23 March 2023

The CPC: 'oil' leaks and greasy palms?

If the head of any organisation is a crook, it amounts to a licence for theft down the line, all the way to the bottom. If there’s a crook at any level of an organisation, it implies that the head of that institution is either a crook or is incompetent. 

Organization, here, could mean all kinds of collectives, for example teams, schools, state institutions, companies, clubs, societies, ministries, councils, judicial apparatuses and even countries.  Hold on to this thought for a while.  

We are talking here about the energy sector. We are talking about petroleum. About crude oil. Refined petroleum fuels and products. Refineries.. Supply side issues. Demand side issues. Margins. Contracts. Hidden costs that are eventually reflected in the Consumer Price Index. Domestic fuel-need security or rather insecurity. Dollar costs. Tender procedures. Foot dragging. Tripartite agreements sat upon. We are talking of the Ministry of Power and Energy. The Ceylon Petroleum Corporation (CPC). The Bank of Ceylon (BoC). Relevant officials. Tier One traders who produce oil, have their own wells and extracting and refining equipment and run their own trading operations. Tier Two traders are, well, just traders.

First, let’s consider how the CPC does and does not do business. The CPC has always shown a preference to purchase from relatively small-time, second-tier players who in reality procure from the top-tier and markup in an ungodly manner. Whether or not there are hidden costs, pocket-lining etc. included in the markup, the high-ups in the Ministry of Power and Energy and the CPC would know. Suffice to say, this is typical. Of course such deals would include politicians, officials and of course such second-tier suppliers. In cahoots. Who picks up the bill though? The consumer!

The mismanagement and corruption (yes!) is perhaps best evidenced by the options that the CPC does not consider, despite cogent proposals with terms far more favourable not just to the CPC but the country economy, the industries and the general public as a whole.  

Let’s consider an alternative scenario. Suppose there is a top Middle-Eastern oil producing company that is owned by that particular government, with trading offices in the UK, Singapore and Dubai.  Suppose this company proposes to supply the entire crude oil requirement of the Sapugaskanda Refinery with a, say, six month credit period, and pledges to off-take all refined products leftover after providing for domestic demand. It would not only sort out the country’s energy issues and provide domestic fuel-need security but also turn Sri Lanka into a regional petroleum, oils and fuel export hub. At zero-dollar cost to the nation.

Consider capacities. As of now the full rated capacity of the Refinery is 55,000 barrels per day. Historically, the facility processes just 22-25,000 barrels per day due to technical, maintenance, procurement, and other “management” issues. The reason is well known.  The output of heavy refined products like the various grades of furnace oils and marine fuels even from high grade light crude oil is around 50-60% and Sri Lanka just doesn’t have sufficient domestic capacity to absorb anything more above a 22-25,000 barrels per day refining operation. Now, considering that a top tier player who is a producer, refiner and trader can off-take anything and everything produced, the Refinery can operate close to capacity without having to worry about shipping out the excess products once domestic demand is satisfied. Sri Lanka would get at least the processing margin and, if the banking system is stable, it is not inconceivable that the entire transaction be channeled through it. It would obviously make the banking system dollar-rich and infuse much needed dollars into the float


Such an arrangement would earn Sri Lanka between 10-20% of its GDP in dollars and remove the cost of crude oil procurement altogether. Now suppose this top-tier player has a market capitalisation approximate to 2 trillion US dollars which is greater than the sum of the next three players, and doesn’t demand upfront payment? Does it even make sense to play with relatively two-bit traders? If it does, does it not mean that either there’s corruption or absolute incompetence?

Just for context, consider that countries like Bangladesh, Cambodia, Malaysia, Singapore, South Korea, Thailand, Vietnam and Indonesia prefer such arrangements, i.e. agreements with the top player who is reliable, reputed and don’t have to impose markups simply because oil need not be purchased. As is, even India, which has its own oil reserves, does good business with this company which operates as co-owner of refining facilities.

Let’s talk numbers. Let’s for simplicity assume a barrel of crude oil costs 100 US dollars. Considering yield margins of 30-35% on refined products, a barrel of crude refined will produce 130-135 dollars of refined products. That would amount to at minimum a processing margin yield of 7-10 dollars per barrel of refined products. If the banking system is stable, the balance 20-25 (or 23-27) dollars can be routed through it. That’s 153 million dollars at the margin and 655 million dollars at the yield margin.

Now what if another refinery is added using the free space at Sapugaskanda, as has been proposed? It would mean 110,000 barrels of additional capacity. Per day.  What if someone proposes that this asset, worth around 1.2 billion US dollars will be built by a top-tier player but will be fully owned by Sri Lanka?

Consider also that the Ministry of Energy has solicited an expression of interest to set up a refining complex in BoI controlled land in Hambantota. Apparently 400 acres with the possibility of adding another 190 acres. Of course this doesn’t necessarily translate into a capacity to refine 650,000 barrels per day overnight considering technical requirements which, one assumes, the experts of the CPC, BoI and the Ministry are aware of. While it does pose the issue of creating unnecessary inbred competition (with Sapugaskanda), if a technically sound and experienced partner who does not fear the market is involved, it does make sense. As long as the CPC moves out of what appears to be a lining-pockets culture of dealing with suppliers.

There’s more on that. An example would make things clear. In July 2022 a tender was called for the supply of JetA1 fuel. Although it could have been supplied at 10 USD per barrel, the suggested price was 13.95. It was eventually awarded at 21.95 dollars per barrel after delaying the awardee's ability to supply at 13.95. That’s for 40,000 metric tonnes per month, roughly 250,000 barrels. That’s some 35 million dollars lost a year. Why was this done, does Kanchana Wijesekera know? Can the MD of CPC provide an answer? Do they believe that Sri Lanka can be turned into a jet aviation fuel hub? At that price? Is it not true that the CPC came up with bizarre technical objections which the industry would guffaw at in order to ensure that the supplier quoting the higher price would be awarded the tender? Was there pocket-lining?

In June 2022, when Sri Lanka was unable to pay in dollar upfront and wanted credit for the supply of crude oil, one supplier was ready to give six months credit. However, the mechanism that exists requires a tripartite Non Resident Rupee Account agreement between the CPC, the supplier and the Bank of Ceylon. The BoC is required to do the dollar conversion and send the money to the supplier. In this instance, the BoC signed two NRRA agreements with two parties offering less favourable terms. The BoC not only refused to sign the NRRA with the supplier offering the best terms, but refused to communicate with this party which, mind you, is a BoC account holder, as to what their specific grievance was. Who at the BoC is responsible for this? Is he or she in cahoots with some CPC and Ministry officials? The Minister could investigate.

As mentioned there is a possibility of an arrangement where the CPC does not have to pay any money upfront. In fact no money would be required. There would be investment in a new refinery at no cost to CPC or Sri Lanka, no NRRA accounts, no markups, no corruption. The supplier takes on the conversion risks, provides the crude oil and off-takes the excess refined products. Sri Lanka gets dollars into the banking system and the CPC gets both Rupee and Dollar profits from the Sapugaskada Refinery. No energy security issues. The CPC can supply to the CEB without interruption. And yet, Sri Lanka refuses to buy into this. Add to refining capacity by setting up refineries in Hambantota and it’s all simple arithmetic. Is the CPC incapable of doing simple addition and subtraction? Is Kanchana arithmetically challenged?  

There seems to be hanky-panky in all this. Where, is the question. Somewhere down the line? If so, the buck floats up to the Minister and the Government, Head of State included, and on it is written the following words: ‘incompetent and/or corrupt’, noting that incompetence at this level amounts to corruption as per Carlson M.M. etal  (2018): “corruption signifies a failure to conform to some standard, the inducement to wrong by improper and unlawful means, or a departure from what is pure or correct.”

Inefficient. Losses. Wrong Decisions. Corruption. These are words associated with entities such as the CPC and CEB. They are used to prop proposals for privatisation. Does not follow. Houses need to be and can be put into order. There’s nothing to stop state-entities playing according to market rules and making profits. Except corrupt officials.  The CPC still can turn things around. Kanchana Wijesekera can step in if he wants to. Sri Lanka does not need to depend on the alleged largesse of the IMF. Good business sense and integrity. That’s what is needed. Does the CPC have these qualities? Does the Minister?

And now, scroll back to the first paragraph of this essay:


If the head of any organisation is a crook, it amounts to a licence for theft down the line, all the way to the bottom. If there’s a crook at any level of an organisation, it implies that the head of that institution is either a crook or is incompetent.'



White elephants in Kanchana's room


Unknown said...

A very big problem no one wants to touch, sadly