Business Times

Expansion of refinery capacity in Sri Lanka necessary

Focus on oil
By Imal Desa

The upgrading of the Marine Fuel (bunker) business in Sri Lanka from the present level of approximately 25,000 to 30,000 MT per month volume utilizing the sole (small) common user facility at Colombo to that of a key regional maritime hub offering a range of services including Marine Fuel at a price that is competitive internationally, at the new port at Hambantota, requires focus amongst others mainly on increasing the refining capacity of Sri Lanka.

The rationale for the expansion of refining capacity is that at present, Sri Lanka has only one (topping) refinery located at Sapugaskande, near Colombo which has a capacity to refine around 2.12 million metric tons per year (or 52,500 barrels per day (bpd)). The crude oil refined in Sri Lanka is almost entirely from Iran on a Government-to-Government basis, imported on chartered tankers incurring a freight payment. The total Sri Lanka domestic petroleum market is about 4.4 million MT per year and growing at around 10 % per year, with the resumption of normal civil life in the North and the East.

The shortfall of around 2.2 million MT refined product and some 360,000 MT marine fuels is imported by Ceylon Petroleum Corp. (Ceypetco) and Lanka IOC (LIOC) the two companies serving the domestic market from commercial suppliers registered on the panel of suppliers to these two companies. These purchases are mostly on the ‘spot’ current/open market, on tender including at times on ‘term’ contract basis, in small to medium size parcels (20 to 40,000 MT per shipment) incurring ‘premiums’ to purchase. The marine fuels are imported by the licensed marine fuel (bunker) traders.

Almost all of the suppliers of refined petroleum products at present are from Singapore, UAE and India who offer their exportable surplus at a price linked to the PLATTS index where freight has to be added on top of the cost of the cargo & the premium to purchase. This is the basis of international oil trading. Any savings are by virtue of economies of scale however, the import cargo parcel size would have to be increased considerably (say 100,000 MT plus per shipment) to achieve savings that would provide an internationally competitive price either at Hambantota or Colombo. Sri Lanka does not have spare storage capacity (except at Trincomalee, on the North East coast) and those tanks being of World War vintage, revamping those are as good as building new tanks, as such achieving economies of scale on procurement may not be possible.

The present bunker hubs of Singapore and Fujairah (UAE) have developed based on the availability of exportable refinery surplus, duty free concessions that facilitate large storage and trade. The development of the Indian bunker market has been slow (despite exportable surplus being available from time to time) due to the various ‘state’ governments implementing a taxation regime that is not user friendly to the development of the marine fuel marketing business.

In this scenario, Hambantota, a strategic location on the East West Trade route could create its own Unique Selling Proposition (USP) bearing in mind the reality of oil trading, at the same time address many of the shortcomings that have prevented the Coombo port from emerging as a bunker (marine fuel) hub; limited tank space, common pipelines, low pumping speeds, archaic customs process relative to the ‘bonding’ (duty free status) of marine fuel.

A case in point was the success of Ceypetco Marine Fuel marketing business in the 1980’s (at the time) Ceypetco had an exportable surplus from its refining operations, as the fuel oil driven power plants were not part of the countries power supply. It may be argued that with the commissioning of the coal power plant at Norochcholai or high rain fall (as in the recent past) Sri Lanka’s dependence on fuel oil driven power plants would reduce, making this fuel oil available for exports (as in a recent export), this approach cannot sustain a business model that is expected to propel Sri Lanka (Hambantota) to become the destination of choice for ship owners to purchase Marine Fuel at internationally competitive prices.

The alternate approach of procuring refined products from friendly governments on long term contracts may not hold given that most of the friendly governments too are short of refining capacity and whilst crude oil is supplied in this manner, there are no credible offers to supply refined products, as experienced by Ceypetco in the recent Gas Oil term tender. No government, friendly or otherwise would supply Gas Oil (Diesel) and Fuel Oil on concessionary terms for Sri Lanka to market these products to commercial customers and make a profit. Thus the Ministry of Petroleum and or Ports, hopes and objectives would not materialize on a long term basis. In fact the Hambantota port was established principally to offer marine fuel at a price that is competitive internationally. If Hambantota is to be viable, then a refinery is a must either at Colombo or Hambantota.

The need of the hour is to increase refining capacity either at Colombo or at a green field site at Hambantota; only then it can be said that Sri Lanka is set on course to capitalize on its strategic position on the main East West Trade Route where on average 150 to 200 vessels of varying sizes pass the southern coast of the Sri Lanka a day as part of the East West Trade (including vessel traffic changing course on the Indian Sub Continent and those vessels plying from the Far East to East Africa) and the fishing trawlers; a potential bunker market conservatively estimated at (a minimum) of 100,000 MT per month volume (achievable within the scope of a 5-year marketing plan) based on an internationally competitive pricing formula that will tap into hitherto untapped business, a small volume of existing established bunker ports of Fujairah and Singapore (combined volumes in excess of 5 million MT per month) coupled with anticipated moderate growth in projected world trade.

(The writer is an independent projects specialist)

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