Indian Oil plans to expand operations in Sri Lanka

Lanka IOC, which operates 150 retail outlets, has sought the Sri Lankan government’s approval to open 300 more outlets over the next five years at a cost of Rs250 crore

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State-owned Indian Oil Corp. Ltd (IOC) plans to expand its presence in Sri Lanka where government forces last week declared victory over Tamil rebels led by the Liberation Tigers of Tamil Eelam (LTTE), marking the end of a decades-old war.

“We will pursue with the Sri Lankan government to expand our presence in the eastern part of the country in places such as Trincomalee,” K.R. Suresh Kumar, managing director of Lanka IOC Plc., an IOC subsidiary, told Mint over phone from Colombo.

“Post the war on terror, we expect infrastructure creation in war affected area. Any creation of infrastructure will help us in the movement of petroleum products in those areas,” he said. Sri Lankan forces crushed the LTTE and killed its chief Velupillai Prabhakaran last week, ending a 26-year conflict in the island nation.

Lanka IOC, which operates 150 retail outlets, has sought the Sri Lankan government’s approval to open 300 more outlets over the next five years at a cost of 6 billion Sri Lankan rupees (around Rs250 crore), with each outlet requiring an investment of 20 million Sri Lankan rupees. “Once we are allowed to go and make an assessment of the northern part, there will be further scope for expanding our presence there,” Kumar added.

Lanka IOC currently retails petroleum products and also supplies them in bulk to industrial consumers out of a storage facility in Trincomalee in north-east Sri Lanka. It competes with Ceylon Petroleum Corp. (CPC), which has 1,070 retail outlets in the country. The company registered a turnover of around $430 million (around Rs2,000 crore) in the last fiscal. Kumar declined to disclose the latest earnings figures, which are yet to be announced.

Lanka IOC has a disadvantage similar to that private sector retailers such as Reliance Industries Ltd (RIL), Essar Oil Ltd and Shell India face in India, where they do not have access to the oil bonds issued by the government to underwrite the subsidy cost of selling petroleum products at a concessional price.

Even though the petroleum sector in Sri Lanka has been deregulated, in the event of any spike in the international oil price, only the state-owned CPC gets subsidies.

“Any form of competition in this sector will be healthy in Sri Lanka. I do not believe that any degree of protectionism in Sri Lanka will help as most of the economies across the world are opening up,” said Monish Chatrath, partner, national management, Grant Thornton India. “This is an interesting time for Sri Lanka after they have addressed the long standing significant security issue. This is a great opportunity for Indian Oil Corp. I do not see much of an issue if the Sri Lankan government uses this to demonstrate investment security, particularly in a sector which is central to the growth of any economy. This will also help IOC use its surplus refining capacity.”

IOC’s business plan is based on the premise that surplus refining capacity in India will be used to service the Sri Lankan market that has demand of 3.5 million tonnes per annum (mpta) and a refining capacity of 2.2 mtpa, as reported by Mint on 23 January.

Automobile demand in the nation of 20 million people is expected to grow as construction of new roads, bridges and buildings takes off, in turn pushing demand for petroleum products.

Utpal Bhaskar

Anupama Chandrasekaran contributed to this story.

Update – The Sri Lankan government may not give permission to Lanka IOC to open 300 more filling stations, stated Petroleum Resources Minister A H M Fowzie in Parliament, on Thursday 11th June.

The Government is now said to be seeking expert opinion to amend the agreement with LIOC. In SL government’s opinion, the agreement does not reciprocate mutual interest.

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