CPC loses Rs. 2b a month, fuel hike after local polls

The government has postponed an impending fuel price hike till the conclusion of the local government elections on March 17 by not increasing diesel prices as done by Lanka Indian Oil Corporation (LIOC) on February 4, a senior Ceylon Petroleum Corporation official said.

He said the CPC was delaying the fuel price hike as the greenlight had not been given by the government despite the loss of more than Rs. 2 billion a month so far this year.

LIOC Managing Director K.R. Suresh Kumar told the Sunday Times from New Delhi, where he is attending a board meeting of the Indian Oil Corporation, that the LIOC’s diesel price increase had pushed some of its customers to the CPC, increasing the losses of his company. But the situation would be stabilized with an overall revision of petrol and diesel prices by the government after the local council elections, he said.

The two companies, the only two players in the petroleum marketing and distribution service, normally increase fuel prices simultaneously. The LIOC, which runs one third of Sri Lanka’s fuel outlets, is losing 25% of its sales volume after the diesel price hike. He said the LIOC was forced to raise diesel prices because “we cannot absorb the losses anymore.”

Mr. Kumar said he had also raised this matter at the IOC board meeting in New Delhi. Sri Lanka's retail fuel prices are politically-driven based on a belief that inflation in the country is a petroleum rather than monetary phenomenon, he observed. Justifying the LIOC’s decision to increase fuel prices, Mr. Kumar said, “The government promised to reduce taxes from January 8 – the day our consignment arrived.

Instead the taxes were reduced from January 11, resulting in a loss of Rs. 220 million to LIOC. As a result of this loss, we were forced to increase prices.” He was referring to the lowering of the tax to enable the government to reduce the price of a litre of petrol by Rs 15 last month.

Enter the third player

Plans are afoot to form a new company to manage 107 currently disused fuel stations countrywide, bringing a third player into the petroleum trade – at least seven years after a similar failed effort, a senior Ceylon Petroleum Corporation official said.

He said these fuel stations which were currently languishing without proper supervision and financial assistance would be handed over to the new company for which bids would be called.

Before the privatisation deal with the Lanka IOC (LIOC) in 2003, the CPC had 300 retail Ceypetco outlets which was about half the market share while some 600 private dealers had the rest. Its Sapugaskanda refinery also supplied about 60% of the requirement for fuel products. Of its 300 retail outlets, 100 were given to IOC while another 107 were earmarked for a third player. The CPC will eventually be left with just 100 fuel stations or a mere 17% market share. The official said the government had decided to offer the third player a minority stake instead of majority ownership and management control in the retail company that would run a third of the Ceypetco outlets, he said.

However, Finance Ministry sources said the CPC would call bids from foreign companies to take over the management of the new retail company. The decision to form the new company was announced by Petroleum Minister Susil Premajayantha at a meeting of senior CPC officials in Colombo recently.

The CPC official quoted the Minister as saying that the corporation was facing a major financial crisis and could not find money even to clean up the 60-year old pipelines pumping oil from the Colombo harbour to the tanks in Kolonnawa and Muthurajawela.

These activities would also be handed over to the new company, he added. Minister Premajayantha was not available for comment as he was on an overseas official visit. The idea of introducing the ‘Third Player’ position in the country's petroleum trade was mooted in 2003 during the former United National Front government period. Under the privatization initiative, the then government handed over the operation of the best profit-making 100 retail fuel filling outlets in the island to LIOC in 2003.

LIOC parent Indian Oil Corporation made a payment of US$75 million for the 100 outlets and one-third of the assets of the CPC, except the refinery. With the completion of this payment to the Treasury on January 22, 2004, the IOC now owns not only the 100 outlets but also one-third of the Common User Facility, the Ceylon Petroleum Storage Terminals Limited (CPSTL), in addition to the China Bay Oil Tanks.

At that time four parties vied for the third party slot, three of whom were foreign government-owned parties viz., Hindustan Petroleum Corporation and Bharath Petroleum Corporation of India and Sinopec (Hong Kong) Ltd of China. The only local party was the East West Group which failed to submit the requisite Bid Bond at that time.

With the change of government, the selection of the third player was brought to a temporary halt.
Corporation labour unions opposed to the entry of a third player into the petroleum retail sector are expected to raise these matters in talks with the government as indications are that the CPC could fall into more financial difficulty if it was privatised further. Its market share is expected to fall further to under 20% from around 58% once the third player is finalised, labour unions and corporation officials warned. If this happens its revenue could also fall sharply.

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