The government has been forced to import fuel at higher prices in recent weeks after an Indian importer picked by the Ministry of Finance defaulted on shipments.
This is likely to add to the cost of living despite recent pronouncements that inflation has fallen to a single digit.
The Ministry was forced to pay a premium of about $2.5 a barrel for a few emergency shipments after an Indian company, Shri Lal Mahal, which signed a contract for one year to supply six cargoes of 50,000 tons each of petroleum at a premium of US$ 1.05 a barrel, failed to deliver on the due date.
The premium is generally made up of financial costs, profits, freight, etc of a bidder while the oil price is based on world market rates, a standard cost to any bidder.
Last year, the Treasury was directed by the Supreme Court to take responsibility for oil imports from the CPC following the Supreme Court cases on the oil hedging contracts the CPC entered into with five banks. Since then a Petroleum Procurement Unit has been set up at the Treasury.
Officials at this Unit said Shri Lal Mahal had not sent any shipments to date. The first cargo was due on June 3 or 4 but never came. The company was a pre-qualified supplier and importing fuel through this company had been approved by the Cabinet in April.
But industry sources said only reputed and registered parties should be doing business with the government while Sri Lal Mahal was not a well known trader.
They said the company asked the Treasury for an extension, which should be treated as a default. If the company had defaulted, then anything that had to be paid over the US$ 1.05 premium should come from its accounts, the officials said.
They said the Petroleum Procurement Unit was forced into having an emergency tender when the first shipment failed to arrive.
The officials said the Treasury would also likely sign a contract with a Singaporean company, Trafigura Pte Ltd, which had a long term contract last year through a proper tender procedure.
A former CPC official said the corporation had an established procedure for importing petroleum to deal with pre-qualified suppliers.
Suppliers who have defaulted are thrown out and new suppliers are checked and brought in at the end of every six month. The tenders are confined to those lists. However, the official said the Petroleum Procurement Unit might be using outdated procedures which need to be changed.
LIOC wants price increased again
The Lanka Indian Oil Company (LIOC), the only other fuel importer, said the recent fuel price increase was not enough and it was continuing its loss-making operations only because it did not wish to damage Indo-Lanka goodwill, and otherwise it would pack up and go.
LIOC Managing Director K.R. Suresh Kumar told the Sunday Times losses, due mainly to rising global oil prices and high taxes, were rising.
“The company is running short of cash and not in a position to import the next shipment of oil unless the government permits an increase in fuel prices by at least Rs 20 a litre to reach breakeven point,” he said.
Mr. Kumar said LIOC was incurring a loss of about Rs. 24 a litre on petrol and diesel while the Ceylon Petroleum Corportation was also losing money. LIOC incurred a loss of Rs.130 million in April and Rs.500 million for the year so far, selling fuel at previous prices.
"Petrol is being sold at almost $79 a barrel in the world market. It costs Rs.140 a litre locally, with added import duties and taxes. After bank payments are settled, the company cannot get any profits," he said. World oil prices which were up sharply at $140 a barrel early last year slid to a low of $30 thereafter but have picked up once again this year.
Mr Kumar said he held talks with Petroleum Resources Minister A.H.M. Fowzie and senior Ministry officials and they agreed to consider his appeal for a price revision. He has also suggested forming a committee comprising officials of the Ministry, Treasury, heads of the CPC and LIOC to work out a pricing formula linked to market trends.
Recently, the CPC raised petrol prices by Rs 10 to Rs 130 a litre and diesel by Rs. 3 a litre in a move apparently connected to rising oil prices and increased costs in import purchases.
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