Dhaka in deep talks with IsDB over $1b Eastern Refinery loan terms

Highlights:
- Bangladesh is negotiating a $1+ billion loan from Islamic
Development Bank for the ERL-2 expansion of Eastern Refinery Limited
- The loan has strict conditions, market-based pricing, and a
six-month execution deadline
- It includes 5-year grace and 15-year repayment with semi-annual
payments during construction
- The project will double refining capacity to 30 lakh tonnes per
year
- Officials see it as critical due to lack of alternative financing
Bangladesh has entered
detailed negotiations over terms and conditions for a more than $1 billion
financing offer from the Islamic Development Bank (IsDB) to support the
modernisation and expansion of Bangladesh's Eastern Refinery Limited, a top
priority project to strengthen the country's energy security.
Split
into two tranches – $520.59 million and $483.10 million – the offer is
structured under a strict Shariah-compliant "forward lease" model
that ties disbursement to tough preconditions, floating market-based pricing,
and a tight six-month deadline for execution, according to officials at the
Economic Relations Division (ERD).
Pricing
will be tied to the six-month SOFR benchmark with additional spreads, while the
tenure includes up to five years of grace period followed by 15 years of
repayment, alongside semi-annual payments during construction and strict
deadlines that could trigger cancellation if unmet.
Several ERD officials confirmed the development. Wishing
not to be named, they said discussions are ongoing with the development agency.
The terms and conditions are expected to be finalised within this month.
Quick outcomes to
outweigh stringent terms?
Procurement
will follow IsDB guidelines, with Bangladesh acting as the Bank's agent in
negotiating contracts, ensuring insurance coverage, and managing any costs not
covered under the financing package, according to the lease terms.
Failure
to sign agreements, meet effectiveness conditions, or request the first
disbursement within the stipulated six-month timelines at each stage may result
in automatic cancellation of the financing.
ERD officials, engaged in the loan negotiations, find terms and conditions for
the IsDB loan offer, though crucial for implementing the long-awaited Eastern
Refinery second unit (ERL-2) in Chattogram, somewhat stringent and structurally
complex. However, they are unlikely to pose a major problem if the Tk31,000
crore project is implemented quickly and starts delivering intended benefits,
they said.
"Since no other development partner is currently providing financing for
ERL-2, this loan is critically important for us. Once production begins quickly
under the ERL-2 project, returns from the project are expected to come
relatively easily," said a senior ERD official.
Under the project, the existing
crude oil refining capacity of 15 lakh tonnes per annum will be expanded by an
additional 30 lakh tonnes through the installation of a second unit, raising
the total capacity to 45 lakh tonnes annually. It is targeted to be
completed by November 2030.
Under the proposed structure, the lender will procure refinery equipment and
lease it to Bangladesh, allowing eventual ownership transfer after repayments
under a rent-to-own arrangement.
The
20-year package includes a grace period during construction, but costs will be
linked to global benchmarks, while disbursement depends on meeting stringent
legal, financial and environmental conditions before funds can flow.
As
per the forward lease agreements, IsDB will procure the project assets itself
and lease them to the government. At the end of the lease period, ownership of
the assets will be transferred under specified conditions. The Bangladesh Petroleum
Corporation (BPC) will serve as the executing agency.
During
the construction phase, Bangladesh will be required to make semi-annual advance
payments on accrued mark-up. The applicable mark-up rate includes a floor of
1.6% and a cap of 28% per annum, creating variability in financing costs. In
addition, the Bank may impose supplemental rentals to cover major maintenance,
insurance, and related expenses, potentially increasing the overall financial
burden.
The
financing will become effective only upon fulfilment of strict conditions
precedent, including legal validation of agreements, confirmation of
counterpart funding by the government, approval of financing by Bangladesh
Petroleum Corporation (BPC), and appointment of project management consultants.
Compliance with environmental, safety, and climate risk assessments is also
required prior to the first disbursement.
IsDB offer
The
IsDB had conveyed its interest in financing ERL-2 in a letter to ERD in
December to help the country's loan state-owned refining facility to enhance
its capacity and reduce import dependency for refined fuel.
The
then interim government had approved the ERL-2 project with an estimated cost
of Tk35,465 crore, which was revised downward to Tk31,000 crore in February
this year by the energy ministry.
A
cost review committee, headed by BPC chairman Amin Ul Ahsan, chairman of
Bangladesh Petroleum Corporation (BPC), reviewed issues of capital expenditures
and subcomponents and recommended the downward revision after cutting costs in several
areas.
BPC
officials said the committee revised the overall project cost downward by
12.59% from the project cost approved by Ecnec.
Project revival
Eastern
Refinery, established in 1968 under French contractor Technip, first planned a
second unit in 2010. The government approved Tk13,000 crore in 2013, but no
progress was made. In 2022, BPC attempted to proceed with its own funds,
raising the estimate to Tk23,000 crore, but work still did not start.
In
2024, S Alam Group offered to construct ERL-2 for Tk25,000 crore. The project
was suspended in August after the mass uprising that toppled Sheikh Hasina's
government.
The
interim government revived the plan, which by then was estimated at Tk36,410
crore. Unable to secure foreign loans, it was revised to rely on state funds
and BPC resources; the original estimate had been Tk42,974 crore.
Officials
said Eastern Refinery currently meets only 20% of Bangladesh's petroleum
demand, the rest imported. ERL-2 will produce Euro-5 gasoline and diesel and
upgrade the existing refinery's diesel, motor spirit, and octane to Euro-5
standards.
















