Govt okays $1b stringent IsDB loan for Eastern Refinery expansion

The government has approved a $1,004 million loan from the Islamic Development Bank (IsDB) to finance the construction of the second unit of Eastern Refinery Limited (ERL), with officials describing the financing as being on highly non-concessional terms.

The approval for the approximately $1 billion loan was granted yesterday by the Standing Committee on Non-Concessional Loan (SCNCL) at a meeting chaired by Finance Minister Amir Khosru Mahmud Chowdhury at his office in Sher-e-Bangla Nagar.

Officials at the Economic Relations Division (ERD) said the refinery expansion remains a commercially viable and strategically important project for Bangladesh's long-term energy security, despite the relatively expensive financing.

According to documents presented at the meeting, the IsDB financing consists of two packages. Under "Forward Lease 1", the bank will provide $520.59 million, while "Forward Lease 2" will provide $483.10 million. A $0.6 million technical assistance grant will also be provided under the first package.

As per an ERD working paper, the loan carries a relatively high financing cost compared with prevailing rates in the international market.

Based on the six-month Term Secured Overnight Financing Rate (SOFR) of 3.84627% as of 5 July 2026, the total mark-up rate is 5.44627%, including a 1.60% spread and risk premium. The loan has a 20-year tenure, including a five-year grace period, with repayments every six months over the remaining 15 years.

The ERD classified both financing packages as "highly non-concessional", with grant elements of minus 3.12% for Forward Lease 1 and minus 3.24% for Forward Lease 2.

Officials said the division had raised several observations before recommending approval. Because repayments will be made every six months, the SOFR benchmark, along with the applicable spread and risk premium, will change over time, meaning both the grant element and the level of concessionality will fluctuate throughout the repayment period.

The ERD also recommended that, before the government on-lends the funds to Bangladesh Petroleum Corporation (BPC) or ERL, the Finance Division should assess BPC's financial capacity to ensure the refinery can service the loan without creating an additional burden on the government.

The division also instructed that all project readiness conditions set by the ERD must be fulfilled before the loan agreement is signed. Repayments are expected to fall on 30 June and 31 December each year.

According to the ERD working paper, Eastern Refinery currently has an annual crude oil refining capacity of 1.5 million tonnes. The second unit will add another 3 million tonnes, tripling total annual refining capacity to 4.5 million tonnes and significantly reducing Bangladesh's dependence on imported refined petroleum products.

Officials said the project preparation mission was completed between 8 and 11 February 2026, followed by the appraisal mission from 8 to 12 March. 

Negotiations with IsDB representatives were held on 28 April, an inter-ministerial meeting chaired by the ERD secretary took place on 14 May, and the negotiation minutes were signed on 20 May. 

After the IsDB Dhaka Regional Hub sent draft loan agreements on 3 June, the proposal was placed before the 45th SCNCL meeting for approval.

ERD officials said the loan agreement could be signed in mid-August during a visit by IsDB President Dr Muhammad Sulaiman Al Jasser.

An official present at the meeting said the finance minister urged authorities to complete the project within the stipulated timeframe and expressed frustration that it had not been implemented earlier. 

According to the official, the minister said an earlier expansion would have better positioned Bangladesh to cope with disruptions to global fuel supplies caused by the Iran-Israel conflict and tensions involving the United States.

Project cost revised

The modernisation and expansion of Eastern Refinery in Chattogram is now estimated to cost Tk31,000.57 crore. Of the total, the government will provide Tk18,566.74 crore, while BPC will contribute Tk12,433.83 crore from its own funds. The project is scheduled to run from January 2025 to June 2030.

The Executive Committee of the National Economic Council (Ecnec) approved the project in principle on 23 December last year at an estimated cost of Tk35,465 crore, subject to conditions. Following further scrutiny, the project cost was reduced by Tk4,465 crore.

According to the Energy Division, Eastern Refinery currently meets only around 20% of Bangladesh's petroleum demand, with the remainder met through imports at significant foreign exchange cost.

BPC officials said the new refinery will produce Euro-5 standard gasoline and diesel while upgrading diesel, motor spirit and octane from the existing refinery to Euro-5 specifications.

Officials added that BPC has already completed the "Installation of Single Point Mooring (SPM) with Double Pipeline" project, enabling the transport of up to 4.5 million tonnes of crude oil annually. 

Once operational, the expanded refinery is expected to produce about 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 each year, reducing import dependence and government subsidy requirements.

Project delayed for years

Eastern Refinery, Bangladesh's only oil refinery, was established in Chattogram in 1968 by France's Technip. 

Plans for a second refining unit were first announced in 2010, and the government approved a Tk13,000 crore project in 2013. However, repeated bureaucratic delays, implementation challenges and financing constraints prevented construction from beginning.

BPC revived the project in 2022 using its own financing, by which time the estimated cost had risen to Tk23,000 crore. In early 2024, S Alam Group proposed constructing ERL-2 at a cost of Tk25,000 crore, and the Energy Division approved the proposal on 9 July. 

The project was later suspended following the student-led mass uprising in August that led to the fall of the Sheikh Hasina government.

After taking office, the interim government revived the project and initially sought foreign financing. At that stage, the estimated cost stood at Tk36,410 crore, including Tk25,500.77 crore in external financing and Tk10,909.32 crore from BPC. 

When external funding did not materialise, the government decided to finance the project through public funds alongside BPC's contribution. The revised estimate initially rose to Tk42,973.70 crore before the Planning Commission reduced the cost following further scrutiny.

Eastern Refinery Limited was approved in 1960 and began commercial production in 1968. At the time, 35% of the company was owned by the former East Pakistan Industrial Development Corporation, another 35% by private businessmen led by former West Pakistan commerce secretary and ICS officer Abbas Khaleeli, while the remaining 30% was held by the UK's Burmah Oil Company.