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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
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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