Sri Lanka and China agree to fast-track $3.7 billion refinery

Sri Lanka’s foreign minister said on Wednesday that the South Asian island nation had signed an agreement with Chinese state energy giant Sinopec to fast-track a proposed $3.7 billion oil refinery in its southern port city of Hambantota.

Sinopec and Sri Lanka will jointly decide the share of refined fuel that will be exported from the facility, Foreign Minister Vijitha Herath told reporters.

“This is one of the largest foreign investment projects Sri Lanka has received and we feel it will be important for us,” Herath said.

“This refinery has been discussed between the two countries for many years and we are committed to taking it forward. We hope to break ground as soon as possible.”

He declined to provide details on the planned capacity of the refinery.

A Sinopec representative in China did not respond immediately to a request for comment and its Sri Lanka office did not answer phone calls.

Sri Lanka is currently completely dependent on imported oil, which costs the cash-strapped country billions of dollars every year, though it does have some smaller refineries.

The country is looking to attract foreign investment to stabilise its economy which crumpled under a severe foreign exchange crisis in 2022. Sri Lanka posted a faster-than-expected rally after securing a $2.9 billion International Monetary Fund (IMF) programme in 2023.

Sinopec and Sri Lanka will work to resolve land, tax and water issues within a month, Herath said, adding that Colombo expects the refinery to assist the Chinese-built Hambantota Port to function as a hub via bunkering services.

Last week, China and Sri Lanka signed 15 cooperation documents, including agreements on economic and technological development, when recently-elected Sri Lankan President Anura Kumara Dissanayake met China’s President Xi Jinping in Beijing.

Dissanayake’s visit to debt-ridden Sri Lanka’s largest bilateral lender came after he first travelled to Beijing’s regional rival India. Specifics of the deals signed between Sri Lanka and China were not disclosed at the signing ceremony.

Sinopec’s effort to build a refinery in the Indian Ocean island puts it in direct competition with India’s interests in expanding its role as an energy supplier to Sri Lanka.

Herath said Sri Lanka is continuing discussions with India on a proposed fuel pipeline between the two countries and is open to refinery proposals from India. Sinopec has agreed to invest $3.7 billion to construct a “state-of-the-art oil refinery” with a capacity of 200,000 barrels in the southern Hambantota region last Thursday, according to the Sri Lanka president’s media division.

“During President Anura Kumara Dissanayake’s four-day state visit to China, Sri Lanka marked a significant milestone by securing the largest foreign direct investment to date,” it said.

A “substantial portion” of the refinery’s output would be earmarked for export as part of efforts to shore up Sri Lanka’s foreign exchange earnings, a statement said.

“This major investment from China is expected to bolster Sri Lanka’s economic growth while uplifting the livelihoods of low-income communities in the Hambantota area,” it added.

The port of Hambantota was handed to a Beijing company on a 99-year lease for $1.12 billion in 2017 after Sri Lanka was unable to repay a huge Chinese loan, a controversial decision which raised questions about Chinese investments in the country.

Sri Lanka also defaulted on its foreign borrowings in 2022 during a crisis that caused months of food, fuel and medicine shortages.

China accounted for more than half the country’s bilateral debt at the time of the economic crash.

Leftist Dissanayake came to power in September and consolidated his position after his party won by a landslide in snap parliamentary polls last November.

His four-day visit to China comes after he was given a red-carpet welcome to India by Prime Minister Narendra Modi during his first overseas trip as premier in December.

In a meeting with Dissanayake on Wednesday, Chinese President Xi Jinping said the two countries “face a historical opportunity to build on the past and forge ahead”.

The two sides should see ties from “a strategic perspective and build a China-Sri Lanka community with a shared future”, Xi said, according to state media.

Sri Lanka had originally awarded the refinery project in 2019 to an Indian family-owned company based in Singapore, but terminated the agreement after the firm failed to start construction.

Officials signalled in 2023 that they would award the contract to Sinopec after another bidder pulled out.

Sri Lanka sits astride the world’s busiest shipping route, which links the Middle East and East Asia, giving its maritime assets strategic importance.

Agencies