Bunkering bungle!

Alleged moves by the Government to allow Lanka IOC Plc bonded storage at Trincomalee have caused undercurrents within the maritime industry on the basis that such a development would endanger national interest as well as efforts to develop Hambantota as a hub.

For its part LIOC's efforts to consolidate its business as well as tap the high potential bunkering business have been longstanding. 

LIOC has identified bunkering as its strategic priority in the medium term. In that context for several years it had sought Government approval for a bonded storage at its Trincomalee terminal. According to LIOC, this will enable it to tap bunkering volumes at Trincomalee port which have a potential of around 8,000 MT 380 CST FO and 500 MT of MGO per month for in transit vessels in the Bay of Bengal.

LIOC's bunkering export revenue in FY2016 was Rs. 9.23 billion, down from Rs. 13.3 billion in the previous year which enjoyed a 24% growth. Bunkering accounted for 13% of LIOC's overall revenue, down by 17% a year earlier. The bunkering business has been facing severe price competition from Indian ports that are able to offer lower prices due to domestic production of fuels. Additionally, Singapore and Dubai are also major hubs for bunkering. Nevertheless the Lankan maritime industry has been emphasising over the years that the country indeed can be an effective hub especially via Hambantota provided the right policies are in place.

Moves by the Government to facilitate LIOC's request come at a time when efforts are underway to seek private sector investments to develop the bunkering business in Hambantota. It is alleged that the LIOC request if complied with would eliminate if not reduce the Government chances to secure more attractive terms for Hambantota plans, as well as reduce the earnings capacity of the Sri Lanka Ports Authority.

Background

Bunker fuel which is imported needs to be stored at a bonded terminal.  Currently, there are only two bonded terminals both owned/operated by the Sir Lanka Ports Authority (SLPA) – one situated in Colombo (Jaya Container Terminal Oil Bank – JCT Oil Bank) and the other at Hambantota (MRMP Terminal).

There are no privately owned / managed lands or floating bonded storage facilities available in the country.  This gives the distinctive advantage to the Sri Lanka Ports Authority (SLPA) to earn considerable revenue from every ton of oil sold as bunkers in Sri Lanka.

  JCT Oil Bank in Colombo has a capacity of 40,000 MT and is operated as a common user facility, which is currently utilised by four active users – Lanka Indian Oil Corporation (LIOC), Lanka Marine Services (subsidiary of John Keells Holdings), Interocean Energy (Subsidiary of McLaren’s Group) and Lanka Maritime Services /Lanka Bunkering Services (subsidiaries of Hayley’s). 

 Every metric ton of oil that passes through the JCT Oil Bank in Colombo generates approximately around $ 10 per metric ton either directly to SLPA or to one of its subsidiaries.

Plans for Hambantota 

Hambantota has a potential bunker storage of 70,000 MT and is currently not being utilised.  Sri Lanka has spent close to $ 90 million on this tank facility and has floated an International Request for Proposal (RFP) to offer this terminal on a concession for a period of 25 years to any interested private party with the aim of developing Hambantota into a bunkering hub plus more importantly to recover cost incurred by the SLPA in building this terminal and now having to service the debt. 

The amount requested by the SLPA as a lease payment on the concession for the Hambantota tank farm is quite high compared to international terminal storage rates.  The reason for the high rate requested is due to the exorbitant rates spent by the previous regime in building this terminal.  According to experts the terminal could have been built at 75% of the original cost of $ 90 million via Chinese loans. 

Be that as it may, industry however emphasised that  leasing the Hambantota terminal is of utmost importance to the Government as is the financial wellbeing of the SLPA faced with the huge commitment of having to service the debt that has been incurred for building this terminal inside the Port of Hambantota.

In the event proper bunker operations commence by any successful bidder,  in addition to the lease payment by any successful bidder the port will also earn revenue through port movement charges and other ancillary services which the port can offer to vessels calling at the port or outside port calling to take bunkers. 

Business case 

Any party who is submitting a bid and guarantees the high lease payments expected by SLPA will do so only if it makes business sense. Already most parties feel the amount requested by the SLPA for leasing out these tanks is significantly excessive.  This being the case, an above average rate compared to international markets will only be offered by any private party to the SLPA if the business model is feasible.

Regardless of whether bunkers are sold in Colombo or Hambantota by any party, the SLPA tends to benefit out of the service offered by the private sector through the collection of revenue by means of lease rental, storage fee, pumping charges, heating charges, pipeline fees, etc. 

Analysts said what this means is of all bunkers sold in Sri Lanka, from Colombo or Hambantota a sizable portion of the revenue will be attributable to the SLPA/Government of Sri Lanka (GOSL) 

Current bunker volume in Sri Lanka is around 35,000 – 40,000 MT per month, which means the current two facilities are sufficient even if the market doubles immediately.  As per industry estimates this available tankage can even cater to an increased market of around 150,000-165,000 MT per month.

When LIOC was originally granted the Trincomalee facility, the expectation of the Government was that it will develop the tank farm for the benefit of the country. Industry sources claimed that unfortunately after a decade only a small part of the tanks were rehabilitated and revenue to the State has been insignificant. Use of tanks for bunker for sale instead of strategic storages would also deprive revenue for SLPA. Additionally, LIOC’s  parent IOC is the largest bunker supplier in all ports in India and analysts fear domination in the Indian sub continent on its part and undermining of the Government's plans to make Colombo a shipping and logistics hub.