Private Notice Question - Heavy Oil Purchases: The 'Premiums' Explained

The heavy oil dossier reveals the inner workings of a system that has direct consequences for consumers. It comprises tender processes, emergency contracts, and fluctuating premiums. This was discussed during a Private Notice Question in the National Assembly.

On Tuesday, April 28, the Private Notice Question (PNQ) from opposition leader Joe Lesjongard addressed to Commerce and Consumer Protection Minister Michael Sik Yuen highlighted a central yet obscure element of electricity pricing: the cost of the premiums related to heavy oil supply.

Through a series of detailed questions regarding the procurement exercises conducted by the State Trading Corporation (STC), discussions traced the conditions for contract awards, disruptions that occurred at the end of 2024, and the costs ultimately borne by the Central Electricity Board (CEB) — and indirectly by consumers.

Annual Contracts

Initially, the minister reminded that "the STC is responsible for supplying heavy oil for national needs, including electricity production and local industries." These contracts are generally established on an annual basis, from April 1 to March 31, to "ensure continuity of supply, competitive pricing, and orderly planning of national needs."

For the concerned period, the annual requirements amounted to approximately 319,000 metric tons of three main types of heavy oil: HSFO 180 CC (for industrial use and domestic trade), as well as HSFO 180 SR and HSFO 380 SR, used for electricity production.

International Sanctions

The first annual contract covering the period from April 1, 2024, to March 31, 2025, was awarded, following an international tender launched on January 5, 2024, to Coral Energy DMCC, the "lowest compliant bidder." The contract, approved at the end of January 2024 and signed in February, stipulated a premium of $69.80 per metric ton.

However, the situation suddenly worsened in December 2024. "Difficulties arose starting December 17, 2024," stated the minister, following the announcement of sanctions by British authorities against the company, which had since been renamed 2Rivers DMCC.

The supplier then informed the STC on December 19 that, "due to banking compliance constraints related to the sanctions, it was unable to continue deliveries and payments, and proposed the termination of the contract." This break occurred after eight shipments had already been delivered, leaving an unfulfilled remainder.

Emergency Purchases

Faced with the risk of supply disruption — critical for electricity production — the authorities opted for an emergency procedure. At that time, national stocks represented approximately 61 days of consumption for HSFO 180 SR and 59 days for HSFO 380 SR.

"Given the strategic importance of heavy oil, the decision was made to proceed with an emergency procurement exercise to avoid any interruption," the minister explained.

Unlike a standard procedure, the STC directly solicited several international operators. Four bids were received on December 20, 2024. After evaluation, Sahara Energy Resource Limited was selected as the "lowest compliant bidder."

However, the premiums obtained under this emergency framework were significantly higher than those of the initial contract, namely $91.90/ton for HSFO 180 CC, $97.90/ton for HSFO 180 SR, and $86.40/ton for HSFO 380 SR.

For a shipment of approximately 29,000 tons, the total value of the premiums was estimated at $2.68 million (about Rs 125.37 million), for a total cost of around $15.05 million (approximately Rs 704.04 million).

A second emergency exercise, launched on December 23, 2024, to cover February and March 2025, was also awarded to Sahara Energy, with slightly lower but still high premiums.

Contractual Framework

Alongside these temporary measures, the STC launched a new international tender on December 10, 2024, for the period from April 1, 2025, to March 31, 2026. Five bids were received, and Sahara Energy Resource Limited was again selected.

This contract involves approximately 340,000 tons of heavy oil, with a "premium" component estimated at $24.99 million (around Rs 1.16 billion). The agreed premiums under this framework are: $78.04/ton for HSFO 180 SR and $68.74/ton for HSFO 380 SR.

The minister clarified that the price paid by the STC includes two elements: "the international reference price of the petroleum product" and "the supplier's contractual premium," which covers a range of logistical and operational costs, including freight, insurance, port fees, risks, and the supplier's margin.

Costs for Consumers

A key point raised in the PNQ concerns the amount actually paid by the CEB to the STC. Under an agreement binding the two entities, the price includes not only the supplier's premium but also additional fees.

For the period 2025-2026, the total premiums charged to the CEB amount to: $91.39/ton for HSFO 180 SR and $82.09/ton for HSFO 380 SR. These amounts include an inspection fee ($0.15), a risk provision ($6.20), and administrative fees ($7.00).

The minister emphasized that "no margin is taken by the STC," with additional costs covering only operational expenses and risks associated with imports.

Price Increase

During follow-up questions, Joe Lesjongard sought to establish a link between these costs and their potential impact on consumers. He notably questioned the minister about the duration of the contracts and the tender procedures.

Michael Sik Yuen responded that a tender was launched in January, but "both bidders were disqualified after due diligence," adding that "the war then intervened, necessitating an emergency procurement with the approval of the Cabinet."

The issue of negotiations with suppliers was raised. "I do not meet with suppliers, unlike the previous government. The STC handles that," the minister stated.

He was questioned about any possible intervention to reduce premiums, given their impact on the cost of electricity production. "We are working on an agreement to see if we can reduce prices," he said.

Finally, when asked about a potential 15% price increase for consumers and a possible reduction in fuel taxes, the minister replied: "We will see."