Unfair fuel pricing hurdle to investment – LIOC MD

Reuters: Lanka Indian Oil Company on Wednesday said it was ready to invest in oil-related infrastructure in Sri Lanka, but a lack of a fair fuel pricing structure is hurting its bottom and ability to invest to keep up with post-war demand growth.

IOC, the Sri Lankan arm of State-run Indian Oil Corp., has long complained to the Sri Lankan Government of heavy losses on fuel sales due to the Government’s policy of not raising retail prices in line with global prices.

“Losses have been extremely high,” LIOC Managing Director K.R. Suresh Kumar told Reuters in an interview. “What I wish for is some kind of a mechanism for the pricing.”

Although LIOC can raise prices on its own, it cannot compete with the Government-set prices at the state-run Ceylon Petroleum Corp’s (CPC) outlets.

Post-war optimism and a vehicle import tax cut helped boost fuel demand by about 10 per cent last year.

“If I don’t build up infrastructure, for the way that we are growing and to sustain 10 per cent growth, other systems will collapse. I don’t want to wait for that day,” Kumar said.

The Government subsidises CPC, but is unwinding that policy under a $ 2.6 billion International Monetary Fund programme.

The Government raised diesel by 3 rupees per litre and petrol by 10 rupees on 2 April, but Kumar said he was still losing Rs. 31 ($0.28) a litre on diesel even while selling Rs. 9 a litre higher than CPC.

“No company can afford that. So this needs a correction,” he said. The price gap has cut LIOC’s diesel sales volume by 65 per cent, while petrol is sold at a breakeven price.

LIOC has managed to offset the losses by expanding sales in other fuel products. It has already captured around 18 per cent share of the lubricant market, 30 per cent of the island’s bunkering sales and 25 per cent of bitumen sales, Kumar said.

With a market capitalisation of around $ 87.8 million, the Kumar said he expects to post a profit for 2011. LIOC lost Rs. 422.7 million in the 2010 financial year, compared with a Rs. 1.24 billion loss in 2009.

The firm expects to invest up to $ 7 million in 2011 on increasing petrol storage capacity in the eastern port city of Trincomalee and open at least 10 more filling stations.

However, Kumar said the firm has asked the Government to let it invest in CPC’s expansion of its only refinery, in gas-handling infrastructure and the bunkering capacity of the newly-built Hambantota Port.

However, the State-run Sri Lanka Ports Authority (SLPA) has said it would not open those areas to foreign investment.

“If you ask me, they can’t,” Kumar said, referring to SLPA’s capacity to handle the bunkering business in Hambantota.