Ceylon Petroleum Corporation - where is it heading?

Percy Thenuwara

CPC: Sri Lanka has to import all its fuel requirements. While almost half of its requirements are imported as crude oil which are refined into products at the refinery, the balance are imported on spot tender purchase system.

While admitting that over the years of procurement experiences of the CPC, refinements and improvements have taken place in the tender evaluation and awarding systems.

It is felt that we should also explore other possible ways of procurement such as forward purchase contracts, hedging, buyer to seller contract agreements, term tender supplies and others in order to maximise our profits.

It is worth spending a reasonable amount to research ways and means of getting into new procurement arrangements in view of the fact that fuel imports are something that we cannot get away with and is a, long term requirement of our country.

Even if we succeed in our oil exploration efforts, we would depend on fuel imports for some time.

On crude oil imports, country to country import arrangements and contracts have to be entered into at the highest level of negotiating skills and should not be done on various political considerations.

Through my own experience at the CPC, I am of the view that some innovative new thinking and directions should come from the management to middle managers as they would otherwise not deviate from the tried and tested safe methods of doing the job well and will not take initiatives on new ways.

Of course on all these matters, some kind of political direction or influence cannot be ruled out and is not unjustified if it is minimal and done in the best interests of the country, after all it is the political leadership that has to bear the final responsibility.

The refinery

There has been some initial studies made on the possibility of revamping / duplicating present refinery units for increasing the current refining capacity.

These studies have shown that the current crude processing capacity of approximately 50000 barrels per day can be increased by about 100 per cent which means doubling the current Capacity to 100000 barrels per day. This will result in reducing the additional costs of importing finished products directly from world suppliers.

The estimated costs of such a revamping effort is in the region of USD$250 -300 million.

However, as our refinery is now almost 50 years old, the viability of an expansion of the present refinery or putting up a new refinery elsewhere possibly in a better location like Hambantota would bring long term benefits.

LP Gas production

Another possible improvement to the refinery can be the addition of a conventional Gas Concentration unit which will increase the current LPG production of the refinery to its maximum.

The initial estimates on such an improvement suggests an increase of 100 per cent which means that the current production of LPG at the refinery which is only 50 M/T can be increased upto 100 - 110 M/T per day.

The capital cost of this addition to refinery has been estimated around Rs.150 - 200 million. This will result in an economical extraction of Butane and Propane (the mix of which is called LPG) from the construent fuel gas streams.

This would bring immense benefits to the country, now saddled with the problem of ever increasing LPG costs due to higher import costs.

Shell Gas company, today's market leader of LPG imports has to charge an additional fee as thruput charges for every KG of LPG imported to the country through their own terminal at Kerawelapitiya, which belongs to Shell Terminal Company.

If we can avoid this , there could be a saving of at least Rs.100 per cylinder for the LPG consumer.

The above show how Ceypetco can come to the assistance of today's harassed LPG consumers. If Ceypetco can increase the LPG production not only the costs will come down but also our dependancy on LPG imports too will come down.

Privatisation

There are new activities Ceypetco can think of initiating and reaching the market leader status.

But before embarking on those activities Ceypetco should be able to be the market leader in its core business, which is the supply and marketing of the essential fuels to the public.

It is of course still the market leader and I believe it should always remain so in the larger interests of the Sri Lankan public.

This is where the much publicised arguments for and against further privatisation of Ceypetco has to be examined. Though there are arguments for further privatisation they are mainly based on the assumption that a privatised venture will be more efficiently handled as they are always driven by profit motivation.

The main argument against privatisation is based on the presumption that it will affect the workers status quo and can even bring in new problems / threats to a Government.

The recent attempt of the previous regime to privatise or sell one third of Ceypetco - one third of the terminalling facility, storage facility and the retailing facility (or the fuel sheds) and hand over their control and management to a foreign party is not a step taken in the right direction and in the greater interests of our country.

The latest suggestion to divest only 49 per cent of the one third is better but needs further review.

We already have The Indian Oil Corporation controlling one third of the former CPC's assets and having the full freedom of handling Imports, supply and distribution and marketing of fuels on their own.

Assuming another one third of shares being bought by another Indian company coming as the third player and if they get together (as it is always possible with the mergers taking place today) what would be the position of CEYPETCO? As the major share will be with a foreign party which can even result in situations of grave risks to our country.

Before thinking of further privatisation, have we ever done a proper analysis of the recurring debt situation of the Corporation and how much of it is due from other public institutions and organisations, i.e. The forces, ministries, govt. departments, the CEB and so many others.

If all credit sales are stopped immediately and proper Financial discipline / treasury management systems introduced, won't it change significantly 'The Corporation's financial situation?

So, without allowing it to manage its finances Independently as in the case of any other private company it is not fair to pass judgement and say "privatisation is the 'panacea'' for all its ills."

I keep asking myself the question whether privatisation is our only salvation and is it the only way out of the present 'mess' of most of the public organisations?

This reminds me of a newspaper article I read sometime ago under the title 'Privatisation for whose benefit'? in which it is argued that in case of future privatisations the public or consumers should be encouraged to form into 'Vigilant committees' or 'Consumer Protection Societies' to look into arbitrary price hikes, anti public actions or mismanagement of the companies resulting in undue hardship to customers in order to bring them to the notice of the government for remedial action.

Judging by Sri Lanka's experiences of some privatised Government ventures, it appears that some kind of checks and balances or a good monitoring system may be necessary to achieve desired results.

New activity

Some suggestions which can form a basis for new thinking towards better performance for higher productivity and economic viability of CEYPETCO in order to avoid further privatisation of the corporation can be listed as follows:

* Develop a Research and Development ( R & D ) unit to engage in continuous research on ways and means of achieving higher targets, increased productivity, increased sales and higher profits. This unit can go into researching for new technological developments and methods that can be introduced to reduce costs of production, distribution and marketing.

The urgent need for a Regulatory Authority for all Petroleum / Gas imports and marketing also can be handled by such an R and D unit.

* Initiate and develop new procurement plans, for long term purchases, forward planning of country's fuel requirements, entering into forward contracts / agreements etc.

* Revamp refinery for expansion of current refining capacity and minimise imports.

* Increase production of LP Gas at the refinery and embark on a new LPG Project with long term view of CEYPETCO becoming an effective Third player in Sri Lanka's LPG Business. (The writer has done some research on this subject and is convinced that a serious effort can be made to bring down the LPG prices through a government owned LP Gas Business operation.)

* Privatise the handling of Fuel transport and distribution by opening it to Sri Lankan private sector entrepreneurs on a competitive tender/ contract basis.

* Privatise CEYPETCO owned fuel sheds on a periodical tender/contract system rather than allowing the same person or his family to continue the operations forever.

* Restructure Agro Chemical, Asphalt, Lubricant production and sales units to achieve higher profitability.

(It is a pity that the CPC's Agro Chemical unit which handled the Agro Chemical Imports, Processing , Packaging , and their Distribution Island wide became the market leader with a 40 per cent market share in the year 2000, had declined in sales and is now only having a 12 per cent market share in the Agro products market.)

Future

The Ceylon Petroleum Corporation, created as a 'Baby' in the year 1961 has grown up over the years into a matured status and has the ability and capability to deliver desired results if restructured and managed properly. It may be true that the 'bathwater' is not clean and a little polluted but still why 'throw the baby away with the bathwater?'

It is difficult to understand as to why it is thought that foreign companies will do a better job than the local counterparts, when the expertise required are available within.

Unless it is for reasons of Capital, where foreign companies can invest more funds, is there a real necessity to privatise Ceypetco further? Even though there is a need to raise funds required for the essential development work, we should look for other options than to sell shares and find an easy way out of the problem.

Under whatever circumstances, we should try to protect, preserve and prepare the Petroleum Corporation to grow bigger and better to face the challenges of the future as it is one of the most important National Ventures we have and which can contribute so much to our National Economy if managed well.

When people of a country lack 'Patriotism' lot of things can go wrong, however big the organisations are. In my belief what is required here is infusing some Patriotism plus Management efficiency which seems to be the need of the hour !

The writer is Former Director of - Ceylon Petroleum Corporation (CPC) and General Manager - Shell Gas Lanka (Pvt) Ltd and - Colombo Gas Company

Open letter by Percy Thenuwara

It is with great sadness the public of this country look at the Sri Lanka Petroleum Corporation on its journey made during a monopolistic situation since the nationalisation of the OIL companies, from 1963 to 2002 and thereafter on a competing situation with The Indian Oil Company up to date.

True that earlier during the monopoly period it was expected to be a service organisation rather than a profit making body and expected to play a major role in the economy of Sri Lanka, and later when placed on a competitive footing it was expected to make amends and contribute to improve the economy by making good profits.

It is sad to say that The Petroleum Corporation has made neither.

But yet those who have to take the responsibility for its running, seems to be not bothered at all and just carries on regardless.

An article on CPC is attached to give an insight to some of the problems faced and also some suggestions to overcome those problems.

There are enough dedicated and committed workers at the CPC, their knowledge and expertise has to be fully harnessed and they have to be directed and motivated.

The recent press statement given by the Secretary to The Ministry of Petroleum Resources and Development raised many issues that should be revealed, discussed and sorted out immediately as the public cannot afford to carry the burdens of the CPC, neither the frequent price hikes any further and the mismanagement of an organisation set up originally with all good intentions for the benefit of the people.

We should always remember that for every rupee raised on the fuel people have to pocket out from their hard earned money! Therefore, the people have every right to question any action of the CPC which can jeopardize the future of the economy and the people of this country.

In any country the Oil business is of prime importance to its economy and can even dictate terms to a country's economic planning and the future.

Sri Lanka's petroleum trade was at one time handled by several people attached to foreign multinational companies such as Shell, Caltex, Mobil, Esso etc.

Then came the bold decision taken by the Sri Lankan Government under the leadership of Sirimavo Bandaranaike and implemented by the then Minister T. B. Ilangaratna to nationalise the oil trade and create The Ceylon Petroleum Corporation in 1961.

There is so much talk now regarding the privatisation of the Ceylon Petroleum Corporation now known as CEYPETCO.

The main argument is that the corporation has been incurring losses, not operating profitably and not having resources for further improvement, therefore it needed to be privatised !

It is difficult to believe that an oil import and distribution company suffer losses. How did it suffer losses when multi national oil companies involved earlier in the same operation made colossal profits ?

If one analyses the reasons for the losses and poor performance of the corporation, every Government and administration will have to take the responsibility for the political decisions and interferences that had led to the dismal performance of the Petroleum Corporation.

It is heartening to note that at least now it has been realised that this is an organisation that has to be run free of politics and efficiently managed by a team of professionals who are answerable for time rated optimum results as this is such an important and strategic corporation for the economy of the country.

This corporation should come under The Strategic Enterprise Management Authority (SEMA) set up to review and restructure this Corporation and also many other Government organisations that are considered strategically important to our country.