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Govt. has directed CPC to choose long-term contracts; market prices reflected in purchase prices: Ministry Media Secretary
The Media Secretary of the Ministry of Petroleum Industries, in an unsigned response to the Sunday Times lead of October 26, 2014, titled “Oil prices falling but CPC signs long-term deal”, has justified entering into forward contracts for the purchase of fuel.
The statement says the CPC follows Government procurement procedure in buying petroleum. Both spot and long-term contract bids are evaluated by relevant committees. Petroleum purchases are carried out on the basis of their recommendations, subject to Cabinet approval. The Government has directed the CPC to choose long-term contracts unless circumstances warrant spot purchases. Accordingly, CPC has moved away largely from spot purchases, and supplies are in the main, obtained on the basis of long-term contracts at present. Long-term contracts currently in operation are either with government-related companies or with companies selected through tenders. The Ministry of Petroleum Industries/Ceylon Petroleum Corporation has observed that the international prices of petroleum products have been on a decreasing trend over the last several months. In line with that trend, the Government has reduced the domestic prices of petrol, diesel and kerosene with effect from 17.09.2014. When petroleum supply contracts are awarded, decisions are based on price indices of markets where purchases are made, like Platt Singapore.Therefore, when the prices are going down, those trends are automatically reflected in the purchase prices. Moreover, benefits of the reduction of international market prices are reflected in the purchase prices of the long-term contracts as well. Hence, price is not fixed but it is variable and accordingly the benefits of international price reduction by design will accrue to CPC. Moreover, long-term supply contracts will stabilise the country’s petroleum supply, avoid supply instabilities associated with spot purchases and ensure predictability in local market supplies.
Our reporter adds: The Ministry admits that international prices of petroleum products have been decreasing over the last several months. It says that this was why the Government reduced the domestic price of petrol, diesel and kerosene in September 2014.
According to the CPC’s own statistics, this is only the second time in five years that fuel prices have been cut. The last occasion was in December 2009—just a month before the Presidential election was held in January 2010. The next time prices were cut was in September this year, amidst widespread speculation that another Presidential election is due in January 2015. It is clear, therefore, that the basis on which the CPC revises its prices is not international market trends but domestic political expediency.
The statement says that, when petroleum supply contracts are awarded, decisions are based on price indices of markets where purchases are made, like Platt Singapore. But nowhere does it reveal what the current agreed prices are based on prevailing trends. Nor is any specific formula described.
Are we forced to accept the Ministry’s word that, “when prices are going down, those trends are automatically reflected in the purchase price”? This is an institution that has steadfastly refused to reveal the FOB costs of petroleum products or how much of the money that the public pays per litre of fuel is going towards taxes. It is difficult, at best, to accept a mere assertion that is unsupported by facts.
The Ministry maintains that, since the price is not fixed, the benefits of international price reduction by design with accrue to CPC. It does not explain those benefits are never passed on to the consumers. Its statement, therefore, raises more questions than it answers—and, at a minimum, does not even satisfactorily clarify the doubts raised by our original story.