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Viewing cable 06COLOMBO1038, A POSSIBLE WAY OUT OF THE FUEL CRISIS

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Reference ID Created Released Classification Origin
06COLOMBO1038 2006-06-21 03:18 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Colombo
VZCZCXRO5532
RR RUEHLMC
DE RUEHLM #1038/01 1720318
ZNR UUUUU ZZH
R 210318Z JUN 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 3720
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 9744
RUEHKA/AMEMBASSY DHAKA 9274
RUEHIL/AMEMBASSY ISLAMABAD 6168
RUEHKT/AMEMBASSY KATHMANDU 4203
RUEHCG/AMCONSUL CHENNAI 6718
RUEHLMC/MILLENNIUM CHALLENGE CORP
UNCLAS SECTION 01 OF 02 COLOMBO 001038 
 
SIPDIS 
 
STATE FOR SA/INS; MCC FOR D NASSIRY AND E BURKE 
 
SIPDIS, SENSITIVE 
 
E.O 12958: N/A 
TAGS: EFIN ENRG ECON CE
SUBJECT: A POSSIBLE WAY OUT OF THE FUEL CRISIS 
REF: COLOMBO 186 
 
1.  (SBU) SUMMARY:   ON JUNE 11, THE GOVERNMENT OF SRI LANKA 
(GSL) RAISED THE PRICE OF FUEL FOR THE SECOND TIME IN EIGHT 
WEEKS AND ANNOUNCED PLANS TO LIBERALIZE FUEL PRICES.  THE 
PRICE HIKE ANNOUNCEMENT CAME AS ABOUT A THIRD OF THE 
STATIONS IN SRI LANKA, RUN BY THE INDIAN OWNED LANKA INDIAN 
OIL COMPANY (LIOC), BEGAN RUNNING OUT OF GASOLINE.  LIOC HAS 
RUN OUT OF ITS GASOLINE STOCKS AND HAS STOPPED ORDERING 
STOCKS BECAUSE OF A SHORTAGE OF FUNDS DUE TO THE NON-PAYMENT 
OF THE SUBSIDY BY THE GSL.  THESE DEVELOPMENTS HAVE FORCED 
THE GOVERNMENT TO RE-THINK ITS CONTROL ON FUEL PRICES AND TO 
TAKE STEPS TO OFFER A BELATED SOLUTION TO THE LIOC.  END 
SUMMARY. 
 
LIOC LETS GAS STATIONS RUN DRY 
 
2.  (U) ON JUNE 9, FUEL STATIONS OPERATED BY THE LIOC CLOSED 
DOWN GASOLINE PUMPS DUE TO THE NON-AVAILABILITY OF GASOLINE 
(DIESEL PUMPS AT THE STATIONS CONTINUE TO OPERATE). 
PREVIOUSLY, THE LIOC REPORTED A LOSS OF RS 7.07 BILLION 
(APPROXIMATELY USD 70 MILLION) FOR THE FINANCIAL YEAR ENDING 
MARCH 31, 2006 AND WARNED THAT IT WOULD STOP BUYING FUEL. 
ACCORDING TO LIOC, THE GOVERNMENT OWED THE COMPANY ABOUT RS 
7.4 BILLION (USD 74 MILLION) AS OF MARCH 31.   REPORTEDLY, 
THEIR CLAIM NOW EXCEEDS RS 11 BILLION (USD 110 MILLION). 
PETROLEUM PRODUCTS ARE SUBSIDIZED BY THE GOVERNMENT WITH THE 
GOVERNMENT AGREEING TO PAY THE OIL COMPANIES THE DIFFERENCE 
BETWEEN THE COST AND THE SELLING PRICE, INCLUDING A 5 
PERCENT PROFIT MARGIN.  THE GOVERNMENT, LIOC AND THE 
GOVERNMENT OWNED CEYLON PETROLEUM CORPORATION (CPC) AGREED 
ON THIS PRICING FORMULA IN 2003 WHEN THE LIOC ENTERED THE 
MARKET PURCHASING OVER 100 FUEL SHEDS OWNED BY THE CPC AND A 
PARTIAL STAKE OF CPC'S OIL STORAGE FACILITY. 
 
3.  (U) AS LIOC RAN OUT OF GASOLINE, THE GOVERNMENT TOOK 
STEPS TO INCREASE FUEL PRICES.  THE NEW PRICE OF GASOLINE IS 
RS 93 (US 93 CENTS) PER LITRE AND DIESEL RS 61 (US 61 CENTS) 
PER LITRE.  SO FAR, THE GOVERNMENT HAS INCREASED THE PRICE 
OF GASOLINE BY 16 PERCENT AND DIESEL BY 22 PERCENT IN 2006. 
THE GOVERNMENT HAS ALSO RAISED THE PRICE OF KEROSENE, MOSTLY 
USED BY LOW INCOME HOUSEHOLDS FOR COOKING.  THESE PRICES 
ALSO INCLUDE VARIOUS TAXES IMPOSED BY THE GOVERNMENT. 
 
GSL MAY PARTIALLY PAY ITS SUBSIDY OBLIGATIONS TO LIOC 
 
4.  (SBU) MR. S. ATTYGALLE, DIRECTOR GENERAL OF FISCAL 
POLICY, TOLD ECONFSN ON JUNE 15 THAT THE CABINET HAS AGREED 
TO PAY THE SUBSIDIES DUE TO LIOC UP TO JUNE 30, 2006 AND 
THEREAFTER ALLOW THE COMPANY TO DECIDE THE SELLING PRICE. 
THE CABINET HAS APPROVED THE PAYMENT OF RS 1 BILLION (USD 10 
MILLION) IN CASH WITH THE BALANCE IN 2 YEAR INTEREST-BEARING 
TREASURY INSTRUMENTS.  WHILE, THE LIOC'S FULL CLAIM WILL NOT 
BE KNOWN UNTIL JUNE 30, THE GOVERNMENT IS UNLIKELY TO HONOR 
THE ENTIRE CLAIM WHICH IS BASED ON A 5 PERCENT PROFIT MARGIN 
AS AGREED IN THE PRIVATIZATION AGREEMENT.  ACCORDING TO 
ATTYGALLE, THE GOVERNMENT HAS AGREED TO ALLOW LIOC A PROFIT 
MARGIN OF 1.5 PERCENT INSTEAD OF THE 5 PERCENT MARGIN.  THIS 
MOVE SHOULD ENABLE THE GOVERNMENT TO AVOID ABOUT RS 2.5 
BILLION (USD 25 MILLION) OF ITS CONTRACTUAL OBLIGATION TO 
LIOC BY RENEGING ON THE AGREEMENT SIGNED WITH THE INDIAN OIL 
CORPORATION (IOC). 
 
POSSIBLE FUEL PRICE LIBERALIZATION ON JULY 1 FOR LIOC 
 
5.  (SBU) ACCORDING TO ATTYGALLE, THE GOVERNMENT HAS ALSO 
PROPOSED TO LIBERALIZE FUEL PRICES AND ALLOW LIOC TO 
DETERMINE THE SELLING PRICES OF FUEL STARTING ON JULY 1. 
CONSEQUENTLY, THE GOVERNMENT WILL NOT PROVIDE A SUBSIDY TO 
LIOC.  IT IS STILL NOT CLEAR HOW THE GOVERNMENT OWNED CEYLON 
PETROLEUM CORPORATION (CPC) WILL DETERMINE ITS PRICES IF AND 
WHEN PRICES ARE LIBERALIZED.  IT IS MOST LIKELY THAT THE 
GOVERNMENT WILL SET THE PRICE OF FUEL SOLD BY THE CPC AND 
PAY A SUBSIDY TO CPC IF CPC'S COSTS ARE HIGHER THAN ITS 
PERMITTED SALES PRICE.  ACCORDING TO ATTYGALLE, LIOC HAS NOT 
YET COMMUNICATED ACCEPTANCE OF THE GOVERNMENT'S PROPOSAL. 
LIOC'S MANAGING DIRECTOR, MR K. RAMAKRISHNAN IS IN INDIA 
DISCUSSING THE GOVERNMENT PROPOSAL WITH THE PARENT COMPANY 
IOC.  NEITHER THE LIOC NOR THE GOVERNMENT HAS RELEASED AN 
OFFICIAL STATEMENT REGARDING THE AGREEMENT. 
 
6.  (SBU) COMMENT:  THE DEBT TO LIOC IS ONE EXAMPLE OF 
VARIOUS DELAYED PAYMENTS FACING THE INCREASINGLY CASH- 
STRAPPED GSL AS IT ATTEMPTS TO AVOID ELIMINATING EXPENSIVE 
 
COLOMBO 00001038  002 OF 002 
 
 
SUBSIDIES FOR FUEL, ELECTRICITY, AND OTHER RESOURCES AND 
SERVICES.  LIOC IS THE FIRST COMPANY TO TAKE THE DRASTIC 
MEASURE OF CLOSING ITS FACILITIES, A MOVE THAT HAD TO OCCUR 
SOMETIME IN ORDER TO CUT LOSSES.  IT IS NOT YET KNOWN IF THE 
LIOC WOULD ACCEPT THE GOVERNMENT'S PROPOSED DEAL.  IT IS 
HOPED THAT THE LIOC WILL BE PERMITTED TO FIX FUEL PRICES IN 
LINE WITH WORLD OIL PRICES, AND THAT THE GSL-OWNED STATIONS 
WILL BE PERMITTED TO FOLLOW SUIT.  MOVING FUEL PRICES TO A 
TRUER MARKET RATE WILL FREE GOVERNMENT FUNDS TO PAY FOR MORE 
ESSENTIAL GOVERNMENT SERVICES AND AVOID SIMILAR SITUATIONS 
AND FUTURE LOSSES AT OIL COMPANIES.  HOWEVER, SHARP FUEL 
PRICE HIKES WILL BE POLITICALLY DIFFICULT FOR THE GOVERNMENT 
WHICH CAME TO POWER ON A PRO-POOR PLATFORM.  IN PARTICULAR, 
DIESEL AND KEROSENE, MOSTLY USED BY LOW INCOME GROUPS ENJOY 
HIGHER SUBSIDIES AND THEIR PRICES WILL HAVE TO BE MOVED 
SHARPLY UPWARDS TO REFLECT WORLD PRICES.  THEREFORE, IT 
REMAINS TO BE SEEN IF THE GOVERNMENT WILL MOVE AHEAD WITH 
THESE DIFFICULT REFORMS.  END COMMENT. 
 
LUNSTEAD