Marking a major milestone in a strategic petroleum storage project in Sri Lanka whose fate has remained uncertain for decades, Lanka IOC, Ceylon Petroleum Corporation and the Government are now jointly developing the Trincomalee oil tank farm in eastern Sri Lanka.
The agreement to implement this project was signed on January 06 2022. The move, which finally firms up India’s role in the controversial project discussed since the time of the Indo-Lanka Accord of 1987, follows Cabinet clearance subsequently.
Sections have opposed the previous Rajapaksa government’s decision to involve India in a project that was much negotiated by different governments, but was never finalized.
The Cabinet of Ministers approved last year to allocate 24 oil tanks for the business activities of the Ceylon Petroleum Corporation and to allocate 14 tanks of the Lower Oil Tank Complex already in use by Lanka IOC for the company’s business activities.
The Cabinet also approved to implement a development project by a company named Trinco Petroleum Terminal Pvt. Ltd for the remaining 61 tanks, of which 51% will be owned by Ceylon Petroleum Corporation and 49% by Lanka IOC.
Accordingly, this deal will bring Sri Lanka US$ 500 Million but the profitability of the venture will depend to a great extent on the cost of funds.
It has to be understood that there is a relationship between the profitability of a business and the cost of its capital.
The type of capital financing impacts the profitability and the profit margins. If the capital itself is debt -heavy it will be a reason for reducing the net profits of a company.
It is difficult for the CPC which is already in heavy debts to provide the initial capital for the new Company.
Partners will have to procure their components of contribution within the limits of cheaper costs if they expect to generate profits. It will be a gigantic task for the CPC which is heavily burdened with debts some remaining unsettled over long periods to fulfill their part.
Compared to the huge cost of refurbishing which may involve unforeseen large expenditures (particularly due to the very long period during which the tanks have remained unused) the initial costs to put them in good order before offering for any commercial venture may be very high.
Lanka Indian Oil Company (LIOC) disclosed that the work on the Trincomalee oil tank farm is now in progress adding that ten tanks would be ready for development after the area is cleared of woods very soon by the State Timber Corporation.
Seven tanks had already been cleared and the clearing of woods around three more tanks would be completed by the middle of next month, LIOC announced.
LIOC will call tenders for consultancy services to design the laying of the pipeline from the jetty to the tank farm.