• CPC facing challenges due to delivery terms imposed by forex and product storage limitations
• Short-term strategies on optimising USD reserves, focusing on retail competitors, expediting projects
• TUs oppose acquiring high-cost floating storage, want focus on existing oil tanks in Trinco
• No proper action plan after CPC-LIOC set up TPTL in 2021 to develop the Trinco oil tank farm

Exploring the option of floating storage capacities has become a focal point in the ongoing debate surrounding the Trincomalee Oil Tank Farm. The State-run Ceylon Petroleum Corporation (CPC) has decided to consider this alternative to mitigate the persistent shortage in petroleum storage, a move that has reignited long-standing concerns about the Government’s inaction regarding the dormant tanks at China Bay in Trincomalee.   

The decision by the CPC to consider floating storage solutions arises due to a critical shortage in petroleum storage capacity, which has prompted discussions on how to address the mounting concerns about fuel reserves, especially amid the ongoing war in West Asia.

The Trincomalee Oil Tank Farm, a strategic asset for the nation, has been a subject of debate and deliberation for several decades. The recent focus on floating storage options suggests a potential shift in addressing the pressing storage issue.

CPC’s risky bet on floating storage

The recent revelation of the CPC’s floating storage plan has sparked a debate, and The Sunday Morning spoke to CPC Chairman Saliya Wickramasuriya about the CPC’s strategy to maintain stable prices in the face of predictions of price increases due to the ongoing war situation.

In response, Wickramasuriya acknowledged the challenges faced by the CPC, particularly concerning delivery terms imposed by forex and product storage limitations. To address these constraints, he outlined a multifaceted short-term strategy, which involves strategically prioritising USD reserves when placing orders, fostering transparent communications with retail competitors through existing product-sharing agreements, and expediting tankage projects at various stages of completion within the CPC, Ceylon Petroleum Storage Terminals Ltd. (CPSTL), and Trinco Petroleum Terminal (Pvt) Ltd. (TPTL).

Looking toward the medium term, Wickramasuriya indicated that additional strategies would come into play. These include the potential use of floating storage and the customisation of the Sapugaskanda refinery product slate. These steps aim to introduce a larger buffer capability and reduce refinery downtime while continuing to supply essential services such as those required by the power sector and airports.

High costs vs. existing infrastructure

However, trade unions, represented by Energy Trade Union (ETU) President Ananda Palitha, take a different stance. They strongly oppose the idea of acquiring high-cost floating storage and argue that the country’s existing oil tanks in Trincomalee should be the primary focus. 

Palitha highlighted the cost-effectiveness of operating the oil tank farm and unloading shipments at China Bay, as well as utilising train transport for oil, contrasting this approach with what he perceived as the CPC’s pursuit of costly alternatives. However, it must be noted that the ETU and other energy sector trade unions have long resisted the privatisation or the joint development of Trincomalee Oil Tank Farm with India as well.

Nonetheless, trade unions in the petroleum sector are strongly opposed to the CPC’s contemplation of floating storage, arguing that it would be the most expensive solution to the storage capacity problem. They contend that the corporation should instead proceed with the agreement made last year under former Energy Minister Udaya Gammanpila.

Speaking to The Sunday Morning, Palitha voiced strong opposition to the idea of acquiring high-cost floating storage. He emphasised that the country already possessed oil tanks in Trincomalee, making the purchase of floating storage unnecessary.

Palitha argued that opting for floating storage would place an additional financial burden on the public, as it tended to be a more expensive solution. He contended that it was both economically advantageous and practical to operate the existing oil tank farm, particularly considering the lower costs associated with unloading shipments at China Bay compared to Colombo Port. Furthermore, he noted that utilising trains for transporting oil could also be a more cost-effective approach.

In Palitha’s view, the CPC should place its focus on these areas, which he perceived as more financially viable and logistically efficient, rather than pursuing costly alternatives. His concerns underline the ongoing debate within the petroleum sector regarding the best strategy to address the nation’s petroleum storage capacity challenges.

Palitha contended that the newly-formed TPTL is designated for the upper tank farm, which is currently non-operational due to a lack of pipelines and tank readiness. On the other hand, the lower tank farm, with nearly 17 operational tanks, including a jetty and associated facilities, remains under the control of the Lanka Indian Oil Company (LIOC).

The TUs have initiated a court case asserting that the lease agreement between LIOC and CPC is illegal, and as such, the Government should reclaim the oil tank farm. Their plea is for the Government to expedite the legal process. If the court rules the agreement as illegal, the tank farm would be returned immediately, or if deemed legal, it would revert to Government control in 2037, upon lease expiration.

Battling for control

According to former Energy Minister Gammanpila, under the agreement with India, 24 out of the 99 tanks in Trincomalee were supposed to be handed over to the CPC.

The oil tanks currently operated by the LIOC were to have been leased to the LIOC for another 50 years, and an additional 61 tanks were to be jointly developed by the LIOC and the newly-established TPTL. In this joint development, 51% of shares would be held by the CPC, with 49% held by the LIOC. The majority of shares in the new company would be held by the CPC, and key appointments and auditing powers would be subject to CPC control.

The Trincomalee Oil Tank Farm, consisting of 100 oil tanks, each with a capacity of 12,500 cubic metres (10,000 MT), was originally constructed in Trincomalee in 1930. 

In 2003, the Sri Lankan Government entered into an agreement with the LIOC and the CPC to lease the storage facilities and the land to the LIOC for a 35-year period. The lease agreement was supposed to be executed within six months from the date of the agreement. Nevertheless, the CPC did not enter into any lease agreement and did not use the tanks. In contrast, the LIOC has been utilising these assets since 2003.

Despite initial decision-making activities for the modernisation of the 84 tanks in the abandoned upper section commencing on 29 April 2015, no substantial progress had been made in the development and rehabilitation of the tank complex.

Furthermore, while the CPC and the LIOC jointly established TPTL on 24 December 2021 to develop the Trincomalee Oil Tank Complex, a concrete action plan to achieve this objective had not been formulated by the company yet.

Dark cloud

As revealed by the CPC to the National Audit Office (NAO) in 2016, a team of CPC officers undertook a comprehensive condition assessment of the tanks and related infrastructure and piping systems, subsequently proposing a business model for their development. However, due to the geopolitical complexities surrounding these tanks at the time, no party had permitted the CPC to carry out the proposed development.

In 2020, the CPC once again took proactive steps by preparing an extensive development plan. The focus was on refurbishing 24 storage tanks in the upper tank farm, with the intention of using them for the storage of petroleum products to meet the domestic demand in the Northern and Eastern Provinces. This strategic move was aimed to achieve significant cost savings through improved distribution and logistics arrangements. As part of this initiative, a pre-feasibility study was conducted internally.

Simultaneously, a CPC subsidiary company – TPTL – was established on 24 December 2021. This occurred under the guidance of the Minister of Energy, with a specific focus on the development of the tank farm. The formation of this subsidiary reflects the commitment to the revitalisation and development of the Trincomalee Oil Tank Farm, which remains a critical asset with considerable potential for enhancing domestic energy security and distribution efficiency.