Financial Times

CPC in the dock over hedging

FR case being contemplated against wrong option

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.

Top to the page  |  E-mail  |  views[1]
Other Financial Times Articles
CPC in the dock over hedging
LMS – BOI case now before Supreme Court
Foreigners sell JKH due to global crisis, company performance
AMW-JKH-Finlays project by 2009
MAXIS nominee as SLT CEO takes over this week
Fowzie, De Mel disagree on oil drilling
Handicraft - assets of Sri Lanka
Doosra by the Banks?
New dimension in Banking and Payment System
Regulation no panacea for all ills
Sri Lanka’s gift in song mesmerises world audience
Monopolies and less geared firms to survive global economic crisis
Hayleys Agro helps boost paddy yields
ST Biz Club discusses ‘Global Economic crisis’
Nestle, Aitken Spence take top awards at CCC awards
Business brief
Bailing out greedy business leaders
Risking his business to develop a downtrodden village
Holistic training for pastry chefs helps southern youth
Important to maintain Ceylon Cinnamon botanical name
Interest rates too high –DIMO chief
Finlays Colombo in medical waste disposal business
Public sector enterprises must improve performance – Amunugama
Weaker Indian rupee makes Indian fabrics more attractive here
Higher debt provisioning, fewer loans slow ComBank growth
SriLankan Airlines focusing on ancillary services
Some Rs 81 bln owed to Treasury from state agencies-report
NCCSL seminar on family businesses
E-WIS wins again at HP awards 2008
CPC energy hedge: Anatomy of a crisis
CPC - Is it heading for liquidation?
Tender procedures deviated in oil deals
Coconut growers worried about growing palm oil imports
Mobile industry settles dispute with Airtel
New-look Nawaloka now biggest private hospital in Sri Lanka
Loss of the EU’s GSP+ will hurt entire economy - exporters
Mlesna opens “Tea Castle” in Talawakelle


Reproduction of articles permitted when used without any alterations to contents and a link to the source page.
© Copyright 2008 | Wijeya Newspapers Ltd.Colombo. Sri Lanka. All Rights Reserved.| Site best viewed in IE ver 6.0 @ 1024 x 768 resolution