The Ceylon Petroleum Corporation (CPC) currently has outstanding financial commitments estimated at US$ 2.18 billion (Rs 218 billion). The financial obligations comprise the following:-
In addition to the above obligations and commitments, the Minister of Petroleum and the CPC Chairman sought on August 18th, 2008, cabinet approval to incur additional debts of another $1.7 billion for a refinery project inflated by over $ 1 billion, which providentially the cabinet on the intervention of the Central Bank did not approve. Had the request been approved the total liability of the CPC would have totaled $3.88 billion (Rs 388 billion).
Financial Management of the CPC
The lines of credit the CPC enjoy are through the goodwill and the guarantee of the government and not obtained on its own financial strengths and merits. The CPC knows very well that loans and commitments have to be met. Yet the CPC has made no provisions to set aside reserves for debt redemption. The CPC pays millions of dollars in cavalier form to international banks for defaulting on contracts, not out of any reserves but through the proceeds of the Iranian credit line to procure crude oil which generate revenue through refining the said crude oil to products. If the management has any prudence or sense of financial responsibility some portion of the revenue must be reserved to pay off debts incurred for crude oil procurement. This has not been the case. According to senior management sources, Iranian loan repayments are due within months and the CPC has no funds. Crude oil refining revenues have been used for other purposes and to repay losses incurred in other risky operations, such as hedging and subsidies.
Several articles appeared in the media when the CPC started hedging the escalating price of crude oil and petroleum product prices in 2007. An example referred to in one of the articles is that of the once successful MRGM – a billion $ US oil marketing company engaged in the risky business of hedging. When the prices went against the positions taken, the losses were such that the company had to declare bankruptcy. These risks when pointed out were brushed aside by the Ministry and the CPC and trivialized.
From reports appearing in the media, it appears that several hedging operations have gone sour and that the CPC would have to pay as much as $360 million over the next several months. The CPC appears to shift responsibility for the debacles to the international banks for not advising the dangers of hedging, the Cabinet of Ministers, the Treasury and the Central Bank for approving CPC's hedging operations. For its part, the CPC claims that the two-member CPC team comprising the Chairman and the Finance Manager who spearheaded the operations are experts and became experts by attending two seminars, one in Singapore and the other in the USA! Petroleum traders who engage in hedging for their respective companies, are highly trained and are paid millions for the success of reducing risks in highly volatile markets.
It is not an excuse to state that the Treasury and the Central Bank wanted the CPC to hedge and approved the operations and that these agencies, as well as the Cabinet of Ministers, who ultimately takes responsibility were hence complicit in CPC's hedging operations. Petroleum is a specialized business. It is the CPC who are supposed to be the experts and became experts by attending two seminars, as claimed by the CPC. If this be the case, then they and they alone must bear culpability.
Neither the Treasury nor the Central Bank knows the workings of oil markets and global supply-demand scenarios. It is the CPC, as experts that should have studied and reviewed the quarterly reports issued by agencies such as the US Energy Information, US Department of Energy, the US Energy Information Administration and the International Energy Agency. If the CPC had cared to read these reports, and if the CPC had any knowledge of the global economy and oil supply demand projections, the CPC would have deduced the probable price trends and would have realized the uncertainties of even very short term demand and price projections. The CPC should have been smart enough to understand that high oil prices are not sustainable and not hedged expecting prices to go to stratospheric levels.
The CPC as self-proclaimed experts took upon themselves to represent themselves as experts to the Cabinet of Ministers, the Treasury and the Central Bank. What is surprising in the CPC expert team is the absence of a financial analyst, a commercial specialist and a petroleum refining engineer.
The hedging debacles that are still unraveling and could cost the country dearly, are symptoms of at best incompetence. The CPC should not be allowed to be forced into liquidation. A careful and searching review of all aspects of CPC operations and timely corrective action to prevent further deterioration could prevent from such a disaster occurring.
It is time that the government intervenes and stops ad hoc decisions of the CPC administration. The banks that precipitated in these transactions should also be taken to task. If it can be proved that they have indeed sold a "dummy" to an uninformed and unsuspecting CPC Chairman and Finance Manager, then action should be taken against them to recover the losses.
It was also reported that a "reverse" hedge is being currently considered in order to reduce the losses that will transpire from the existing contract. This will be another disaster waiting to happen! Meanwhile, the banks involved in this sordid deal gone sour, should be asked to declare the commission they made on the transaction and comply with the boast they themselves make in their glossy "Annual Reports" of being the masters of transparency. Especially, in this instance, as it is public monies they have gobbled from unsuspecting officials. If they don't, one can only surmise the sheer size of the commissions which in any case, will become known in time to come.