Sri Lanka asks Lanka IOC to sell diesel at loss

COLOMBO, June 20 (Reuters) - Sri Lanka's government has told Indian Oil Corp's (IOC.BO) local arm to cut its diesel prices to bring them into line with those of state-owned Ceylon Petroleum Corp (CPC), a state official said on Friday.

Lanka IOC LIOC.CM sells its diesel at 130 rupees ($1.2) a litre, 20 rupees more than CPC, but this has pushed up losses at CPC by 400 million rupees a month as drivers have flocked to its cheaper pumps, increasing its sales by 20 million litres.

Sri Lanka already subsidises CPC at 30 rupees a litre for diesel, officials said. So even if the state firm sells a larger volume of fuel, it loses a larger amount of money, as it must sell at prices fixed by the government that are lower than market rates.

In mid-2006, Sri Lanka allowed Lanka IOC to fix its own prices depending on world markets, but said both petrol and diesel should be on a par with CPC.

"They must keep (the price) on a par with CPC," Petroleum & Petroleum Resources Development Minister A.H.M. Fowzie told Reuters, adding the government was ready to take "severe" action.

Lanka IOC raised its diesel price three times late last month, increasing its margin over CPC, but kept petrol prices at the same level as CPC. It said any move to force it to cut its diesel prices would hit its bottom line.

"If you continue with the CPC price for diesel, we will be losing 20 rupees a litre and will not be able to move further," said Lanka IOC Managing Director K.Ramakrishnan. "That will remove all the profits we have on petrol."

Lanka IOC says it sells its diesel at break even.

It also noted that a new 24.50 rupee per litre tax on petrol imported as a finished product, imposed by Sri Lanka on May 25, had cut into its margins.