Coming months after the Rajapaksa government decided to "repossess" a number of unused tanks, the move is being seen by some as retaliation for India's recent moves.
Petroleum secretary Vivek Rae has asked foreign secretary Sujatha Singh to take up the issue at the diplomatic level since the Lankans were refusing to engage the petroleum ministry. He said Lanka IOC had given a proposal for a joint venture to the Lankans in May but there was no response yet.
Colombo had also rebuffed oil minister Veerappa Moily who had discussed the issue with his Lankan counterpart at a recent Asian energy roundtable in Seoul.
India voted against Sri Lanka in a US-sponsored resolution at the Human Rights Council in March, which was seen as a sign of betrayal by Colombo. Right after that decision, the Lankan government announced it would renegotiate the tank farm agreement signed in 2003.
Now, India is threatening to put a damper on the first multilateral CHOGM in Sri Lanka by downgrading its presence from the prime minister level. Sri Lanka has already threatened it would associate more closely with China and Pakistan if Prime Minister Manmohan Singh did not travel to Colombo for the summit.
Lanka IOC was given 99 storage tanks and ancillary facilities , divided into 'upper' and 'lower' farms, that date back to World War II days. IOC utilizes the 15 tanks for petroleum products but the upper tank farm needs substantial investment since they are more rundown.
A lease agreement for 35 years for the land and facilities was to be signed but it never was. The lease agreement was a successor to the original agreement whereby India pays $100,000 annually.
Sri Lanka has delayed the agreement. When IOC wanted to invest in a bitumen facility Lanka's Board of Investment (BOI) refused to clear it until the lease agreement was done. In 2013, Sri Lanka proposed setting up a joint venture with Lanka IOC. IOC said they have prepared a "comprehensive proposal" but the Lankans have been stonewalling them.
The Indian government has concluded that this is a political issue, and would need political intervention.