By Sarah Hannan
The dream to turn Sri Lanka into the energy hub of Asia is seemingly distant, as the energy sector is relying on outdated infrastructure and has, at times, experienced several breakdowns and shortages whilst attempting to cater to the growing energy requirement of the country.
[caption id="attachment_115438" align="alignleft" width="300"]
Minister of Energy Udaya Gammanpilla speaks to The Sunday Morning at his office in Colombo. PHOTO ESHAN DASANAYAKA[/caption]
This week on The Sunday Morning Hot Seat, we had Minister of Energy Udaya Gammanpila, who was keen on clarifying the strategic plan that the Government has in place to ensure the sector addresses the lags and implements the much-anticipated upgrades.
Following are excerpts of the interview:
What steps have your Ministry taken towards making Sri Lanka the energy hub of Asia?
In order for Sri Lanka to become the energy hub of Asia, we need to work on three things. First of all, Sri Lanka should be able to process and export petroleum-related products. We should have the required mechanism or refineries, and other infrastructure facilities to import crude oil and export the processed and refined petroleum products to other countries. Once this is set up, we can attract that export segment of the business because of our location. As the Middle Eastern countries are the main oil-producing nations, we can import crude oil from these countries and refine it and produce petroleum-based products to be exported to the Far East, mainly China, Japan, and Indonesia.
Secondly, we should attract the oil bunkering business or supply fuel to ships. We plan to set up two refineries. One will be at Hambantota as a joint venture between Sri Lanka and China, with the main objective of it being to supply fuel to ships that would be passing through what is considered the busiest international shipping route in the world. As most of those ships originating from China also head back towards China, having a joint venture with them is the best strategy to attract those ships to the island, especially to the Hambantota Port, as it is on this international shipping route. Then the second refinery will be in Trincomalee, also as a joint venture, but this will be between Sri Lanka and India, so as to supply fuel to the Indian transhipment ships.
Thirdly, we should be in the business of supplying jet fuel.
These are the three steps that Sri Lanka should take to becoming the energy hub of Asia.
I have also planned to establish a new refinery with the capacity of processing 100,000 barrels of crude oil per day at the Euro 6 standard, and in addition to that, upgrading the existing refinery to process 50,000 barrels of crude oil per day, again at the Euro 6 standard. Right now, we are doing the feasibility study for that, and we will most probably be able to commence the construction of the refinery during the year.
What challenges do we face in initiating oil and natural gas exploration that has been talked about for many years?
Although we have talked much about this issue, it has not materialised for over 60 years. After my appointment as Minister, I found out why we failed.
Firstly, we do not have competent people that understand the technicalities of the oil industry. When international experts come down to Sri Lanka to discuss the potential of excavating oil or natural gas, our officers here have no in-depth knowledge to enable them to answer the questions posed. That destroys the confidence of the investor.
In addition, we did not have an oil or gas policy – which is now being drafted. We have recruited oil experts to our Secretariat for this purpose. We are also planning to introduce a new act, for which there will be an expert panel. We know that there are hundreds of Sri Lankan oil experts who are working all over the world – we should seek their advice for ministerial-level and policy-level decisions from time to time.
Thirdly, this is an industry that is worth billions of dollars. For this kind of project, investors need to put down at least $ 5 billion – which is a huge investment, for which they expect a legal framework. As mentioned, there was no legal framework, and I have submitted a cabinet paper under the Petroleum Development Authority Act to provide that legal framework.
Last year, you said the oil exploration exercise returned positive results for three oil basins in the country. Have we already started the necessary groundwork in this regard?
The three basins are the Mannar Basin, Cauvery Basin, and Lanka Basin. It is confirmed that we have gas in Block M2 of the Mannar Basin, and there are indications that we have oil in two other wells.
However, even with these resources, we could not attract investors because of the weaknesses I explained to you earlier. As such, we should not go for another auction.
We will present the aforementioned act to the Cabinet, and the bill will be passed at the meeting on Monday (25), after which we will go to the Attorney General's (AG) Department to get its approval. After that, it is a matter of publishing it in the Gazette and submitting it to Parliament. It may take at least three months.
If we lack the technical expertise, which country should we turn to for expert knowledge?
We are looking at Sri Lankan energy sector experts working abroad who are willing to help their motherland on a voluntary basis. There are a lot of Sri Lankans who have expressed their willingness to contribute their knowledge towards exploring oil and natural gas.
Your aim is to elevate this industry prior to the next presidential election. How confident are you in achieving this goal?
I am very confident that we can achieve this. I don’t see why investors won’t come here if this is profitable and is fully secure for them. It is a matter of having our legal and policy framework in place and marketing professionally overseas.
As you know, the Sri Lankan Government is cash hungry at the moment, because of our credit exposure. Our public debt is about to be 100% of GDP (gross domestic product), and in this backdrop, the Sri Lankan Government is not in a position to borrow further.
So, we are going to go for oil exploration. Of course, we will only be issuing the license, and we will fix our terms as to what percentage we need as profit, royalties, and other taxes. Meanwhile, it is up to them to invest 100% and make their profit.
There were talks of restoring the Trincomalee oil storage tanks and reacquiring some of it under the Ceylon Petroleum Corporation (CPC) from Lanka Indian Oil Company (LIOC). What is the progress on that?
We cannot reacquire those tanks because they have been leased for a period of 35 years, since 2003, to LIOC. That was agreed on in 2003 at a nominal annual rental of $ 100,000 per annum. To me, it was a crime – all those culprits behind this corrupt deal should have been punished, but that’s in the past.
At the moment, there are only 99 tanks in total in Trincomalee, and out of these 99 tanks, 15 are utilised by LIOC, and the rest are unutilised and left without a utility value. I have talked to the Indian Government through the Indian High Commission in Colombo. We have stuck to our conditions without being flexible. I must be thankful to the Indian Government, as they have now accepted our terms. We are at the final stages of this discussion and most probably within a month, I would be able to share the good news.
I do not want to discuss the details while negotiations are still ongoing.
Upgrading the existing 75-year-old oil pipeline system that is used to transfer crude oil to the Ceylon Petroleum Storage Terminals Ltd. (CPSTL) has been delayed despite the necessary work being initiated by the Yahapalana Government. What steps are being taken towards completing the upgrades?
Whilst the previous Government had initiated the Cross-Country Pipeline Project to replace the pipelines that are 75 and 45 years old with new ones, it was unfortunately done in a very haphazard manner, because there was no engineering estimate or feasibility study.
By the time I became the Minister, the Procurement Appeal Board had recommended that the Minister should re-evaluate the bids, and since the previous Minister had not done it, the aggrieved party had gone to the National Procurement Commission.
According to our engineers, they are in a position to complete the project at one-third the cost that was quoted by the company that won the tender. Because of that, I have already sought the opinion of the AG, as to how we can exit the tender agreements that have already been awarded and what kind of steps should be taken towards that end. Once I receive the AG’s opinion, I intend to submit a cabinet paper to withdraw from that contract, and build these pipelines with our own engineers.
Trade unions have raised concerns that the pipeline network from the Colombo Port to the Kolonnawa Terminal has not been routinely maintained. What measures will the Government take to ensure the necessary maintenance work is carried out?
First of all, I must say no trade union has made any allegations against their management or the Ministry.
Also, with regard to the pipelines, there are two issues: firstly, these are very old, as the life time of these pipelines is approximately 30 years, but the existing pipelines are 75 years and 45 years old. So, all these pipelines were meant to be replaced, and that is why this project has been initiated – the intention behind the project was good, but the way they had executed it was wrong, which is why we had to delay this and revisit what they had done and come up with a proper plan.
What is the estimated loss that the petroleum industry in Sri Lanka is currently incurring due to outdated infrastructure?
Most of these losses cannot be attributed to financial losses. Because we have old pipelines, there might be leakages from time to time, but we fix these immediately, so there are no huge financial losses.
The financial issues arise because of the old refinery; because the percentage of furnace oil production is very high, and also since this refinery does not have a proper hydrocracker, which can be used to further process the furnace oil to produce other petroleum-based products. In that sense, there is a financial loss, as furnace oil is very cheap in comparison to diesel, petrol, to other petroleum-based products. But with the new refinery, that problem will be resolved.
We are going to use the hydrocracker of the new refinery to further process the furnace oil produced by the existing refinery.
The blockages that are reported from time to time in the pipeline are said to have delayed fuel stock unloads, which has resulted in the CPC paying added demurrages totalling Rs. 488 million in the last five years. How will the Government ensure that this expenditure is minimised?
This loss could be avoided, and we will be able to do so in two years, because we will have two new pipelines. We will definitely complete this in 2022.
With that being said, at present, a ship allows the consignee to unload the cargo within 72 hours, i.e., loading and unloading should be done within 72 hours. As loading usually takes less time, we will have some leverage.
However, at present, it takes us around 90-96 hours – that is why we had to pay demurrage and incur those losses that you mentioned.
But after the installation of these two pipelines, which may take 18 months to two years to complete, by late 2022, we will not have this issue at all.
In 2019, a cabinet proposal was submitted by former Petroleum Industries Minister Kabir Hashim to renovate the dilapidated oil pipeline at a cost of Rs. 15 billion by China Petroleum Pipeline Bureau (CPPB). The trade unions opposed that move, indicating that local engineers at the CPC and CPSTL could renovate both pipelines at a total maximum cost of Rs. 5 billion. Has the Government looked into the proposal?
The figures you have are wrong, as the value of the tender awarded was not Rs. 15 billion but Rs. 10 billion. If we can do this at Rs. 5 billion, then there is a 50% reduction on cost – this was ignored by the previous management and, I don’t want to name the companies, but they were trying to give it to a particular company, and that is why another company went to the Procurement Appeal Board, and thereafter the National Procurement Commission asked the Ministry to re-evaluate the bid.
Did the CPSTL management get back to you with the cost estimations to replace the pipelines? If so, what is the present cost?
The cost estimations are approximately Rs. 5 billion.
Who are the private investors that have expressed interest towards setting up the new refinery in Sapugaskanda?
Several companies have expressed their interest and several diplomats have talked to me, but I have clearly informed them that for the first time in Sri Lankan history, we are going for open bidding rather than working with one company.
Has the groundwork to establish the oil refinery in Hambantota for export purposes commenced? Once established, what are the products that the Government plans to export through this refinery?
That refinery will process products such as diesel, jet fuel, and bunker/shipping fuel. But the Hambantota Port and Mattala Rajapaksa Airport would use the jet fuel and bunker fuel. Then we will look at exporting other products such as petrol, diesel, and other petroleum products such as lubricants, bitumen, and also other by-products as long as Sapugaskanda refinery meets the domestic requirement and those products are produced in excess.
Treasury Secretary S.R. Attygalle in December told us that there was no money left in the Fuel Price Stabilisation Fund after the fuel dues had been settled to the Central Bank of Sri Lanka (CBSL) and after lending the rest to the Ceylon Electricity Board (CEB) to settle the outstanding amounts to the CPC. How do you plan to recover these monies that were lent to the CEB?
If the fund was meant to stabilise fuel prices, the monies should have been kept for that purpose exclusively. Unfortunately, the funds that were allocated for fuel price stabilisation were misused for a different purpose; that is why the Sri Lankan Government has a duty to not pass the burden of increasing the fuel prices to the consumer, since we did not pass the benefit of the price decrease.
I pointed this out at the last Cabinet meeting, and the President issued directives to the Treasury to transfer Rs. 48 billion to the Fuel Price Stabilisation Fund for the exclusive use of the stabilisation of fuel prices.
So, that is why we have come up with a formula for it. Although that fund was established, no fuel pricing stabilisation mechanism was in place. Usually, we need to have a reference price, then a bandwidth, and split – those are the three features of a stabilisation formula. We are in the process of preparing those features and also in the process of appointing a management committee for which I will submit a cabinet paper in the near future.
Does that mean we do have a Fuel Price Stabilisation Fund? When do you plan to introduce this new fuel price stabilising formula?
Yes, of course. Although funds have been used for a different purpose, we are going to get the funds back to the exact amounts that were misused. So, the fund will be back, but there is no mechanism yet. When we say a reference price, that means the price will be stabilised. For instance, say Rs. 140 is the reference price. If the price then goes down by Rs. 10, 70% for example will be taken to the fund and 30% will be passed on to the consumer. That 70:30 ratio would be considered the split. The bandwidth would be Rs. 10 for example – that is, with every Rs. 10, we will be revising the price.
Then after a certain point, when prices go down further, we cannot pass the benefit to the consumer, because then the price would be too cheap and people will consume more; this would mean there will be a huge foreign currency outflow.
Then, at a certain point, we have to stop it. At this point, the funds that were accumulated in the Fuel Price Stabilisation Fund will be exclusively invested in government bonds and treasury bills, and when the fuel prices go up, we will use the same mechanism where the fund will once again bear 70% of the burden and 30% would be passed on to the consumer, in the context of the example I gave.
After a certain point, when the fund is totally exhausted, we will have no choice but to pass it on to the consumer.
We are working on the mechanism of incorporating those three features. We hope to submit a cabinet paper for approval within a month.
You had stated in December that the fuel prices will be revised annually? Can we manage by only revising fuel prices in such a manner?
I was misquoted by the media as having said so. What I said was that we have not revised the fuel price for more than one year. It was on 1 September 2019 that the fuel price was last revised, meaning we have not revised the fuel prices for 16 months. We cannot keep the price at that rate anymore, and we badly need a price revision.
What are your thoughts on Japan and Kuwait creating a joint petroleum reserve for Southeast Asia? Would we also look at similar projects?
Those countries decided to do that because, especially last year in March and April, we witnessed the lowest prices in the global petroleum sector. In fact, it would have been the lowest prices that the sector witnessed after several decades. In the US, prices reached minus values, because you pay the buyer to purchase petroleum products, to get the tank empty to accommodate the inward ship cargo.
As such, cash-rich countries such as Japan and Kuwait are planning to now have storage facilities to store excess fuel, as that would be an investment similar to that of investing in gold. Because when prices go up, they can sell their stock and make huge profits.
It is true that we have tanks, and as I mentioned before, we are talking to the Indian Government to determine how to use these unutilised tanks for the benefit of Sri Lanka.
There are certain restrictions in using the existing oil tanks in Sri Lanka imposed by the Indo-Sri Lanka Accord however. So, we are now talking to India on how best we can avoid those restrictions and bring back the benefits to the country.
I do not want to discuss details, as it may disturb the ongoing discussions and negotiation process.
Minister of Energy Udaya Gammanpilla speaks to The Sunday Morning at his office in Colombo. PHOTO ESHAN DASANAYAKA[/caption]
This week on The Sunday Morning Hot Seat, we had Minister of Energy Udaya Gammanpila, who was keen on clarifying the strategic plan that the Government has in place to ensure the sector addresses the lags and implements the much-anticipated upgrades.
Following are excerpts of the interview:
What steps have your Ministry taken towards making Sri Lanka the energy hub of Asia?
In order for Sri Lanka to become the energy hub of Asia, we need to work on three things. First of all, Sri Lanka should be able to process and export petroleum-related products. We should have the required mechanism or refineries, and other infrastructure facilities to import crude oil and export the processed and refined petroleum products to other countries. Once this is set up, we can attract that export segment of the business because of our location. As the Middle Eastern countries are the main oil-producing nations, we can import crude oil from these countries and refine it and produce petroleum-based products to be exported to the Far East, mainly China, Japan, and Indonesia.
Secondly, we should attract the oil bunkering business or supply fuel to ships. We plan to set up two refineries. One will be at Hambantota as a joint venture between Sri Lanka and China, with the main objective of it being to supply fuel to ships that would be passing through what is considered the busiest international shipping route in the world. As most of those ships originating from China also head back towards China, having a joint venture with them is the best strategy to attract those ships to the island, especially to the Hambantota Port, as it is on this international shipping route. Then the second refinery will be in Trincomalee, also as a joint venture, but this will be between Sri Lanka and India, so as to supply fuel to the Indian transhipment ships.
Thirdly, we should be in the business of supplying jet fuel.
These are the three steps that Sri Lanka should take to becoming the energy hub of Asia.
I have also planned to establish a new refinery with the capacity of processing 100,000 barrels of crude oil per day at the Euro 6 standard, and in addition to that, upgrading the existing refinery to process 50,000 barrels of crude oil per day, again at the Euro 6 standard. Right now, we are doing the feasibility study for that, and we will most probably be able to commence the construction of the refinery during the year.
What challenges do we face in initiating oil and natural gas exploration that has been talked about for many years?
Although we have talked much about this issue, it has not materialised for over 60 years. After my appointment as Minister, I found out why we failed.
Firstly, we do not have competent people that understand the technicalities of the oil industry. When international experts come down to Sri Lanka to discuss the potential of excavating oil or natural gas, our officers here have no in-depth knowledge to enable them to answer the questions posed. That destroys the confidence of the investor.
In addition, we did not have an oil or gas policy – which is now being drafted. We have recruited oil experts to our Secretariat for this purpose. We are also planning to introduce a new act, for which there will be an expert panel. We know that there are hundreds of Sri Lankan oil experts who are working all over the world – we should seek their advice for ministerial-level and policy-level decisions from time to time.
Thirdly, this is an industry that is worth billions of dollars. For this kind of project, investors need to put down at least $ 5 billion – which is a huge investment, for which they expect a legal framework. As mentioned, there was no legal framework, and I have submitted a cabinet paper under the Petroleum Development Authority Act to provide that legal framework.
Last year, you said the oil exploration exercise returned positive results for three oil basins in the country. Have we already started the necessary groundwork in this regard?
The three basins are the Mannar Basin, Cauvery Basin, and Lanka Basin. It is confirmed that we have gas in Block M2 of the Mannar Basin, and there are indications that we have oil in two other wells.
However, even with these resources, we could not attract investors because of the weaknesses I explained to you earlier. As such, we should not go for another auction.
We will present the aforementioned act to the Cabinet, and the bill will be passed at the meeting on Monday (25), after which we will go to the Attorney General's (AG) Department to get its approval. After that, it is a matter of publishing it in the Gazette and submitting it to Parliament. It may take at least three months.
If we lack the technical expertise, which country should we turn to for expert knowledge?
We are looking at Sri Lankan energy sector experts working abroad who are willing to help their motherland on a voluntary basis. There are a lot of Sri Lankans who have expressed their willingness to contribute their knowledge towards exploring oil and natural gas.
Your aim is to elevate this industry prior to the next presidential election. How confident are you in achieving this goal?
I am very confident that we can achieve this. I don’t see why investors won’t come here if this is profitable and is fully secure for them. It is a matter of having our legal and policy framework in place and marketing professionally overseas.
As you know, the Sri Lankan Government is cash hungry at the moment, because of our credit exposure. Our public debt is about to be 100% of GDP (gross domestic product), and in this backdrop, the Sri Lankan Government is not in a position to borrow further.
So, we are going to go for oil exploration. Of course, we will only be issuing the license, and we will fix our terms as to what percentage we need as profit, royalties, and other taxes. Meanwhile, it is up to them to invest 100% and make their profit.
There were talks of restoring the Trincomalee oil storage tanks and reacquiring some of it under the Ceylon Petroleum Corporation (CPC) from Lanka Indian Oil Company (LIOC). What is the progress on that?
We cannot reacquire those tanks because they have been leased for a period of 35 years, since 2003, to LIOC. That was agreed on in 2003 at a nominal annual rental of $ 100,000 per annum. To me, it was a crime – all those culprits behind this corrupt deal should have been punished, but that’s in the past.
At the moment, there are only 99 tanks in total in Trincomalee, and out of these 99 tanks, 15 are utilised by LIOC, and the rest are unutilised and left without a utility value. I have talked to the Indian Government through the Indian High Commission in Colombo. We have stuck to our conditions without being flexible. I must be thankful to the Indian Government, as they have now accepted our terms. We are at the final stages of this discussion and most probably within a month, I would be able to share the good news.
I do not want to discuss the details while negotiations are still ongoing.
Upgrading the existing 75-year-old oil pipeline system that is used to transfer crude oil to the Ceylon Petroleum Storage Terminals Ltd. (CPSTL) has been delayed despite the necessary work being initiated by the Yahapalana Government. What steps are being taken towards completing the upgrades?
Whilst the previous Government had initiated the Cross-Country Pipeline Project to replace the pipelines that are 75 and 45 years old with new ones, it was unfortunately done in a very haphazard manner, because there was no engineering estimate or feasibility study.
By the time I became the Minister, the Procurement Appeal Board had recommended that the Minister should re-evaluate the bids, and since the previous Minister had not done it, the aggrieved party had gone to the National Procurement Commission.
According to our engineers, they are in a position to complete the project at one-third the cost that was quoted by the company that won the tender. Because of that, I have already sought the opinion of the AG, as to how we can exit the tender agreements that have already been awarded and what kind of steps should be taken towards that end. Once I receive the AG’s opinion, I intend to submit a cabinet paper to withdraw from that contract, and build these pipelines with our own engineers.
Trade unions have raised concerns that the pipeline network from the Colombo Port to the Kolonnawa Terminal has not been routinely maintained. What measures will the Government take to ensure the necessary maintenance work is carried out?
First of all, I must say no trade union has made any allegations against their management or the Ministry.
Also, with regard to the pipelines, there are two issues: firstly, these are very old, as the life time of these pipelines is approximately 30 years, but the existing pipelines are 75 years and 45 years old. So, all these pipelines were meant to be replaced, and that is why this project has been initiated – the intention behind the project was good, but the way they had executed it was wrong, which is why we had to delay this and revisit what they had done and come up with a proper plan.
What is the estimated loss that the petroleum industry in Sri Lanka is currently incurring due to outdated infrastructure?
Most of these losses cannot be attributed to financial losses. Because we have old pipelines, there might be leakages from time to time, but we fix these immediately, so there are no huge financial losses.
The financial issues arise because of the old refinery; because the percentage of furnace oil production is very high, and also since this refinery does not have a proper hydrocracker, which can be used to further process the furnace oil to produce other petroleum-based products. In that sense, there is a financial loss, as furnace oil is very cheap in comparison to diesel, petrol, to other petroleum-based products. But with the new refinery, that problem will be resolved.
We are going to use the hydrocracker of the new refinery to further process the furnace oil produced by the existing refinery.
The blockages that are reported from time to time in the pipeline are said to have delayed fuel stock unloads, which has resulted in the CPC paying added demurrages totalling Rs. 488 million in the last five years. How will the Government ensure that this expenditure is minimised?
This loss could be avoided, and we will be able to do so in two years, because we will have two new pipelines. We will definitely complete this in 2022.
With that being said, at present, a ship allows the consignee to unload the cargo within 72 hours, i.e., loading and unloading should be done within 72 hours. As loading usually takes less time, we will have some leverage.
However, at present, it takes us around 90-96 hours – that is why we had to pay demurrage and incur those losses that you mentioned.
But after the installation of these two pipelines, which may take 18 months to two years to complete, by late 2022, we will not have this issue at all.
In 2019, a cabinet proposal was submitted by former Petroleum Industries Minister Kabir Hashim to renovate the dilapidated oil pipeline at a cost of Rs. 15 billion by China Petroleum Pipeline Bureau (CPPB). The trade unions opposed that move, indicating that local engineers at the CPC and CPSTL could renovate both pipelines at a total maximum cost of Rs. 5 billion. Has the Government looked into the proposal?
The figures you have are wrong, as the value of the tender awarded was not Rs. 15 billion but Rs. 10 billion. If we can do this at Rs. 5 billion, then there is a 50% reduction on cost – this was ignored by the previous management and, I don’t want to name the companies, but they were trying to give it to a particular company, and that is why another company went to the Procurement Appeal Board, and thereafter the National Procurement Commission asked the Ministry to re-evaluate the bid.
Did the CPSTL management get back to you with the cost estimations to replace the pipelines? If so, what is the present cost?
The cost estimations are approximately Rs. 5 billion.
Who are the private investors that have expressed interest towards setting up the new refinery in Sapugaskanda?
Several companies have expressed their interest and several diplomats have talked to me, but I have clearly informed them that for the first time in Sri Lankan history, we are going for open bidding rather than working with one company.
Has the groundwork to establish the oil refinery in Hambantota for export purposes commenced? Once established, what are the products that the Government plans to export through this refinery?
That refinery will process products such as diesel, jet fuel, and bunker/shipping fuel. But the Hambantota Port and Mattala Rajapaksa Airport would use the jet fuel and bunker fuel. Then we will look at exporting other products such as petrol, diesel, and other petroleum products such as lubricants, bitumen, and also other by-products as long as Sapugaskanda refinery meets the domestic requirement and those products are produced in excess.
Treasury Secretary S.R. Attygalle in December told us that there was no money left in the Fuel Price Stabilisation Fund after the fuel dues had been settled to the Central Bank of Sri Lanka (CBSL) and after lending the rest to the Ceylon Electricity Board (CEB) to settle the outstanding amounts to the CPC. How do you plan to recover these monies that were lent to the CEB?
If the fund was meant to stabilise fuel prices, the monies should have been kept for that purpose exclusively. Unfortunately, the funds that were allocated for fuel price stabilisation were misused for a different purpose; that is why the Sri Lankan Government has a duty to not pass the burden of increasing the fuel prices to the consumer, since we did not pass the benefit of the price decrease.
I pointed this out at the last Cabinet meeting, and the President issued directives to the Treasury to transfer Rs. 48 billion to the Fuel Price Stabilisation Fund for the exclusive use of the stabilisation of fuel prices.
So, that is why we have come up with a formula for it. Although that fund was established, no fuel pricing stabilisation mechanism was in place. Usually, we need to have a reference price, then a bandwidth, and split – those are the three features of a stabilisation formula. We are in the process of preparing those features and also in the process of appointing a management committee for which I will submit a cabinet paper in the near future.
Does that mean we do have a Fuel Price Stabilisation Fund? When do you plan to introduce this new fuel price stabilising formula?
Yes, of course. Although funds have been used for a different purpose, we are going to get the funds back to the exact amounts that were misused. So, the fund will be back, but there is no mechanism yet. When we say a reference price, that means the price will be stabilised. For instance, say Rs. 140 is the reference price. If the price then goes down by Rs. 10, 70% for example will be taken to the fund and 30% will be passed on to the consumer. That 70:30 ratio would be considered the split. The bandwidth would be Rs. 10 for example – that is, with every Rs. 10, we will be revising the price.
Then after a certain point, when prices go down further, we cannot pass the benefit to the consumer, because then the price would be too cheap and people will consume more; this would mean there will be a huge foreign currency outflow.
Then, at a certain point, we have to stop it. At this point, the funds that were accumulated in the Fuel Price Stabilisation Fund will be exclusively invested in government bonds and treasury bills, and when the fuel prices go up, we will use the same mechanism where the fund will once again bear 70% of the burden and 30% would be passed on to the consumer, in the context of the example I gave.
After a certain point, when the fund is totally exhausted, we will have no choice but to pass it on to the consumer.
We are working on the mechanism of incorporating those three features. We hope to submit a cabinet paper for approval within a month.
You had stated in December that the fuel prices will be revised annually? Can we manage by only revising fuel prices in such a manner?
I was misquoted by the media as having said so. What I said was that we have not revised the fuel price for more than one year. It was on 1 September 2019 that the fuel price was last revised, meaning we have not revised the fuel prices for 16 months. We cannot keep the price at that rate anymore, and we badly need a price revision.
What are your thoughts on Japan and Kuwait creating a joint petroleum reserve for Southeast Asia? Would we also look at similar projects?
Those countries decided to do that because, especially last year in March and April, we witnessed the lowest prices in the global petroleum sector. In fact, it would have been the lowest prices that the sector witnessed after several decades. In the US, prices reached minus values, because you pay the buyer to purchase petroleum products, to get the tank empty to accommodate the inward ship cargo.
As such, cash-rich countries such as Japan and Kuwait are planning to now have storage facilities to store excess fuel, as that would be an investment similar to that of investing in gold. Because when prices go up, they can sell their stock and make huge profits.
It is true that we have tanks, and as I mentioned before, we are talking to the Indian Government to determine how to use these unutilised tanks for the benefit of Sri Lanka.
There are certain restrictions in using the existing oil tanks in Sri Lanka imposed by the Indo-Sri Lanka Accord however. So, we are now talking to India on how best we can avoid those restrictions and bring back the benefits to the country.
I do not want to discuss details, as it may disturb the ongoing discussions and negotiation process.