand

By Ranjith Jayasundera and Ruan Pethiyagoda

The public's immediate concern with the Ceylon Petroleum Corporation (CPC) is the exorbitant cost of petrol, diesel and kerosene, that could change quickly with descending oil prices - and the burden of importing more petrol and diesel from abroad if Sri Lanka's refining capacity does not catch up with the local growth in demand for oil over the coming years.

It is for this reason that several successive governments have looked at a variety of options for increasing Sri Lanka's refining capacity, from expanding the existing CPC refinery, to building new refineries. Unsurprisingly, the incumbent government has found a way to spend more money than the annual defence budget, stir the pot with the Western world, drive the country further into debt and lock us into Iranian oil, without solving the refinery expansion crisis.

On August 19, Petroleum Resources Development Minister A.H.M. Fowzie submitted to cabinet, a proposal for 'modernising' the CPC's Sapugaskanda oil refinery. The cabinet paper sought permission to appoint two committees 'for the selection of a contractor' to carry out the expansion project.

Yet the paper in detail describes how it has been 'decided' to award the project to the Iranian government, to be designed and implemented by that country and paid for in full by the Sri Lankan government. '70% of the project cost shall be arranged through financing by Iranian Banks' the cabinet paper says. The remainder has to be raised by the government.

Central Bank investigation

What seems to have caught the attention of high-ranking government officials and has, this newspaper learns, merited a Central Bank investigation, is a comparison of the project's proposed cost the increase in output it would provide. The US$ 1.7 billion project, according to the cabinet paper, would only increase the CPC refinery's capacity by 50,000 barrels per day.

In contrast, an $800 million project touted as recently as 2006 - before Iran entered the Chinthana picture - was planned to build a brand new refinery able to process 100,000 barrels of oil per day. For more than twice this cost, the Iranian proposal will provide only half the output. Minister Fowzie, on Friday, released a statement claiming that "The Government of Iran has consented to grant us USD 1500 mn for the establishment of a new oil refinery station."

This statement alone is quite a deviation from the truth. The note presented by the Minister to cabinet states clearly that only 70% of the project cost, or approximately US$ 1.19 billion, will be provided by Iran, and even that via a loan, which the government would eventually have to repay.

The remaining cost of around US$ 510 million, he proposed to cabinet, would have to be raised by the CPC "through bank bonds within a period of 2-3 months." Which bank would grant such a phenomenal loan to an institution with an existing, staggering debt of US$ 750 million, Minister Fowzie does not mention, nor is there any talk about how such a loan could be repaid.

A CPC Trade Union official who was familiar with the cabinet paper said that the Petroleum Corporation's employees are puzzled and frightened by the proposed deal. "We were worried about the old $800 million proposal also, but this is much worse. It doesn't make sense to pay so much money to Iran to just increase capacity by 50,000 barrels. By the time the project is finished, the demand would have already gone up and we'll need to expand again before we can even finish paying for this."

Earlier proposal

On the earlier proposal for the construction of an $800 million refinery to process 100,000 barrels of oil per day, he said that the unions initially had a flurry of concerns. "We thought that it would make our refinery to be neglected and unable to keep up. If someone else was paying for it, why would they help the CPC, is what we thought."

Proponents and advocates of that project, led by a consortium named Global Energy, had met with trade union representative in early 2006 to thrash out their differences. "They explained that the government couldn't afford $800 million. So this company would have built the refinery, operated it without competing with our one (the CPC) , and then handed it over to the government after a set period of time. They would make their money, of course, but the government would have gotten all the benefits, and we would have been competitive with the Indians, which we are not now."

Studies at the time (in 2006) revealed that an expansion of 50,000 barrels per day would fall short of the estimated 2010 petroleum products demand by one million metric tonnes - a deficiency that would have increased to 3 million metric tonnes by 2015 - thus the decision to go with a 100,000 barrels per day refinery.

"They were going to export their extra produce until demand caught up, and although that wouldn't have helped us at the CPC, it would avoid competition, and make the rupee stronger as well," a former Sapugaskanda refinery engineer said. "But now with Iran, by the time this project is done,  still there won't be enough capacity and the CPC debt will get even bigger."

Technical expertise

He also raised concerns about whether Iran has enough technical expertise to handle such a project, due to long term sanctions they have been under from the United States. "No international engineering company would help them without the US blacklisting them immediately," he added.

By design, the new equipment would be tailor-made to processing only Iranian crude oil, "which is no longer the best or the cheapest." It is only prudent, given the see-sawing nature of international relations, that if the government is putting down $1.7 billion to build an oil refinery, it should be ready to process cheap crude oil from anywhere, and not tie us to Iran.

A senior Petroleum Ministry officer said that officials involved are tight lipped on the project, and that the Minister himself has been disturbed by the Central Bank investigation. "The cabinet paper itself raises enough concerns. While it wants to appoint committees to choose a contractor,  it not only says who the contractor is, but how they should be paid  in Euros and not in dollars."

Minister Fowzie, in his Friday statement, raised the issue of the phenomenal price difference between the older US$ 800 million proposal and the current Iranian one. He said that under the old proposal, which he said was one touted by the UNP government, old machinery was to be imported and landed on the government once the contractor had made the best of it. "They will engage in the process of refining oil during the 25 year period and will leave us the machines afterwards," he said.

Staggering price

Documents available to us, however, prove otherwise, which raises the question of why the Minister is to justify the staggering price of his Iranian proposal. The old $800 million proposal was a BoI project, and under standard BoI terms, used machinery cannot be imported into Sri Lanka. The comparisons are today irrelevant however, as the Global Energy offer, and all of its kind, are currently off the table.

The Minister has further put his foot squarely in his mouth by attributing the older proposal to the UNP. In reality, the cabinet paper for the Global Energy project was put forward by former Finance Minister Sarath Amunugama during the term of President Chandrika Kumaratunga.

A treasury official confirmed that final arrangements to sign the loan agreement for 70% of the project cost with an Iranian bank are underway, even though neither the CPC nor the Treasury has any concrete plan to raise the remaining 30% or US$ 510 million. He further said that a few but the Treasury Secretary Dr. P.B. Jayasundera are privy to the details of the agreement.

The terms of the Iranian loan of over US$ 1 billion are not clear, and the fact that it was raised on commercial terms is what raised red flags at the Central Bank, whose critical report on the deal has since been buried. Funding for government development projects has in the past been secured at nominal rates, before the current administration began the practice of doling out bond issues and loans at commercial interest rates.

No rationale

In this case, especially given the stunning cost of the project, there is no rationale for directly awarding such a massive contract to Iran without calling for an open tender or seeking other more viable offers. 

The 1.7 billion dollar question now is how the government plans to repay the Iranian loan, when the output from this refinery will be higher priced than even petrol or diesel imported from Singapore. CPC Chairman Asantha de Mel told The Sunday Leader that the loan was to be given at LIBOR + 0.5%, which works out now to around 3.7%. He also said that the loan has a grace period of five years, and that the refinery could be up and running in two years.

"We will have three years to run the refinery and generate profits before we start servicing the loan." Asantha de Mel also said that the price of the refinery would be capped at US$1.57 billion and that "we can't get a loan like this anywhere in the world." He said that there is a world benchmark price for such projects of US$ 30,000 per barrel per day, and that a cost of US$ 1.5 billion would thus be the average price for such a project.

"To those who are criticising this move, my response is that is it something we should have done years ago. The capacity will be more than we need and we can stop importing refined products and the price is the best we can get. If anyone can provide a similar service to us for $800 million now, tell them to call me and I guarantee we can sign the deal with them tomorrow over the counter," the CPC Chairman said.

Quite a task

For De Mel's formula to work out, the CPC would have to be in a position to start repaying the loan five years after it is taken. Even if the whole amount of US$ 1.57 billion was at a nominal 3.7% interest, paying it back over 10 years will be quite a task.

The capital cost of the loan would work out to $157 million per year, and the annual interest initially would be $58 million. So the CPC, with a current debt of US$ 750 million, would have to be profiting by at least $215 million per year, or $30.7 million per month to begin meeting the debt requirements.

Whether this is feasible, is known only to an inner circle in the CPC, Petroleum Resources Development Ministry and the Treasury.

In the public interest, we can only hope that a future government will not be left with an even more spiralling public debt burden that this administration has already brought to bear.

Mervyn Silva's sidekick on the rampage

RAPED!

By Malaika Fernando

One of Labour Minister Mervyn Silva's supporters who was last year in the limelight for his alleged involvement in the attack on the Sri Lanka Rupavahini Corporation (SLRC) News Director has once again taken centre stage, this time over an alleged sexual assault.

Nuwan Udaya Gunathilake alias Kudu Nuwan, was a key figure in the SLRC drama last December where Silva and Nuwan who acted as his personal security officer stormed the SLRC office and allegedly abused and assaulted News Director T.M.G. Chandrasekara for failing to broadcast a defamatory speech delivered by Silva the day before at a function held in Matara.

Interestingly, at the time of his appearance at the SLRC, Nuwan was a suspect out on bail in a double murder case.

Rupavahini news staff alleged that it was Nuwan, on Silva's instructions that assaulted the news director. The SLRC news staff demanded an apology from Silva and Nuwan for assaulting the news director.

Refusing to make any apology the crisis worsened with Silva and Nuwan taking refuge in the chairman's office as angry Rupavahini staff demanded an unconditional apology for the assault on their news director.

Same medicine

The staff then decided to give a dose of the same medicine to Silva and Nuwan who were holed up in the chairman's office. The staff surrounded the office and threatened to force their way in if Silva and his security officer, Nuwan, failed to come out.

Nuwan was finally brought out of the chairman's office in handcuffs by police who had arrived on the scene on a demand made by the staff. However both Silva and Kudu Nuwan  were beaten up by the enraged staff despite the police protection and a police cap was placed on Kudu Nuwan's head by policemen to prevent head injuries.

Shortly after the Cinnamon Gardens Police took Nuwan into custody over the alleged assault on the SLRC news director. It was then that Kudu Nuwan, who at the time was in plain clothes and tinted hair, was found to be a suspect in a double murder case who had recently been released on bail.

Nuwan was detained and treated at the National Hospital. He was later released on bail by the Colombo magistrate.

Just a few months later, Nuwan resurfaced in the police complaints book. That was last week. This time for an alleged sexual assault charge.

Sexual assault charge

A close associate of Mervyn Silva, Nuwan, is now a man wanted by the police in connection with an alleged sexual assault charge levelled against him by a female employee attached to a nightclub on Flower Road, Colombo 7.

Kudu Nuwan had visited the nightclub on Wednesday (3) night with a few others who also were allegedly involved with the underworld.

It was in the early hours of Thursday (4) that Nuwan had allegedly raped the female employee at the nightclub.

A frequent visitor to the nightclub, Nuwan after raping the female employee had walked out without batting an eye lid, while Shirani (name changed), the victim is now left helpless and jobless.

Soon after being allegedly raped by Nuwan, Shirani had called the police emergency line 119 and reported the incident. The Kollupitiya Police after conducting initial investigations had taken Shirani to the police station for further inquiries.

According to Shirani, her employers have decided to distance themselves from the whole incident, as they fear an attack on the club by Nuwan and his underworld 'friends.'

Fear of an attack

"They are scared that they might not be able to continue with the club if they made Nuwan unhappy as he is being backed by Mervyn Silva," Shirani said.

The Sunday Leader also learns that Silva had last week made contact with the officers at the Kollupitiya Police Station and had requested them not to be 'too keen' on conducting the investigations and arresting Nuwan.

Police Spokesperson SSP Ranjith Gunasekera said the police was 'still trying' to locate Nuwan Udaya Gunathilake alias Kudu Nuwan following the sexual assault charge made against him at the Kollupitiya Police.

Gunasekera told The Sunday Leader that the police had deployed a team to locate Nuwan and up until Friday evening, the police had been 'unsuccessful' in their attempt.

He said that Nuwan would be arrested as soon as he is located.

Interestingly, the police who take swift action to arrest any other person charged with even a minor offence has been unable to locate an alleged murder suspect who has been arrested for assault and now charged with rape.

The police just last month ignored a court directive to arrest Silva over the alleged assault and intimidation of a camera crew attached to Sirasa TV. Even days after the directive was issued, the police only stated that they would "act upon" the court directive, but failed to arrest Silva.

Silva finally surrendered to court through his lawyers and obtained bail.

The police who dragged their feet on carrying out the court directive and arresting Silva, have so far shown the same enthusiasm in attempting to arrest Silva's henchman, Nuwan.

While murderers, gangsters and rapists roam free in the country thanks to a police that turns a blind eye, innocent victims like Shirani are left with no one to turn to and their pleas for justice are likely to fall on deaf ears.