Oil crisis – Cheaper oil possible within a year

 The most convenient and cheapest way of solving the country’s oil problem, while ending massive losses for CPC, is to convert the Trincomalee oil tank complex into a regional petroleum hub

Recently the Government raised fuel prices, ranging between Rs. 7 and Rs. 23 per litre, 21 months after the last price revision. The protests over price increase was more from politicians, trade unions and their sup-porters than consumers, also surprisingly included some within the ruling party. In addition, domestic gas price increase too were demanded by suppliers.

The President informed the public of the need to increase prices along with global crude oil prices, with the current price of a barrel of crude oil passing over $ 70, with the possibility of going higher. In 2019 oil imports cost $ 3.6 billion with oil costing $ 68.80, but reduced to $ 2.3 billion in 2020 with reduction of oil prices to $ 45.57 and Corona resulted travel restrictions. However, with current prices exceeding $ 70, import costs may exceed $ 4 billion, reaching one-third of total anticipated foreign earnings for 2021.

Meanwhile, two LPG companies, Litro and LAUGFS, filed a price revision with Consumer Affairs Authority (CAA), but the request was turned down.

Public concerns

Public and Opposition politicians protesting against the price hike pointed out that when oil prices came down, the profit was not passed over to the consumer. The protestors are demanding that the price revision be reversed. Also a no confidence motion has been brought against the Minister.

When the present Government came to power, Brent oil price was around $ 58, came down to near $ 20 by April 2020, has been climbing gradually reaching around $ 70 at present. In addition, in October 2019 the dollar was around Rs. 181, today the dollar has reached Rs. 198. Thus not only the price of crude oil, but exchange rates affect the selling price. But can a sudden reduction of oil price lasting few days as happened in April 2020 be passed over to consumer?

CPC in a financial mess

Meanwhile, media reported that the Cabinet approved obtaining a loan of $ 1 billion from international pri-vate lending agencies for settlement of interest on loans obtained by Ceylon Petroleum Corporation. The interest on CPC loans amount to $ 2.081 billion on Rs. 652 billion loans from State-owned Bank of Ceylon and the People’s Bank.

How did so much losses accumulate? The loans include billions not settled by Ceylon Electricity Board and SriLankan Airlines over decades. In addition, CPC supplies fuel to CEB at nearly half the price, creating another mess.

Petroleum supply to consumers

Our sole oil refinery at Sapugaskanda is 40 years old, built when vehicle numbers were low and refines only 20% of current requirement. The balance is imported as refined oil. Our Kolonnawa storage facility can store only three weeks’ requirement, thus needing frequent shipments. The pipeline delivering fuel to Kolonnawa is old and rotted, needing fuel be pumped at low pressure, taking long time to deliver. In addition oil is un-loaded from the ship to a buoy anchored in the sea, which holds the pipeline carrying the oil inland. Thus dur-ing rough weather unloading is discontinued. The pipeline route is occupied by squatters, making installing a new pipeline troublesome.

Due to low storage capacity, oil is imported in small quantities and delays in unloading results demurrage, thus actual oil costs become much higher. In addition, low storage does not allow purchasing large quantities when crude oil prices are low, but needs purchasing irrespective of high prices. But our politicians and the Minister do not seem to understand the situation.

CPC’s contribution to electricity

CPC supplies oil to Ceylon Electricity Board at subsidized prices. CEB using cheap oil claims their oil based pow-er generation costs are reasonable and have used same to discourage new renewable power projects utilis-ing solar and wind. Solar and wind power are not steady and needs support as hydro or LNG based power.

The country’s electricity supply is in a critical situation. Since 2015 not a single major power plant was con-structed. The existing natural gas plant at Kerawalapitiya has been running on petroleum for nearly five years, as no gas supply is available, delivering electricity at nearly double the price. An additional 300 MW natural gas plant at Kerawalapitiya tendered in 2016 was awarded only few months ago. Even today, LNG supply is not in the pipeline. Number of proposals received for LNG storage anchored in the sea were not accepted. Until LNG supply is established the burden would be on CPC.

Reducing fuel prices

Reducing fuel prices to consumer requires attending to deficiencies in the entire system, from bulk crude oil purchasing, unloading, pumping, storage and refining stages. The country needs a higher capacity refinery covering total requirement. A large storage facility would enable purchasing bulk crude oil when prices are low and delay purchasing when prices go higher. A facility allowing fast unloading of larger quantities of fuel in a buoy in deeper sea and a new pipeline. But the squatters on the pipeline trace would demand housing prior to moving out, a highly expensive exercise. Thus every phase would be extremely expensive.

Meanwhile, a JVP senior questioned how Indian Oil Company (IOC) which delivered fuel to customers at the same price as CPC could run at a profit. Simple, IOC purchases oil in bulk and it is unloaded at Trincomalee Port where ships berth by the jetty and are stored in existing tanks, leased from Sri Lanka. They use 15 tanks each with 12,000 tons capacity to store oil. Thus no unloading in mid-sea and large ships bring refined oil in large quantities at lower prices.

Government’s solution

The Minister wishes to call quotations for a large new refinery with a capacity of 100,000 barrels a day at Sapugaskanda. The project, expected to cost approximately $ 3 billion, or Rs. 600 billion, will be the largest project in Sri Lanka's history. Due to lack of finances expected running is on BOT basis (built, own and trans-fer). But when owned and run by a third party, who would purchase crude oil, timing, also running costs and the selling price, makes it an extremely complicated procedure.

Also how about unloading of oil from a ship to a buoy, pumping, construction of a new pipeline, relocating settlements over pipeline? A month’s storage would mean three million barrels. Have the cost of these con-sidered? In addition, the US Ambassador too is interested in the project.

A refinery in Hambantota

Meanwhile Ceylon Petroleum Corporation signed a MOU with the Hambantota International Port Group (HIPG) to develop Hambantota Port as a strategic energy centre in Sri Lanka. The new storage terminal with associated facilities located on a 50-acre land would be connected to the port via a pipeline. The terminal is expected to meet bunker oil market for vising ships, also for both domestic and export purposes.

The energy centre would be developed with Chinese funds, mostly to supply fuel to ships calling over at Hambantota Port, but will it support CPC to come out of the current mess?

Gas supply

The country’s gas supply is handled by two companies, Litro and LAUGFS. Domestic gas is Liquid Petroleum Gas (LPG) obtained as a by-product in refining petroleum. The output from Sapugaskanda is given to Litro and the balance is imported. Meanwhile LAUGFS has a LPG storage yard next to Hambantota Port and purchases LPG in bulk, stores in its yard and exports to East Africa and Bangladesh in its own small ships. It is claimed the bulk purchase price of LAUGFS is less than half of that paid by Litro.

Recently, LAUGFS owner W.K.H. Wegapitiya met the President and offered to coordinate gas supply be-tween the two organisations. But the Minister wished to take over 40% of LAUGFS and Wegapitiya left the meeting. Later the President intervened and appointed a committee on the issue.

Trincomalee tank farm

Under Ranil Wickremesinghe, an agreement was signed in February 2003 between Indian Oil Corporation (IOC) and Sri Lanka to lease China Bay oil tank farm in Trincomalee, built by British prior to Second World War, for a 99-year period. The Indians took over the oil tanks and are using them.

Power plants in Trincomalee

Indian Prime Minister Narendra Modi during his visit to Sri Lanka in March 2015 informed that ‘India is keen to develop Trincomalee to become a regional petroleum hub’. Later in 2015, Indian and Sri Lankan Governments signed an agreement (MOU) to establish a 500 MW coal-fired power plant in Sampur, Trincomalee, later modified for a 500 MW LIQUEFIED NATURAL gas (LNG) power plant at President Sirisena’s request.

Solving petroleum supply issue

The most convenient and cheapest way of solving the country’s oil problem, while ending massive losses for CPC, is to go ahead with Indian PM Modi’s proposal to convert the Trincomalee oil tank complex into a re-gional petroleum hub.

Oil tanks in Trincomalee numbering 99 were built by the British during the late 1930s, each with a 12,100 met-ric ton capacity, and they have idled for 70 years. Currently, only 15 tanks in the Lower Tank Farm are used by Indian Oil Corporation (IOC). The remaining 84 tanks in the Upper Tank Farm remain unutilised and refur-bishment would cost around $ 2 million, yielding 1.2 million metric tons of storage, far in excess of domestic requirement. Thus Trincomalee oil tanks could be developed establishing South Asia’s energy hub, as pro-posed by Indian PM as a joint venture between two countries.

The proposed energy hub would include:

a. Crude and refined oil storage (already available)

b. An oil refinery

c. LNG import, gasification plant and storage

d. Gas-based electricity power generation

The refurbishing of upper oil tanks and using them for storage of imported oil, crude and refined, would allow bulk purchasing and retail sale as the initial step of the regional petroleum hub. This would enable Sri Lanka to obtain its oil requirement at much lower prices, insulated from the ups and downs of the world oil market.

A large oil refinery established would allow refining own crude oil, as part of oil hub, also exports thereby, lowering prices, but after few years.

In parallel to refurbishing oil tanks, it could be a LNG import, gasification plant with storage, for local use also for exports. This would enable delivering LNG to plants in Kerawalapitiya, also the possibility of converting existing oil based power plants too into LNG, thus reducing power generation costs and ending subsidised oil to CEB.

The gas-based electricity generation plant would supply power needs of the Eastern Province with existing power lines, but would take some time. 

The above plants would be massively expensive and are beyond the reach of our country, but when the pro-posal was brought by Indian PM, Japan wished to support financially. Thus financing would not be an issue.

Allegations against Sri Lanka

Our country’s policy is non-alignment, to be friendly with every country and to have no enemies. But with poor finances the country is already leaning towards China, resented by the West. Recent human rights alle-gations made against Sri Lanka with manipulated death numbers during the end of LTTE war shows that the West wishes to punish Sri Lanka for being friendly with China.

Transition of India from enemy to a friend

When India forced the Indo-Lanka Peace Accord of 1987, training and arming the LTTE, with the escalating ethnic war, it made Sri Lanka look at India as an enemy. But when Rajiv Gandhi was killed by a female LTTE cadre, the Indian Government’s attitude changed. During the final years of war, India gave military and dip-lomatic support to defeat the LTTE. But our Minister’s attitude towards India does not seem to have changed.

After ending the war, India assisted Sri Lanka with rehabilitation of railway, housing for war victims, ambu-lances countrywide and educational scholarships. The two countries have signed number of agreements over the years, but the only working arrangement was the transfer of oil tanks in Trincomalee. In addition, with Sri Lanka having financial problems the President had to request help from the neighbour.

Our Ministers’ changing policies

Our Ministers wish to solve the issue differently. After the new Government came to power in December 2019, Power and Energy Minister Mahinda Amaraweera made a statement  that “Sri Lanka aims to double its crude oil tank capacity by 2020, while a tripartite LNG terminal and power plant agreement will be signed with India and Japan by mid next year”.

In June 2020, the CPC Chairman told Daily FT that they were considering the development of 25 oil tanks in Trincomalee at a cost of $ 20-30 million. “At present we distribute fuel to the entire country through our main storage facility in Colombo. If the proposed 25 tanks can be developed accordingly, the Government will be able to store fuel required for two to three months with cost-efficient distribution options for the North, East and North Central Provinces, thereby saving money for the Government,” the Chairman told the Daily FT.

Indian news media reported in February 2021 that “According to Energy Minister Udaya Gammanpila, Sri Lanka will re-acquire 99 World War II-era oil storage tanks leased to Indian Oil Corporation in the eastern port district of Trincomalee”.

Modi’s blunder

When President Gotabaya was elected, his first overseas visit was to his neighbour India, to meet Indian Prime Minister Modi. The main request from the Indian PM was speedy implementation of Provincial Coun-cils. But he overlooked that Sri Lanka established the PC bill (now held up due to legal issues). But on Rajiv Gandhi’s promise to make the LTTE lay down arms, India failed for three years and President Premadasa had to send the IPKF away.

If Modi requested the development of Trincomalee as an oil hub instead of PC, by now considerable progress would have been made.

Allegations against Minister

Minister Udaya Gammanpila is accused of imposing blundering oil costs on the public and a no-confidence motion is in Parliament. The above shows the Minister was more concerned about enhancing own power while the public had to pay; the next few days will show.

The way forward

The country’s politicians need to realise that there are no permanent friends or enemies among nations, only their objectives. India which was close to Russia a decade ago has become a member of the Quad with US.

The development of underutilised Trincomalee harbour, among the largest, natural, deep-water harbours in the world, would attract other investments around the world, bringing in development to the neglected east.

Also India is the world’s third-largest oil importer of crude oil, thus massive oil storage possibility in Trincoma-lee oil tanks would reduce India’s oil price vulnerability. Thus India would be interested in developing the oil tanks urgently.

If the President requests Indian PM Modi for the implementation of the Trincomalee oil hub, the Indian PM would react positively immediately, with details to be agreed between officials in two countries.

Oil hub would require refurbishing unused oil tanks and next would be a large refinery enabling import of cheaper crude oil, a project possible with support from Japan. Also the US, which is interested in the refinery, would not object. Thus the currently proposed most expensive refinery would become redundant. Solving the issue with Indian assistance would relieve the country of expensive oil prices, at the lowest cost to the country, at current difficult times.

Cheaper oil within a year

When around 15 unused oil tanks are refurbished to store imported oils, allowing Sri Lanka to import refined oil requirement amounting to 80%, it would result in cheaper oil to the public, with the entire process taking less than a year.

Agreeing for an oil hub with India would counterbalance relations with Chinese Hambantota Port and the Port City and would result in Sri Lanka becoming more acceptable to West, resulting in the disappearance of hu-man rights allegations against Sri Lanka from Western countries.