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Plugging the hole in the national fuel tank

13 Jul 2022

  • Experts detail long-term measures that can ensure energy security over the years to come
BY Sumudu Chamara Although resolving the foreign reserves crisis is the immediate and most effective solution to the prevailing fuel shortage, that is not really a step that will ensure the country’s fuel security in the long run, and therefore, the fuel crisis should be considered an opportunity to take long overdue steps in ensuring fuel security in the country. To do that, the authorities and the Government should look into employing internationally tried-and-tested strategies in partnering with private and/or foreign bodies and investors that can help Sri Lanka despite its poor fiscal situation, including the foreign reserves situation.  These points were highlighted during a discussion on managing the procurement, distribution, and use of petroleum oil in Sri Lanka, which was attended by technology and economics expert Prof. Rohan Samarajiva, and Singularity Sri Lanka Founder Manju Nishshanka, and organised by the Advocata Institute, a policy think tank.    Fuel supply and short-term solutions The discussion focused on the current situation concerning the fuel supply and distribution in the country, where the manner in which the Government is handling the matter was looked into. Prof. Samarajiva noted that when dealing with the fuel shortage, psychological aspects should also be taken into account.  As an example, he said that people should be convinced that the fuel supply is being continued, and that such will in turn help curtail the tendency to obtain fuel from black markets. He noted that the high demand has been created by the people’s expectations. With regard to the Government and authorities’ behaviour, he said that those responsible for the supply of fuel have made irresponsible statements and have lost the public’s trust, which has made dealing with the fuel crisis a very challenging task. Speaking about the same, Nishshanka pointed out the importance of having a proper system in place to distribute the fuel that the country has received. Both speakers expressed concerns about prioritising various groups such as essential services when distributing fuel. In this regard, Nishshanka said: “If Government says that it can only provide 50% of the country’s fuel requirement, what are we going to do for the rest of the population? What is the criteria to choose who will be given fuel and who will not be given fuel? At some point, the issue of limiting the fuel supply is going to explode, as energy is a basic requirement. Temporary limitations do not work, and curtailing the fuel supply to certain groups is not fair in the medium or long term.” He opined that measures such as issuing tokens to get fuel, encouraging the work from home concept, and rationing fuel are temporary solutions, and are not sustainable. “Unfortunately, what happens every day is giving temporary solutions to fulfill day-to-day needs. This is an extremely adverse situation, and leads to a severe decline in the situation. Ideally, we need to look at solutions to not only present issues, but also possible future issues.”  Expressing similar opinions about prioritising certain groups when providing fuel, Prof. Samarajiva also said that it is difficult to interpret what essential services are, in a context where every travelling need could be essential in different ways.  Both the speakers were of the opinion that although the obvious short term solution to the fuel crisis is resolving the foreign reserves crisis, the country should and can look into several medium and long term steps to ensure stability in the fuel supply process. Long-term solutions During the discussion, Nishshanka extensively discussed a little known concept in Sri Lanka called crude intermediation, which he said would be useful in dealing with many aspects of the prevailing fuel crisis. Above all, this could, according to him, help Sri Lanka deal with the issue of the lack of foreign reserves to purchase petroleum oil.  Noting that crude intermediation is not a short-term strategy but a medium- to long-term strategy, Nishshanka said that it is intended to ensure the uninterrupted supply and procurement of fuel or crude oil, and that it involves dealing with the financial aspects of the fuel industry in the country, separately.  He added: “This is not a new concept. It is a tested and proven method in many regions including the US, Europe, and Asia. This method is especially used by countries that do not produce crude oil. Maintaining the power and energy supply is any country’s backbone. In a context where many industries depend on it, it is important to ensure that it is maintained without any interruptions.” According to Nishshanka, countries that do not produce crude oil employ crude intermediation due to two main reasons, i.e. to alleviate the impact of price increases, and to ensure the undisrupted procurement of crude oil. “As a solution to manage these two risks, with the involvement of the finance industry, this concept came into existence,” he said. Adding that the process of crude intermediation is handled mainly by financial institutions such as investment banks and investors with expert knowledge about this subject and the commodities market, he further said: “What happens in this process is separating the financial aspects of oil production, such as investments, expenses and income, from the overall process, and handling these financial aspects as a separate aspect. Those who will handle this are known as special purpose vehicles (SPVs). There are many reasons to maintain a SPV, the main reason being price fluctuations that can take place in the oil market. Through SPVs, it is possible to minimise the impacts of such price fluctuations. They analyse future price-related risks and hedge it in a very comprehensive manner, and thereby reduce the risk. They also hedge currency rate fluctuations. Therefore, this method can help prevent massive losses.” Describing the nature of crude intermediation agreements, Nishshanka said that there are two ways to obtain oil through crude intermediation. One is financial contracts and the other is physical contracts. He explained that while financial contracts pertain only to price related aspects, physical contracts focus mainly on the process of obtaining fuel and crude oil in addition to price-related aspects. Furthermore, he said that since crude intermediation is intended to obtain crude oil, most of the time, people opt for physical contracts, and that through entering into such agreements, it is possible to obtain crude oil without interruption.  In response to the question on how long it may take for Sri Lanka to enter into a crude intermediation agreement given the present situation of the country, Nishshanka said that if all favourable conditions are present, it may take around two months to identify potential partners, get access to the oil market, and to sign agreements. Since this process largely involves legal documentation-related activities for which there are already standardised processes, he said, Sri Lanka may perhaps be able to finish all that work in less than two months.  With regard to the practical aspects of crude intermediation, he said that in the Sri Lankan context however, it is a bit of a complex process, and that for this to materialise, or to establish a SPV, it is important that market liberalisation takes place.  He added: “We have to get investors who are interested in both US dollars (USD) and Sri Lankan rupees. There are such investors, some of whom have spoken about the matter. There are many investors and businessmen in Sri Lanka who earn in USD, mainly through export businesses, and spend in Sri Lankan rupees to maintain their businesses operations in the country. They are ready to invest.” One of the obstacles, according to Nishshanka, is the aforementioned investors not willing to invest in a context where there is political instability in the country. He added that if this situation is resolved, and if a new, stable Government comes to power, it would be possible to find investors from within Sri Lanka in no time. Meanwhile, Prof. Samarajiva also spoke of market liberalisation, adding that despite the Government’s recent decision to allow any oil producing country that can bring fuel to Sri Lanka to run their fuel distribution, as far as the fossil oil industry in the country is concerned, there is no true liberalisation. He noted that this decision taken by the Cabinet of Ministers does not supersede the existing Act (the Ceylon Petroleum Corporation [CPC] Act, No. 28 of 1961) in this regard. Moreover, he pointed out that for new oil suppliers to enter Sri Lanka’s market, several crucial steps need to be taken in order to create space in Sri Lanka’s market, which is currently dominated by the CPC and the Lanka Indian Oil Corporation. One such step he pointed out was transport-related matters, which at present cost a lot. Another matter is amending the aforementioned Act. He opined that investors will not have any certainty regarding the success of their operations in a country without such measures. Adding that the Government’s decision has not paid enough attention to these aspects, Prof. Samarajiva further noted however that most investors do not accept the Government’s promises in a context where it has broken such promises before.  Even though Sri Lanka is actively seeking private sector involvement to revive the petroleum oil sector, as was highlighted by the two speakers, creating a friendly business and political environment is necessary. At the same time, while focusing on the foreign reserves issue, looking into the practicality of modern, long term methods such as crude intermediation is crucial.  


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