VZCZCXRO5476
RR RUEHLMC
DE RUEHLM #1050/01 2110635
ZNR UUUUU ZZH
R 300635Z JUL 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 6524
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1230
RUEHKA/AMEMBASSY DHAKA 0314
RUEHIL/AMEMBASSY ISLAMABAD 7298
RUEHKT/AMEMBASSY KATHMANDU 5411
RUEHKP/AMCONSUL KARACHI 2218
RUEHCG/AMCONSUL CHENNAI 7890
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 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