US sanctions on Iran, Lanka may buy oil from Saudi Arabia, Oman

By Bandula Sirimanna

Contingency plans are being drawn up by the government to import crude oil from Saudi Arabia and Oman after sanctions were imposed by the United States on Iran. At present, Iran is the main supplier and its crude oil is refined at the state owned Ceylon Petroleum Corporation's Sapugaskanda refinery.
A top government petroleum administrator said Sri Lanka was exploring the possibility of increasing crude oil purchases from Saudi Arabia and Oman as a contingency measure in the wake of the US sanctions on oil imports from Iran.

With the imposition of economic sanctions on Iran by the US, countries like Sri Lanka which import oil from Iran, have been given six months to make alternative arrangements. This was conveyed to Sri Lanka’s External Affairs Ministry by the US administration. In terms of this, Sri Lanka will not be affected in importing oil from Iran for at least the next six months, Petroleum Industries Minister Susil Premajayantha said. He said he would hold talks with the Omani Oil Minister who will be in Sri Lanka next week on the possibility of purchasing crude oil from that country.

The government is holding discussions with Aramco officials to bring down more fuel cargos from that country to meet Sri Lanka’s crude oil requirement if Sri Lanka was compelled to halt crude oil imports from Iran, he said.

U.S. sanctions do not ban purchases of Iranian crude, but they pose obstacles for foreign banks to pay Iran the hard currency that makes up around 50 % of the Iranian government’s total revenue. Under this set up Iran has no option other than halting its crude oil exports pushing countries like Sri Lanka into difficulty as it depends on Iranian crude oil for its Sapugaskanda oil refinery, a senior Finance Ministry official said.“Therefore, a channel needs to be opened with the US to ensure payment for the oil through some source,” he said.

He pointed out that Sri Lanka would have to pay the penalty for depending so much on Iran for the country's crude oil requirement. While Iranian crude oil is not the cheapest in the market, Iranians impose a massive premium as much as US$ 2 a barrel on their sale price when the normal premium is about as US$ 0.50 cts a barrel, he said.

“The benefit given to CPC on credit terms is taken away by the high premium imposed at the time of delivery. Apart from the negative financial implications of Iranian crude sale terms, buying so much of Sri Lankan crude oil requirements from Iran will exert certain strategic implications under the US sanctions against that country," the official said.

Meanwhile, the CPC is in a dire financial crisis. It owes Rs. 110 billion to Iran; Rs. 50 billion to finished product suppliers; and Rs. 40 billion to commercial banks including hedging losses. While significant loans have been also taken from EXIM Bank, AAB and India, payments are also due to the Treasury on account of PAL, custom duties etc, making a grand total of more than Rs. 200 billion, the official revealed.

The Iranian offer to expand the Sapugaskanda oil refinery, from 50,000 barrels a day to 100,000 is apparently dead because of Iran’s insistence that Sri Lanka put up US $500 million of its share of the cost up front and the Treasury not ready to commit such a vast sum at once, Finance Ministry sources said.

With an Iranian offer to upgrade the ageing Sapugaskanda oil refinery, completed by an Italian firm in the late sixties, failing to click, China is now likely to fill the void by pumping in the required external financing to the tune of US$ 1.5 billion. The total cost of the project is US$ 2 billion.

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