The battle for the Trincomalee oil tank farm

What is the strategic importance of the Trincomalee oil farms? Why does it need to be modernised?

December 09, 2021 03:37 pm | Updated December 10, 2021 05:57 pm IST - COLOMBO:

Re-building relations: A worker fills the tank of a motorised vehicle at a Lanka India Oil fuel station in Colombo, 2012.

Re-building relations: A worker fills the tank of a motorised vehicle at a Lanka India Oil fuel station in Colombo, 2012.

The story so far:

When Sri Lanka’s Finance Minister Basil Rajapaksa visited New Delhi last week, India’s possible economic assistance dominated talks with his counterpart Nirmala Sitharaman, and External Affairs Minister S. Jaishankar. Following his visit, the Sri Lankan High Commission in New Delhi issued a media release – the Indian side has not released any statement – that outlined “four pillars” of short-term and medium-term cooperation between the neighbours. At a time when Sri Lanka faces one of its worst economic crises, the “pillars” outlined lines of credit from India to cover import of food, medicines, fuel, and other essentials, and a currency swap to help Colombo cope with its balance of payment challenges. Significantly, it spoke of an “energy security package” that would include the “early modernisation of Trincomalee Tank Farm.”

Why is the Trincomalee Oil Tank Farm significant?

The specific reference to the “early” modernisation of the Trincomalee Oil Tank Farm, in the statement released by the Sri Lankan mission after Mr. Basil’s visit, tells a long story – of a bilateral agreement nearly 40 years old, many failed negotiations since, and a persisting trust deficit that has weighed down on Indo-Lanka relations. It could also be seen as a signal of Colombo’s intent to come up with domestically suitable terms for India’s role in the Trincomalee project.

Going by diplomatic signals, it appears that India’s response to Sri Lanka’s request for urgent economic assistance would be contingent on Colombo’s willingness to finalise Trincomalee Oil Tank Farm development with New Delhi.

In November 2019, Sri Lanka went to polls and President Gotabaya Rajapaksa who promised, among other things, to “secure vital national assets”, was elected to office. All the same, the Rajapaksa government was keen on bringing in investment and identified three key projects in which the Indian government would be its partner – the East Container Terminal (ECT) at the Colombo Port, an LNG terminal in Kerawalapitiya near Colombo, and the development of the Trincomalee Oil Tank Farm, official sources in Colombo and New Delhi said.

They were specifically picked out from a longer list of bilateral development cooperation projects envisaged in a Memorandum of Understanding (MoU) that India and Sri Lanka signed in 2017, when the Maithripala Sirisena-Ranil Wickremesinghe administration was in power. The projects did not take off then, for reasons ranging from Sri Lankan worker unions’ resistance to Indian involvement, to irreconcilable differences between the two leaders. On the other hand, President Gotabaya Rajapaksa, projected as “a doer”, had come to power with a thumping majority. His party also secured a two-thirds majority in the 2020 parliamentary elections. New Delhi had reason for hope at least until early this year.

Explained | From East to West: Colombo’s ‘compromise’ with New Delhi in Port project

The first diplomatic jolt for New Delhi came in February 2021, when Sri Lanka unilaterally cancelled the trilateral agreement – signed in 2019 during the Sirisena administration’s term, among Sri Lanka, India and Japan -- to jointly develop the ECT. The Rajapaksa government cited the wave of protests by port union workers and Buddhist monks as it abruptly reneged on a deal that New Delhi considered high priority, visibly straining India relations.

Further, the US-based New Fortress Energy in September finalised a contract with Sri Lanka to build an offshore liquified natural gas (LNG) receiving, storage and regasification terminal in Kerawalapitiya, where India was to partner Sri Lanka as per the 2017 MoU.

Meanwhile, Colombo offered the West Container Terminal at the Colombo Port as a “compromise” to India’s Adani Group for development.

Explained: The Adani Group’s recent port deal in Sri Lanka

But seeing Colombo make its own plans for two out of the three projects that had been bilaterally discussed, New Delhi’s apprehensions about the Trincomalee Oil Tank Farm project only increased. Early in October, Foreign Secretary Harsh Vardhan Shringla visited Sri Lanka, and travelled across the country, including to the Trincomalee Oil Tank Farm. He urged the Sri Lankan leadership to expedite India-backed projects.

What is the history of India’s interest in Trincomalee?

The development of the Trincomalee Oil Tank farm has been a recurring talking point in Indo-Lanka relations from 1987 when it was mentioned in the Indo- Lanka Accord signed by Prime Minister Rajiv Gandhi and President Jayewardene.

In its annexure, the Accord assured India that “Trincomalee or any other ports in Sri Lanka will not be made available for military use by any country in a manner prejudicial to India’s interests,” while stating “the work of restoring and operating the Trincomalee oil tank farm will be undertaken as a joint venture between India and Sri Lanka.”

Despite that, nothing really took off until 2003, when Indian Oil Corporation set up Lanka IOC, its Sri Lankan subsidiary. In an agreement with the Government of Sri Lanka and the State-run Ceylon Petroleum Corporation in February 2003, the LIOC obtained – for an annual payment of $1,00,000 – a 35-year lease to develop the oil tank farm spanning 850 acres in the north-eastern tip of the island.

However, the agreement remained dormant for years, until the Sirisena- Wickremesinghe administration tried revisiting it through the 2017 MoU. It proved another failed attempt, as petroleum workers protested “handing over” of a strategic national asset to another country.

Why do the Trincomalee oil tanks need to be modernised?

The facility, built by the British around World War II as a refuelling station, has 99 storage tanks that look like giant wells. They have a capacity of 12,000 kilolitres each. Eighty-four of those are in the 800-acre Upper Tank Farm (UTF). For a good part of a century now, these tanks have remained unused, shrouded in a forest. The Lower Tank Farm (LTF) has 16 tanks, spread across 50 acres. One tank is damaged from a Japanese aerial attack the war, so 15 are operational and run by the LIOC, while the UTF, for decades, remains neglected. Four of the 15 tanks are used for water storage by the Sri Lanka Air Force and Prima Group, a well-known name in Sri Lanka’s food processing sector.

Given its easily accessible, strategic location in the Indian Ocean, along some of the world’s busiest shipping lanes, a well-developed oil storage facility and refinery adjacent to the Trincomalee Port would have global draw, say those in Sri Lanka in favour of refurbishing the plant.

Making a case that its early development was to Sri Lanka’s advantage, Opposition MP and economist Harsha De Silva wrote in the local Daily FT last year that global storage facilities were filing up as oil prices plummeted. “Countries like Singapore (and many others) have built large storage capacity and oil trading hubs over the years, using both domestic and foreign investments. Sri Lanka on the other hand has an 800-acre enviable oil tank farm that we inherited from the British, but is now almost a forest… At least now let us develop this facility on a PPP basis, keeping aside political differences,” he wrote.

From India’s geostrategic viewpoint, Trincomalee is an important counterbalance to the southern Hambantota Port backed substantially by China. New Delhi has articulated its interest at the highest levels. Prime Minister Narendra Modi, during his visit to Sri Lanka in March 2015, said developing the upper tank farm in Trincomalee would help the coastal town become a regional petroleum hub.

Where does it stand now?

President Gotabaya Rajapaksa has appointed Energy Minister Udaya Gammanpila to oversee negotiations and “resolve the situation” regarding the Trincomalee oil tanks “in a manner that is beneficial to both countries”.

Asked if there was progress in negotiations, since the Sri Lankan statement referred to the “early modernisation” of the project, Mr. Gammanpila said: “The Finance Minister did not brief me on this before his departure, or after his return. I am in total darkness,” he told The Hindu. However, on the negotiations itself, he said: “I do not wish to make public comments on ongoing negotiations as they may impact the talks.”

According to sources familiar with the negotiations from the Indian side, New Delhi has indicated that India is willing to invest “whatever it takes” to make the asset productive. A conservative estimate of the investment needed to refurbish the near-century old facility points to at least $ 2 million a tank. “We are talking of a serious investment of hundreds of millions of dollars,” a top Indian official remarked, indicating it has to come from the private sector.

Until then?

Irrespective of assurances given to India, Sri Lanka’s challenge would be to negotiate a deal that the regime’s supporters find convincing. More importantly, government interlocutors have the task of communicating this to the public at every stage to ward off any suspicion. That too at a time when the ruling Rajapaksas’ popularity is at its lowest since they came to power. The government has already incurred the wrath of the country’s farmers following its rash switch to “organic only” agriculture. Living costs have rapidly risen and there is frequent shortage of essentials, including LPG.

Even if the government were in a better place, taking the Trincomalee talks forward with India may not be that easy. India-backed projects in Sri Lanka tend to draw way more public resistance from nationalists among the majority Sinhalese constituency than projects with Chinese or American involvement. Observers in Sri Lanka attribute this to the “baggage” that Indian diplomacy carries, years after its intervention during different stages of Sri Lanka’s civil war. This, despite India’s known support to the Rajapaksa administration’s efforts to defeat the LTTE and end the civil war in 2009.

“Moreover, the Indian Foreign Secretary’s visit to the site, accompanied by official pictures of him posing with the oil tanks was bad optics. Frankly, that complicates matters for us when we try to convince our people here who think we are selling these assets,” said a top Sri Lankan official, who did not wish to be quoted.

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