Petroleum Minister outlines CPC plans to breakeven by end 2014

Minister of Petroleum Anura Priyadharshana Yapa guarantees to breakeven the Ceylon Petroleum Corporation by end of 2014 through product variation and stresses that he will not increase fuel prices to minimise losses.

Following are excerpts from the interview:

Q: How challenging is it to be the Minister of Petroleum?

A: This is one of the most important ministries in the country. As you need water for your survival, oil is needed for a country for many purposes. Without oil, all the businesses in Sri Lanka will come to a halt. This is also a critical sector. Usually we spend around one third of foreign currency earnings to buy fuel; for transportation, for industries and power generation. At least 60% of oil imports are utilised for generation of power. I have to look at supplies, distribution, refinery, storage facility. Every year our demands go up by 5 to 7 %.

Q: The Ministry of Petroleum became controversial following the importation of substantial fuel. How would you define this incident and what measures will you be taking to assure that no such situations will arise in future?

A: At times, when the refinery has full capacity, it is adequate to meet the demand. But when the demand goes up, the production that is coming from refinery may not be enough. Due to US sanctions, when this kind of a situation arises we are compelled to buy from spot market. When this incident happened, we had to immediately buy from the spot market. Then there were some issues. They said one shipment was contaminated. This created havoc in the country. Recently Indian Oil Company imported oil in a mix cargo and they found that the entire diesel consignment was not up to the standard.

This year we have another problem. Due to the American embargo we are unable to buy Iranian crude. We are now looking at Oman crude as well as other light crude available in the Middle East. As a result our yield has come down to around 35% from 50% which is a 15% decrease.

In the oil trade the market is volatile. When we open tenders, we have to be mindful about what we are doing. I am trying to address this by categorising the present suppliers. There are three categories; suppliers backed by a refinery, top level traders and normal trades. By doing this I am trying to bring in more top level suppliers to the country when there is bidding. This will enable us to get good quality products at a maximum possible lowest rate.

Before I took over the Ministry, they had gone into long-term contracts. Now I am investigating the advantages and disadvantages of these particular shipments. These are crude as well as refinery. Usually there are only two shipments a year. I want to bring it to a level so that at least 70% should come from long-term contracts and 30% by spot buying. This will help us to find out the exact amount that we need to buy. We have to find the lowest average available in the market. We will either have to get it from Singapore or the Arabian market. I am trying to negotiate with them for that.

Q: Can you elaborate more about these negotiations?

A: Like I mentioned before, it is important to find the lowest average available in the market. We will either have to get it from Singapore or the Arabian market. I want to have meetings with everyone and I want to do it in the presence of our officials. I don’t want to do it alone. The second thing is we will have to go for a market at the lowest possible market average in place. The market is volatile; it goes up and down all the time. We will have to research and see what the best time to buy is. It is only then that we can go for the spot market. Otherwise you will have to pay high premium.

Q: Are you saying that you want to revamp the tender procedures?

A: The tender procedure is simple. Tenders are called according to our standards. But when you go for the spot market, it is important to find the exact correct time. I have instructed my officials to prepare a yearly plan. Then there won’t be any issues. Whatever you want to buy, the price has to be favourable and competitive.

Q: There are allegations that tenders are prearranged and when the tenders are called, tankers are in the outer harbour. Your comments?

A: That is not true. This tender procedure was changed during Minister Susil Premajayanth’s time. Normally we buy from open tenders and the average should be two days up and two days down. Now we are getting good results. The last shipment was very favourable to us. We are trying to save money out of this. The old system is not in place anymore. I have received information that earlier the tenders were only sent to a few selected group of people. But now they can’t do it.

The US sanctions affected us very badly. Our refinery is designed to take only the Iranian sweet light crude. But we no longer can buy that because no one opens tenders and LCs. Banks are not allowed to do that. Recently we had a discussion, but they (Iran) said they are unable to do anything. Countries like Japan are facing huge problems. They had to increase electricity prices. As a result their products became less competitive in the world market. I was told that the Japanese Government has given money to those people to gap that difference. Likewise whoever used to buy Iranian oil is now facing difficulty.

We went through a very tough time last year. I don’t think it will be that bad this year. Due to this we have to buy many products from the spot market. This is a critical situation because when you buy from spot market, premiums are always high. This year too we will have to do that. But we will have a system ready. Until and unless the embargo against the Iranian crude is lifted, we have to go through this issue.

Q: How would you describe the impact of the American embargo?

A: When we had the Iranian crude, our yield was high. When we buy other crude, although we can still operate, the yield is low. I can’t give you an accurate amount to describe the loss because I don’t have the exact numbers. But the yield has come down by 15%. Another important point is that we don’t have crude to meet the demand in Sri Lanka; we get 5% from Oman, others are Arabian light. We are fulfilling this with great difficulty. We might not get that quantity, then we have to mix it. Otherwise there will be technical problems at the refinery.

Q: Have you appealed to the United States to remove this sanction?

A: They said once the embargo is imposed they are unable to do anything about it.

Q: What measures will be taken to overcome this situation?

A: We have completely stopped buying oil from Iran since mid last year. So we have to increase Oman crude.

Q: The US sanction did not come into effect over night. They warned about it well in advance. Why did the Government failed to take any early action?

A: Our refinery was designed for the Iranian crude. Then we have to change the entire system. How can we do that? Building a refinery is not an easy thing; it will take three to four years at least. If the Japanese are finding it difficult, how do you expect us to take early precautions?

Even if we get Iranian oil, we have another 50% importation. There is no country that can buy the entire requirement from the spot market. There is a percentage and in the long term I want to increase that to 70% and limit spot buying to only 30%. Spot buying is done when we need immediate cargo, then it will reach within four to five days. But when you go for spot, the premium is high. We have to talk to people and get this at a reasonable rate. I believe I can do that.

Q: What do you have to say about allegations that Sri Lanka continues to buy Iranian crude through third parties?

A: We can’t do that. We can’t buy Iranian oil even through third parties. We go by our tender procedures. We don’t enter into any third party contracts. Only the present registered suppliers are with us. We are not trying to buy through third parties; that is a wild allegation.

Q: What are your plans to improve refinery facilities?

A: I want to modernise the first refinery because it is 40 years old. I am hoping to add more capacity. I want to add at least another 50,000 barrels per day. If we can have a capacity of 100,000 barrels per day, then there will be no issues regarding the local requirement.

We are now getting lot of requests, but we will have to work with our experts. We have still not reached a final decision on this. The cost is the most important factor. The cost is high. Actually this is something that could have been done a long time ago.

Q: What is the estimated cost to modernise the refinery?

A: My estimates are between US$ 1.5 billion to 1.8 billion. But this is not the exact figure. In order to get the exact amount we need to go through a technical committee. We are discussing this issue with several parties. Italian, Korean and European companies were interested. But we have not confirmed yet.

Q: CPC is a loss-incurring institute that has been a long-term burden to the Government. Do you have any plans to revamp this organisation?

A: Oil is subsidised. It has been subsidised for a long period of time. We always sell it at less than the market price. However, now we have increased it; Rs. 3 per litre of petrol and Rs. 6 per litre of diesel.

We have requested the CEB to pay us. We cannot operate our institute if they don’t pay us. They owe us around Rs. 38 billion. We are now discussing with all the other Government institutions too. We can settle this issue in another three to four months. I have a feeling that they can have a deficit of another Rs. 27 to 29 billion. This figure is after recovering all the outstanding amounts from State institutions. This is not a bad figure. Then we will have to find out how best we can buy from the market.

I have another plan. Without going for a price increase, I want to go for Euro 4; standard fuel to super diesel and super petrol. Hopefully by next year, we can have a small plus margin for ourselves. That is my plan.

Q: Are you saying without increasing prices you are planning to minimise the loss through product variation?

A: Yes. Product variation will be my key focus.

Q: When will you be able to breakeven the CPC?

A: By the end next year we will be able to breakeven CPC. I hope that I will be able to achieve this target.

Q: When are you hoping to introduce Euro 4 standard?

A: Immediately. I have asked them to get the information. I will straight away go for Euro 4. I want to give our customers better products. Cost wise I don’t see a big difference.

Q: What’s the investment on product variation?

A: I don’t have an exact figure yet. Even now we are giving subsidies. We give petrol at Rs. 10 less than the market price. In the case of kerosene, the subsidy is around Rs. 65 per litre. We are losing huge amounts of money because of this.

Q: What’s the monthly loss of CPC?

A: Last year the loss was Rs. 89 billion. Hopefully this year the figure might come down to Rs. 59 billion.

Q: Can you elaborate on your plans for product variation?

A: We have already given the lubricant business to Caltex. At present we have a 15% market share, but I am hoping to increase this to 25% considering the market volume. At present we are working with a Malaysian company. There is an agreement with the CPC and this company; they will supply us the lubricant. They have said they want to have a mixing facility in Sri Lanka. I believe this is a good move. Sri Lanka will benefit from this type of deals. If we want to go for another product, we might even lose the market. I don’t want that to happen. I don’t want to take that risk.

We are importing bitumen. One company wanted to have their main storage in Sri Lanka. They will buy bulk storage here. Both these parties I have not met.

Q: Are you expanding retail outlets? What is the investment on that?

A: We are planning to build a new tank in Jaffna. Then we can send oil by train and even on highway. It is a very important move. The latest plan is to build 10 more tanks in Kolonnawa. Lack of storage facility is one of the major difficulties we have to face. If we overcome this, we can have more lucrative contracts.

A new pipeline is to be built from Sapugaskanda to Colombo Port. We have shortlisted the requests and working on that. We have already sent the details to the Standard Cabinet Appointed Review Committee, which will make the decision. The fourth major project in line is the development of the refinery. Unfortunately I don’t have a timeframe for any of these projects. These are huge investments so we can’t hurry things.

Q: Do you have any plans for bunkering?

A: We are not doing bunkering anymore. Ceylon Petroleum Storage Terminal Limited (CPSTL) will enter into the bunkering business very soon. CPC will also get into bunkering. We have the knowledge and trained people to do that so we have to get into bunkering business.

Q: What are your plans for Mattala?

A: We are building tanks in Mattala to provide aviation fuel. Tanks in Hambantota Port will be ready by November. Till then we will transport fuel using bowsers.

Q: What do you think about country’s economic situation?

A: The economy is doing well. This Government has done a lot for the country. No other government has done this much of development work for Sri Lanka. This Government is consistent and reasonable. We know what is best for the country and we strive to give the best to the people. Everyone will agree with me on that.

The biggest problem we have to face is the decline in the buying power of Europe and the United States. My feeling is that Europe will not recover for a long time. The United States’ growth is also slow. Due to this we have to look for other options. We need to look at the Asian market. I feel that we have to work closely with India. India is a huge market. It has a lot of potential. There may be differences of opinion, but if we can have agreements on the areas in which we have common interests, it will be beneficial to the country.