Why not to privatise fuel oil refinery
The cost of importing refined fuel oil like diesel and octane is higher than that of importing crude oil. If crude oil is imported and refined within the country to produce diesel, octane, etc, the cost would be much lower. But as the capacity of the country's only state-owned fuel oil refinery Eastern Refinery Limited (ERL) is inadequate, a large amount of refined fuel oil needs to be imported at a higher cost. Bangladesh Petroleum Corporation (BPC) imports around 6.5 million tonnes of fuel oil per year, of which refined oil is the majority as ERL has a refining capacity of only 1.5 million tonnes. As a result, a huge amount of foreign exchange is spent annually on the import of refined fuel oil.
ERL, a subsidiary of BPC, was established in 1968. More than half a century has passed after independence, the country's demand for fuel oil has increased year by year, but the capacity of the country's only state-owned oil refinery has not been increased from 1.5 million tons. An initiative to increase oil refining capacity by three million tonnes was taken by ERL in 2012, but it has not been implemented due to a lack of funding. Now, the government has decided to implement this long-planned second unit of ERL in partnership with a private company. According to reports, the development comes after the group, in October last year, sent a proposal to the Prime Minister's Office to build the refinery on an 80-20 equity basis on the land owned by ERL in Chattogram.
For all latest news, follow The Daily Star's Google News channel. No doubt, building the second unit of ERL is very important, but it is not clear why this strategically important and assuredly profitable project should be privatised. Why is the government itself not investing? Initially, an investment of Tk 13,000 crore was required for this project, but due to non-provision of funds on time by the government and multiple revisions of the Development Project Proposal (DPP), the cost increased to Tk 23,736 crore. According to the latest DPP, the finance division had agreed to spend Tk 16,142 crore and the BPC agreed to spend Tk 7,100 crore. There was a funding gap of only Tk 493 crore. Although ERL's original plan has not been cancelled officially, the government is moving forward to implement the new proposal of building the second unit of ERL under the joint venture.
The question is, while the government is able to spend thousands of crore on various infrastructure development projects and pay capacity charges of more than Tk 1,00,000 crore to rental power plants over just 14 years, can it not invest in the construction of an oil refinery? This project is not like the government's usual white elephant projects as the investment here would be quite worth it and will help save our foreign currency reserves.
Moreover, the huge profits that BPC makes every year by selling oil at higher prices than the international market could also be used to increase the capacity of its subsidiary ERL. BPC's net profit after tax from 2014-15 to 2020-21 was Tk 46,858 crore. BPC also has made a profit of Tk 4,586 crore in the 2022-23 financial year. Apart from this, the government earns tens of thousands of crore worth of revenue annually from fuel oil duties.
If only a part of this money is used for enhancing the capacity of the ERL, a lot of foreign currency could be saved and customers could get fuel oil at cheaper rates. In fact, around $11 per barrel can be saved if imported crude oil is refined locally to produce diesel. As a result, the capacity enhancement of state-owned ERL will save about $240 million annually. It is mentioned in the original proposal that the investment will be recovered within four years and nine months. So, there is no justification for handing over such a profitable and cost-saving project to a private company.
Of course, this is not an isolated incident, but rather part of a bigger plan. In November 2023, the government introduced a policy titled "Establishment of Refineries at Private Level, Storage, Processing, Transportation and Marketing of Crude Oil Imported Policy-2023." According to this policy, local and foreign private companies will be allowed to set up refineries after acquiring a licence from the government and, after selling a specified portion of the refined fuel oil to BPC, they are to sell the remaining portion through their own marketing network.
There is a concern that the consequence of privatising this strategically important sector will be the same as that of granting permission to generate electricity through rental, quick rental, and independent power producers, which has become a burden for the country. The experience of importing and marketing liquid petroleum gas (LPG) through the private sector has also been unpleasant. Currently, around 99 percent of the LPG market is dominated by private companies which sell LPG at a rate higher than the one fixed by the energy regulator. What is the guarantee that the same will not happen in the case of fuel oil? Who will ensure that private companies will not sell fuel oil at higher prices, as we see being done in the cases of edible oil or sugar?
There is also no guarantee that private companies will actually sell the specified portion of their oil production to BPC and maintain the quality standard. A relevant example is the country's experience of refining condensate from gas wells through private refineries. According to that agreement, the responsibility of the private gas condensate refineries was to sell the petrol and octane, produced by refining the condensate, to BPC. But there were allegations that most of the private refineries did not supply petrol and octane to BPC in proportion to the amount of gas condensate they took. Rather, they sold it directly to petrol pumps and the quality of petrol and octane they produced was also not up to the mark. Due to these allegations, the government stopped supplying condensate to almost all private refineries in 2020, save for two.
It seems that the government is creating a new threat of the quality and price of refined fuel oil being manipulated by permitting private companies to import and refine crude oil instead of enhancing the existing capacity of state-owned ERL.
Kallol Mustafa is an engineer and writer who focuses on power, energy, environment and development economics. He can be reached at kallol_mustafa@yahoo.com
Views expressed in this article are the author's own.
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