The Sri Lankan government has rejected Iran’s offer to assist in expanding the island’s Sapugaskanda oil refinery capacity from 50,000 to 100,000 barrels per day over a dispute on the project’s financing, foreign media reports.

 
A government official with knowledge of the project speaking on condition of anonymity said that the deal breaker was Iran’s insistence that Sri Lanka commit $500 million of its share of the cost up front, but the Treasury baulked at immediately committing such a vast sum.

 
The source added that that the Treasury would have acceded to the Iranian request if it at least had been on a pro rata basis based on the progress of the project, but backers of the refinery expansion now need to find an alternate financing source, the Island Online reported.

 
In the interim the situation at Sapugaskanda is becoming more strained as the refinery is finding it increasingly difficult to produce gasoline and diesel under ever more stringent standards to meet environmental concerns, which has resulted in the refinery diminishing its output to 40,000 barrels per day.

 
According to environmentalists, a law imposing a standard of 500 parts per million sulfur content for auto diesel became law in January 2007, but it has not been fully implemented due to the inability of the Sapugaskanda refinery to produce fuel meeting the new standard, Oilprice.com reports.