Global oil prices drop – but not in Lanka

  • Critics say fuel costs are not reflecting world market rates, and that the government is on a slippery course using hedging strategies to buy oil
By Bandula Sirimanna

Global crude oil prices have dropped to their lowest level in 16 months, but this drop is not being reflected in fuel prices paid by the Sri Lanka consumer, say critics.

On Friday, the price for Brent crude oil fell to US$66.02 per barrel. Meanwhile, the Ceylon Petroleum Corporation (CPC) stands to lose millions of rupees by continuing with a hedging mechanism with regard to the purchase and sale of oil.

The country’s main suppliers of crude oil, the CPC and Lanka IOC, the Indian Oil Corporation’s subsidiary in Sri Lanka, are not expected to reduce prices any time soon.

CPC chairman Ashantha de Mel told The Sunday Times that the corporation had lost up to Rs. 25 billion in the first eight months of the year alone as a result of offering fuel subsidies. Even if prices were revised, the CPC would still incur a substantial loss, he said.

According to the CPC chairman, Sri Lanka, which has very low foreign exchange reserves to begin with, spends as much as US$3.5 billion a year on fuel imports. This huge cost cannot be passed on to the consumer, he said, and the CPC has no option but to resort to hedging to reduce its exposure to price fluctuations in the world oil market (hedging is a means of protection against financial loss).

“The corporation has adopted a structured risk-mitigating strategy that includes fuel hedging. This approach does not make money; instead it reduces potential losses,” the CPC chairman explained.
Through six oil hedgings initiated early last year with Standard Chartered Bank and Citibank, the country had gained more than US$25 million, Mr. de Mel said. This money has been used to reduce CPC losses and maintain price stability, he added.

The CPC recently entered into a new six-month hedging arrangement with Citibank for 200,000 barrels of fuel. Through this arrangement, the CPC has structured a solution to manage price volatility and provide consumers relief in prevailing market conditions for part of its oil imports. With Citibank, the CPC has hedged 100,000 barrels of diesel for six months at a fixed price of US$81.50 dollars a barrel and a maximum of US$90 dollars a barrel.

Mr. de Mel said that if oil prices came down, the CPC would have to pay back money to both banks from the US$25 million gained by hedging. He said the CPC last month purchased oil at US$ 96.80 a barrel and gas oil at US$ 120 a barrel. He ruled out a price reduction, adding that he could not predict next month’s world market prices.

Meanwhile, UNP MP Dayasiri Jayasekera says the CPC’s hedging strategy had failed on this occasion, and that the government would have to pay at least Rs. 36 billion to both banks because oil prices had dropped to a very low level in recent months.

Speaking to The Sunday Times, UNP’s Mr. Jayasekera said governments of other countries did not normally resort to hedging, and that hedging was practised largely by private companies. He said the CPC had entered into a hedging arrangement with Citibank and Standard Chartered at a fixed price of US$130 per barrel, and that the government was losing heavily because of its “shortsighted strategy”. He said the CPC was being secretive about the details of the hedging arrangement, adding that that the Minister responsible for Energy, Mines and Petroleum Resources had been asked to table all the hedging arrangement details in Parliament but had failed to do so. He said the government was doing the Sri Lankan public a huge disservice by resorting to hedging.

According to the CPC chairman, Mr. de Mel, all details relating to the hedging arrangements have been forwarded to the Parliamentary Consultative Committee. Finance Minister Ranjith Siyambalapitiya told The Sunday Times that fuel prices could not be reduced immediately, and that fuel subsidies should be made available to industries vital to the economy as well as the poorest consumers. Lanka IOC managing director K. Ramakrishnan said his company was making a marginal profit of Rs. 2 per litre at present, thanks to additional taxes. He said Lanka IOC was not in a position to revise prices any time soon. He said the Rs. 15 tax on petrol and the Rs. 10 tax on diesel, introduced on September 18, had made a big difference to the company’s profit margin. According to JVP MP Vijitha Herath, the Ceylon Petroleum Corporation imports fuel at Rs. 76.40 per litre and sells it at Rs.157.

“How can a people’s government impose such a huge fuel tax, when this same government, in its 2008 budget, promised it would not introduce fuel taxes or impose extra financial burdens on the people?” he asked. Mr. Herath told The Sunday Times that the “petroleum crisis” was a good example of how the government was “gradually ruining the country” and making it “dependent on foreigners and foreign companies”.

UNP General Secretary Tissa Attanayake said the government was not reducing oil prices, although the CPC had made a profit of Rs. 1.5 billion over the past three months, after global crude prices dropped to US$91 a barrel.

World price seesaws around $70 amid OPEC threat

NEW YORK, Oct 18, 2008 (AFP) - Oil prices plummeted to 69.85 dollars on Thursday and rebounded Friday above 71 dollars a barrel on speculation the OPEC crude producers' cartel could cut production at an emergency meeting next week, traders said.

London's Brent North Sea crude for delivery in December rose 3.28 dollars to settle at 69.60 dollars a barrel. The November contract expired on Thursday after diving to a 17-month low at 65.45.

OPEC said on Thursday that it would hold an extraordinary meeting earlier than expected next Friday -- instead of in November -- to discuss the global financial crisis and its impact on the oil market.

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