Oil hedging: Lanka to pay Rs. 10 billion

Citibank wins arbitration case in Singapore; two more cases pending in London
By Anthony David

An arbitration panel in Singapore is to direct the Sri Lanka Government to pay a staggering US$ 94 million or Rs. 10.3 billion to the Citibank over oil hedging deals together with interest. The ruling is expected to be conveyed to the Government shortly, the Sunday Times learns.

Petroleum Minister Susil Premajayantha told the Sunday Times he was aware that the hearings in the Singapore arbitration had been concluded. However, he said, the Government was yet to hear the findings.

The state-owned Ceylon Petroleum Corporation (CPC) had entered into contracts with five banks led by Standard Chartered Bank (SCB) since January 27, 2008 to protect itself against rising fuel prices. When oil prices were more than 135 dollars a barrel in mid-2008, the CPC benefited as it had sought protection on the upside.

But with the prices crashing after that, the CPC ended up owing the banks. The Citibank has made an arbitration demand of US$ 94 million (Rs. 10.3 billion). It also claimed interest. Two other banks -- Deutsche Bank and Standard Chartered Bank -- have also sought arbitration in London over amounts due to them. While Deutsche Bank claimed US$ 64 million (Rs 7 billion), the SCB asked for US$ 103 million (Rs 11.3 billion )

Minister Premachandra told the Sunday Times: “After they communicate the decision, we will have to consider the options available to us”. He said legally the government had some options. However, it would be around March or April when the other arbitration cases were completed.

“My position is that we should not be paying a cent,” he said. Minister Premajayantha also said: “The recent reduction of taxes on fuel imports will cost the government Rs. 4,000 million annually. “The government imports 400 million litres of petrol a year and therefore the reduction of Rs. 10 per litre is an additional cost to the government. If not we will have to pass this on to the consumers.

“The international prices have been going up. The crude oil prices have gone up from US$ 83 to US$ 91 a barrel while the refined oil prices too have gone up. This is not because of the elections. “This is the 16th consecutive month we are managing without a price revision of any type of fuel. Even in countries like the US, there have been increases of fuel prices. In Iran, an oil producing country, the prices have been increased four times and in India thrice.”

On the cost of living, the minister said: “The high cost of living is not only in Sri Lanka. The big onions which were being imported at Indian Rs 20 suddenly shot up to Indian Rs. 70, and India stopped exports forcing us to import from Pakistan. Soon we will see a shortage of wheat flour and lentils due to floods in Australia. Brazil, the largest exporter of sugar to Sri Lanka, too has been affected by floods. Regarding coconuts some 300,000 trees were felled. Vegetable are seasonal crops and they have been affected too.

“We have to give concessions to farmers, paddy too has been badly affected. Fortunately we have stocks which have been collected from the last season. Within a couple of weeks, we hope the situation will be normalized.”

On the promise to give a salary increase of Rs. 2,500, the minister said: “We have increased salaries by five percent and given a COL allowance. There are only 1.2 million public servants. Whenever we increase salaries, inflation is going up. The solution is to increase production.”

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