Sri Lanka rejects Chinese refinery proposal

12 October 2017, Week 40, Issue 664

The Sri Lankan government last week rejected a proposal by a Chinese consortium to build a 100,000 bpd refinery near the southern port of Hambantota, which is slated to be a strategic piece in China’s One Belt, One Road (OBOR) initiative.


Citing competition for the local market with two Sri Lanka fuel distributors, the government said the Chinese proposal could cause the local firms to suffer with the introduction of a new competitor.

China Huanqiu Contracting & Engineering, a subsidiary of China National Petroleum Corp. (CNPC), and privately owned refiner Shandong Dongming Petrochemical entered a joint bid some 18 months ago to build a US$3 billion refinery in Sri Lanka. The venture had asked the government’s permission to sell refined products produced at the plant in the local market.

Denied entry

The Chinese companies proposed building the refinery on 500 acres (2 square km) near the southern port of Hambantota, which is operated by China Merchant Port Holding (CMPH) under a 99-year contract signed in July. CMPH is also planning the creation of an 11-square km special industrial zone located adjacent to the port.

A Sri Lanka government spokesman said the firms had been denied permission to sell locally but suggested that they should participate in tenders from local suppliers if they wanted to sell fuel in the Sri Lankan market, according to a report by Reuters. Another official said the government feared control of the US$6 billion annual market would be taken over by the Chinese consortium.

Ceylon Petroleum Corp. (CPC) and Lanka IOC, a subsidiary of India’s state-owned Indian Oil, dominate the island’s fuel product distribution sector.

Sri Lanka has one ageing refinery located near Colombo and operated by CPC that was originally designed to process Iranian crude. International sanctions against Iran created problems with the refinery, which switched to running Malaysian and Abu Dhabi crude.

The Sri Lankan Petroleum Resources Ministry unveiled plans last year to expand the CPC refinery to 5 million tpy (100,000 bpd). In October 2016, the ministry said it would build a second refinery at Trincomalee with 100,000 bpd of capacity in partnership with Indian Oil. Lanka IOC operates a fuel storage facility at the southeastern port where most of 99 storage tanks that are there are unused.

It remains unclear, however, if the Chinese proposal is entirely dead or whether it could still go ahead if the Chinese companies accept the Sri Lankan government’s refusal and opt to export the entirety of the proposed refinery’s production.

Chinese ambitions

The position taken by Colombo may be political in that there is opposition in Sri Lanka and India over China’s expanding role in the Indian Ocean region. The CMPH-managed port will likely figure prominently in the future distribution of Chinese-made goods throughout the Subcontinent, as the special industrial zone would serve as a regional base for Chinese manufactures.

Prior to signing the contract for port operation earlier this year, a Chinese official based in Sri Lanka commented that the port on its own would be of little interest to China if there were no industrial zone nearby. To this end, CMPH is drawing up a master plan for the zone. It includes an oil bunkering facility, Chinese manufacturing plants and logistic companies.

Sri Lankan unions are also playing a role in the future of the country’s refining sector. They have in the past protested about government plans for the Trincomalee project with Lanka IOC and the Chinese refinery proposal, demanding that Colombo put its energy into revamping CPC and its refinery in the capital city.

A refinery at Hambantota would serve CMPH and China’s OBOR project well, giving the port the ability not only to supply fuel to ships arriving at the port, but also to generate electricity for the port and surrounding area, and provide feedstock to industries that establish themselves in an industrial zone.

The deepwater port at Hambantota was built by Chinese companies at a cost of US$1 billion for the Sri Lankan government and has been operated by the country’s Port Authority. But it has struggled under local management, losing some US$300 million since it opened seven years ago. With the resources available to CMPH – its total assets amount to US$855 billion – the port is expected to experience a significant change.

The port operations licence cost CMPH US$1.1 billion and to secure the special economic zone (SEZ), the company promised US$5 billion in investment from Chinese firms and 100,000 new jobs.

Edited by

Andrew Kemp


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