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