New Delhi: To protect its economic interests amid growing strain in Indian ties with Sri Lanka, state-owned Indian Oil Corp. Ltd (IOC) has proposed to jointly develop a key storage facility in Trincomalee as a petroleum products trading hub that will cater to the demands of the region.

The sop that will help boost the island nation’s economy follows a threat of eviction from the strategic storage facility—the largest one located between West Asia and Singapore. The Sri Lankan government plans to take back 99 oil storage tanks leased by Lanka IOC Plc, an IOC subsidiary that operates 150 retail outlets and has a 43.5% market share.

This threat follows India’s GMR Group last year losing a contract to run the Male airport in the Maldives and comes in the backdrop of Prime Minister Manmohan Singh cancelling his visit to Sri Lanka for the Commonwealth heads of government meeting in November.

“We have made a proposal to them that we can revive some tanks and if the government of Sri Lanka wants we can develop the facility as a trading hub that can cater to the economies of Vietnam, Cambodia and Bangladesh, among others, which import petroleum products," an Indian government official aware of the development said, requesting anonymity. “They haven’t responded to our proposal which will boost economic activity in that country and earn them revenue. The tanks can be revived in a phased manner."

Mahishini Colonne, Sri Lanka’s deputy high commissioner to India, confirmed the development. She, however, denied any move to take over the tank farm from IOC.

Sri Lanka was considering taking back 99 oil storage tanks leased to Lanka IOC in the eastern port district of Trincomalee in 2002, news agency Press Trust of India reported on Friday.

The report quoted Lankan President Mahinda Rajapaksa, who in his budget speech as finance minister told Parliament: “Our oil storage tanks located in Trincomalee were privatized. We are currently having talks to take them back."

The Indian Prime Minister cancelled his trip to Sri Lanka due to pressure from Tamil parties in India. Tamils in India, who share close cultural ties with Sri Lankan Tamils, are upset with Sri Lanka’s majority Sinhala community for alleged atrocities committed during the last phases of the civil war.

Queries emailed to IOC, India’s foreign and petroleum ministries on Monday remained unanswered.

IOC’s attempt to soften Sri Lanka’s stand, if accepted, will help cater to the island’s market as well as the country’s revenue by catering to other economies. The China Bay Tank farm has 99 storage tanks having a capacity of 12,000 kilolitres each. Currently, only 15 of these tanks are operational.

“The proposal is pending with them. It is a good location. With Sri Lanka being an importer, more storage tanks can be revived. Our agreement for using these tanks is for a long period of time. However, as a sovereign government, they can exercise their right," said the official quoted earlier.

Indian efforts to step up energy diplomacy by engaging with Myanmar, Bangladesh and Sri Lanka aren’t having the desired results, while Chinese presence has been stepped up in the island nation. Chinese firms are building Sri Lanka’s Hambantota port, an ambitious project that will service the busy east-west shipping route.

“IOC is working with our authorities for developing the facility as a joint venture on the similar lines to what NTPC Ltd has done. A similar arrangement has been talked about," Colonne said. “It is under discussion. It will take some time."

Indian state-run power utility NTPC Ltd is setting up a 500 megawatt plant in Sri Lanka with the Ceylon Electricity Board.

Sri Lanka’s three-decade-long civil war ended in May 2009 with the defeat of the rebels who were fighting for a separate homeland for the minority Tamils who constitute some 14% of the country’s 20 million population. Human rights groups say upto 40,000 civilians were killed in the final months of the Sri Lankan government’s military campaign.

India has been leaning on Sri Lanka to speedily integrate Tamils into the political mainstream. India also voted against Sri Lanka in the United Nations Human Rights Council hearings in Geneva on 21 March over the alleged war crimes.

Lanka IOC, which retails petroleum products as well as supplies them in bulk to industrial consumers, competes with Ceylon Petroleum Corp., which has 1,070 retail outlets in the country.