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Sri Lanka oil bill: 'We need an alternative'

Hard hit by the sanctions on Iran, Sri Lanka hopes the nuclear deal will save its deteriorating economy.

Last updated: 09 Dec 2013 06:50
Ameen Izzadeen

Ameen Izzadeen is the deputy editor of the Sunday Times, and the international editor at the Wijeya Newspaper Group, Sri Lanka.
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Sri Lanka has not been able to find a decent substitute for Iranian crude [Reuters]

A jubilant Petroleum Minister Anura Priyadarshana Yapa told a local radio station that Sri Lanka would have a huge advantage if the sanctions on Tehran were eventually lifted. Responding to a question by an opposition member about the government's seeming inability to bring down petrol prices, Yapa told parliament it was due to the fact that the country's petroleum sector has been badly hit by the sanctions on Iran.

The nuclear accord between Iran and the six world powers was, therefore, not only good news for Tehran, but also Sri Lanka, a country severely affected by international sanctions imposed on the Islamic republic. Iran accounted for almost 93 percent of the country's oil needs and had even offered a seven-month credit to Sri Lanka to settle the oil bill. 

Prior to the sanctions, which severely affected Iran's ability to export its oil, Sri Lanka had been importing 39,000 barrelsa day. After the sanctions were placed, the country's oil import bill shot up. Sri Lanka's search for an alternative source of oil, when supplies ran thin, was costly.

Sanctions' effect

Sri Lanka's only oil refinery at Sapugaskanda, a half-a-century old national asset, had been fine-tuned largely to handle light crude from Iran. Before the crippling sanctions started to bite, Iran, which also provided military aid to Sri Lanka during the civil war, had pledged more than $1bn in aid to modernise and expand the refinery's capacity.

We have been kind of under US sanctions. Since the sanctions on Iran came into effect, we could not buy oil from Iran.

-Susantha Silva, Managing Director of the state-run Ceylon Petroleum Corporation 

Susantha Silva, Managing Director of the state-run Ceylon Petroleum Corporation (CPC) told Al Jazeera, "We have been kind of under US sanctions. Since the sanctions on Iran came into effect, we could not buy oil from Iran. We imported 13 cargoes every year from Iran. But once imposed, we were compelled to reduce the quantity to 9 in keeping with the US sanctions."

He said Sri Lanka was also hit by the sanction-driven oil price increase in the world market. Oil imports constituted 25 percent of Sri Lanka's $20bn import bill last year. The oil bill, more or less, was equal to the foreign exchange Sri Lanka earned through remittances from expatriate workers in the Middle East and elsewhere, last year.

Given Sri Lanka's widening trade deficit, any increase in the oil bill was a blow to the economy. It was under such circumstances that the US sanctions hit Sri Lanka like a bolt from the sky, sending the fuel sector into disarray. The US and European Union sanctions also effected Sri Lanka, a country which is trying to rebuild its economy after three decades of civil war.

Silva said that apart from the global price hike, the CPC also faced numerous problems: "The banking sector refused to open letters of credit. To circumvent this problem, the Iranians agreed to give us loans to buy their oil. But ships, including Sri Lankan vessels, to Iran could not get P&I (protection and indemnity) insurance cover. Iran offered to send crude in its vessels, but our ports were not geared to handle Iran's large carriers."

No substitute for Iranian crude

Sri Lanka now buys crude and refined products from countries such as Oman, Saudi Arabia, Singapore and Vietnam at a much higher price. But it has not found the right replacement for the Iranian crude, which is low in sulphur. In desperation, the CPC tried Arabian light, but the refinery encountered technical glitches because of the crude's high sulphur content. Then it tried Oman crude, but the refinery produced more residue than oil. The CPC now runs the refinery with crude from Abu Dhabi National Oil Company but in this instance too, the CPC has to blend it with other crude to obtain the right final product.

This week the Sapugaskanda oil refinery was functioning smoothly, but no one knows for how long.

According to Silva, the Sapugaskanda refinery has been closed twice last year and twice this year for want of crude. The last shut down was a month ago. Days before the Commonwealth Heads of Government Meeting (CHOGM) was opened in Colombo, the government had to issue a statement to allay fears of a fuel shortage. The rumours about the fuel shortage spread after the government, acting on US complaints, turned away a ship carrying Iranian oil from a third party source. The US complained during a meeting between its ambassador, Michele Sisson, and President Mahinda Rajapaksa in October.

Rajapaksa has been a critic of the US sanctions. In February 2012, he told Sri Lanka-based foreign correspondents that the sanctions hit largely small nations like Sri Lanka . "We need an alternative. In the end, they [the U.S. and the West] are not punishing Iran. They are punishing us, small countries," said Rajapaksa.

The CPC's Silva could not agree more. He said his corporation was happy to hear that Iran and world powers had reached an interim deal that might lead to a situation where restrictions on Iran would be lifted and countries like Sri Lanka could find some relief.

Ameen Izzadeen is the deputy editor of the Sunday Times, and the international editor at the Wijeya Newspaper Group, Sri Lanka. 

 

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The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.

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