Govt. expects 10 % drop in Iran crude demand

Saturday, 25 February 2012 01:30 - - {{hitsCtrl.values.hits}}

Reuters: Sri Lanka expects crude imports from Iran to drop by at least 10 per cent this year due to a range of inflation-fighting policies that should cool demand, potentially helping it find a way around US sanctions, a Government official said on Friday.

The island is facing one of the biggest squeezes from the impending sanctions, despite being a small player in the world crude market, since its sole refinery can only process Iranian crude and a handful of others.

In the last month, Sri Lanka has increased interest rates for the first time since 2007 to avert a looming balance-of-payments crisis, raised state-controlled fuel prices by as much as 37 per cent, and stopped defending the rupee currency

“We’re quite confident there will be a reduction in the quantity of oil we purchase because of our new policies,” the official told Reuters on condition of anonymity.

“Our own view is that it will reduce by at least 10 per cent and that will satisfy both parties,” the official said. He expected the 10 per cent reduction would be year-on-year.

That could give Sri Lanka some leverage to argue it has reduced ties with Iran, and followed in the footsteps of India, China and Japan, the official said.

All three plan cuts of 10 per cent or more, and South Korea is in talks to trimming ties with Tehran. The US has said that is a precursor to any waiver from the sanctions, which would lock violators out of the US financial system.

Colombo has so far said it is not seeking a waiver from US sanctions, which in terms of domestic politics, would be the most costly option for President Mahinda Rajapaksa.

The Rajapaksa administration has blasted Washington for its insistence on accounting for war crimes allegations and making political concessions to minorities after the end of a three-decade civil war in 2009.

So far, Sri Lanka‘s policy response has been to seek cargoes from Oman and Saudi Arabia to offset its huge reliance on Iran, which supplied 93 per cent of the crude oil last year to its only refinery, the aging 50,000 barrels-per-day Sapugaskanda plant.

“We are getting ready to face the situation in future by increasing the Arabian Light crude oil quantity and through other alternatives,” Petroleum Industries Minister Susil Premajayantha told parliament this week.

The Government has mulled using a currency other than dollars to settle its crude bill, like India.

“We are still trying to understand if we could have a scheme which is not going to be too controversial. But we are looking at different options, which still don’t include barter,” the government official told Reuters.

Sri Lanka’s government, reliant on export revenues, is reluctant to upset trade with Washington or Tehran. The US is the Indian Ocean nation’s largest trading partner, while Iran is its fourth-biggest.

The accounted for a fifth of Sri Lanka‘s $10.5 billion in export revenue in 2011, according to provisional Government data. Iran brought in $180 million.

There has been speculation Sri Lanka might try to trade tea for oil, but the roughly $130 million it earned last year from tea sales to Iran would barely cover two months of its $1.3 billion Iranian crude bill in 2011.

Last year, it also spent $100 million on Saudi crude and the rest of its $4.6 billion oil bill on refined products.