Wednesday, Feb 01, 2023

Developing Trincomalee oil tank farm: What the deal means for India, Lanka

🔴 While the two sides will jointly refurbish 61 of the 99 tanks at the farm, 24 will be developed by CPC and 14 by LIOC. This arrangement is for the next 50 years.

Trincomalee oil tank farm, sri lanka india oil deal, IOC, Indian Oil Corporation Ltd, Sri Lanka India deal, oil tank farm deal, Sri Lanka economic crisis, Explained, Indian express, Indian express ExplainedSri Lanka's Energy Minister Udaya Gammanpila (Twitter/@UPGammanpila)

Last week, Sri Lanka’s Energy Minister Udaya Gammanpila announced that the Indian Oil Subsidiary Lanka IOC would be given 49% stake in the joint development of the Trincomalee Oil Tank farm, with Ceylon Petroleum Corporation keeping 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 sides will jointly refurbish 61 of the 99 tanks at the farm, 24 will be developed  by CPC and 14 by LIOC. This arrangement is for the next 50 years. The next step is three formal agreements: two between CPC and LIOC — one for the joint development and  the other for the 24 tanks to CPC — and the third between the Sri Lankan government and LIOC.

35-year-old agreement

If it goes according to plan — and that is a big if — India and Sri Lanka would have finally achieved the implementation of an agreement —  contained in an exchange of letters between then Prime Minister Rajiv Gandhi and Sri Lankan President J R Jayewarndene as part of the annexure to the India-Sri Lanka Accord of July 29, 1987 — that the tank farm would be developed jointly.

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The agreement remained dormant for nearly 15 years at first, prevented by the civil war. In 2002, a Norway-brokered ceasefire halted the war. Amid reports that the US was looking at the Trincomalee harbour as a naval base to aid its war in Afghanistan, then Indian High Commissioner Gopalkrishna Gandhi made a highly public visit to the facility.

Lanka IOC was formed a year later, mainly for retail distribution of petrol. In addition, it was agreed that LIOC would get a 35-year lease of the storage facility at Trincomlaee at an annual rental of $100,000.

The three stakeholders — CPC, LIOC and the Sri Lankan government — arrived at a framework agreement in February 2003 that was to be formalised with a lease in six months. By the end of 2004, political equations in Sri Lanka changed. The agreement kept getting postponed. India-Sri Lanka tensions during Mahinda Rajapakse’s second term as President did not help.

But the absence of a  lease did not stop anything on the ground. LIOC began distribution in Sri Lanka, and within a decade expanded this from 150 to 200 petrol pumps. The company was paying the annual rent for the oil farm, and received tax benefits as a foreign investor. It refurbished 14 tanks, began using them, and added two more after setting up a lube blending plant, and repaired an long existing pipeline from the jetty at Trincomalee harbour.


Initially reluctant about investing too much in Trinco, India began pushing for the project only after China swung Hambantota in 2010.

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

In 2017, two years after the Rajapaksa government had been voted out, India and Sri Lanka signed an MoU for several projects, including an agreement on the refurbishment of the Trinco tank farm. But like most of the projects on that list, the Trincomalee agreement did not come through all this time.


‘Historic victory’

In his announcement last week, minister Gammanpila, who belongs to the hardline nationalist Pivithiru Hela Urumaya, described the new arrangement with India as a “historic victory” as Sri Lanka would now get 24 tanks to itself and 61 in which it would have a majority share.

He contrasted this with the 2003 one in which the entire tank farm had been “handed over” to LIOC. He said the 2017 MoU was to “sub-lease” some tanks from LIOC, but that could not materialise. He recalled an incident in which a team of CPC officials had entered the tank farm in December 2016 to take charge of 10 tanks and were arrested for trespass on a complaint by LIOC. The minister said he would visit the oil tank farm with the same officials now and plant the Sri Lankan flag at the storage facility.

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Sri Lanka’s economy

For most of last year, Sri Lanka has been reeling under a foreign exchange crunch, which has caused its worst economic crisis since the 1970s. The forex shortage has led to restrictions on imports, and prices of food essentials have spiked to a record high. In 2022, the country will need a reported $4.5 bn to service sovereign bonds. But excluding a $1.5 bn currency swap facility with China, the reserves are at an all-time low of $1.6 bn.

In October, after a spat with China over a contaminated consignment of organic fertilisers which Sri Lanka’s state-owned fertiliser company refused to accept and first refused to pay for but eventually had its pockets shaken out by the Chinese threat of arbitration, Finance Minister Basil Rajapaksa visited Delhi hoping to secure a financial lifeline. He was offered a “four-pronged” package – a line of credit for fuel purchases from India, a separate line of credit for food imports from India, early “modernisation” of the oil storage facility at Trincomalee, and the enabling of Indian investments.


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

Why Trincomalee matters

The pre-WWII era oil storage facility has a capacity of nearly 1 million tonnes, which far outstrips the demand in Sri Lanka. Located inland from China Bay, the facility was meant to be serviced by the natural harbour at Trincomalee. In 2010-2011, LIOC officials had pitched for refurbishing the tank farm as an extension of Indian Oil storage on the Indian east coast, or for developing it as a refuelling facility to small ships. Trincomalee is the nearest port to Chennai.


At this time though, India’s interest is to prevent a third country from entering the 850-acre facility. Even though CPC is the majority stakeholder, it is understood that India will put up the money for the development . How the CPC , which cannot afford to import the country’s oil requirements  at this point, will raise the finances to refurbish its 24 tanks remains to be seen.

First published on: 03-01-2022 at 04:01 IST
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