Two Cabinet memorandums in this regard were presented by Petroleum Industries Minister Anura Priyadharshana Yapa. They sought to extend the existing term contracts with Petrochina International (Singapore) Pte Ltd by one year and Emirates National Oil Company, Singapore by 15 months.
Specified quantities of gas oil, gasoline and jet fuel will be bought by CPC at fixed prices throughout this period. The long-term contracts are being entered into against the backdrop of plummeting crude oil prices caused by a variety of factors, including oversupply in the world market. According to the Cabinet memorandum, the price of oil is fixed on the basis of the monthy average price in the Singapore market plus a premium ranging from US$ 1.72 to US$ 3.72 per barrel. The move would mean that Sri Lanka will not benefit of a possible drop in oil prices.
Oil-price.net, an online resource, predicts that current price falls are set to continue. “A fall to $80 (per barrel) seems likely over the next year,” it states. “A rush to develop oil production in Europe could even see the oil price fall to $60 a barrel if Denmark is going to find a market for all its Arctic oil.”A term contract explicitly describes a fixed duration that the agreement will be in effect. The signing parties are obligated to adhere to the terms and conditions within the contract until expiration, or end date, of the contract.
Mr. Yapa told Cabinet, “It was considered that the current turmoil in the Middle East (West Asia), in particular, the conflict in Iraq, in addition to sanctions related issues affecting Iran, has created supply instabilities in general. Therefore, it is important to have long-term contracts for petroleum supplies to ensure supply stability and to avoid supply interruptions.”
The Government earlier took a policy decision to increase oil procurements based on term contracts “since world oil markets prices face continued variations and sometimes high premiums have to be paid for spot purchases”, according to the CPC’s 2013 Performance Report, presented to Parliament recently.
“The uninterrupted fuel supply will also be ensured through the procurements based on term contracts,” the report said. “Therefore, long-term agreements have been signed with several companies to procure the petroleum products.”
With the expiry of earlier term contracts, the two Singaporean companies had made proposals to the CPC to extend the agreements. The memorandum pertaining to Petrochina reveals that the CPC Managing Director had been instructed by the Special Standing Cabinet Appointed Procurement Committee to negotiate with the company “for further price reduction”.
Petrochina accordingly reduced its premium for gas oil and gasoline but “increased interest rate marginally”. Twelve combined cargoes of gas oil and gasoline will be purchased in this manner. With regard to Emirates National Oil Company, the fixed premiums indicated in the earlier contract in respect of gas oil and Jet A-1 “remain unchanged”. The premiums are not specified. Twelve combined cargoes of gas oil and jet fuel will be delivered during the contract period.
The two companies in question have had issues about previous supplies to Sri Lanka. In October last year Sri Lanka returned 30,000 tons of gasoline supplied by Petrochina as the quality of the cargo did not meet the specifications while in 2011 a stock supplied by ENOC was found to be contaminated.