Oil on slippery slope with CPC
STRATEGIC partnership between the Ceylon Petroleum Corporation (CPC) and
Indian Oil Company (IOC) entered into in September last year following
Prime Minister Ranil Wickremesinghe's visit to India in January 2002, is
already falling apart at the seams following accusations of unfair play
being levelled by both partners at each other.
Gomes' letter charging the Indians with selling diesel oil using
the Caltex brand names
letter to the Treasury from Sri Lanka Customs stating the
violation in excise duty committed by the Indians
only CPC but other business entities are also charging that the Indian
company is playing dirty and attempting to steal not only the business
of CPC but that of private entities as well by resorting to unethical
business tactics. Charges are also being levelled that the Indian
company is swindling even the government of Sri Lanka by trying to
smuggle in oil products imported from India and avoid paying the
required excise duty.
are already in the midst of an investigation against IOC for bringing
into Sri Lanka shipments of kerosene oil which the Indians have
allegedly declared as jet aviation fuel in order to avoid paying excise
duty. Kerosene for domestic use is subject to an excise duty of Rs. 1.25
per litre whereas jet aviation fuel is free of excise duty.
are two grades of kerosene oil. One is the kerosene oil used for
domestic purposes, which according to laws in India is banned from
export. The second grade believed to be of a slightly superior quality
is referred to as jet aviation kerosene and according to Indian law can
be exported. Customs investigators are suspecting IOC of classifying the
kerosene oil imported from India to Sri Lanka as jet aviation fuel in
order to avoid paying customs duty.
August 19, Director General, Customs, S.A.C.S.W. Jayatilake wrote to
Treasury Secretary, Charitha Ratwatte stating that Lanka Indian Oil
Company (Pvt) Limited (LIOC) have so far brought into Sri Lanka four
consignments of oil classified as jet A-1 aviation fuel. The total
quantity is 38,262,634 metric tonnes and the value declared is Rs.
to the government
asserts that except for the last consignment, IOC has paid no excise
duty at the time of importation, resulting in a loss of revenue to the
government of Sri Lanka of Rs. 37.8 million.
far we have not yet established whether LIOC has imported domestic
kerosene oil or the second grade which is referred to as jet aviation
kerosene or whether it is jet aviation fuel. This difference needs to be
examined," Jayatilake asserted.
maintained that Sri Lanka Customs is also trying to establish if LIOC
has in fact imported jet aviation fuel and is selling it as such which
he said "would be a serious revenue fraud committed by the Indian
it is established that the product is indeed domestic kerosene oil, not
only will IOC have committed an offence by attempting to deceive Sri
Lanka Customs and avoid paying taxes but would also be in violation of
Indian law which the Indian High Commission in Colombo confirmed
prohibits the export of domestic kerosene oil.
is a major government owned entity in India. It is also one of the
Fortune 500 companies.
an initial step to create competitive conditions in the petroleum
sector, IOC was invited last year by the government to make use of the
oil tank farm situated at Trincomalee. The invitation was extended in an
attempt to promote a strategic partnership with CPC and thus prevent
possible unfair market practices by other multinational oil companies.
what indeed has now happened is a fallout whereby the CPC is accusing
LIOC of resorting to unfair market practices, attempting to seriously
marginalise the CPC as well as increase their profit margins thereby
increasing petroleum prices for the consumer.
Premier last year invited IOC to manage the oil tank farms situated at
China Bay in Trincomalee as only a fraction of the tanks were being used
while the bulk stood neglected and in need of huge investments for
repair and rehabilitation. The
tanks were built during World War II by the British navy and taken over
by the government in 1957.
CPC, which was set up as a state owned enterprise in 1961 took over the
ownership of the oil tanks by settling the full value of the tanks
estimated at that time. This oil tank farm in fact is considered to be
one of Sri Lanka's most important strategic assets and is located within
the defence force complex in China Bay.
Economic Reforms Minister Milinda Moragoda presented a cabinet paper to
promote the participation of IOC in Sri Lanka in May last year, he noted
that because of its strategic value, the development of this oil tank
complex was specifically included in the Indo-Lanka agreement.
this context, he noted that this initiative would be important to Sri
Lanka's national security and energy security interests. Moragoda sought
cabinet approval to lease out the oil tanks in Trincomalee on a
long-term lease to a local company to be incorporated by IOC.
terms and conditions of the lease were later worked out by CPC and PERC
and IOC was incorporated as Lanka Indian Oil Company (Pvt) Limited.
and Energy Minister, Karu Jayasuriya also presented a cabinet memorandum
on this subject the same day as Moragoda did, reiterating that the
government proposed to assign to LIOC 100 out of 300 filling stations
belonging to the CPC.
a result, 100 of CPC's best filling stations were handed over to IOC
after LIOC paid a down payment of US$ 2 million on the condition that
the Indian firm would pay the balance due once a value assessment of the
100 filling stations was complete. This balance payment would be
mutually agreed upon by both parties to the MoU, namely CPC and LOIC.
valuation was subsequently conducted by Ernst & Young who placed the
value of the 100 filling stations at approximately Rs. 9.8 billion or
US$ 100 million. What has now shocked government officials is that LIOC
has offered a pittance, which is less than half the value placed on the
100 filling stations.
in addition is required to pay an equity of one third for common storage
facilities shared with CPC at the Ceylon Petroleum Storage Company.
LIOC operates 15 oil tanks at Trincomalee, which were handed over
by the government to the Indian firm for a nominal yearly lease of Rs.
100,000 and involved no other commercial transaction.
February 7, Minister Karu Jayasu-riya issued a license to LIOC to
import, sell, supply or distribute petroleum products for sale in the
100 outlets purchased from CPC for a period of six months. This licence
expired on August 6.
June 17, LIOC requested the energy supply committee to grant a licence
without restrictions to import, procure, store, sell, supply and
distribute petroleum and petroleum products in terms of the agreement
signed with the government and CPC.
CPC however strongly objected. In a letter to Charitha Ratwatte on July
11, CPC Chairman, Daham Wimalasena voiced serious concern. Wimalasena
maintained that granting an unrestricted licence to LIOC prior to
reaching an agreement on the price for 100 filling stations and for the
purchase of one third equity in a proposed common facility terminal
company would effectively create an uneven playing field as far as Sri
Lanka's petroleum market is concerned.
stated that if LIOC is allowed to acquire franchise dealers at this
stage, while CPC continues to deliver products incurring all costs, it
will affect the strategic value placed as this value is based on the
increase in the profitability in acquiring a bigger share of the
remaining market in addition to what is given to them via the 100
at present have got a 15.4% share of the market through the 100 stations
and the assumption is that they will eventually acquire at least one
third of the market if not more in the present context.
Wimalasena points out that the value realised from the third player will
reduce substantially as the valuer will take into account the market
share of the remaining franchise stations.
offer at present made by LIOC for the 100 stations is way below the
values given by Ernst & Young. Wimalasena has in his letter to
Ratwatte pointed out that if LIOC were to engage in protracted
negotiations, CPC will not be able to continue to service bank debts and
could even get into a default situation as the state company would lose
a sizeable portion of its present sales.
further charges that CPC is already experiencing serious problems where
recoveries from LIOC is concerned and that LIOC withholds payments for
long periods quoting nebulous reasons. LIOC at present owes the CPC an
estimated Rs. 200 million in unpaid dues. It is believed that LIOC at
present makes a monthly profit of Rs. 1000 million from the 100 filling
stations as most of their costs including the finance costs are borne by
charges that this has enabled LIOC to offer various incentives to
private dealers to lure them away from the CPC and the CPC is finding it
extremely difficult to match these incentives, as the state company is
not allowed to keep a margin. Wimalasena in effect maintains that LIOC
is not abiding by the rules of market competitiveness in a level playing
field but resorting to unethical methods in order to achieve greater
profitability and thus harm the business of CPC.
addition to Wimalasena's concerns, on July 15, Managing Director,
Chevron Texaco and Caltex Lubricants Lanka Limited, Kishu Gomes wrote to
Chairman, IOC, M.S. Ramachandran stating that LIOC is guilty of
committing a serious violation of business ethics.
this letter Gomes states that LIOC is using similar brand names such as
Super DS 30, Super DS 40, and Super DS 50 and in some instances DS 40 to
mislead customers into believing they are purchasing the well renowned
Caltex lubricant. IOC in fact has different product names for these
diesel engine oils such as Servo Super 10 and Servo Super 20-50. However
the use of 'DS 40' and 'Super DS 30-50' by LIOC, Gomes maintains is
something new and very recent.
had told Ramachandran that he views this new development as an act to
deceive customers in Sri Lanka who are not used to referring to Caltex
products by these names.
you would know this is not an accepted business tactic under any
circumstances or by any standard and we expect a much higher standard of
ethical business conduct from your esteemed company," Gomes states
in his letter.
Managing Director, LIOC in Sri Lanka, M. Nageswaran has also in a letter
to Charitha Ratwatte on July 4, complained against CPC stating that CPC
has not facilitated or assisted LIOC to enter into arrangements with
dealers who own retail outlets even in instances where such dealers have
indicated a desire to terminate their current arrangements with the CPC.
On the contrary he charges CPC with trying to dissuade the dealers
"though subtle coercion."
Wimalasena has in a strongly worded reply to Nageswaran pointed out that
he cannot understand how the CPC through coercion, subtle or otherwise,
can influence independent businessmen from making commercial decisions
of either joining LIOC or remaining with CPC or wait for the third
asserts that in fact some of the 100 dealers who were assigned to LIOC
strongly opposed the transfer and even went to the extent of seeking
political support at the highest level opting to remain as CPC dealers.
of them Wimalasena reiterates even threatened legal action, which was
avoided as a result of CPC prevailing on them not to do so.
meantime asserts that the licence issued to LIOC is very restrictive and
permits LIOC only to import, sell, supply or distribute petroleum
products required for sale in 100 outlets purchased from the CPC valid
for a period of six months. He adds that as a result LIOC is unable to
supply or distribute petroleum products to dealers who own retail
outlets and wish to enter into dealership agreements with LIOC.
maintains that the agreement with LIOC clearly deals with the 100
stations released and does not cover supplies to additional stations.
"The method of access to dealer owned stations and the supply
thereto have been explained to you on far too many occasions to warrant
further mention here," Wimalasena asserts.
CPC Chairman adds that LIOC's current position of operating 100 best
stations without having to make any worthwhile investment in itself a
violation of the principle of a level playing field. He adds that CPC
has extended to LIOC a considerable amount of interest free credit in
order to ensure that the spirit of the agreement is upheld at all times.
charges that in fact what has now transpired is that as a result of an
MoU between LIOC and the CPC sealed on September 5, 2002, has
effectively killed the concept of a level playing field and sought to
obtain for IOC a very dominant position in Sri Lanka's petroleum market.
in the world the CPC Chief states is a ready-made business given free.
In this context to further expect an unrestricted licence and supply
franchise outlets without payment Wimalasena maintains is both
unreasonable and unacceptable.
view of the concerns raised by the CPC Chief, Ratwatte on July 8, noted
that the request by LIOC to grant a license with no restrictions to
import, procure, store, sell, supply and distribute petroleum and
petroleum products in terms of the agreement signed with the government
and CPC cannot be accommodated.
the Treasury has decided to grant a temporary licence with effect from
July 9 this year to LIOC until such time payment has been made by the
Indian firm for the purchase of one third of the equity of the proposed
common facility terminal company and for the 100 filling stations.
Negotiations in this regard are at present underway between LIOC,
PERC, CPC and the government.
meantime in his letter to Nageswaran has urged LIOC to treat this
business as a commercial venture particularly because the Trincomalee
tank farm which IOC got on non commercial terms, has now vast commercial
potential in a peaceful Sri Lanka and that continuous agitation for more
concessions will only further deteriorate the present uneven playing
and conditions to an agreement between IOC and CPC was initiated
according to a cabinet paper presented by Minister Karu Jayasuriya last
year where it was decided to divest and lease 100 CPC owned filling
stations to IOC on terms to be negotiated.
in addition was granted BOI status, which means the company is in a
position to import dispensing pumps at a much cheaper price than the CPC
which does not have BOI status. The CPC is charging that LIOC is now
offering these pumps free to private dealer owner outlets, which consist
of another 400 filling stations around the country.
this offer should be made to only one third of the private dealer owners
as due to the present restructuring of CPC, the government has called
for bids for a third player to compete in a level playing field with a
strong regulatory authority in place.
government is attempting to bring in a third player for which another
100 filling stations belonging to the CPC will be allocated after the
chosen company pays a satisfactory fee based on the valuation of the
filling stations. However,
by LIOC now offering the pumps to any number of private dealers they
would be in a position to secure some of the best filling stations
around the country.
it is alleged is in fact importing the expensive US made Tokheim pump at
a cost of over Rs. 400,000, which is being offered to private dealer
owner outlets at no cost to the owners.
In contrast, the CPC is able to purchase the cheaper dispensing
pumps L&T which are of Indian make or another dispensing pump made
in China, which is less costly. The Indian pump is purchased on the
Indian line of credit.
were granted BOI status after proving they would invest US$ 5 million to
upgrade the 100 petrol stations assigned to their management. However,
they are now being accused of using these monies to lobby private owner
outlets as well.
Sunday Leader in fact has photographic evidence of the IOC having
already established one such pump at a private dealer owner outlet at
Battaramulla called Nadeesha Travels and Tours (Pvt) Ltd.
is also offering private dealer outlets to maintain the pumps and tanks,
to repaint buildings, supply generators, lend attractive credit
facilities and even supply furniture and sign boards.
attempt to contact Nageswaran at LIOC failed as he is presently in
India. LIOC said they did not have a phone number for him in India.