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Sunday, 18 March 2012

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Government Gazette

Crude oil crisis; A matter to re-think

Over the past few weeks, crude oil prices were the hot topic and still continues to be so. Every individual has begun to feel the pinch by way of increased commodity prices.

The total possible conventional crude oil reserves include all crude oils with 90-95 percent certainty of being technically possible to be produced.

All crude oils having a 50 percent probability of being produced in the future and discovered reserves have a 5-10 percent possibility of producing oil in the future. The current technology is capable of extracting about 40 percent of the oil from most wells.

Some speculate that future technology will make further extraction possible.

In February 2010, the US Joint Forces Command issued the Joint Operating Environment 2010 warning US military commands "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day." This matter is looked from different angles by different people.

This article relates to professional views regarding probable remedies in the event Sri Lanka has to face such an issue in the future.

Prof P.S.M Guneratne, Department of Finance, University of Colombo, told the Sunday Observer that Sri Lanka being a small country and merely a price-taker cannot bargain on price hikes in the world market.

QWhat are the major causes for the current oil crisis in Sri Lanka?

A Well, basically there are two major reasons. The first is the upward trend in prices in the international oil market. The second is cash flow problems faced by the Ceylon Petroleum Corporation due to non-recovery of receivables.

Q What are the possible remedies for this on-going issue?

A It is high time for government authorities to be concerned about this issue and develop a strong governance mechanism. It is the responsibility of all heads of institutions to meet their liabilities on time and ensure that their entities are commercially viable.

If not the result would be the transfer of colossal losses of such institutions on CEPTCO that would be transferred subsequently to the public and have an impact on the economy. This would also impose threats on efficient institutions as well, whereby the whole economy will become stagnant.

A major area of demand for energy in the world is from transportation, residential, commercial and industrial and it has continued to be so in the past few decades.

It is important for the Government to systematically develop the transport sector which would encourage more public modes of transport offered to suit different income levels, even at a premium price this then could lead to more energy saving. Coordinating transportation is also a top priority. Currently there is a lack of coordination between road transport and railway transport which compels people to take to private modes of transport which in turn leads to unnecessary cost. Providing transport in the night in the suburbs is also an area that needs serious attention.

It is important to pay attention on renewable energy sources as alternatives to crude oil and the Government should provide more incentives and support for such developments.

Policies which identify a well-planned purchasing system are welcome. In the world market short- term bubbles can be observed. There are short to medium-term bubbles in the oil market.

Therefore, timing of purchase is very important. To optimise on this strategy, we need to have more storage facilities so that we can buy and store more when the price is relatively low.

This would allow some time and space for all stakeholders, i.e. the Government, CYPETCO, the CEB and industrialists to adjust to the changing market momentum. The oil market is a case in point.

Price fluctuations in the oil market are beyond real demand and supply reasons. There are parties who want to make profit by speculating. The Government or CEPETCO should obtain the services of a commodity (oil) specialist in relation to timing and pricing matters.

Such bubbles can be made advantageous in the purchasing process.

Also extending the range of suppliers, rather than depending on one supplier would also allow the Government to achieve cost advantages.

It is a good idea to have a special fund for smoothing the effect of price fluctuations. When the prices in the world market are relatively low, there can be a surcharge on oil to build the fund. Reserves available in the fund can be invested in the secured financial instruments to make an additional income.

When oil prices are relatively very high in the world market, the fund can be used to smoothing the prices in the local market. Some percentage of the fund can also be used to promote sources of renewable energy.

However, it is not the sole responsibility of the Government. All of us are individually responsible in terms of energy consumption.

Prof J. K. D. S. Jayanetti , Department of Physics, University of Colombo in an interview with the Sunday Observer also pointed out some practical aspects regarding renewable energy sources.

Q What are the renewable energy sources available in Sri Lanka?

A Well there are many sources of renewable energy available in Sri Lanka. For example solar power, wind power, ocean waves, bio gas and burning wood.

Q To what extent are these sources used in the Sri Lankan context?

A Well, when it comes to solar power, it is mainly used to provide electricity to households.

Model villages in the North Western province use solar power to provide electricity to households.

When considering solar power, basically two factors affect the likelihood for such energy sources. They are cost effectiveness and maintenance.

When it comes to areas like Hambanthota and Kalpitiya, wind power is being used. Burning wood such as gliricidia is also a cost-effective and successful method.

QWhy are people reluctant to go for such energy sources?

A The first thing is the cost associated with implementation. For example if you consider solar power the 'sunk' cost is comparatively high compared to electricity. Due to convenience and affordability, people tend to demand for electricity.

Q Is it a must that we should go for renewable energy?

A We must find alternative methods which people can afford rather than saying it is a must.

Prof Ajith De Alwis, Department of Chemical and Process Engineering of Moratuwa University, also gave his ideas to the Sunday Observer regarding renewable energy sources and the extent of development that has taken place in this regard.

Q What areas of renewable energy are being studied? What is the progress?

A We all know that wind energy utilisation in Sri Lanka has made major strides and you may witness wind power generation side by side of the coal power station in Norochcholai. Sri Lanka has done major assessments regarding wind power.

Systems are in place for grid integration and for power purchasing.

The micro and mini hydro sector has made much progress as well with many potential sites getting utilised.

Sri Lanka has an early history of micro hydro use in relation to tea estates and today the scope has broadened with utilities taking power from mini hydro plants.

There was emphasis on biomass power with gliricidia being made the fourth national plantation crop with the singular intention of gliricidia as an energy crop.

Recent demonstrations in Hambantota with solar photovoltaics is an indication of the emphasis on solar power which has much potential. The Biogas sector has also moved on, though much emphasis has not been made as this being a major renewable energy option with wide potential.

One can say we have made some progress but when considered from a self -sufficiency perspective not much progress is evident.

Another area that has been stated but not moved into in any significant manner are geothermal energy and OTEC ocean thermal energy conversion.

Q What is the trend of Sri Lankans towards such initiatives ?

A Sri Lanka is keen on energy but I am not quite sure we understand the steps necessary when making use of renewable resources nor the mindset necessary in switching to decentralised energy.

We consume energy but not in a very responsible manner and this scenario needs to be changed. There are passionate groups for various renewable energy streams. Collectively

harnessing such enthusiasm in a productive manner on a scale that would benefit Sri Lanka is what is required.

Q Will such energy sources be substitutes for crude oil in the future, if world oil price hikes worsens?

A Whether we like it or not, crude oil as we know is a finite resource and the earlier we move away from this addiction it will be better for us.

Our planning horizons are quite short -term and this is a problem. Renewables will come in and it is important that we do not pursue a least-cost purchase mentality but a development mentality with regard to renewables.

Q What are the practical obstacles that you have experienced with renewable energy sources?

A Well the major issue stated is cost effectiveness. That is why innovation matters. You will not find a country anywhere that is not giving support and subsidies when it comes to renewable utilisation.

Why they do it in that way is because of the realisation of its importance. Energy is a primary need and in each format, the mechanisms of deployment is different. In the growth phase as we are seeking large scale ways of renewable energy systems there is lot to learn and it is the state that has to support that. Look at India and the United States.

Q Is there a particular source that can be used as an immediate remedy to the current issue with respect to availability and cost effectiveness?

A Having delayed and always wishing for that elusive date when prices will come down, the simple economic approach has really placed us in quite a backward situation.

One recommendation even at this late hour is to re-initiate recommendations given by the inter ministerial committee on biofuels as a matter of priority. As we own our renewables and each location is different we just cannot import solutions.

It is high time for the country to find viable solutions to face the energy challenge in the years to come in an effective manner.

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