OREANDA-NEWS. April 25, 2012. Sri Lankan Petroleum Minister Susil Premajayantha said Tuesday that Sri Lanka planned to cut imports of Iranian crude oil by three cargoes, each of 135,000 mt, before the end of its current contract with the National Iranian Oil Company in September.

Sri Lanka's only refinery at Sapugaskanda receives 14 tankers annually, of which Iran supplies 13 and Saudi Arabia one.

Premajayantha told Platts on the sidelines of a gas and LNG conference in Abu Dhabi that the refinery's current term contract expires in September.

Sri Lanka has already received six of the cargoes from Iran and will cut three cargoes from the balance before the end of the year. The cuts would translate into 3 million barrels that would have to be replaced.

"We will have to reduce our imports to comply with the US sanctions," he said.

The Sapugaskanda refinery, which began operations in 1968, was designed to run on a slate of Iranian light grades, he told the conference.

The import-reliant country secures 30% of its refined product needs on the international spot market and imports crude oil for domestic refining to make up the balance of imports which cost Sri Lanka USD 5 billion annually, or a quarter of its total import bill. Iran supplies 92% of the crude oil imported, he said.

Sri Lanka has had a "positive response" from both Oman and Saudi Arabia for its request for additional cargoes, Premajayantha said on the sidelines of the 2nd Annual Global Gas and LNG summit. Colombo is seeking two cargoes from Oman and one from Saudi Aramco to replace the Iranian barrels, he added.

However, an EU ban on insurance cover for Iranian cargoes, has impacted Sri Lanka, he said, forcing higher insurance premiums for tankers, a cost that he said was being shared equally by the tanker operator and the state-owned oil company.

EU sanctions against Iran not only ban the import of Iranian crude from July 1 but also prohibit the transportation of and the provision of insurance cover for Iranian cargoes, a measure that is having an impact beyond European shores because of the relationship between international reinsurance clubs.

For now, Sri Lanka has few options with crude oil and product imports making up 85% of its total energy demand, with the remainder coming from hydrothermal, coal and renewables, Premajayantha said.

The Sri Lanka government has approved a decision to switch to LNG for power generation and the ministry has opted for a floating LNG terminal rather than a fixed regassification terminal. Two US companies have already submitted proposals for the FSRU, which Premajayanthi said would require an investment of USD 800 million.

The small island state is also planning to open up bidding for four of six exploration blocks in the offshore Mannar Basin within the next two months to help develop indegenous production of hydrocarbon resources and help meet anticipated growth in energy demand as a result of an improving economy, he said.