Building second unit at ERL: Islamic Development Bank agrees to lend $1.0b

An Islamic Development Bank (IsDB) mission has assured Bangladesh of providing US$1.0 billion in loan for setting up a 3.0-million-tonne-capacity oil refinery, officials say and hope it would cut import dependence for petroleum fuels.

The IsDB technical team extensively reviewed the ERL capacity during its 4-day mission on March 8-11 and agreed to provide the $1.0-billion financing package in phases for financing the Eastern Refinery Limited (ERL) Unit-2 project, a senior Economic Relations Division (ERD) official said Saturday.

"The loan is expected to be approved at the IsDB board next month and we would sign a deal in June this year," he added.

If finalized, this would represent one of the single -largest project loans ever extended by the Jeddah-based lender to a member-country, according to the ERD official.

The loan will be disbursed in three tranches as the refinery -setting-up works will take five years to complete.

Situated in Chattogram, the ERL, a subsidiary of the state-owned Bangladesh Petroleum Corporation (BPC), would have its second unit with a crude-refining capacity of 3.0 million tonnes per year by investing some Tk 354.65 billion ($2.89 billion).

Currently, the ERL has its first unit with 1.5-million-tonne capacity for refining crude oil, mostly imported from the now-troubled  Gulf region.

"The IsDB completed the mission last week. It had a wrap-up meeting with ERD on March 11. The mission has given us the green signal on the proposed $1.0-billion loan for the unit-2 refinery at ERL in Chittagong," another ERD official told The Financial Expresses.

"The IsDB has asked for some documents on the BPC's creditworthiness and environmental impact before placing the loan proposal before its Board in April.The BPC will provide all the documents shortly," he added.

"We are taking preparation to sign the loan deal in the meeting of the Board of Governance, to be held in Baku, Azerbaijan, in June next," the ERD official said.

Meanwhile, the ERL Unit-2 project, which had been in limbo for over 15 years, was recently revived by the past interim government as the last meeting of the Executive Committee of the National Economic Council approved the scheme involving Tk 354.65 billion.

As per the project, the government would provide Tk 212.78 billion as loans from its internal resources while the remaining Tk 141.88 billion will come from the Eastern Refinery's internal resources.

The official says as the IsDB has given the final signal on funding, the financing mode in the approved DPP would be revised.

While the project was initially cleared for self-financing with government funds after foreign partners remained elusive, the IsDB entry significantly altered the fiscal outlook, says an Energy and Mineral Resources Division (EMRD) official.

The second unit is designed to triple the refinery's annual capacity from 1.5 million tonnes to 4.5 million tonnes.

Currently, Bangladesh can only refine about 20 per cent of its total petroleum demand, forcing a heavy and expensive reliance on imported finished products.

"This expansion is not just about capacity, it's about environmental standards and economic resilience," the EMRD official adds.

"The new unit will produce Euro-5-standard diesel and gasoline, significantly reducing our carbon footprint while saving millions in foreign exchange annually."

The project is currently slated for completion by November 2030. Once operational, the refinery is expected to meet nearly 50 per cent of the national demand for petroleum products, providing a critical buffer against global market volatility.

The ERL was established in 1968 under the French contractor Technip. Plans for a second unit (ERL-2) were first drawn up in 2010, and the government approved Tk130 billion for the project in 2013.

However, no progress was made. In 2022, Bangladesh Petroleum Corporation attempted to proceed using its own funds, raising the estimated cost to Tk230 billion, but work still didn't start.

In early 2024, the controversial S Alam Group expressed interest in constructing ERL-2 at a cost of Tk 250 billion, and the energy division approved the proposal on July 9. However, the project was suspended in August following the mass uprising that led to the fall of Sheikh Hasina government. After taking office, the interim government revived the project that would cost Tk 354.65 billion.

Officials said the project could produce 400,000 tonnes of furnace oil, 60,000 tonnes of LPG, 600,000 tonnes of Euro-5 gasoline, 1.1 million tonnes of Euro-5 diesel, 200,000 tonnes of lube base oil, and 500,000 tonnes of jet fuel annually.

BPC data show that in FY2024, Bangladesh consumed 6.73 million tonnes of petroleum products, of which ERL produced only 1.25 million tonnes, leaving 5.05 million tonnes to be imported.

Fuel demand has grown at an average annual rate of 5.5 per cent in recent years. BPC projects that by FY2030, demand could reach 10.79 million tonnes, while domestic production would peak at just 4.5 million.