News Trinco’s Oil Farm: Will the IOC Gain Complete Monopoly over Fuel Distribution?

Trinco’s Oil Farm: Will the IOC Gain Complete Monopoly over Fuel Distribution?

2017 Aug 4

The Trincomalee oil farm issue has been a hot topic of conversation among our locals, especially in light of the recent petroleum strikes.

So what exactly is the issue surrounding the Trincomalee oil farm?

The Government of Sri Lanka is attempting to embark upon a joint venture with the Indian Oil Company (IOC).

“Sri Lanka will only lease out oil tanks to India under the proposed deal to jointly operate a strategic oil facility in the Eastern port district of Trincomalee,” Prime Minister Ranil Wickremesinghe said.

About 73 of the 99 storage tanks in Trincomalee are to be managed under a new equity arrangement between India and Lanka, according to the proposed agreement.

The Government is reportedly considering the joint venture on the grounds that it is currently out of order and they claim to lack the funds to restore the farm.

However, when asked if the estimated cost for restoration had been calculated, the Government had been unable to provide any answers.

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The Ceylon Petroleum Corporation (CPC), is against the Government’s proposal, and is of the opinion that the tanks should be vested under their domain instead.

What is the Trincomalee Oil Farm?

  • The Trincomalee oil storage network was built by the British in 1924 and completed in the late 1930’s.
  • The farm consists of 101 circular tanks.
  • During World War II, 2 of the tanks were destroyed, leaving only 99.
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  • The upper tank farm houses 85 tanks whilst the lower tank farm is home to the remaining 14.
  • Each tank has a storage capacity of 125,000 m³.
  • Collectively, the total fuel that can be stored in the farm amounts to 1 million tonnes. Both Muthurajawela and Kolonnawa storage terminals combined can only store 400,000 tonnes.
  • Trincomalee is the second deepest natural harbor in the world, and is also in close proximity to the main shipping route across the Indian Ocean.  As such, Trincomalee remains in the spotlight as a potential transit point for international trade routes. Great Britain was therefore well aware of the value of the oil storage facility, which is why they held onto control over the farm till 1964, over a decade after Sri Lanka gained independence in 1948.
  • The CPC reportedly spent 250,000 gold coins to gain control of the farm.
  • However, the Government had acquired the land ownership of the farm.   
  • In 1987, the then President J. R. Jayawardena attempted to lease the tanks to the USA.
  • Neighbouring India caught wind of this, and grew alarmed that it would pose a threat to their national security.
  • As such, they hurriedly entered into the Indo-Lanka Accord, which granted first preference to India in the running of the oil storage facility.
  • Convener of the CPC, D. J. Rajakaruna stated that although the Accord was signed under the guise of standing against terrorism, the true underlying reason was the oil facility in Trincomalee.
  • In 2002, another proposal was made to embark upon a different venture with Singapore, where Singapore would store their oil and retrieve it whenever they desired, and and Sri Lanka would charge a storage fee per barrel. This proposal also fell through.
  • On February 07, 2003, a tripartite agreement was arrived at by the then UNP Government and the IOC, where the IOC was given operational power of 14 tanks out of the 99.
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  • As per this agreement, India was to upgrade and commission all 99 tanks in the farm on a 35-year lease.
  • However, the project did not take off as planned.
  • Sections 1 and 2 of the agreement reportedly stated that a due taxation system would be formulated within 6 months after signing of the agreement, but this did not happen.
  • The CPC states that at present, the IOC was holding custody of the tanks illegally, as the agreement had become void.
  • The IOC is reportedly using only eight tanks, all from the lower tank farm.
  • In 2011, attempts were made to reinforce the agreement.
  • Prime Minister Narendra Modi, during his visit to Sri Lanka in March 2015, stated that the project to develop the upper tank farm in Trincomalee would help the coastal town become a regional petroleum hub.

The CPC is demanding that the tanks be vested under their control.

They state that there is now a dire need for more storage tanks, as the current capacity of Muthurajawela and Kolonnawa has proven to be insufficient.

The country reportedly only has the capacity to store fuel to meet the demand of a mere 2 weeks, which could potentially lead to a national crisis, especially given the prevalent droughts, as diesel-power plants are increasingly made use of to satisfy the daily power demand of the country.

It is estimated that a cost of USD 2-3 million would have to be incurred to build a new tank from scratch, so the CPC questions as to why they should pay such a large sum of money when over 50 tanks are rotting away in Trincomalee without use.

The CPC, following a technical assessment, illustrated that 16 tanks could be restored with a sum of USD 10 million, which, as they outlined, could be acquired easily within a year.

In light of this, in 2016, a Cabinet paper was submitted seeking the transfer of 16 tanks to the CPC for their use.

Although the Cabinet did in fact approve the paper, the Prime Minister had then proceeded to intervene and prevent its enforcement.

The CPC claims that they can source the required funds to restore and maintain 16 tanks, and further state that they can additionally convert it into an international storage facility, which will be an apt way to make use of its strategic location along the main shipping route.

Upon discussions with the Prime Minister, the CPC had reportedly explained to him of their capability to manage the tanks, which the Prime Minister had accepted.

Drawing a real-life comparison, the CPC had explained to the Prime Minister that the joint venture with IOC was like leasing one’s own house for Rs. 1000 and then renting a room to live in for Rs. 23,000.

The Prime Minister has reportedly formally agreed to not arrive at any legally-binding agreements until the proceedings of the Supreme Court case filed by the CPC were drawn to a close.

The Supreme Court case has been filed on the grounds that the venture violates the fundamental rights of the people of Sri Lanka.

Convener D. J. Rajakaruna further warned that if the venture was seen through, within 6 months the IOC would gain complete monopoly of the petroleum industry of Sri Lanka, which would be a major cause for concern.

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