CPC'S off-Specification Syndrome


By S. Talpahewa,

Former Chairman/Managing Director, Ceylon Petroleum Corporation.

It appears that Ceylon Petroleum Corporation is now afflicted with the chronic disease of Off-specification Fiascos. During the short period of the last three years four major "off-specifications fiascos" had occurred at the CPC. They are –

a) First "Fiasco" - the distribution by CPC of alleged contaminated High Sulphur Fuel Oil 1500 Secs., ex MT "Elibank Germany, to Independent Power Producers in 2009,

b) Second "Fiasco" - the infamous willful importation of "Dirty Petrol" and/or Contaminated/substandard gasoline (petrol) by CPC and Ministry of Petroleum Industries officials in 2011 and the distribution of same island wide,

c) Third "Fiasco" - Jet A1 Fuel Oil (Aviation Fuel Oil) supplied by British Petroleum Singapore Pte. Ltd., in May 2012 - first found to be off- specifications when tested at the CPC/CPSTL Laboratory and subsequently found to be within specifications when tested at the CPC Refinery according to International Standards.

d) The current "Fiasco" - distribution of "Dirty Diesel" (Gas Oil) and/or off-specification/contaminated Diesel (Gas Oil) by CPC throughout the country - 2012.

a) "First Fiasco". In August 2009 CPC imported a consignment of High Sulphur Fuel Oil 1500 Secs. (HSFO) from a Singaporean trader based on the "CFR (Cost & Freight) Incoterm", especially for the use of Independent Power Producers (IPPs), the specifications of the product were to be in conformity with the CPC specifications as stated in the relevant Invitation to Bid or the "Tender Conditions".

At the load port the product at issue had been tested by Independent Inspectors and found to be in conformity with the relevant specifications and the product was acceptable to the CPC. Accordingly the consignment of HSFO at issue was duly delivered on board the Tanker "Elibank Germany" for delivery at Colombo. Upon arrival of the vessel in Colombo the consignment of HSFO at issue was again tested at the CPC/CPSTL laboratory by Independent Inspectors and CPC technicians and was found to be in conformity with the relevant CPC standard specifications, resulting in the consignment of HSFO at issue being accepted by the CPC officials.

Two to three weeks thereafter several news items appeared in the media, both print and electronic, that the IPP’s, numbering about five, had experienced machinery break-downs as a result of using the aforesaid HSFO at issue and that some of their sophisticated engines had been damaged, which had developed into a "National Crisis". IPP’s submitted several claims to the CPC covering the damages to their machinery.

Perhaps, without knowing the implications of a "CFR contract" pertaining to the transport of petroleum products and also without precisely knowing the implications of "merchantable quality" as explained in the Sale of Goods Ordinance of Sri Lanka (No.11 of 1896 ?) an official attached to the CPC had given statements to the Press inter alia that though the HSFO in question was in conformity with the relevant specifications, the product was not of merchantable quality and consequently the supplier of the product in question was unreasonably suspended by the CPC, from the list of Registered Suppliers, without even holding a proper inquiry. CPC lodged a claim against the seller of the HSFO in question in a sum of US$. Ten (10) Million, but did not proceed any further with the case obviously on the advice of the Attorney General. In dealing with a case of that nature the concerned CPC officials should have been aware of the implications of a CFR contract in the transport of fuel oil. In the case of a CFR contract of this nature seller ceases to be responsible for the loss of or damage (contamination etc.) to the product once the product passes the flange of the tanker.

The suspension of the supplier of HSFO in question and the lodging of a claim against the said supplier by CPC in a sum of USD 10 million as aforesaid were obviously purely based on the misinterpretation of "merchantable quality" of the HSFO in question by the CPC officials.

When the concerned CPC officials made statements to the media as aforesaid they either, in all probability, were not aware of the implications of a CFR contract and also the explanations as given in the Sale of Goods Ordinance of Sri Lanka (No.11 of 1896 ?) covering "merchantable quality of a product", i.e., "there is no implied warranty or condition as to quality or fitness for any particular purpose of goods supplied under a contract of sale – i.e., in conformity with stipulated specifications/conditions as contained in the relevant Invitation to Bid, or they were attempting to cover the lapses of certain CPC officials who had failed to update the specifications of refined petroleum products in keeping with the requirements of the end-users to whom the products were to the supplied..

The problem proper, it appears, was not the "merchantable quality of product" but the failure of the concerned officials of the CPC to stipulate the correct specifications in inviting offers for the HSFO at issue. This position is further strengthened by the fact that CPC, in its subsequent invitation for competitive bids for the same product for the use of the IPP’s, had stipulated the correct specifications. The supplier concerned, nevertheless, had been subsequently reinstated as a registered supplier of CPC on their making an ex gratia payment to the CPC of US$.175,000/-, thus rectifying a mistake committed by the CPC, though belated. It is now revealed in the media that a three-member committee had been appointed by the "Petroleum Ministry Secretary R.H.S Smaratunga and mandated to find out why former Chairman Harry Jayawardena renewed the registration of black-listed Vitol Asia Pte Ltd of Singapore even after a cabinet subcommittee headed by senior Minister A.H.M Fowzie had advised against it". The Board of Directors of CPC at the material time headed by the former Chairman, Harry, Jayawardena, in my view, had acted within the powers vested in them by Petroleum Act No. 28 of 1961 and hence the former Chairman, CPC, Harry Jayawardena cannot be faulted. Cabinet subcommittee "advise", Treasury and/or ministry circulars are not binding on the CPC according to the relevant Act. They can be treated as only "Guide Lines".

Be that as it may. In view of the above facts it is clear that it would have been the duty of the Petroleum Minister and/or his secretary to appoint a committee comprising suitably qualified officials to ascertain why the concerned officials of the CPC failed to stipulate the correct specifications in importing a consignment of High Sulpur Fuel Oil as detailed above, thereby almost bringing about a "National Crisis" and not why Former Chairman, CPC, Harry Jayawardena. "renewed the registration of the black-listed Vitol Asia Pte Ltd of Singapore" and rectified a mistake previously committed, either by accident or design, by the CPC.

d) The current (Fourth) "Fiasco": The current "Fiasco" is somewhat similar to the aforesaid "First Fiasco". CPC had recently imported several consignments of refined petroleum products based on the "Incoterm DES (2000). In an "Incoterm DES (2000) contract seller ceases to be responsible for the loss of or damage (contamination etc.) to the product once the product is brought to the named port before discharging.

It has been found that the Gas Oil (Diesel) distributed throughout the country recently (after 28th July, 2012 ?), from among the aforesaid cargoes of Gas Oil (Diesel), was of a substandard nature and resulted in several locomotives, diesel driven vehicles, including SLTB buses, gantry cranes at the Colombo Port stalling. As in the recent case of "Dirty Petrol Fiasco" CPC is now attempting to shift the blame for the alleged "substandard diesel" to "outdated pumps, lack of proper filtering mechanisms" etc. The foreign suppliers of products concerned by any stretch of imagination, cannot now be held responsible for the substandard nature of the product in question, for in the case of a contract governed by "Incoterm DES (2000) the seller ceases to be responsible for the loss of or damage (contamination etc.) to the product once the product is brought to the named port before discharging. They had discharged their contractual obligations in performing the respective contracts without any breach or default. Hence, it is now the duty of the CPC and the Petroleum Ministry to find out where actually the fault lies without pulling the wool over the eyes of the unsuspecting general public and attempting to shift the responsibility for the contamination of the product to a particular supplier and/or the suppliers of the products already contained in the storage facilities at Kolonnawa, into which the consignment of Gas Oil at issue had been discharged.

Continued tomorrow

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