Petrol crisis: Urgent need for independent regulator
Public Utility Commission says Sri Lanka needs to ensure energy security
The week- long fuel crisis which triggered a war of words between Lanka Indian Oil Company ( LIOC) and the Minister of Petroleum Industries has highlighted the urgent need for an independent regulator.
LIOC, which claimed it was unfairly criticised for the petrol shortage, is among those calling for market regulation. The Public Utilities Commission of Sri Lanka has also long pushed for reform.
“We need to ensure energy security,” PUCSL Director General Damitha Kumarasinghe said. “There are two players now. We don’t know if there is pricing efficiency or whether the inefficiencies of the CPC (Ceylon Petroleum Corporation) and LIOC are going into the price. We have to ensure that procurement of petroleum resources is done on the right basis, from the right source.”
“An independent, third party has to be there,” he said. “The consumer is also helpless where petroleum is concerned. There is no consistency in fuel or service standards. Natural gas is also coming in. There are safety issues to be considered. When we develop as a country, we must have these structures in place.”
The downstream petroleum industry is still governed by the Petroleum Products ( Special Provisions) Act and the Ceylon Pe t roleum Corporation Act. The Petroleum Industries Minister has overall regulatory powers.
Draft amendments to these two laws to enable the PUCSL to fully regulate the petroleum industry are held up at the Ministry.
There must be better coordination between relevant bodies to prevent future crises, LIOC Managing Director Shyam Bohra said . Things can get complicated because the CPC and LIOC are competitors, and the CPC is under the Minister who is the regulator. An impartial regulator was the best way forward.
The LIOC in a statement blamed the petrol fiasco on the CPC which it said caters to 84 percent of the Sri Lankan market. Why, asked Mr Bohra, is the small player being targeted? The onus was on the majority party to ensure there was no shortage. The crisis was precipitated by panic buying.
LIOC has now cancelled its term contract with the French oil company M/s Total which on October 16 brought in 35,000 metric tonnes of petrol that did not meet CPC/ CPSTL ( Ceylon Petroleum Storage Terminals Ltd) standards. While the chemical specifications were fulfilled, laboratory tests showed the “presence of visible impurities” in the samples.
With Total not supplying a replacement cargo on time, LIOC has consulted lawyers on possible legal action. This is expected to be a drawn-out process. It is being done under the terms and conditions of the agreement Total has with LIOC.
Mr Bohra said there was no argument that the TOTAL stock did not meet certain criteria. The rejection, therefore, was justified. But assigning blame on LIOC for the subsequent shortage was not. Neither did the company attempt to “pressurise” Petroleum Industries Minister Arjuna Ranatunga to accept the consignment. LIOC merely acted as message- carrier between Total-- which offered to filter the petrol--and the Ministry, which did not want that consignment.
LIOC and CPC keep their stocks together in a ‘common user facility’ ( CUF) which is essentially a set of tanks in Kolonnawa managed by CPSTL. The sharing of oil between CPC and LIOC happens via book transfers. Physically, the stocks are pooled together.
LIOC’s slice of the market is so small that each shipment of 30- 35,000MTs lasts around 50 days. It has a buffer stock of 3,500MT of petrol at the CUF. Even with the rejection of the Total cargo, therefore,
The LIOC vessel that arrived on October 16 contained 30,000MT of 92 and 10,000MT of 95 octane petrol. The stocks were rejected after two different tests found visible particles in samples, said Ceylon Petroleum Common Workers’ Union (CPCWU) Convener D.J. Rajakaruna.
The company was under obligation to immediately supply replacement cargo. It had first said another vessel would arrive by October 31. There is usually a 10-day window after a fuel shipment is rejected for a replacement to get here. And there were sufficient stocks in fuel storage to manage during this time, Mr Rajakaruna said.
But trouble began on October 27, the trade unionist said, when LIOC officials said M/s Total would not be sending a replacement stock. “The LIOC waited till the last moment to say another ship wasn’t coming,” he claimed. “The company did this to force us to accept the rejected cargo.”
Meanwhile, the CPC’s own vessel could not depart from the UAE on schedule owing to a delay of several days to load the ship. Mr Rajakaruna described the delay as “unusual.”
The crisis was exacerbated by the sudden shutdown of the Sapaugaskanda oil refinery on October 31. The CPC lost the ability to refine 700MT of petrol a day during this period.
LIOC officials were aware of these issues as they attend the weekly stock review meetings where inventory is taken and the schedules of incoming vessels for the next two months are examined. there was enough for the company to service its sheds until a ship arrived on November 10.
When the Total tanker docked on October 16, a sample of petroleum was taken and rejected. Meanwhile, the CPC was also informed that its own consignment--the next installment in a term con- “LIOC knew the extent of the crisis, and it used the opportunity to its advantage,” Mr Rajakaruna alleged.
But he also stressed that the Government was chiefly to blame for the fuel fiasco. “People shouldn’t have to stand in the street for petrol just because one ship doesn’t turn up,” he pointed out.
The CPC had insufficient storage to hold a suitable buffer stock. “This is why we have demanded the return of tanks in the Trincomalee tank farm,” Mr Rajakaruna said. Last year, a Cabinet paper was presented to acquire some of the tanks after it was found there was not enough storage to stock fuel from four vessels that had brought in emergency consignments for thermal power plants during the drought.
“Cabinet approved it, but the Prime Minister had it withdrawn by presenting a memo saying it would impede talks on running the tank farm as a joint venture with India,” he said.
The CPC controls more than 80 percent of the market but could not prevent long lines at fuel stations because it had no storage. If the LIOC, with 16 percent of the market, is allowed full sway over the tank farm, there would be nothing to prevent it from acquiring more sheds and tightening its grip.
"The Government was also letting the oil refinery to die a natural death instead of upgrading it from its current production capacity of 50,000 barrels per day," Mr Rajakaruna claimed.
If the Chinese were given a free hand to build a tract--would come a few days later than it was scheduled to arrive.
“By around October 24 or 25, those in the system including at LIOC and CPC knew we will have a situation where one consignment had been rejected and other looked like it would be delayed,” said an authoritative official source who asked not to be named.
While LIOC had asked Total to replace the questionable stocks in keeping with the contract, the supplier had said it would take 20-21 days. “Because of the time factor, the supplier suggested filtration,” the source said. “The initial offer was to do it on land but this was complicated because we would have had to accept the consignment. The supplier then said it will bring another vessel for ship-to-ship filtration.”
This technique sees petrol being cleaned while transferring from one ship to another. It is called STS or ship-to-ship transfer. All this was to be done at Total’s cost.
On October 25, this option was discussed at length by the Technical Specification Committee (TSC). It agreed to allow an STS and for a sample to be tested again after filtration to determine whether it was suitable for distribution. The TSC also said it might consider accepting the consignment if it came from a new ship with a new bill of lading. “It did not want to test a sample from the same ship,” the source said.
But during the weekly stock review meeting on October 31, Minister Arjuna Ranatunga, who returned from overseas travel, issued instructions that the Government had no wish to accept a shipment that had been rejected. This was despite being told that there would be a shortage by November 5 or 6--something refinery in Hambantota and the Trincomalee oil tanks are handed over to India, the CPC will lose every chance to expand storage, said Bandula Saman Kumara, President of the CPC’s Nidahas Sevaka Sangamaya.
“There’s the likelihood of such crises happening again if this is allowed,” Mr Kumara warned. (Under the memorandum of understanding signed between India and Sri Lanka to set up a joint venture for the Trincomalee oil tank farm, however, ten tanks would be for the exclusive use of the CPC).
Unqualified people were appointed to important departments to handle fuel procurement and storage, said Cyril Suduwella, an energy expert who worked for three decades at the Sapugaskanda Oil Refinery.
“When we have a fuel vacuum such as this, we need a qualified team of experts to manage the crisis,” he explained.” These positions are now filled by political cronies who have no knowledge or expertise in their fields. They often find themselves out of their depth when a crisis occurs.”
“The crisis is a clear indication that the CPC’s senior management had no proper knowledge of the oil market,” he said. “They could have floated spot tenders and obtained petrol from suppliers in places like Singapore or nearby countries. But that can’t be done without a proper knowledge of the subject.”
To avert problems in future, the capacity of the Sapugaskanda refinery must be increased to between 100,000 to 150,000 barrels, he said. CPC and LIOC had both realised by then.
It was on Friday, October 3, that messages started circulating via whatsapp and other platforms warning of a scarcity. One of them read: “LIOC has rejected their latest 40k MT petrol shipment, after the laboratory results of CPC revealed that is [sic] substandards [sic]. Around that time, Sapugaskanda refinery underwent an unexpected plant shutdown due to a power failure. Hence still Sapugaskanda too cannot meet the standard Octane requirement. Considering the day- to- day demand we all can survive until next Tuesday. If Sapugaskanda refinery fails to recover and meet the Octane requirement before next Tuesday obviously there will be a petrol shortage in the country. So better to top up your petrol tanks.”
This was compounded by Minister Ranatunga issuing a media communiqué requesting the public not to panic but to use petrol sparingly. He also blamed the LIOC for the shortage saying the situation arose “due to the rejection of substandard shipment of oil” imported by that company.
Diplomatic channels were also used to convey to various levels of the Government of an impending shortage. This might have been misconstrued as “pressure”, political sources said. Minister Ranatunga angrily told media he would not succumb to undue influence.
The short messages combined with poor communication by the Government triggered a frenzy. Queues piled up at petrol stations. “While a crisis would have happened by November 5-6, it now erupted on November 3,” an official said, requesting anonymity.
The CPC then cut down on issuing stocks to tankers and started rationing petrol. The situation became progressively worse during the weekend, forcing Cabinet to meet on Monday, November 6. Following that discussion, the Government formally requested India to help with emergency supply. This was duly dispatched from India’s refinery in Paradeep in the East Coast. But this would also take two-three days' sailing time.
That refinery had only 21,000 kilolitres (not metric tons) of 92 octane petrol that met CPC specifications. All of it was sent to Colombo as a special consignment. LIOC usually does not purchase petrol from India and sell to Sri Lanka. It buys fuel on a global competitive tender. This is how Total had secured the last contract.
India also offered 14,000KL from its Kochi Refinery but said Sri Lanka would have to send a tanker to collect it as one was not available. This option was not taken. In the meantime, CPC’s own ship ‘Neveska Lady’ docked in Colombo on November 8 with 40,000MT on board.
“Petrol almost ran out on November 8,” the official said. “Rationing was going on and a little less was consumed. The CPC did not have sufficient buffer, if you discounted LIOC stocks. This situation, especially the communication aspect, was just not handled well.”
Reacting to reports that LIOC had rationed fuel, too, Mr Bohra said they had held back some for emergency services. The company had to take another hit before the controversy fizzled out. It offered to send a shipment of diesel in the tanker from Paradeep as there was spare capacity. This was misinterpreted as an attempt to sell “substandard diesel” to Sri Lanka when the Indian standards were Euro 4 and higher than those here.
“This whole thing went off really badly,” the official reflected. “And the Government has taken a serious hit, unnecessarily.”
The oil tanker that brought the substandard fuel berthed outside the Trinco harbour . Pic by Amadoru Amarajeewa
LIOC Managing Director Shyam Bohra. Pic by Indika Handuwala