Is the Sinopec deal profitable for Sri Lanka?
Cash-strapped Sri Lanka has signed another long-term deal with Chinese oil giant Sinopec.
The agreement includes petroleum products storage, distribution, and sale. Sinopec is a state-owned company in China, and Sri Lanka has been planning to liberalize the fuel retail market for some time now.
Not only China but also Australia and the US will join the fray soon.
India is already there, with the Indian Oil Company (IOC) operating a lot of retail outlets throughout the country since 2003.
The IOC entered the local market when Ceylon Petroleum Corporation, a government-owned entity, already had a monopoly on the petroleum product distribution market. The IOC was able to establish itself in the market by offering competitive prices, better customer service, and a larger range of products. This enabled the IOC to gain market share and expand its operations throughout the country.
"Negotiations have already been completed with Sinopec Fuel Oil Lanka Ltd. and its parent company in China and Singapore for a long-term contract on important storage, distribution, and sale of petroleum products in the country, to the chagrin of Ceylon Petroleum Corporation workers, who stand to lose 150 distribution outlets from their grip. Powerful petroleum trade unions backed by various political parties who oppose privatizing viable state-owned enterprises are likely to lodge a strong protest against the move and may contemplate trade union action, including scuttling the smooth distribution network. This could lead to essential service disruptions, a slowdown in the economy, and ultimately a loss of public confidence. Such a situation could cripple the government by creating an untenable crisis.
A total of eight trade unions attached to the Ceylon Petroleum Corporation (CPC) two years ago decided to oppose the proposed amendment to the CPC Act No. 28 of 1961 (as amended), which would allow the Minister of Energy to issue licenses to any private party to import, refine, market, supply, produce, mix, and distribute petroleum products.
Speaking to the media at that stage, JathikaSevaka Sangamaya (JSS) Secretary Ananda Palitha said: "Firstly, we are against the proposal in the recently submitted cabinet paper by Energy Minister and Cabinet Co-Spokesman Udaya Gammanpila, which would allow the minister in charge to issue licenses to any suitable party to import, refine, market, supply, produce, mix, and distribute petroleum products.
Secondly, if the government wants to build new refineries, it must not do so through an amendment to the CPC Act. Instead, it must do so through cabinet and parliamentary approval. It should also ensure that petroleum products are sold only through the CPC," Palitha noted.
Despite all the opposition, the Cabinet approved licenses for Sinopec, United Petroleum Australia, and RM Parks of the USA in collaboration with Shell Plc. This was to enter the fuel retail market in Sri Lanka."
As of now, the deal is limited to Sinopec. The energy and procurement committees approved a recommendation to award the three companies licenses to operate. They will be allocated 150 dealer-operated fuel stations to each of the investors currently run by the CPC, a state fuel entity." This will allow the companies to access the established and developed infrastructure of the CPC as well as benefit from the existing customer base.
All these selected parties will be granted a license to operate for 20 years to import, store, distribute, and sell petroleum products in Sri Lanka.
A source from the power and energy ministry said Sri Lanka is still trying to normalize its crisis-hit economy by encouraging new investments. Sinopec is one such example.
For years, China has been eager to mark its presence in Sri Lanka to gain a foothold in the Indian Ocean. This is due to Sri Lanka's strategic location.
The fundamental principle of China's interest in Sri Lanka is its Maritime Silk Road Project. The project encompasses a geopolitical and economic strategy to boost infrastructure connectivity through Southeast Asia, Central Asia, and the Indian Ocean. This is according to research conducted by Dr Saaman Kelegama in 2014.
The 21st Century Maritime Silk Road Project (MSR), announced in 2014 by President Xi Jinping, seeks to meet the needs of developing nations that lack infrastructure investment. The Center for Strategic and International Studies (CSIS) reports that China needs Sri Lanka in its Maritime Silk Road project because Pakistan is too politically unstable to serve as its stronghold in the South Asian region.
Sri Lanka, known as the "pearl of the Indian Ocean," serves China in many ways, including access to the Gulf for oil resources and encircling the Indian subcontinent. Many researchers have identified the Maritime Silk Road as the sea route for the Belt and Road Initiative launched by China. Though there is historical evidence for a longstanding Sino-Sri Lanka relationship, the more recent turning point in relations was the Rubber-Rice Pact between China and Sri Lanka when Sri Lanka was facing a crisis situation owing to the Korean War.
Around 1952, rice prices rose dramatically after the Korean War. Sri Lanka tried to secure American economic assistance to purchase rice. However, Washington, D.C., was unwilling to sell at a lower price or provide aid to purchase rice at market prices. At the same time, the United States released large amounts of rubber from their stockpiles to lower the market price of rubber. This was something Sri Lanka primarily exported. China initially offered to sell rice to Sri Lanka, but Sri Lanka's non-alignment status made the government wary of trading with a communist bloc country.
Eventually, the Sri Lankan financial crisis was severe enough for then-Minister R.G. Senanayake to exchange Sri Lankan rubber for Chinese rice. This is how China became an indispensable partner for Sri Lanka.
During the Rajapaksa regime, it got more recognition, and Chinese loans were provided to Sri Lanka for infrastructure development. Prior to that, Sri Lanka invested heavily in Chinese weapons purchases to fight the separatist war that engulfed the North and East. This paved the way for Sri Lanka to walk into the Chinese debt trap. Presently, according to Sri Lanka’s Western allies, China is key to addressing Sri Lanka’s debt restructuring effort, which China has reservations about. As part of the agreement with China for infrastructure development, Sri Lanka had to pay back the loans with interest.
Now that Sri Lanka is unable to make the payments, its Western allies are trying to convince China to accept a restructuring of the debt. However, China is reluctant to do so, as it would mean that it would not receive the full amount of money owed.
The Rajapaksa regime virtually made China a partner in Sri Lanka's war against domestic terrorism, providing China with unrestricted access to Sri Lanka. Most Chinese investments in Sri Lanka are unviable ventures, thereby increasing the already humongous debt burden.
Official figures show Sri Lanka’s total debt is USD 83.6 billion. This includes foreign debt amounting to USD 42.6 billion and domestic debt amounting to USD 42 billion.
In April 2022, Sri Lanka declared its first-ever debt default, the most severe economic crisis since its independence from Britain in 1948, triggered by foreign exchange shortages that sparked public protests. The country also faced long lines for fuel, which is still rationed. However, India's "neighborhood first policy worked well for Sri Lanka, as India voluntarily offered a US$4 billion aid package to overcome the economic crisis.
Against this backdrop, will the Sinopec deal benefit Sri Lanka? No doubt there will be worker unrest, which will lead to organized protests against the sale of the Ceylon Petroleum Corporation. These workers believe it is an outright sell-out of a national asset that should remain under government control.
In March, the trade union collective of the Ceylon Petroleum Corporation launched a "Sathyagraha" against the government's move to privatise the Ceylon Petroleum Corporation, which is making profits.
