CPC confirms hedging options

The Ceylon Petroleum Corporation (CPC) has finally identified the oil hedging technique to counter the risky business of swelling oil prices thereby gearing to reduce the rising cost of living. The CPC is perusing proposals submitted by Deutche Bank, Citibank and Standard Chartered Bank to undertake oil hedging and will announce whom they have picked to go ahead with the project by next week.

“Oil hedging is a good option because when prices go up we do not have to pass it onto the consumer and the country has been carrying out a risky business “like gambling” importing around 30 million to 35 million barrels per year,” Petroleum Minister A.H.M. Fowzie said, adding that this mechanism will help save US$5 a barrel.

The government will test hedging oil prices at a small quantity for six months to ensure that the overall exposure to petroleum was in a manageable position. Central Bank Governor Nivard Cabraal said the oil subsidy was expensive for the government and oil hedging was the best option so far.“We have asked the banks to quote their proposals according to the ‘zero dollar structure’ where there is an upper limit and a lower limit that will be put on the price,” he said, adding that the country has spent US$2070 million in 2006 for importing oil.

A CPC official said that the zero cost dollar strategy is one where if the oil price hedged is US$70 and if the price rises to US$75, the US$5 difference will be paid by the bank. However, if the price decreases from US$70 CPC will be required to pay the bank. Cabraal was quick to add that despite hedging mitigating risk it does not eliminate all risks. “It is a protection against loss,” he added.

CPC Chairman Asantha de Mel said that if petroleum hedging proves to be a success, then they will look to hedge diesel as well. “Diesel has the highest consumption and diesel price escalations have a direct impact on electricity, etc,” he said, adding that the main aim of the hedging mechanism is to absorb the shocks of oil price swells.