Hedging probe gathers pace

CID raids CPC headquarters; former chairman Asantha de Mel to be questioned
By Bandula Sirimanna

Detectives of the Criminal Investigation Department (CID) raided the Ceylon Petroleum Corporation’s headquarters in Kollupitiya on Friday to seize files and documents on the controversial oil hedging deal.
They will now question former chairman Asantha de Mel on the controversial transaction involving a loss of over Rs. 500 million US dollars, a senior CID officer told the Sunday Times.

Asantha de Mel

The CID probe follows the collapse of a hedging deal which the state-owned CPC entered into with five banks. The CPC had said the deal which came into operation in January 2007 was aimed at buying fuel at a reasonable price as oil prices skyrocketed.

When prices were more than 135 dollars a barrel in mid-2008, the CPC benefitted as it had sought protection on the upside, but with prices crashing thereafter the CPC ended up owing the banks close to US$ 1 billion.

The surprise raid came a few days after a fresh fundamental rights petition, challenging the contracts and repayments to five foreign and local banks, was filed in the Supreme Court by public interest activist Nihal Sri Ameresekere.(See related story on the petition in the Financial Times section).

The petition, which is coming up in the Supreme Court tomorrow, alleges that CPC officials including Mr. de Mel were induced through foreign trips for them and their families when entering into these contracts and that Standard Chartered Bank was the lead bank in this exercise.

The detectives said investigators were preparing a detailed report on this massive loss. The CPC signed agreements with the five banks to hedge against prices, at a time when oil prices were over $100 per barrel and speculated to reach $200. However there was no ‘downward cap’ on prices, in the sense that if prices fell below $100, the CPC had to pay off banks.

Oil prices slumped to $30 in mid 2008 but are recovering and was around $60 this week. The issue went to the Supreme Court in mid 2008 when a petition was filed against the CPC’s payments to the banks.

The case had to be withdrawn after the government failed to honour a court ruling to reduce fuel prices.

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