Development of the Trincomalee oil farm: what the deal means for India and Lanka

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Last week Sri Lankan Energy Minister Udaya Gammanpila announced that Indian oil subsidiary Lanka IOC would be given a 49% stake in the joint development of the Trincomalee oil park, with Ceylon Petroleum Corporation retaining 51%.

The CPC has formed a special purpose company, Trinco Petroleum Terminals Ltd, and it is expected to get Cabinet approval this week. While the two parties will jointly renovate 61 of the farm’s 99 reservoirs, 24 will be developed by CPC and 14 by LIOC. This arrangement is for the next 50 years. The next step consists of three formal agreements: two between CPC and LIOC – one for joint development and the other for the 24 tanks at CPC – and the third between the Sri Lankan government and LIOC.

35 year agreement

If all goes according to plan – and this is a big if – India and Sri Lanka would have finally succeeded in implementing an agreement – contained in an exchange of letters between then Prime Minister Rajiv Gandhi and the Sri Lankan President JR Jayewarndene under the annex to the India-Sri Lanka agreement of July 29, 1987 – that the tank farm would be jointly developed.

The agreement lay dormant for almost 15 years initially, hampered by civil war. In 2002, a Norwegian brokered ceasefire ended the war. Amid reports that the United States viewed the Port of Trincomalee as a naval base to facilitate their war in Afghanistan, Indian High Commissioner Gopalkrishna Gandhi paid a very public tour of the facility.

Lanka IOC was formed a year later, primarily for retail gasoline distribution. In addition, it was agreed that LIOC would obtain a 35 year lease for the storage facility in Trincomlaee at an annual rent of $ 100,000.

The three stakeholders – CPC, LIOC and the Sti Lankan government – reached a framework agreement in February 2003 which was to be formalized by a lease in six months. At the end of 2004, the political equations in Sri Lanka changed. The deal has continued to be postponed. Tensions between India and Sri Lanka during Mahinda Rajapakse’s second term as president have not helped.

But the absence of a lease has not stopped anything on the ground. LIOC started distribution in Sri Lanka, and within a decade it has grown from 150 to 200 gas pumps. The company paid the annual rent for the oil farm and received tax benefits as a foreign investor. He refurbished 14 tanks, started using them and added two more after setting up a lubricant blending plant and repairing a long existing pipeline from the jetty at Trincomalee port.

Initially reluctant to invest too much in Trinco, India only started pushing for the project after China dumped Hambantota in 2010.

In March 2015, during Prime Minister Narendra Modi’s visit to Sri Lanka, the two sides agreed to set up an oil hub in Trincomalee, for which a “joint task force” would draw up plans.

In 2017, two years after the rejection of the Rajapaksa government, India and Sri Lanka signed a memorandum of understanding for several projects, including an agreement on the renovation of the Trinco reservoir farm. But like most of the projects on this list, the Trincomalee deal fell through this entire time.

“Historic victory”

In his announcement last week, Minister Gammanpila, who belongs to hard-core nationalist Pivithiru Hela Urumaya, called the new deal with India a “historic victory” as Sri Lanka would now have 24 tanks for itself. and 61 in which he would have the majority. to share.

He compared this with that of 2003 in which the entire tank farm was “handed over” to LIOC. He said the 2017 MoU was to “sublet” certain tanks to LIOC, but that failed to materialize. He recalled an incident in which a team of CPC officials entered the tank farm in December 2016 to take charge of 10 tanks and was arrested for trespassing following a complaint filed by LIOC. The minister said he would now visit the oil storage facility with the same officials and plant the Sri Lankan flag in the storage facility.

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Sri Lanka’s economy

For most of the past year, Sri Lanka has been reeling from a currency crisis, which triggered its worst economic crisis since the 1970s. Foreign exchange shortages resulted in restrictions on imports and foreign exchange. prices of essential food items have reached an all time high. In 2022, the country will need $ 4.5 billion to service sovereign bonds. But excluding a $ 1.5 billion currency swap facility with China, reserves are at an all-time low of $ 1.6 billion.

In October, after a row with China over a contaminated shipment of organic fertilizer that Sri Lanka’s state fertilizer company refused to accept and initially refused to pay, but eventually saw With his pockets shaken by the Chinese arbitration threat, Finance Minister Basil Rajapaksa visited Delhi in the hope of securing a financial lifeline. He was offered a “four-part” package: a line of credit for fuel purchases from India, a separate line of credit for food imports from India, early “modernization” the oil storage facility at Trincomalee and the possibility of Indian investments. .

Neither side called it a quid pro quo, but an official told The Indian Express recently that Sri Lanka has been told that the agreement on the lines of credit and the oil storage facility “is expected to move forward in parallel and that progress in one should strengthen progress in the other towards strengthening economic ties in both directions ”.

Why Trincomalee is important

The pre-WWII oil storage facility has a capacity of almost 100,000 tonnes, which far exceeds demand in Sri Lanka. Located inland from China Bay, the facility was to be served by the natural harbor of Trincomalee. In 2010-2011, LIOC officials advocated for the refurbishment of the tank farm as an extension of Indian Oil storage on the east coast of India, or for its development as a refueling facility for small vessels. Trincomalee is the closest port to Chennai.

At present, however, India’s interest is to prevent a third country from entering the 850-acre facility. Even though CPC is the majority shareholder, it is understood that India will invest the money for development. It remains to be seen how the CPC, which cannot afford to import the country’s oil needs at this stage, will raise the funds to refurbish its 24 tanks.

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