India Seals Deal With Sri Lanka on Trincomalee Oil Tank Facility

India recently signed three agreements with Sri Lanka for the refurbishment and use of oil tanks at the Trincomalee Oil Tank Farm in Sri Lanka’s Eastern Province. The agreements are expected to boost India’s economic and energy security as well as provide it with presence in a strategic piece of real estate.

Sri Lanka’s Energy Minister Udaya Gammanpila announced on January 6 that Lanka IOC, a subsidiary of Indian Oil Corporation (IOC), would hold a 49 percent stake, with Ceylon Petroleum Corporation (CPC) keeping the remaining 51 percent.

Under the agreement, which will remain effective for 50 years, the two sides will jointly refurbish 61 of the 99 tanks at the farm; another 24 will be developed by CPC and 14 by Lanka IOC. Each tank can hold 12,000 metric tons of oil. Refurbishing each is expected to cost at least $100 million.

The oil tank farm lies adjacent to Trincomalee harbor, one of the world’s finest natural harbors. Several big powers, including the U.S. have reportedly coveted a presence in this strategic territory. And now India will have a strong presence there.

Built by the British during World War II, the oil tank farm originally comprised 101 tanks; two of the tanks were destroyed in a Japanese attack in 1942. Sri Lanka gained independence from British colonial rule in 1948, but the British retained control over the Trincomalee farm. It was only in 1964 that the Sri Lankan government bought it back.

Although the recent agreements relating to the oil tank farm came after 16 months of negotiations between Indian and Sri Lankan officials, India’s interest in Trincomalee goes back several decades.

Back in the 1980s, when India and the United States were on opposite sides in the Cold War, and Sri Lanka had a pro-West president, J. R. Jayawardene, there were reports that the U.S. was interested in obtaining facilities at Trincomalee harbor, including the use of its oil storage tanks. This was seen in India as a threat to its national security.

In July 1987, India and Sri Lanka signed an accord to resolve the ethnic conflict in Sri Lanka. In an annex, the accord said 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.” It then went on to say that “the work of restoring and operating the Trincomalee Oil Tank Farm will be undertaken as a joint venture between India and Sri Lanka.”

However, Sinhala nationalist opposition to an Indian presence at Trincomalee, the civil war, and Sri Lankan domestic politics stood in the way of India securing a foothold in the Trincomalee Oil Tank Farm.

India’s interest in Trincomalee was revived by concerns over China’s mounting presence in Sri Lanka, especially when Beijing took control of Hambantota Port on a 99-year lease. But what seems to have prompted Sri Lanka to finally relent and seal the Trincomalee deal with India now is the economic crisis in the country.

Sri Lanka has been in the grip of a grave economic crisis, worsened by pandemic waves that harshly impacted its tourism-dependent economy. A foreign exchange shortage has hit imports, resulting in shortages of essential commodities and spiraling prices. The crisis is accentuated by the fact that Sri Lanka needs to repay around $7 billion in debt this year. It has engaged in talks with India and China to restructure its debt payments. In July 2020, India extended Sri Lanka a swap facility of $400 million to cope with the impact of the first wave of the pandemic.

Late last year, Sri Lanka’s finance minister, Basil Rajapaksa, was in Delhi to ask the Narendra Modi government for emergency financial assistance, including lines of credit for purchase of essentials from India and a currency swap.

Indian Minister for External Affairs S. Jaishankar is said to have presented Rajapaksa with a “four-pillar” package that included a line of credit for fuel purchases from India, another line of credit for import of food and medicines, early “modernization” of the oil storage facility at Trincomalee, and the enabling of Indian investments in Sri Lanka.

The Sri Lankans were reportedly told that the agreement on the credit lines and the oil storage facility “should progress in parallel and progress in one should reinforce the progress in the other towards strengthening economic ties in both directions,” Indian Express quoted an official as saying.

The desperate financial situation back home appears to have prompted the Sri Lankans to agree to the package.

A week after the two countries signed the agreement on developing of the oil facility at Trincomalee, India announced a $400 million currency swap with Sri Lanka. It also deferred another $500 million in debt due for settlement to the Asian Clearing Union, a regional initiative that includes the central banks and monetary authorities of nine countries in the region.

The Trincomalee agreements mark an important milestone in India-Sri Lanka relations. Ties between the two neighbors have weakened significantly in recent years. Several infrastructure projects that India was eyeing went to China. The East Container Terminal (ECT) project at Colombo which India and Japan were to develop jointly with Sri Lanka was canceled and given to the Chinese.

The Trincomalee facility deal is a major step in India’s efforts to recover lost ground in Sri Lanka. However, it may be too early for India to celebrate.

The Sinhalese nationalist Janata Vimukti Peramuna (JVP), which spearheaded the opposition to the 1987 Accord and annexures, is attacking the India-Sri Lanka agreements relating to the Trincomalee Oil Tank Farm.

“The Indian government’s plans to capture Trinco oil tank farm” and “its expansionist plans” cannot be allowed to succeed, JVP Politburo Member and former Member of Parliament Sunil Handunnetti said recently.

He has called on the Sri Lankan people to join the JVP to protest India’s “plan to remove the Lion flag [as the Sri Lankan flag is called] from Trincomalee and to hoist the Indian flag there.”

India will need to tread carefully in the coming months. The Gotabaya Rajapaksa government had blamed trade union protests against India’s participation in the ECT project for its decision to drop India from this project. Will it drop India from Trincomalee, citing trade union and other protests again?

India could end up seeing the oil facility deal slip away as well.