Fuel security needs more players, not fewer

By Dhananath Fernando

Originally appeared on The Morning

On a Sunday evening, I received a call from the owner of a filling station. His privately supplied station was not receiving enough fuel. Customers were turning away and his business was struggling.

He asked why competition had not brought prices down and why Ceylon Petroleum Corporation (CPC) stations had fuel when his station was running short.

A few days later, those questions became part of a national debate. President Anura Kumara Dissanayake took a firm position on private fuel suppliers restricting distribution. He said the CPC had earned Rs. 28 billion in profits and announced plans for 75 additional CPC filling stations in areas facing shortages.

This came as the Government committed around Rs. 41 billion to subsidise diesel over three months.

The frustration is understandable. When a filling station runs dry, it affects bus operators, farmers, businesses, and commuters. Private suppliers cannot simply walk away from their supply commitments and expect the public to bear the consequences.

But there is another question we must ask. Is greater Government domination of the fuel market the right long-term answer?

SL’s fuel status quo

We have a short memory when it comes to economic crises. In 2022, when Sri Lanka ran short of foreign exchange, Lanka IOC’s access to its parent company’s supply chain provided an important alternative source of fuel. It did not solve the crisis, but it offered an option at a time when options were desperately needed.

After the crisis, the market was opened further to Sinopec, RM Parks, and United Petroleum. United Petroleum later halted imports amid operational and contractual disputes. Whatever the merits of that dispute, it should remind us how difficult it can be to attract and retain investment in a heavily regulated market.

Energy security does not mean that the government supplies every litre of fuel. It means having several reliable ways to import, finance, store, and distribute fuel when something goes wrong. The next shock may be a price increase or a shortage of dollars. Removing alternatives today could make the next crisis worse.

Of course, private companies are not saints. If they hold adequate stocks but deliberately restrict supplies in breach of their obligations, that deserves investigation and action. The answer is to examine stock records, contractual commitments, and actual deliveries, and enforce the rules fairly. We need not expand State operations whenever a private operator fails.

We also need to be careful when comparing fuel prices and profitability. Under the current arrangements, the Government announces the CPC’s retail prices, while private operators may set their own prices subject to contractual provisions. The much-discussed 4% margin is part of the pricing framework and contractual protections; it is not a simple cap on every company’s overall profits.

There is also the Government’s diesel subsidy. If one company receives support and another is expected to absorb a larger loss, a lower retail price cannot automatically be presented as proof of greater efficiency. The public should be able to see the cost of imports, the subsidy, the storage charges, and the margins before drawing conclusions.

The CPC has advantages that newer entrants do not enjoy. It owns the Sapugaskanda Refinery. According to the CPC’s own project documents, the refinery supplies roughly 40% of the country’s auto diesel demand and 15% of its 92 octane petrol demand. Refining crude oil creates a different cost structure from importing finished fuel, while the applicable taxes also differ. We should compare the full cost of each model, rather than assuming every operator starts from the same position.

Then there is Ceylon Petroleum Storage Terminals Ltd. (CPSTL), which operates vital common storage and distribution infrastructure. The CPC owns two-thirds of the company, while Lanka IOC owns one-third. Other operators depend on access to these facilities and pay for services. The CPC is also the country’s sole aviation fuel supplier. These arrangements complicate claims that all players compete on equal terms.

Reform measures

The more practical reform is to make shared storage and pipelines genuinely open to all licensed suppliers, with published, independently scrutinised charges and clear access rules.

We should also explore bringing additional private investment into storage infrastructure, including through a wider ownership structure where commercially justified. There is already valuable infrastructure in Trincomalee. Developing it can improve our ability to withstand future disruptions without placing the entire financing burden on taxpayers.

Fuel pricing needs reform too. Instead of relying too heavily on each importer’s reported landing cost, the formula could use transparent international benchmarks such as Platts Singapore, with reasonable allowances for freight, insurance, taxes, and storage.

An efficient importer who negotiates a better deal should benefit from that effort, while consumers should be protected from inflated costs. Price adjustments should also be timely enough to reflect major global movements, rather than forcing losses to accumulate.

Minimum stock requirements matter, but storage is expensive. Obligations without fair access can favour the incumbent. Better shared facilities and clearly enforced stock rules would serve energy security more effectively.

Competition is not just about the price displayed on the pump. Over time, private participation has helped improve station facilities, digital pumps, service standards, and the range of fuel products available. Consumers benefit when businesses compete on reliability, convenience, and quality as well as price.

Preparing for the future 

None of this means the Government should tolerate supply restrictions, poor-quality fuel, or unfair treatment of dealers.

The regulatory arm must be capable of monitoring stocks, testing quality, investigating complaints, and penalising breaches. That is a demanding task, but it is a better use of public capacity than automatically expanding State operations in a capital-intensive industry.

The CPC can remain a strong participant in the market. What it should not become is the reason other participants are discouraged from investing. The Government’s job is to ensure fair rules and reliable supplies, not to win a market share contest.

When the next shock arrives, Sri Lanka will need more options, not fewer. We should not sacrifice tomorrow’s energy security to win today’s argument at the fuel pump.