Bangladesh can't afford another BPC failure to expand refinery capacity

Had the Eastern Refinery Limited (ERL) built its second unit as planned a decade back, Bangladesh could have largely averted the fuel oil shocks and gained from discounted Russian oil as some other countries did.

But state-oil monopoly Bangladesh Petroleum Corporation sat idle on the futuristic project until early this year when the finance ministry agreed to fund two-thirds of the project cost to support the country's lone refinery to expand its capacity.

In a major policy shift, the government is also now moving towards allowing the private sector to import and refine crude oils and market their products through their own networks.

Under the initiative, private refiners will be able to export surplus petroleum products after selling locally and supplying half of their outputs to the BPC.

The energy ministry has already drafted a policy framework, which is awaiting final approval.

The private sector, which has long been willing to enter the coveted refinery business, has welcomed the government's move and expects it to come into force soon.

The energy crisis, induced by the Russia-Ukraine war since February last year, has been an eye-opener for countries with insufficient refinery strength.

During the crisis, the refining industry became a chokepoint, hiking the crude processing cost, requiring importing countries to pay higher for gasoline and diesel. That prompted the net fuel importers to build their own capacity through building new refineries and modernising older ones at an unprecedented faster speed. Some are reviving projects shelved for years and investing on their own or seeking funds.

While China and neighbouring India, with their in-place refinery capacity, were among the few countries that withstood energy crisis and instantly benefited from discounted Russian oils, Bangladesh could not cash in on Moscow's offer for its inadequate refineries.

Built in 1968, the country's lone refinery has so far been happy with its annual capacity of 1.5 million tonnes, meeting only 20% of the country's demand. The refinery's age-old technology was not built to process Russian crude.

On the other hand, the refinery strength built over the years helped both India and China to make best use of Russian crude oil since the country faced Western sanctions because of the war. Russia looked for new customers and its crude oil exports to India increased 14-fold and doubled to China till the end of 2022.

Even cash-strapped Pakistan placed its first order for discounted Russian crude oil in April, which will help it save on oil costs and ease the dollar crisis.  Crude import under the deal is expected to reach 100,000 barrels per day.

Pakistan also woke up to the crisis. Recently, the country prepared its new refinery policy offering incentives and tariff protections to encourage private investment in the highly capital-intensive business.

Its four state-owned petroleum companies have teamed up with Saudi Arabia's Aramco to build Pakistan's largest oil refinery with an investment of $10 billion in the strategic Gwadar Port.

The new deep conversion oil refinery, which will have a petrochemical complex to help the country save $2 billion annually on imports of polypropylene and polyethylene, will enjoy a 20-year tax holiday.

Already equipped with a huge refining capacity mostly aimed at meeting domestic needs, China looks to build the world's largest volume of spare crude refining capacity by 2028.

India allowed the private sector in oil refinery and retailing since it opened up its economy in early 1990s and one of its big conglomerates now owns the world's largest refinery.

During the ongoing crisis, India's private refiners optimised their capacity to explore oil export markets and increased their shipments of refined petroleum products to European countries which had stopped buying Russian oils directly.

State-owned refiners focused on easing domestic market supplies helping the government to keep oil prices lower and inflation in check while Bangladesh had to hike fuel oil prices several times hurting businesses and fuelling domestic inflation.

Sri Lanka, which had to temporarily shut its lone refinery in 2021 for want of crude oil supplies due to a dollar crisis, is now seeking Saudi Arabian and Chinese investment for new refineries to meet domestic demands and exports. It has revived its decade-old plan to build two new refineries.

A Bloomberg report in April quoted an investment bank estimating that a net global refinery capacity will increase by 1.5 million barrels a day this year, and by another 2.4 million next year – largest increase in net global refining capacity in 45 years.

Though late, Bangladesh has felt the urgency to raise the refining capacity through reviving the 2011 plan to build the second unit of ERL, apart from drafting policy framework to bring in private investment in oil refinery.  

Without waiting further for funds from foreign sources, the Ministry of Finance has agreed to lend Tk16,142 crore to the BPC for the Tk23,746 crore ERL-2 project, scheduled to be completed in June 2027.

The new unit will save $9-10 per barrel in refined fuel considering current international market prices, amounting to annual savings of $237 million, as estimated in an earlier study.

The second unit of Eastern Refinery Limited, once built in the next five years, will raise the ERL's capacity to 4.5 million tonnes, when the country's demand for petroleum products will reach over 8 million tonnes.

Still, there will be a gap, requiring more private investment in the business. The new policy is a welcome move to encourage domestic and foreign private investment in the capital-intensive refinery industry.

Apart from meeting fuel oil needs, initiatives should be there to promote non-oil by-products including petrochemicals, much needed for non-cotton fabric now in high demand in the global fashion market. As Bangladesh's apparel industry is approaching fast to expand its footprint in the man-made synthetic fibre-based apparels, local petrochemical complexes could be a major backward linkage for them.

The new refinery policy needs to take the prospects of petrochemicals to meet the apparel industry's need for non-cotton fibre raw materials.

The BPC's previous management was blamed for failing to proceed with the decade-old plan to build a second ERL unit and even to complete the feasibility study in years.

While it is a brave decision to self-finance the roughly $2 billion second refinery unit project, its benefit will depend on the BPC's capability to implement it timely. Previous track records leave reasons for doubts and now the onus is on the state-owned agency to be right on track with the project schedule to secure the country's energy future.