[Editorial] Trincomalee Oil Farm Deal

About the Trincomalee Oil Farm:

  • The Trincomalee oil tank farm is a World War II era installation, built by the British as a refuelling station.
  • It is located in the Trincomalee Province (in north-eastern Sri Lanka), in the ‘China Bay’.
  • It has 99 storage tanks, each with a capacity of 12,000 kilolitres.
    • 84 tanks are in the Upper Tank Farm/ UTF, which spans across an 800 acre area.
    • 16 tanks are in the Lower Tank Farm/ LTF, which spans across a 50 acre area.
  • 15 of these storage tanks are currently operational. These are operated by the LIOC (Lanka IOC– a subsidiary of Indian Oil Corporation in Sri Lanka).
  • 4 of these 15 tanks are used as water storage facilities by the Sri Lankan Air Force and the Prima Group (a food processing firm).

Why is it significant?

  • The oil tank farm is strategically located in the Indian Ocean region, where some of the busiest shipping lanes are present.
  • It is also easily accessible and placed close to the Trincomalee Port.
  • Such large storage facility is significant in light of the recent fluctuations in oil prices. Countries like Singapore have been building large oil storage facilities and trading hubs using domestically sourced and foreign investments.
  • Developing this facility would transform the coastal region into a regional petroleum hub.
  • From the Indian standpoint, the project is an important counterbalance to the Hambantota Port, which has significant Chinese presence.

Most probable and repeated topics of upsc prelims

What is India’s history with this project?

  • The development of this oil farm has been a recurring point in the India-Sri Lanka bilateral relations since 1987.
  • In 1987, it found mention in the Indo-Lanka Accord– signed between President Jayawardene and PM Rajiv Gandhi.
    • The Accord assured that Trincomalee and other ports in the island nation wouldn’t be made available to any country for military purposes in a manner prejudicial to Indian interests.
    • It also stated that the work of restoring and operating the oil tank farm would be undertaken as an Indo- Lankan joint venture.
  • Yet, it remained a non-starter until 2003, when the LIOC was established by the Indian Oil Corporation. In a February 2003 agreement with the Lankan government and the state-run Ceylon Petroleum Corporation, the LIOC got a 35 year lease to develop the Trincomalee oil farm’s 850 acres, for an annual payment of $100,000.
  • This agreement, however, remained dormant for several years, before attempts were made to revive it through an MoU in 2017. This too turned into a failure as the workers protested the ‘handing over’ of a national asset (Lankan national asset) to another country (India).
  • In more recent times, New Delhi’s apprehensions about its role in the oil farm project grew upon seeing how Colombo took unilateral decisions in 2 other bilaterally discussed projects: East Container Terminal at Colombo Port and Kerawalapitiya LNG terminal.

What is the current situation in Sri Lanka?

  • The island nation is possibly suffering its worst economic meltdown since the 1970s.
  • This is due to several factors:
    • The 2019 Easter killings dealt a blow to Sri Lanka’s tourism sector– the country’s main economic activity and revenue source. The pandemic and the consequent travel restrictions sealed the sector’s fate in 2020.
    • Its foreign exchange earnings have been dwindling. This has led to restrictions on imports and consequently, a shortage of essential commodities– especially food.
    • The country is facing a decadal high in its retail inflation with food prices skyrocketing.
    • The government’s ill-advised decision to switch to organic agriculture, overnight, is having its fallout on paddy harvest (adding to the food crisis) and tea production (the country’s main export item).
    • The sole oil refinery in Sri Lanka has been shut down as there isn’t sufficient money to import oil.
    • These issues are being compounded by the country’s external debt:
      • In 2022, it will have to pay $4.5 billion to service its sovereign bonds.
      • It owes 50% of its external debts to international capital markets.
      • It owes slightly less than 25% of its external debts to international banks.
      • Of the country’s debt stock, only 10% is owed to China and another 10% to Japan.
      • It has been bailed out several times by the IMF. The most recent bailout was in 2016. However, the tough conditions had led to the country exiting the program in 2019.

What is the way ahead?

  • The Sri Lankan President announced that the credit inflows from India and China would improve the country’s forex reserves.
  • Recently, the Sri Lankan Central Bank announced $3.1 billion year-end reserves– an improvement from last month’s $1.6 billion. However, it has offered no explanation as to how this was achieved. This has led to speculations that the country had drawn on a $1.5 billion currency swap arrangement, made in March 2021 with China.
  • New Delhi is working on an assistance package for its southern neighbour. This package is include:
    • A credit line for medicines and food to be purchased from India
    • Another credit line for oil imports from India
  • The key to this assistance package is the finalization of Trincomalee oil tank farm deal. According to Sri Lankan Energy Minister, it is to be finalized in January 2022.
  • For nearly a century, this oil farm has remained unused and is now covered in forest vegetation.
  • Though 15 of the LTF tanks are still operational, the UTF has remained neglected for decades now.
  • Even a conservative estimate of the investment required to revive this old oil tank farm comes to at least $ 2 million per tank. This calls for serious investment, which India is ready to make, possibly by involving its private sector.

Conclusion:

  • If this assistance package and the oil farm deal come through successfully, it would signal an important step in strengthening of India-Sri Lanka ties.
  • Such a shift has potential to change the dynamics of India-China rivalry for establishing influence in the IOR.
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