Serious questions are surfacing with little or no clear answers over the controversial oil hedging deals undertaken by the Ceylon Petroleum Corporation (CPC) in which the loss – at current crude oil prices – is estimated at over $300 million or about 15 % of the Sri Lanka’s foreign reserves, analysts said.
Amidst a flurry of activity this week which included officials from Standard Chartered Bank (SCB) being sent from overseas offices to the Colombo branch to examine the issues, CPC officials ducked a COPE (Parliamentary Committee on Public Enterprises) meeting on the CPC crisis on Wednesday while it was also evident that proper cabinet approval was not obtained for the deal.
The issue is that while the CPC has received $24 million from the banks from the zero cost collar hedging instrument – when the crude oil price went up - it has so far paid out $38.5 million with another $300 million as a likely payout in the months to May 2009 if prices remain at current ($48-$60 per barrel) level. Under the hedging instrument, while there was a cap (restriction) on the upside price where SCB and other banks paid up x 100,000 barrels, on the downside there was no cap and the payment by the CPC is double (200,000 barrels). Industry analysts say the CPC didn’t put in place a risk management team to properly manage the risk.
Even worse is that, according to an investigation by The Sunday Times FT, there was no proper cabinet approval. When CPC Chairman Asantha De Mel waved a ‘cabinet approval’ document at a press conference last week to defend allegations that the hedging contracts had gone wrong, he was in fact showing a memorandum to the Cabinet by Petroleum Minister A.H.M. Fowzie where the latter had recommended hedging to reduce losses.
In an interview last week with this newspaper, Mr De Mel repeated the assertion that hedging had been given cabinet sanction and when asked for a copy of the approval, the paper was given only Mr Fowzie’s recommendation.
The Sunday Times FT probe also reveal that the hedging agreement between the banks and the Ceylon Petroleum Corporation (CPC) was not referred to the Attorney General’s Department to verify some of its clauses, raising serious doubts about the legality of the contracts.
Legal experts said the contents of the contract were only known by the five banks – Standard Chartered Bank, Citibank, Commercial Bank, Deutsche Bank and People’s Bank -- and the CPC, the signatories of the contract.
Acting Attorney General Priyasad Dep, when asked by The Sunday Times FT whether the CPC or the Ministry of Petroleum Resources had referred the hedging contract to his department for a legal view before signing the agreement, said that he was not aware of it.
He added that in some instances CPC contracts were referred to his department for legal advice by the subject Minister normally but not this particular agreement. “This CPC hedging contract has not been referred to the AG’s Department … not to my knowledge,” he said.
When COPE met in Parliament where Mr De Mel and his officials were summoned to explain the issues relating to the controversial deals, the latter didn’t turn up. Committee member and MP Dayasiri Jayasekera said the officials didn’t turn up and instead had made a request to grant them more time to face the committee. He said COPE has given time till November 27 to clarify the questionable oil hedging deal.
Oil industry experts say the CPC’s decision to resort to a zero cost collar instrument has proven to be a severe mistake and was the wrong instrument as clearly proved now. They said the CPC officers who went ahead with hedging and even recommended the zero cost collar instrument to the Cabinet were simply inexperienced and did not properly understand the complexities of hedging, despite the CPC Chairman referring to himself and his DGM as experts in last week's interview in The Sunday Times FT interview.
Experts said a glaring setback with the hedging agreements was the absence of an escape clause for the CPC when oil prices tumble whereas banks are covered by an escape clause.
Separately a group of professionals calling themselves “Corruption Watch” announced this week that they were taking the government to courts over the oil hedging deal and Mihin Lanka.
Its Convener Shiral Lakthilake told reporters that legal action will be taken against the institutions that had squandered public money amounting to several billions of rupees.