News

Give more subsidies or allow fuel price hike: Udaya Gammanpila

  • Fuel stabilisation fund, not fuel pricing formula, will address fluctuating prices
  • Difficult to formulate debt repayment plan since prices determined by Cabinet
  • Crucial $ 3.6 b Oman line of credit agreement being finalised for signing
  • Negotiating with India to reach a contract on Trinco Oil Tank Farm favourable to CPC
  • No possibility of a CPC pipeline in future under agreement with New Fortress Energy
  • Oil and gas exploration programme attracted international attention

By Asiri Fernando

National energy security has been a hotly debated topic throughout history, with little progress being made on that front. A culmination of legacy issues in poor policymaking, lack of consistency, and an entrenched culture of subsidising fuel and energy costs finally pushed the Government to the brink and forced them to consider some tough decisions.

The national energy crisis, compounded by a possible fuel scarcity in the future, highlights the need for bipartisan national policies, now more than ever before. In an interview with The Sunday Morning, Minister of Energy Udaya Gammanpila discussed the energy landscape of Sri Lanka, key issues including debt, investment, and national interest, and his ambitious plans for domestic gas exploration.

Following are excerpts of the interview.

How much debt is the Ceylon Petroleum Corporation (CPC) in now, and what is the Government’s repayment plan?

Our debt is from two state banks, namely Bank of Ceylon (BOC) and People’s Bank. This total debt is to the tune of $ 3.6 billion. We are not proud to say it, but we are the biggest borrower in the country. The CPC is the largest institution in the country with an annual turnover of around Rs. 700 billion. Unfortunately, this is not a commercial venture, where the management has the right to mark cost-reflective prices. This year, as of 30 September, our cumulative losses were Rs. 83 billion, and we risk losing almost Rs. 120 billion more by the end of the year if we don’t change our pricing.

The prices are determined by the Cabinet. Therefore, it is very difficult to arrange a plan for repayment, especially since our debt is rapidly increasing as our prices do not reflect cost. Currently, we are selling our products at excessively low prices. In addition, we are selling kerosene and furnace oil at concessional prices. On the other hand, the Ceylon Electricity Board (CEB) owes us Rs. 89 billion and SriLankan Airlines owes us Rs. 67 billion. However, we pay interest on the amounts they owe us.

Unless the Government has the capability to subsidise, the CPC should be allowed to mark cost-reflective prices. Otherwise, the CPC will collapse and the two state banks we borrowed from will follow, and then the entire economy will collapse.

Given the enormous debt of the CPC and the current foreign currency crisis Sri Lanka is facing, do you think further privatisation of the energy sector is inevitable?

We don’t want that to happen. That is why we have demanded that the Government give us more subsidies or let us sell at cost-reflective prices.

Will the Ministry of Energy support a move by the CPC to bring in a pricing formula for fuel based on market value fluctuation?

A pricing formula, used by the previous Government, is something that is used by developed countries. If we change prices frequently, there will be two negative impacts. Firstly, when there is a sudden price increase, it will have a huge impact on the cost of living, which cannot be borne by the poor segment of society. Secondly, if the fuel prices fluctuate frequently, our exporters would not be in a position to submit quotations with confidence.

Because of that, I have recommended to the Cabinet that it establish a fuel price stabilisation fund, which would be more suitable for a country like Sri Lanka. I submitted the proposal on 15 March this year. The Cabinet Subcommittee deliberated it for quite a while, and their report will be taken up at the cabinet meeting on Monday (tomorrow, 18 October).

In your opinion, how important is it to secure the proposed $ 3.6 billion line of credit from Oman for petroleum for the energy security of Sri Lanka? If the Omen credit line fails, what other options are you considering?

The Cabinet gave its nod to sign this agreement. So, it is just a matter of signing it. Lawyers from both parties are deliberating on the legal clauses and framework of the agreement. This agreement is quite crucial. Sri Lanka lost three major foreign currency inflows due to the Covid-19 pandemic – tourism, foreign remittances, and foreign investments. There is an import-export gap which was filled by these three inflows, which have dried up now. We are in a currency crisis. I am the first minister to say it.

If we can secure this loan, we can infuse $ 300 million into our forex market on a monthly basis for a year. This will ease the present crisis and the people will ultimately be benefited. We can control inflation, which is driven by import costs and the appreciation of the dollar, and we will be able to ensure uninterrupted fuel supply. Despite many obstacles, Sri Lanka has been able to maintain uninterrupted fuel supply.

There are several (four) options in the pipeline. The Omani one is the most attractive credit facility. If these fail, then we can opt for the alternatives.

What is the current progress in negotiations between Sri Lanka and India regarding the maintenance, operation, and development of the Trincomalee Oil Tank Farm?

In 2003, the present Opposition was in power, and they handed over the entire Trincomalee Oil Tank Farm to India for 35 years, with the contract ending in 2038. Unfortunately, the very same people, now in the Opposition, claim that I am trying to give these oil tanks to India. How can I give it when it has been given already?

I have only one task – that is to take back control of these oil tanks. In fact, when I was appointed Minister of Energy, this was mentioned as a priority in the President’s gazette as one of the duties of my post.

Most of the Indo-Sri Lankan agreements have been in favour of India, except for two. Since I have studied these agreements, I was able to negotiate with India to enter a contract which is very much in favour of Sri Lanka. I negotiated with the Indian Government, as the CPC is a Sri Lankan government institution; similarly, IOC (Indian Oil Company) is fully owned by the Indian Government. Negotiations are ongoing and are very favourable to us.

As the Minister of Energy of Sri Lanka, what is your opinion on why India linked the Trincomalee Bay and the Oil Tank Farm to the controversial 13th Amendment?

Well, my assessment of it is as a close follower of Indo-Sri Lanka relations. My conclusion is that India supported Tamil militants and forced Sri Lanka to sign the Indo-Sri Lanka Accord, not because of anything else, but due to the Trincomalee Oil Tank Farm. It has more national security value than commercial value.

There are 100 tanks which can store one million metric tonnes (MT) of fuel. If any other country is trying to attack or invade India, that country will try to secure control of Trincomalee first, because then they can have uninterrupted fuel supply for their efforts in India, which is in close proximity. That is why India is sensitive about these tanks and forced Sri Lanka to jointly develop these tanks in the Indo-Sri Lanka Accord of 1987.

Do you think Sri Lanka should use a mechanism such as a national security audit for future critical infrastructure development projects to ensure that its national objectives are met?

Unfortunately, Sri Lanka does not have a policy for foreign agreements, or an international trade policy. We don’t have a national security policy. When you try to vet some agreements, there must be yardsticks to measure if it’s good or bad. Only if we have policies can we effectively evaluate an agreement to see if it is in our favour or not.

When the previous Government signed a trade agreement with Singapore, we bitterly criticised and forced the Government to formulate a trade policy to evaluate trade agreements to determine if it was in our favour or not. But the previous Government didn’t do that. Our present Trade Minister is in the process of formulating a national trade policy. Likewise, we need to have a national security policy. Then we can evaluate these agreements to see if they are in our favour or not.

Following the tests and mapping of the Mannar Basin, what quantity of natural gas and other petroleum products have been identified at present?

According to our seismic data on Mannar (150-3,000 m depth), we have identified a gas potential of nine trillion cubic feet and crude oil potential of two billion barrels. The collective market value (according to current pricing) of both combined is $ 280 billion.

Can you explain how the Government plans to extract the resources for the benefit of the public?

We have had these resources for millions of years. But, up to now, we have failed to mine and monetise it. We should not go for another auction without fixing our past issues. I have consulted the market giants and they pointed out eight weaknesses in the Sri Lankan petroleum industry.

We have made some changes at the administrative level. We appointed industry experts to lead the Petroleum Resources (Development) Secretariat. The industry giants will only come if there are experts who understand the industry and the terminology they use.

We introduced a new Act, and through it we launched the Petroleum Development Authority, to which I have transferred all my (as Energy Minister) regulatory authority. This is because one of the main concerns with investors was that regulatory authority was vested solely with one person, and that person was a politician. I abolished the committee of ministry secretaries that handled administrative decisions, as they did not understand the industry. We plan to establish a board of directors who have an understanding of the petroleum industry. I have moved to create a legal and fiscal policy to secure investment by industry giants.

We have demarked clearly the boundaries of the regulator, policymaker, and operator. In order to conduct exploration and mining activities, we are going to establish a company called the National Oil and Gas Company of Sri Lanka.

Which companies have expressed interest in exploration? Has your Ministry reached out regarding a possible joint venture for petroleum extraction in Mannar?

I visited the recent Gastech Conference where I explained our plans to extract and monetise our natural gas reserves. I spoke to ministers from Azerbaijan, Iran, the UAE, and Oman. We spoke to market giants such as ExxonMobil and TotalEnergies SE. So, we have already made a lot of contacts. Recently, a market giant purchased our data pack for the Mannar Basin at a price of $ 10 million. So, the industry is looking bullish.

What type of joint venture model is the Government looking at when partnering for petroleum extraction in the Mannar Basin?

As I said, the National Oil and Gas Company of Sri Lanka will be the national operator. Whoever comes for exploration and extraction in Sri Lanka must allow the national operator to hold 15% of the shares and have at least one seat on the board. So, we will get an income for these shares, and in addition to that, we will gain experience with those companies. Then, on a future date, our national operator can conduct exploration and exploitation on its own. That is how Petronas of Malaysia developed. There will also be signature bonuses, royalties, and taxes. Of course, these will be determined by the (oil) reserves.

You voiced your concern about the recent agreement between Sri Lanka and New Fortress Energy Inc. of the US, stating that the move will give a foreign entity a monopoly in the supply of liquefied natural gas (LNG) to Sri Lanka. You also stated that the move will send conflicting messages to potential investors who are keen on petroleum exploration in Sri Lanka. Do you think the Cabinet voted for an agreement which is short-sighted and not in the best interest of Sri Lanka in the long term?

As the Minister for Energy, it was my duty to inform the Cabinet of possible complications and adverse impacts of this agreement. I did so twice and highlighted four issues.

Firstly, since there was an ongoing tender for this project, if the Government offered the project to a non-participating company, it would be a good governance issue.

Secondly, there is a diplomatic issue. The previous Government signed MoUs (Memoranda of Understanding) with South Korea, Japan, and India to offer them this project. Since we can’t offer the same project to three different countries, we went for an open tender. China was able to secure the tender. Now, when we offer this project to a US company, India, China, Japan, and South Korea will be upset with Sri Lanka.

Thirdly, there are energy security and national security issues. As you may know, the US has been interfering in Sri Lanka’s internal affairs for the last 40 years. When we offer them the monopoly of supplying (liquefied natural) gas to our power sector, they can influence decisions of the Sri Lankan Government with the threat of stopping the supply of LNG.

Fourth, it will have an adverse impact in terms of attracting investors for domestic gas mining. We are not a party that raises our voice emotionally. We are not against foreign investment.

Will the LNG supply agreement with New Fortress Energy be up for renewal in five years, and do you think it should be?

No, the agreement I saw was of a more dangerous nature. They (New Fortress Energy) will have a monopoly for five years. But the termination will take place only when the CPC has a pipeline of its own. As far as I can see, there can’t be another pipeline once New Fortress Energy Inc. lays theirs. Then, there is no possibility of a CPC pipeline in the future. In other words, this agreement is indefinite.

If you are in the Opposition after five years, what would you like to see a future government do about the said LNG supply agreement with New Fortress Energy?

Why should we wait for another government? I think our Government should review this agreement for the sake of national interest.