brand logo

Fuel prices: Looming energy crisis?

13 Feb 2022

By Vinu Opanayake The Lanka Indian Oil Corporation (LIOC), the small player in the oil market duopoly, last Sunday (6) increased its retail selling prices of Lanka auto diesel by Rs. 3 per litre and octane 92 petrol by Rs. 7 per litre. The price hike was fuelled by increasing global oil prices. However, the State-owned Ceylon Petroleum Corporation (CPC) is yet to indicate another price hike. Minister of Energy Udaya Gammanpila told The Sunday Morning that the Ministry had sought a tax reduction on fuel from the Government, adding that forex challenges faced when importing fuel were being managed with assistance from the Central Bank and the Treasury for the time being.  “The last price revision took place on 21 December 2021. However, since then, Brent crude oil prices have increased from $ 72 per barrel to $ 92 per barrel in the international market. The unprecedented rise in international oil prices has breached seven-year highs. To date, the international price of gasoil and gasoline 92 is exceeding $ 100 per barrel. Oil prices are soaring…” the LIOC noted.  However, the CPC, whose fuel prices mostly go hand in hand with the LIOC, decided to maintain its prices while continuously stressing the fact that global oil prices have gone up substantially since the last time the CPC revised local fuel prices.  The decision not to revise fuel prices in accordance with the fluctuating global oil prices is severely affecting the profitability of the already loss-making State-owned CPC. Sri Lanka is a heavily import-reliant country, particularly for its petroleum needs. According to the data from the Central Bank of Sri Lanka (CBSL), from January to November last year, the country’s fuel import expenditure stood at around $ 3.3 billion compared to $ 2.3 billion during the same period the previous year.  Sri Lanka’s main fuel markets have been a couple of Middle Eastern countries. According to research done by former Treasury Secretary Dr. R.H.S. Samaratunga, Sri Lanka was importing crude oil largely from Iran and a minor portion from Saudi Arabia. However, after the US began imposing sanctions on Iran, Sri Lanka faced complications as it was majorly dependent on Iran for fuel. Following this, the country began importing fuel from other Middle Eastern countries, especially the UAE.  The CPC places petroleum orders for the whole year, mostly at the beginning of each year. The CPC either floats six-month or one-year tenders to procure fuel or purchase fuel in the spot market. After floating a tender and signing the agreement with the seller, the average of the Singapore Platts prices of that particular month would be the price at which fuel is purchased. However, if there is a price hike during the agreement period, buyers might have to pay the increased price for the fuel imported during that period.  There is also spot purchase. Spot purchase or spot buying is the practice of buying to meet immediate requirements, rather than for stock or to meet future demand. Spot purchases are also done through a tender process, in accordance with the approved procurement guidelines of the Government of Sri Lanka.  Sri Lanka purchases petroleum products at Singapore Platts prices. The Singapore Platts benchmark prices are the daily average of all trading transactions between buyers and sellers of petroleum products, as assessed and summarised by the Standard & Poor’s Platts, a Singapore-based market wire service.  However, in the past few years, particularly after the spread of the pandemic locally, the country has been finding it extremely difficult to place orders. Not complying with a price formula or not reflecting the fluctuating global oil prices in the local market has raised questions about the country’s energy sector. With such volatility, what does Sri Lanka’s energy sector future look like? ‘Prioritise fuel imports’ Speaking to The Sunday Morning, CPC Union Collective Convener Ashoka Ranwala stated that the Government used to have a fuel monopoly in the country under the Ceylon Petroleum Corporation Act No. 28 of 1961. The monopoly aimed at protecting people from falling prey to profiteering motives of vicious businessmen, by supplying the entire national oil demand through a State enterprise. He added that up until 2002, the CPC was a non-problematic profit-making State enterprise and that it sold fuel to the public at subsidised rates.  “In 2002, under the Government of Ranil Wickremesinghe, this Act was amended where the CPC was bifurcated as CPC and CPSTL. In addition to this, breaking the fuel monopoly of the CPC, the LIOC too entered the market,” he stated, explaining that this was how Sri Lanka’s oil market had changed about 20 years ago.  He added that today, both the CPC and the Sapugaskanda Refinery were making losses. According to Ranwala, a crude oil tanker needs to come to Sri Lanka at least once every two weeks. He stated that a crude oil tanker which usually has a capacity of 90,000 MT costs around $ 62 million.  “Sri Lanka needs at least two to three tankers of $ 62 million per month. If not, the refinery at Sapugaskanda cannot function consistently. In order to be a profitable business, the refinery should continue its operations at a higher frequency, which means a minimum of 5,500 MT a day should be refined, But the way things are going, the refinery is running at a loss,” Ranwala said.  He alleged that it had now become a habit of the Government to bring down about one such crude oil tanker per month, refine it, and then close the refinery’s operations after the entire tanker was refined. According to him, ideally, a refinery is commissioned to continuously operate for at least two years, indicating that closing down the operations of the refinery on and off due to the non-availability of crude oil is a huge loss for the country. Ranwala further stated that in the global market, natural gas or LNG had gained traction and Sri Lanka was exploring possibilities of venturing into this industry, but the conversion needed to happen swiftly.  “Since LNG is a petroleum product, the mandate of introducing LNG is with the CPC. What we have been saying for the past 10 years was to bring down this LNG as soon as possible as we have options locally to convert it and LNG is pretty much cheaper in the global market. This will also mean that Sri Lanka could bring its fuel expenditure down considerably,” Ranwala added.  He suggested that the CPC buy or lease a vessel that could be filled with LNG and be used for local purposes through pipelines while being parked in the middle of the sea, adding that once the LNG in this particular vessel finishes, it could be refilled by another ship that imports LNG.  “This Government has either given up or not tried any measures to bring the State energy sector into profitability. On the other hand, LIOC is increasing its presence in Sri Lanka. The Government says that it has found an LNG deposit in the Mannar basin which is valued at $ 350 billion. This should ideally be explored and operated by Sri Lanka, but what they will really do is sell this to someone and get the dollars,” he claimed.  Ranwala stated that while the aforementioned were long-term solutions, as a short-term solution, Sri Lanka should find dollars to bring down at least two crude oil tankers per month instead of “wasting” dollars on other “non-essential” items. He alleged that by doing so, the Government was attempting to hand over the fuel monopoly to India.  “We do not have money to import crude oil because the Treasury is not prioritising the imports it should prioritise. It is all about prioritising. Fuel and medicines are priorities. The Treasury should take a firm decision to allocate this amount of money towards fuel expenditure every month,” he briefed. No impending energy crisis Speaking to The Sunday Morning, Minister of Energy Udaya Gammanpila stated that there was no energy crisis at the moment nor an impending crisis, and added that he was seeking a tax reduction on fuel from the Treasury.  “For now, we do not have any issues with regard to payment. State banks keep financing our needs while the CBSL issues dollars for us. With that, so far, we have not encountered any issues with regard to fuel imports,” he shared. Meanwhile, when asked whether the CPC would increase its fuel prices and how they would manage without increasing fuel prices, CPC Chairman Sumith Wijesinghe stated that no decision had been arrived at so far with regard to a price revision.  ‘There is no energy crisis, there is a dollar crisis’ Speaking to The Sunday Morning, Advocata Institute Chief Operating Officer (COO) Dhananath Fernando stated that while Sri Lanka did not have an energy crisis, it did have a dollar crisis, which could be termed as the mother of all crises.  “We can call it a fuel crisis if there is a shortage of supply globally. But that is not the case here because there is enough fuel globally; it is just that Sri Lanka cannot afford it. Prices have come down slightly by Wednesday. The Government has to somehow sort this forex crisis first. There has not been a proper discussion on reforms,” Fernando added.  He further noted that the way to solve the dollar crisis was by undertaking economic reforms and depreciating the currency. He added that coming up with a viable economic reform plan was imperative at this point.  “The only thing we can do is, again, go to a friendly country and ask for a credit line. For the last two years, we have been doing this. At the last minute, someone throws us a lifeline, and again after a month or two, someone else gives us a lifeline,” he added. As Fernando mentioned, early this month, the Sri Lankan Government signed a $ 500 million fuel credit line with India to import fuel into the country. This is a revolving credit facility for a one-year period at an interest rate of less than 2%.  Globally, crude oil prices have been on a seven-week rally. So far, global crude oil prices have surged by over 20% during 2022 after increasing by over 50% during 2021.  On the other hand, there have been no talks about establishing a fuel price stabilisation fund or reintroducing a fuel price formula. Even though Minister Gammanpila initially wanted the Treasury to allocate funds to set up a fuel price stabilisation fund, the lack of funds in the Treasury have hampered these plans. However, following this, due to increasing global oil prices, the Ministry of Energy is of the view that the current timing is not appropriate for the Ministry to introduce a fund.  


More News..