Petrol hedge deals probed

  • Central Bank quizzes CPC move; mounting losses reported

The Central Bank (CB) has begun an extensive probe on the oil hedging deals by the Ceylon Petroleum Corporation (CPC), criticized over mounting losses, even as a government minister said there will not be any more hedging next year.

Even as CPC Chairman Asantha de Mel came out blazing at a news conference on Monday and stoutly defended the decision to resort to the ‘zero cost collar’ option in hedging on oil prices, five-man teams from the CB visited five commercial banks on Thursday and Friday and obtained all documents pertaining to the transactions.

CPC chief Asantha de Mel

“We believe there is a problem in the due process in these transactions and want to get to the bottom of it. We will be looking at all the documents over the weekend,” a senior CB official said, adding “our report will be based on whether the due process in line with CB guidelines was followed”.

Standard Chartered Bank (SCB) CEO Clive Haswell told The Sunday Times that CB officers ‘visited’ the SCB on Thursday. As criticism grew over huge monthly payouts by the CPC to the banks due to falling oil prices, Petroleum Minister A.H.M. Fowzie told this newspaper that his Ministry planned to discontinue oil hedging – once the current contracts end – due to criticism from the opposition and ‘interested parties’.

While the SCB is said to have the widest exposure with the CPC on the oil hedges, the other banks involved are Citibank, Commercial Bank, Deutsche Bank and People’s Bank. SCB, Citi and Commercial flanked Mr. De Mel at Monday’s fiery media conference and separately issued a joint statement saying they had adequately explained the risks (of hedging) to the CPC.

Mr. de Mel also rejected The Sunday Times reports that the CPC may have been misled, saying the corporation was adequately informed of the risks and later, in an interview with this newspaper, said he and CPC Deputy General Manager-Finance Lalith Karunaratne had travelled across the world learning about hedging and were now experts in that field.

Mr. Fowzie says the CPC has gained $24 million over the period in which these contracts were done (since January 2007) when prices were high but lost that in one month alone when prices fell.

So far the CPC has paid out $38.5 million to the banks, mainly SCB and Citi. If current prices persist ($52-$60 per barrel), the CPC will be paying $300 million to the banks over the next six months, according to Mr De Mel. (A detailed report on the interview with the CPC chairman is in the FT section.)
But Mr Fowzie commended the CPC chairman’s commitment to hedging saying the $24 million received by the Corporation earlier clearly indicated the benefit to the country from hedging.

Mr. de Mel said the 'zero cost collar' hedging instrument was not the best option and that he was directed by the Cabinet to use this option. He however insisted that the country would have lost a lot of money if this option was not resorted to last year – at a time when oil prices were high.

Mr. Fowzie pointed out that if the CPC chairman decided not to get involved in hedging (as stated by Mr de Mel in the interview) the ministry would appoint a special committee of experts to carry out his task and he (Minister) would also invite opposition members or their nominees to serve on this committee so that all transactions could be carried out in a transparent manner.

But this committee would be appointed only if the government decided to go ahead with oil hedging, he said. The criticism stems from the fact that the zero cost collar option provides for a price cap where payments on the upside (by the banks to the CPC) are restricted while on the downside payments (by the CPC) are unlimited. Both the CPC and the banks say no one anticipated that oil prices would fall to as low as $52 and at the time (January 2007) most experts predicted it could rise to as high as $200 or fall to around $80 on the low side.

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