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How Ceylon Petroleum Corporation is staying afloat amidst mounting pressure
Sumith Wijesinghe - CPC Chairman[/caption]
“The oil prices have skyrocketed in the global market; a litre of kerosene is still being sold locally for Rs. 70, whereas it should ideally be sold at Rs. 100 per litre to keep up with the global price hike,” he noted. Wijesinghe stated that as a result of selling kerosene at a concessional rate, CPC ended up incurring a loss of Rs. 35 billion last year.
CPC’s colossal sums of debt
CPC has requested a price hike for petroleum oil from the Sri Lankan Government, which was rejected, and CPC was instructed to maintain fuel prices without reducing them to reflect the change in the global oil market. The subsidised prices offered proved to be the critical factor igniting CPC’s mounting debt.
Moreover, when oil prices dropped to negative levels globally as the pandemic spread outside of China in the first half of last year, this added some relief to the institution’s existing debt, as local fuel was still being sold at the same levels.
Apart from the losses borne by the subsidised price, CPC bore an additional loss due to currency fluctuation when the rupee depreciated significantly. A Rs. 45.1 billion loss was incurred in the four months up to April 2020 following the rupee being devalued, and in 2019 alone, CPC made a loss of Rs. 11.8 billion. CPC previously incurred a loss amounting to Rs. 106 billion, including a Rs. 80 billion loss from forex losses, in 2018.
Their 2018 Annual Report stated that the Sri Lankan rupee, during the same period, depreciated against the US dollar by 16.4%, reflecting the general strengthening of the dollar globally, outflows from the government securities market, and demand for import expenditure in the foreign exchange market. Therefore, the gains of the previous year through conservative fiscal policy largely dissipated.
As per the Central Bank’s report, the economic growth in 2018 stood at 3.2%, which is less than 3.4% in the previous year, due to the global and domestic disturbances faced by the country. Despite the sharp depreciation of the rupee coupled with the introduction of the pricing formula for domestic petroleum prices, the inflation rate remained well anchored in the low single-digit level of 4.3% in 2018 compared to 6.6% in 2017.
Therefore, the practice of selling petroleum products at a loss – regardless of global fuel price fluctuations, with international petroleum prices increasing by 31% in 2018 – had created a bottleneck situation for the regional oil provider during the outbreak of the pandemic, last year.
According to the Central Bank of Sri Lanka’s 2020 Annual Report, the depreciation of the rupee against the US dollar resulted in an exchange rate variation loss of Rs. 21.8 billion to the CPC during the year, given the large foreign currency exposure of the CPC.
CPC’s debt restructuring request declined by State banks
The total debt owed to state-run People’s Bank and Bank of Ceylon reached Rs. 592.7 billion by end-April 2020, in comparison to Rs. 566 billion in December 2019. CPC had made a request to both the main state banks to restructure its billions of debts owed to them, which was declined by both the banking institutions.
CPC Deputy General Manager (Finance) Varuna Weerasooriya told The Sunday Morning Business earlier this year both banks rejected the request under the grounds that they did not have sufficient foreign reserves at the moment.
They had also requested the Ceylon Electricity Board (CEB) and the national carrier SriLankan Airlines to repay the large sums both institutions owe in outstanding debt to the CPC.
The CEB’s outstanding debt to the CPC is Rs. 93 billion, out of which Rs. 48 billion was paid in August 2020 using the Government’s Fuel Price Stabilisation Fund. The balance outstanding payment at the moment is Rs. 45 billion.
CPC claims that CEB purchased Rs. 2 million worth of fuel every month, although no payments were made for the fuel used. Thereby, CPC warned CEB earlier this year to settle the outstanding payments to CPC. In response to the warning, CEB had requested a moratorium or a grace period to comply with the CPC’s recent decision.
Additionally, CEB recently raised Rs. 20 billion in debt capital via a recent debenture issue at the Colombo Stock Exchange (CSE), out of which Rs. 6 billion was utilised to pay Ceylon Petroleum Corporation (CPC) for CEB’s pending fuel payments to the national oil supplier.
The CSE approved CEB’s application to issue senior unsecured listed redeemable rated debentures at an issue price of Rs. 100, amounting to a potential capital-raising of up to Rs. 20 billion. The debentures are issued for a period of five years, with a fixed coupon interest rate of 9.35% p.a. (AER 9.35%) to be paid annually.
However, speaking to us earlier this month, CPC Deputy General Manager Varuna Weerasooriya pointed out that CEB raised Rs. 20 billion, but only transferred a minor portion of its long-outstanding bill to CPC.
“CPC imports oil and makes the payment to the suppliers in dollars, and given that the dollar rate fluctuates constantly, the Rs. 6 billion transferred is depreciated in value,” he stated.
In 2020, the Government owed a massive sum amounting to Rs. 135 billion to the CPC for various services, including fuel subsidies and the CEB’s pending payments. Out of this, Rs. 93 billion of the outstanding payments of the CEB to the CPC has been due since February 2019.
Thereby, in an attempt to partially settle the loans, the Ministry of Power and Energy used the Government’s Fuel Price Stabilisation Fund to settle CEB’s outstanding payments to the CPC.
CPC provides fuel for the CEB under a credit limit of Rs. 80 billion per month. With the constant delay in settling outstanding payments, CPC warned it would discontinue fuel supplies to the CEB when they exceeded this credit limit, which resulted in the CEB opting for islandwide power cuts.
The grassroots of CEB’s shortcomings over the years were due to the incompetent decisions made with regard to cancelling power plant projects, as well as emergency power purchases at expensive prices.
The Government increased the duty on petroleum imports by the Lanka Indian Oil Corporation (Lanka IOC) and CPC last year. The import duty was increased to prevent excessive profits being made by Indian oil giant Lanka IOC, which had until recently resulted in a massive loss of foreign reserves of the country.
Appointment of a sub-committee
A subcommittee was appointed by Premier Mahinda Rajapaksa, who is also Minister of Finance, to look into the CPC’s losses. The subcommittee was appointed to come up with a proposal that will indicate a long-term plan to resolve CPC from the threat of bankruptcy.
In an attempt to avoid possible bankruptcy, CPC is geared to discuss the solutions presented by the committee. The subcommittee comprises Minister of Power Dullas Alahapperuma, Minister of Industries Wimal Weerawansa, Fisheries and Aquatic Resources Minister Douglas Devananda, Money and Capital Market and State Enterprise Reforms State Minister Ajith Nivard Cabraal, and Minister of Energy Udaya Gammanpila.
The discussions will focus on managing CPC’s financial performance without increasing retail prices of fuel, and handling the losses incurred by CPC.
Oil stabilisation fund
In 2020, the Government proposed to form an Oil Price Stabilisation Fund to manage the fluctuating global oil price with an initiative of maintaining the local oil prices, and also facilitating the delayed payments of the Ceylon Electricity Board (CEB) by compensating revenue loss by cross subsidising funds saved.
Speaking to us, the CPC claimed there is such a proposal, and Energy Minister Udaya Gamanpila is in the process of launching it. When the prices go up, he wants to use it to cushion the losses, and if the prices go down in the world market, he wants to save and build a fund.
“Currently, further discussions are ongoing to see how to establish the oil price stabilisation fund since the Cabinet has passed the proposal to the subcommittee for further negotiations,” stated the Secretary to the Energy Minister.
In August 2020, CEB settled half of the outstanding payments to the CPC by using the Government’s Fuel Price Stabilisation Fund of Rs. 48 billion. According to Ministry of Energy Spokesman Dharma Wanninayake, who spoke to us in August last year, the CEB’s outstanding debt to the CPC was Rs. 93 billion.
“We have paid Rs. 48 billion out of it and the balance outstanding payment at the moment is Rs. 45 billion. This is a major relief to the CPC, to utilise that money and settle their pending payments and undertake development activities,” he stated at that point.
CPC to increase refinery capacity and oil storage facilities
CPC caters to about 80% of the national oil requirement, yet the refinery at Sapugaskanda has the capacity to produce only 30% of this requirement. The rest has to be imported from various countries, particularly from the Middle East. CPC supplies petroleum products to the country through its distribution channel that consists of 1,302 filling stations islandwide.
Thereby, CPC claimed that the enterprise has conducted a feasibility study on the local production of the oil giant.
Wijesinghe emphasised that a feasibility report will be available by the end of August this year. Meanwhile CPC has identified the need to increase its refining capacity by around another 100,000 barrel.
“CPC plans to increase the refining capacity which will be launched in a period of the next two to three years, and the state enterprise is currently looking for an investor for the project,” he said.
Additionally, the state owned enterprise has drawn up plans to expand oil storage facilities in Sri Lanka.
“CPC is planning to increase oil storage facilities by initially establishing two terminals; one in Trincomalee and another in Hambantota and currently discussions are underway with the Hambantota port to obtain the land for the storage facility,” Wijesinghe stated.
In conclusion
According to data from the Ministry of Finance, out of the $ 3.35 billion import expenditure recorded during 2019, 17% was on fuel and related imports by CPC. Since the cost of imports accounts for about 95% of CPC’s total expenditure, its financial performance is directly affected by the global oil price movements and exchange rate, according to reports.
Additionally, the Central Bank report further claims that Sri Lanka’s major contribution to the increase in import expenditure is due to the excessive importation of petroleum products, which amounts to 6.7% growth in expenditure on imports of fuel in 2014 over the previous year to $ 4,597 million. The average import price of crude oil imported by Ceylon Petroleum Corporation declined to $ 104.53 per barrel in 2014, from $ 109.84 per barrel in 2013.
The continuous losses accumulated by CPC over the years, which amounted to Rs. 337 billion at the end of 2019, has had a significant impact on its operations, thereby weakening its balance sheet in the absence of equity infusion.
Therefore, the establishment and proper management of the oil stabilisation fund can pave a path to Sri Lanka’s national oil provider to overcome the debt rattling the institution currently and tackling the never-ending pattern of global oil price fluctuations, and their impact on developing economies such as Sri Lanka and its state-owned oil companies.