By Sulochana Ramiah Mohan
The US State Department two weeks ago, in writing, warned the Sri Lankan government to completely stop all dealings with Iran. The Sapugaskanda oil refinery was closed on Friday with no crude to refine.
The US sanction imposed on Iran has already tipped the government to spend an additional sum of US$ 1.2 billion to import crude and refined oil into the country from other sources.
A member of the Board of Directors of Ceylon Petroleum Corporation (CPC), on grounds of anonymity, revealed that, although they gave a concession to purchase Iranian crude in June, the US two weeks ago sent a strong letter to Sri Lanka to completely stop all transactions with Iran.
“At the moment we have not talked about an oil price hike but it can be a sudden decision to increase the price depending on the situation. There is adequate oil for now,” he said.
“Even when the US gave us the concession to purchase 10 cargoes from Iran, we could only get eight shipments. Now the US says to put a fullstop to all transactions,” he added. Twenty per cent of the world’s crude oil was supplied by Iran, though it has dropped to 1.8% due to sanctions.
“The US is monitoring by satellite if countries are following their order to not deal with Iran. We only need Iran crude but with the US sanctions we are looking at other countries to supply sweet crude and light crude which need to be blended.”
Lack of foresight
“Officials at the refinery did not prepare themselves for the sanctions. They were happy that the US gave Sri Lanka a concession for six months. But now, the US wants us to stop all transactions with Iran. They’re watching all the ships in our waters. They see how we are getting crude. So now the government is in a fix. President Mahinda Rajapakasa will have to face numerous problems if we don’t follow US sanctions.”
“We don’t know what the government will do. We have asked the president and the Cabinet to decide the next step. All banks that open Letters of Credit (LC) have stopped issuing them. CPC has decided to get down Arabian Light Crude and Miri from Malaysia so that both could be blended to get the right product.”
“We closed the refinery on Friday. This is not good. The losses we would incur per day will amount to millions of rupees. Even the machines will go out of order if they not in operation continuously.”
Forced higher costs
“The core issue here is that getting down Arabian crude will involve an additional cost. Within a short period, US$1.2 billion has been spent to import crude and refined oil into the country.”
“At the moment there is adequate oil. We have stocks of refined oil but that is a costly product. These purified fuels were brought on tender from countries like Vietnam, Oman, etc. But the costs were all borne by the CPC, which means the government is incurring a loss. We spend a lot to purchase but we sell at a very low price.”
Another senior official at the Finance Division of CPC stated that the CPC losses are increasing. “The critical issue is that CPC, being a commercial enterprise, does not enjoy any commercial freedom to decide the petroleum prices. The Treasury is not in a position to pay for losses but it also does not want to increase the price of petroleum. CPC reserves have depleted drastically. Even the Auditor General’s Department stated that CPC is a ‘growing concern,’ and is very doubtful of its operations unless the government or other financing institutions support the corporation,” he said.
“CPC has submitted a letter of requisition explaining the crisis but it’s upto the Petroleum Ministry and the Ministry of Finance to decide. Since CPC is an enterprise, the government has to take a timely decision. We have exposed numerous losses. They need to address them. Unfortunately this is not happening, and CPC is going through a tough time. During the first seven months of this year, CPC posted Rs66.6 bn as losses. Any enterprise making such big losses will see their capital reserves erode,” the senior official said.
He also stated that the CEB and CPC losses for the first seven months together stand at Rs102.6bn (CEB’s loss is Rs 36bn).
He said, “The government’s revenue targetted for 2013 is Rs1500bn. CEB and CPC losses amount to 7% of this figure. Clearly, the losses are a significant portion of the revenue the government is targeting. We also should know that Rs 50 bn means 1% of the GDP, so these losses are nearly 2% of the GDP. Even the education sector is asking for 6% of the GDP to run the show whereas we have ‘eaten up’ 2% of the GDP already. How can we mitigate these losses? The economy has to run. Oil prices cannot be controlled by poor countries like Sri Lanka.
Therefore, whatever the amount that needs to be fixed, should be fixed. The government should fix prices only for those who need that benefit. That type of preferential system is a must for Sri Lanka. But in reality, those who can afford higher prices are also getting fuel at a low price. That is not the way to allocate resources. Subsidies should be offered only to those who cannot afford to pay more.
That is not practiced in the petroleum sector. A price mechanism should be followed when needed. No one is taking the main burden. Diesel is currently sold at a subsidized price and luxury diesel vehicle owners are also enjoying the subsidy. So the subsidy should be confined to the needy segment of society.”
“Losses made by the CPC, the Water Supply Board, CEB, the Ports Authority, SriLankan Airlines and Mihin Air – when you add these up and compare with the government’s revenue, you will know the reality of the government. We must break even. These institutions have been a burden to the public,” CPC’s senior official further said.
On the verge of shut down
Another official attached to the refinery said that the Sapugaskanda refinery station was completely shutdown on Friday because of the lack of crude. After the August shut down (the annual shut down) only Arabian Light Crude was used at the refinery, but the right amount of petrol and octane could not be produced. Adding to this, the amount of sulphur is also high in Arabian Light Crude.
“The refinery is on the verge of breakdown as it is old. The government in 2007 laid a foundation stone for a new refinery in the same premises. The present refinery produces about 40% of furnace oil which is cheaper than crude oil. This means that the profit margin is less,” he said.
He explained that though the new refinery was planned the government did not do a feasibility report at that time and so the money was not allocated. Without allocating cash for the new refinery they laid a foundation stone which was a pure farce before the public.
“Having the idea for a new refinery the government also failed to look into the old refinery and did not allocate cash for renovation. Now the boilers are all old and on the verge of shutting down. In this scenario, we are unable to use Iranian oil which the refinery is designed for.”
“We are told shipping Iranian crude is impossible due to US sanctions and no insurance is granted for ships working for Iran. We need cargo transport insurance. Banks are not willing to do this. Iran said we can insure with P&I Insurance but they are reluctant to give for Iran, so we could not. They even said they will supply. Oman crude is what the government has scheduled to bring,” he averred.
If the government had got the Arabian crude and mixed with Miri light we could have continued operations without waiting for Iran. The government did not schedule an immediate replacement of crude and looked for ways and means elsewhere, struggling to mitigate the issue.
“We are wondering if the refinery would be shut down completely. We have enough finished products in the market (petrol and diesel), but if the refinery is shut down the CPC loss would be Rs 7 to 8 billion per day.
The finished product (petrol) is taxed at Rs 40 per litre. If we refine ourselves, this tax can be avoided. We produce 1mn litres of petrol per day. So a loss of nearly Rs 40mn can be avoided. We do not know what the future is going to be with such enormous losses. We do not know the profitability of the Oman crude,” he added.
He also said that the government should immediately attend to the modification of the refinery and immediately get down the right crude to run the refinery. According to the feasibility report, US$1500mn is needed to modify and double the purifying system.
“Now they don’t have the money. We even doubt whether this would be privatized. If it is privatized the revenue would not come to the government and the government will not benefit,” he said.
Iran has no problem in supplying oil – Iranian Ambassador
“Iran is ready to ship crude to Sri Lanka in our large ships,” said the Iranian Ambassador to Sri Lanka Dr. Hassani. “We know Iran’s huge oil ships cannot enter Sri Lanka’s small harbour but there is one option: a small ship can reach the big ship in Sri Lankan waters and transfer the cargo.”
He also added that Iran has no problem with regard to insurance for their ships. sUS sanctions on Iran have made it difficult for Iran to have money transactions in US dollars and insuring ships carrying Iran goods.
The ambassador says that they have discussed how Iranian ships can still come to Sri Lankan waters and supply the required oil for the refinery.