26 August 2016 12:03 am
By Chandeepa Wettasinghe
The government’s decision this week to go ahead with the 2016 budget proposal in liberalizing the lubricant and bitumen markets will have opposite outcomes compared to its intention of making Sri Lanka a lubricant hub, local lubricant market operators argue.
The government on Wednesday announced a Cabinet decision to issue new licences through the country’s Petroleum Resources Development Ministry to import lubricants, claiming that there were too few competitors, and that the move would enable Sri Lanka to become a lubricant trading hub for the region.
“Already one (company) exited couple of years ago, and now there are 13. If competitiveness declines, there will be more and more people exiting,” Kishu Gomes, Managing Director of Chevron Lubricants Lanka PLC, which controls almost half of the country’s lubricant market, said.
International reports this month said that Chevron Corp is contemplating the selling of US$ 5 billion in assets in Asia to raise cash and cut costs amid declining oil prices. Gomes however said that he was confident of Chevron Lanka’s strengths to remain competitive and generate healthy margins.
Putting things into context, Lanka IOC PLC (LIOC) Managing Director Shyam Bohra told Mirror Business that the 13 market players compete for Sri Lanka’s 54 million-litre lubricant market, while in India, 27 players compete for a 2 billion-litre market. He noted that while liberalization is a good principle in general, in this case, it could go against the national interests of Sri Lanka. “The previous government also thought that there would be need for more players, but after taking into consideration the pros and cons, they decided against it,” Gomes added.
He noted that if the licensing fee had been increased further, compared to just doubling it to Rs. 2 billion, then only serious players would have considered entering the market.
“The government is trying to get a small increase in revenue. But in the long term it will be damaging,” he said.
He noted that since Sri Lanka already has the world’s 5 largest petroleum giants BP, Total, Shell, Chevron and ExxonMobil, as well as the regional leaders like LIOC, Petro China and Bharat Petroleum active, the government should ask them to set up plants here to make the country a lubricant hub.
Currently, only LIOC, Chevron and Ceylon Petroleum Corporation (CPC) blend lubricants in Sri Lanka.
“If the government is serious about creating economic value, they should get the remaining 10 to blend locally. If they give licences to import, foreign exchange will go out. We are exporting to Bangladesh and Maldives, LIOC exports to a few countries, and Laugfs does a few exports, bringing in foreign exchange,” Gomes said.
However, he said that even after years of operations, these companies are unwilling to undertake investments in Sri Lanka like Chevron, due to the absence of economies of scale and market size. Further fragmentation is likely to stifle investments into better technology, which Bohra said was changing on a daily basis in the lubricant industry.
Meanwhile, Bohra maintained that he was not against the liberalization of bitumen, saying that it would be extremely difficult for new entrants to build up the expertise and networks that LIOC and CPC have in an extremely small market.
The lubricant market is dominated by Chevron with a 47 percent market share and Rs. 11.56 billion in revenue in 2015, while Lanka IOC has a market share of 19 percent with a revenue of Rs.71.31 billion in 2015 through lubricants, bitumen and fuel sales. Around 20 percent of the lubricant market is dominated by illegal and grey product sellers, which Gomes said the government was aware of, but yet to take any action against. Bohra too agreed that greater implementation of the regulations may create more opportunities in the market.