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Ceylon Petroleum Corporation: Dissecting fuel finances and losses

19 Mar 2022

  • Petroleum TU alleges CPC and LIOC price hikes unreasonable
  • Questions why petroleum sector has no regulator
  • CPC losses due to mismanagement and poor Govt. policies: Ranwala
  • NAO report indicates $ 14 m loss to State in fuel purchase between 2009-’19 
By Maheesha Mudugamuwa Concerns have been raised over the financial management of the State-owned Ceylon Petroleum Corporation (CPC) as it continues to incur losses despite recent adjustments made to local fuel prices to reflect world market prices.  As petroleum products are not being distributed among the public free of charge, consumers are questioning how the Corporation incurs a massive loss which is ultimately passed onto them directly or indirectly via Government taxes.  Petroleum sector trade unionists allege that the Government has increased prices to match world market prices even before stocks at new rates have arrived in the country.  According to them, petroleum products that are currently being distributed by the CPC had been ordered at last month’s prices as the orders had been placed 35 days prior to the price revision. The CPC this month increased petrol (octane 92) by Rs. 77 and (auto) diesel by Rs. 55, after the Central Bank of Sri Lanka (CBSL) floated the rupee.  Regulation needed Speaking to The Sunday Morning, Energy Trade Union (ETU) Convener Ananda Palitha said the CPC and Lanka Indian Oil Company (LIOC) had no right to increase prices due to the fluctuations of the world market prices as none of these institutions were incurring losses from local sales.  According to Palitha, LIOC is earning a profit of Rs. 6 per litre even at present compared to CPC and at the same time CPC had earned a huge profit from selling its products, especially petrol and diesel, at higher prices during 2020 when the world market prices had declined to a record low during the height of the Covid-19 pandemic.  But none of these profits were passed down to the consumers, he stressed. “CPC’s Chairman or the Energy Minister or the Ministry Secretary have no right to say that the Corporation is incurring losses as it should be said by the Finance Ministry or the Government as the fuel prices were adjusted by them,” Palitha said.  He also questioned the Government as to why petroleum sector prices were not being regulated like electricity tariffs. Elaborating that the Public Utilities Commission of Sri Lanka (PUCSL) had been established to regulate the tariffs of electricity, fuel, and water, Palitha said fuel had never been placed under the Commission.  “The Corporation is a profit-earning entity and the reason for the current losses incurred by the CPC is purely due to mismanagement,” he stressed, while highlighting that the country had to pay a total of $ 2.5 million during the last two months as demurrage costs as the management had failed to properly place orders as well as manage existing resources to unload fuel. CPC losses The country’s petroleum sector is dominated by the CPC, which accounts for approximately 86% of the retail market share. Sri Lanka depends on imported petroleum products to meet its primary and secondary energy requirements. According to the Fiscal Management Report (FMR)-2022 issued by the Finance Ministry, the CPC recorded a loss of Rs. 61,886 million for the first seven months of 2021 mainly due to the increase in international oil prices by 47% from $ 51/bbl (dollars per barrel) to $ 75/bbl and a Year-on-Year (YoY) 9% depreciation of the rupee against the US Dollar from Rs. 182.73 to Rs. 199.49.  As highlighted in the report, the financial shocks of CPC had temporarily been absorbed by the two State banks, the Bank of Ceylon (BoC) and the People’s Bank (PB), which had reached Rs. 707,505 million in payables as at end of July 2021.  To fulfil the demand of 2,942 million litres of finished petroleum products, CPC has imported 18.4 million barrels of crude oil and finished products at an aggregate cost of Rs. 253,668 million in the first seven months of 2021. In such a backdrop, the total cost of sales has increased by 17% YoY to Rs. 315,885 million in the first seven months of 2021, compared to Rs. 268,225 million recorded in the corresponding period of 2020, the report stated.   It is further highlighted that despite the increase in retail prices of petroleum products in June 2021 to absorb some of the costs, CPC recorded an operating loss of Rs. 18,848 million in the first seven months of 2021 compared to the operating profits of Rs. 17,402 million in the same period of 2020.  Meanwhile, with the pressure to settle the outstanding of the US Dollar denominated loan, the CPC faced severe financial constraints with finance cost increasing by 19% year-on-year to Rs. 13,709 million for the first seven months of 2021 compared to Rs. 11,516 million in the same period of 2020. Higher credit receivables amounting to Rs. 152,430 million as at the end of July 2021 have adversely affected the financial position of the CPC, the FMR stated.  Management issues In such a backdrop, the reports of the audits of CPC conducted by the National Audit Office (NAO) highlighted a number of management issues that had resulted in losses amounting to millions of rupees which ultimately passed to the public.  Accordingly, one recent audit report highlighted that as per the audit examination carried out pertaining to the hedging transactions taken place in respect of procurement of oil during the period of 2007 to 2009, the total loss to the country on those transactions as of 31 December 2019 was Rs. 14,028 million.  Moreover, the Commercial Bank of Ceylon had filed a case at the Commercial High Court, Colombo against the Corporation claiming $ 8,648,300. In addition to that, a sum of $ 27.8 million plus interest is shown in the books of accounts of the People’s Bank as receivable from the Corporation with regard to the hedging transactions.  It has also been revealed that the CPC is yet to enter into formal agreements to supply fuel with 13 major customers, including the Ceylon Electricity Board (CEB), representing a total outstanding balance of Rs. 91,722 million. Also, it is revealed that the total amount of $ 250,925,169 is still to be paid to the National Iranian Corporation, Tehran in relation to the purchase of petroleum products by the Corporation which was equivalent to Rs. 32,343.52 million in the year 2013. As revealed in the audit, the payment of such outstanding balance was stopped due to sanctions enforced on Iran by the United States and such balance has been showing as a payable amount from the inception, at the exchange rate as at the end of each year and the difference of the adjustment transferred to exchange gain or loss of the respective year.  Accordingly, as stated in the report, the payable balance as at the end of the year under review has been increased to Rs. 45,811.68 million. It was also observed that the payment of these balances had not been done due to uncontrollable external factors. However, the audit was unable to ensure whether the Corporation had taken any effort to settle this amount through alternative forms and evaluate the financial feasibility of keeping the balance unsettle in a situation where gradually depreciating the LKR over USD for a longer period.   Bad policies Commenting on the losses, JVP-affiliated Petroleum Common Workers’ Union (PCWU) President Asoka Ranwala stressed that the losses incurred by the CPC were mainly due to the mismanagement of the CPC and overall due to the bad financial policies of the Government.  Highlighting the dollar crisis faced by the Corporation, he said the wrong financial policies applied by successive governments was the reason why the CPC had been unable to earn dollars and had to depend on the Treasury.  Ranawala told The Sunday Morning that governments in the past did not promote the CPC’s dollar-earning businesses such as bunkering and aviation, the main dollar income earners, and as a result the entire country was at present facing a severe financial crisis.  “They have completely stopped bunkering and given it to a private company and did not take any steps to expand the aviation sector as well. At present, the only dollar-earning business handled by the CPC is aviation but it is not enough to fill the gap,” he added.  Consumers impacted Meanwhile, speaking on behalf of consumers, National Movement for Consumer Rights Protection (NMCRP) Chairman Ranjith Vithanage stressed that the recent fuel price hikes had affected almost all households.  He said: “Every consumer commodity had increased drastically during the past two months and the increase of fuel prices had aggravated the situation. Many people can’t afford all three meals a day nowadays and even those who have money cannot secure the commodities that they need as there is a shortage in the market.”   “This is the worst period of the country’s recent history where the entire economic pressure has been passed on to the consumers. Increase of fuel prices only made the situation worse,” Vithanage said, urging the Government to immediately provide relief to the general public by lowering the cost of living and making essentials available.  Continuous attempts by The Sunday Morning to contact CPC Chairman Sumith Wijesinghe, CPC Managing Director Buddhika Madihahewa, and Energy Minister Gamini Lokuge were futile.  

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