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hedging
economics
Main

method of reducing the risk of loss caused by price fluctuation. It consists of
the purchase or sale of equal quantities of the same or very similar
commodities, approximately simultaneously, in two different markets with
the expectation that a future change in price in one market will be offset by
an opposite change in the other market.

http://sundaytimes.lk/081130/FinancialTimes/ft314.html

The Sunday Times – Sunday November 30, 2008

Oil hedging crisis? Any investment ‘not backed by collaterals’ is
sheer gambling

On June25, 2006, The Sunday Times FT ran an article headlined “Lankan
offers to stabilize oil prices,” wherein a consultant stated that oil could have
been capped around $40.00 /barrel compared to $ 70-72 /barrel , reigning at
the time of the article, by using a combination of derivatives such as hedging,
swaps and futures options. However through sheer curiosity I wrote a letter ,
which was published on 9th July 2006 , explaining inter alia -that the
consultant’s proposals were “ irrational & misleading’ as option- contracts
have a” time –period” and “premium factor” thus could not be “capped’
indefinitely. Also the proposal doesn’t convey the associated “ risk factors”
the government would have been exposed to , had the oil prices dwindled or
remained around the $ 40 mark

On Nov 9, 2008 The Sunday Times exposed the current status of CPC oil-
hedging contracts with foreign banks in Sri Lanka. The banks claim that CPC
was made aware fully of the risk factors which imply that the CPC had
knowledge that it would lose millions of dollars (at least $300 million in this
case) if oil touched around $70 per barrel, which was prevailing 18 months
ago. Hence, did the CPC concept paper disclose this risk-exposure of the
government, in the event oil prices reverted to $70/barrel or so, that
prevailed few months ago, which was a high probability?

We are living in an information –age and if you link to Google-Web Browser,
you would encounter numerous authoritative articles, confirming that nearly
60% of oil traded was speculator driven. Anybody could speculate on 1000
barrels valued at $67000 by merely depositing $ 3375, (20%) either on a
“call option or put option” and thereafter, if the price fluctuates on the
opposite direction, up to a maximum of 20% , the position would get

automatically triggered, limiting the loss to $ 3375, with no “collaterals“ to
fall back. In this gambling plan, the balance 80% is leveraged-funds,
furnished by “Hugh-Speculator Funds & Investment Banks” which commands
trillions of dollars, and who are the ultimate beneficiaries. As the bookmakers
never go bankrupt, even the combined -colossal sovereign –wealth funds of
OPEC would not be able to intervene, once the volatility is set in motion.
OPEC‘s only option is to curtail production, anticipating that the price would
prop-up through fundamentals of Supply/Demand, although it is a forlorn
hope in the foreseeable future.

With nations taken as hostage by these speculators the regulatory authorities
have lobbied to increase the “down- payment on oil futures contract” , to 50
% or so instead of 20%, as this would mitigate the wild volatility, by
restricting players to genuine buyers, which would be immensely beneficial to
global trade and domestic monetary equilibrium of countries.

It should be emphasized that there is no “ fool proof technique” of profiting
from hedging or option trading, no matter what exotic jargon
consultants/brokers may use such as zero cost collar hedging strategy, etc.
Above all, to claim to be an expert in hedging – is blissful ignorance –
particularly in a field even the mighty pension-funds and hedge funds had
gone bust. In hindsight, we have a case where the captain of the Titanic
blames the iceberg .

A good example is how Bank of Ceylon deals with its customers when
negotiating a L/C particularly denominated in yen. With constant volatility of
the yen, the bank would instantly ‘cover’ its position and pass the best “spot-
rate “ to the client ensuring transparency and customer satisfaction. This is
because the rules and regulations, (tested over a long period of time) are well
defined and clearly in place, so that the dealers know their responsibilities
towards the client as well as the bank, preventing any exposure to losses,
consequent to volatility.

As a case study, the Port Authority has nearly $1 billion development loans
from the Japanese government where the principle and interest are payable
annually upto year 2035. It is common knowledge that the Yen had moved
from $/y 250 to $/y 97 over the ears 1990-2008. During my tenure of service
upto mid 2004, there had been many instances where the so called experts
have suggested to hedge the yen against port authority Dollar Revenues.
However in-depth studies of these proposals revealed that “ the huge up
front premium factor” for hedging the currency, would negate any financial
benefit to the institute.

There is nothing novel in what I have stated and in my experience, officials in
authoritative places , whether Treasury, Central Bank, Ministries, Board
Members or even Corporate Executives, are extremely conversant with the
risk –factors of speculation. Hence these institutes are well insulated from
consultants/experts, even though dismayed by the CPC episode. No wonder
between 2002-2006 , the Sri Lankan expert from Canada had a frustrating
experience in selling the instruments having met influential ministers as

quoted in The Sunday Times of 25th June 2006. Further the articles that
appeared in your paper had critically analyzed this fiasco in-detail hence
there is nothing more to amplify. The $ 300 million that is earmarked for
vaporization is awesome to comprehend, as the new breakwater of the port
could be built, without donor funds. Finally, as an avid reader of your column
may I extend a word of appreciation to The Sunday Times FT editor for
enlightening the readers with his incisive journalistic skills.

Anil Wirasinghe, (Rtd. Director Finance – SLPA) Email –
anil_wirasinghe@yahoo.co.uk

php?nid=1933997040 Mon. 2007 (LBO) – The head of Sri Lanka's state petroleum utility has called for a national policy on oil hedging for the longer term as international bankers were due to present a fresh proposal on short-term hedging.lankabusinessonline. I do not think its fair for one person to given the entire burden of decisions." he said.com/fullstory. "To hedge 15 million barrels I would have had to spend 75 million dollars. Derivative Games In a zero cost collar.000 barrels. avoiding the need to pay a premium giving protection from 70 to 72 dollars. This is not a decision the chairman of CPC or the minister of petroleum could take on his own." CPC Chairman Ashantha de Mel said. He says the country should decide the maximum level of it can afford to pay for oil and give the petroleum corporation the responsibility of ensuring that the costs are fixed. Earlier this year Ceylon Petroleum Corporation (CPC) dipped its fingers into gas-oil (diesel) options engaging in an options strategy called 'zero-cost collar' which gave a limited two-dollar upside protection for 300. "I think in hedging there should be a policy by the government. . CPC sold a put option to fund a call option. Skinned Alive If a hedge goes against the CPC. de Mel fears he would be "skinned" in parliament.http://www." He says if CPC had bought a call option for 5 dollars at the time diesel was 70 dollars a barrel he would have saved 13 dollars. De Mel says he is calling the central bank and the treasury for a meeting to discuss the possibility of hedging greater volumes of petroleum products and using other derivatives such as futures and ask a committee of experts to device a policy. 09 March 2009 14:03:04 National Hedge 12 Jul. 2007 13:52:50 Sri Lanka petro chief calls for national hedging policy July 12. The cost of plain vanilla call options was high but it gave unlimited upside protection. as knowledge about hedging was minimal. "At the time the premium of a call option was five dollars.

If the strategy is acceptable bids would be called from all banks. Analysts say a rule-of-thumb hedging strategy would be to fix about a third of the supplies through futures or forwards. Balance of payments problems are not really caused by 'shortages' of foreign exchange but by excess domestic money in the economy which is usually created by increases in central bank's domestic assets. when oil prices usually bottom out. are we going to hedge 60 percent." de Mel says."If we get 7 out of 10 hedges right we should be happy. Even if the CPC does not use hedging. at one time hedging up to 80 percent of its fuel requirement." he says. By funding losses with rupee debt. perhaps for about a month. Nobody. which is also known as money printing. the country would 'save' foreign exchange as long the CPC does not sell at a loss. hedge another third with options which allows a firm to benefit from a substantial swing in prices and leave the rest exposed to the spot market. de Mel claimed had said it was good that the CPC earned 1. De Mel says the corporation would like to hedge for one year starting from around December or January. Several firms. Forex Equation De Mel also believes that hedging may allow the country to 'save' foreign exchange. are we going to hedge 30 percent or are we going to hedge all 100 percent. . They had asked why a greater amount had not been hedged. the CPC would in effect build up a speculative position against the national currency. This week a team from Citibank was flying down from Singapore to make a presentation to the CPC for short-term hedging. including the national carrier Srilankan had been using fuel hedging." de Mel says. "We feel oil would go up for the next month and then it should come down.5 million dollars from the zero cost collar earlier in the year. But economists point out that 'saving' foreign exchange cannot be done by hedging. which it has been doing in the past couple of months. as the outflow of foreign exchange is determined by changes in aggregate demand in the economy which drives imports. "The country will have to say. which is roughly about a third of its total expenses.

It will not be prudent for them to discard the entire concept of hedging given one bad experience. Minister A. If that be the case. Foreign exchange can only be saved by having an automatic price adjustment formula to eliminate losses. He was not in favour of hedging at all from the very start. Provided below is a succinct account of what really transpired and how a solution to a problem has led into a much more serious problem and placed the CPC in a vulnerable and yet another unprecedented crisis. analysts point out. This unprecedented crisis obviously contests the validity of the concept of hedging. Hedging.lk/081123/FinancialTimes/ft329. and not save any foreign exchange. I am sure CPC is in the wrong path for it’s losing foreign exchange due to a wrong hedge. will only give a country some certainty about future prices. A former chairman of the CPC interpreted hedging as a process to control the world market spot price! Recently I heard that hedging facilitates earning foreign exchange. So we have seen all the definitions to this mystic word “Hedging” and not well understood. resulting in a 'saving' of foreign exchange. In this connection my task is to prove the validity of hedging and protect the project initiative for the greater benefit of the national economy. 2008 CPC energy hedge: Anatomy of a crisis By Upul Arunajith As the architect of this trailblazer project.H. An accumulation of profits in any import firm would reduce demand in the aggregate economy. Notwithstanding its wide use with varying degrees of success internationally. If the central bank continues to intervene and pump domestic liquidity into the system to maintain a particular reserve money target. http://sundaytimes. causing pressure on the exchange rate to increase. I consider it my responsibility to provide an explanation as to what this “CPC Hedge” is all about given due regards to media reports during this entire saga in the recent past. . I have read multiple interpretations to this word “Hedging”.This in turn drives imports. I also hear that “Hedging” is “Speculating” a widely held belief. Fowzie has gone on record saying that in the future he will opt to keep out of hedging.html The Sunday Times: Sunday November 23. a process known as 'sterilized intervention' demand pressure as well as pressure on the rupee would continue to rise.M.

Mettalgesellschaft Refining Hedge Programme – “Stack Hedge” The Mettalgesellschaft Refining Hedge provides a good example of a hedge that went bad and the refiner losses totalling a billion. For the record. If the wrong instrument is used.What is hedging? Hedging is a mechanism that protects buyers and sellers of commodities from adverse spot market price volatility by taking an opposite position in the Derivatives Market. A case in point is the Orange County issue. In the case of exchange traded derivatives. One of the cardinal rules associated with Derivatives trades is that these trades should be kept simple. so does the hedging programme insulates the buyers and sellers of commodities from adverse price movements. Without speculators there will be no liquidity. Exchange traded instruments are futures and option while OTC are SWAPS and Options. Futures correct strategy. Derivatives are traded in an organised Exchange or Over The Counter (OTC). Hedging is akin to an auto insurance programme. hedging is not speculation. the same way the insurance policy protects the owner in the even of a contingency.00 bbl Southwest Airlines was able to make profits in the billions as it took a proactive role way back in 2001 when oil was trading under US$20. the hedge will sooner or later go in the wrong direction and will lead into a crisis. Strips. these are for the most part tailor-made to suit counter-party requirements and governed by International Swaps and Derivatives Association (ISDA).00 bbl 2006 Hedged at US $ 32. . The refiner used a “Stack Hedge” strategy using futures contracts. Hence.00 bbl 2008 /09 Hedged at US $ 35. 2005 Hedged at US $ 26.00 bbl 2007 Hedged at US $ 31. Hedgers and speculators play a mutual exclusive role. The success of any hedging programme is entirely dependant upon the use of the: correct instrument – Option. Derivatives facilitate the hedging process. In the case of OTC derivatives. I first made the proposal to the Sri Lankan government at the end of 2002 to introduce hedging. all trades are transparent and the performance is guaranteed. Southwest Airlines Jet Fuel Hedging Programe: Success Story. – Call. From a laymen interpretation. On the contrary speculators add liquidity to the markets and facilitate the hedging process. the risk associated with the instrument becomes hard to monitor. The moment it gets too complicated and deals are structured. This Credit Derivative instrument is a Credit Default Swap. Hedging is not speculating. The current sub prime mortgage is mostly driven by the excessive use of Credit Derivatives that traded in the OTC market and controlled by ISDA.

the instrument risk cannot be monitored. using a cash settled Call Option to Cap the price of crude oil + freight for a period of 24 months structured through the world’s fourth largest energy trading firm based in Geneva facilitated through a broker based in Singapore. Hence pointing fingers at the cabinet is of no use for it was the CPC-prepared cabinet paper that promoted the Zero Cost Collar.50 (the pre-agreed Call Option Cap Price). There were warning signals that the Zero Cost Collar was the wrong strategy. Had they pursued the simple plain vanilla instuments. For having . Basket Hedge Model – Final product development We developed the world’s first Basket Hedge model for the CPC in February 2007 locking in the price of Crude oil + Freight at US $ 61. The cabinet would have approved what the CPC concept paper recommended. In structured deals as stated earlier. I had personally informed them of the impending disaster to no avail.The refiner had an agreement to sell a certain quantity of petroleum products at a fixed price on a long term supply contract. This forced the refiner to close the position taking a massive loss of over US$ 1 billion. Nonchalance to the warning signals and failure to heed to advice was the key to the CPC. The tool selection was driven by cash flow constrain to some extent but this is not the only reason why CPC got into this crisis.50pb for 24 months. as per discussion held at the Treasury in Colombo. Both parties lack the skills for a critical review. This exposure was hedged with short term futures contracts and when the market spot market price dropped. This is a classic example of not being able to use the right instrument and failure to watch for warning signal of the market price movement.50pb. while having the flexibility of participating (in the open market) if the world market price drops below US$61. CPC pays only a maximum of US$61. Failure to understand the tools and the strategies will sure lead to disaster. If the market price is US$135 the CPC purchases the commodity at US$ 61. if the oil + freight cost remains above US$61. Thus the hedge went in the wrong direction.50 for the commodity + freight. CPC Hedging Programme – “Zero Cost Collar” In the case of the CPC hedge failure can be directly mapped out to the strategy implemented by the CPC.50pb. the risk is limited and can be monitored. If the market price drops to $50 the CPC purchases the commodity at the lower market price. Tool and Strategy selection is critical to the success of any hedging programme. Hedge Structure Analysis: During the term of the hedge. the refiner got margin calls and faced a funding gaps.

this benefit, to Cap the price and also to participate the event of a price drop,
CPC has to pay an Option Premium akin to an auto insurance premium.

Hedging the “commodity” and “freight”

We provided unlimited upside protection above US$61.50pb. If the price
moved above 61.50pb, to US $ 100pb the hedge provider paid the variance
between $100 and $61.50 = US $ 38.50 per barrel to the CPC. If the price
dropped to $55 the CPC had flexibility to participate in the price drop.

Basket Hedge Model rejected by the CPC

Regrettably though, this hedge model was rejected by the CPC. In violation of
the agreement we had at the Treasury meeting, the CPC went to two
commercial banks in Colombo, Citibank and Standard Chartered Bank (SCB)
and asked them to develop hedge models. In this context it has to be stated
that neither of the two banks are specialized energy traders nor did they
have the wherewithal to provide a hedge to the CPC for a huge exposure of
US$2 billion.

Taking my idea and asking for counter proposals is an act of plagiarism by
CPC. This is a departure from the agreement we had at the Treasury
discussions to work with dedicated commodity hedge providers based
overseas.

Local banks

Local banks did not have the financial stamina to provide the required
coverage due to high volatility of oil and taking into account the CPC’s
exposure. This later proved to be the case when the Citibank made a
strategic exit after making a US$4 million “knock-out payment” to the CPC
when the hedge went in favour of CPC citing that there was a “single client
limitation”. Following this development, CPC went back to the SCB to seek
hedging. Given that SCB first sold a wrong hedge model to the CPC and also
lost US$2 million going back to SCB is leading to financial suicide and
definitely will not be in the interest of the CPC. Citibank did a good job of
misleading the CPC but did a poor job in calculating the risk and ended up
with a huge unexpected payment to the CPC.

This situation where the local banks are unable to provide coverage to the
CPC given its exposure was discussed at the preliminary Treasury meeting
and that was the reason why we all decided to work with foreign based hedge
providers who were specialized in commodity trading and hedging.

SCB “Zero Cost Collar” Hedge Strategy:

Responding to the CPC’s call to develop Hedge models, SCB developed a
Hedge model using a strategy referred to as a “Zero Cost Collar” which is a
wrong strategy. SCB developed this model in such a way that the CPC will

end up paying the SCB as opposed to the SCB making a payment to the CPC.
Unfortunately, the calculations of the SCB backfired and the Bank eventually
ended up paying the CPC.

Added to this there was an instance when the SCB sold a “Crack Spread” to
the CPC and the CPC lost US$2 million. These financial losses are passed on
to the average gullible consumers.

Citibank “Leverage SWAP”:

Having advised the CPC that the Zero Cost Collar as developed by the SCB
was the wrong strategy, and the CPC Chairman having agreed that it was the
wrong strategy in view of the vulnerability of the CPC to this strategy, CPC
went to Citibank and signed an agreement to get an oil hedge at US$73 pb
on a trial basis for a period of three months. Again this too was wrong and
costly strategy.

Due respect given where it’s due, it was the current CPC chief Asantha De
Mel who took the bold step to get into unchartered waters by implementing
the concept of hedging. However it has to be stated where he went wrong
was implementing the wrong strategy from the very inception. This could
have been averted for he was given signals that it was wrong.

As a parting remark, this failure is only a teething problem associated with
hedging and it is imperative that we continue with the hedging programme
for that is the only salvation CPC will have against high spot market price
volatility.

(The writer, involved earlier in the hospitality trade in Sri Lanka, has
been residing in Canada since the early 1990s. He has been involved
in banking, risk management, commodity futures and derivaties
trading. He could be reached at uarunajith@can.rogers.com).

http://www.lankaeverything.com/vinews/business/20081229123738.php

Impact on People\'s Bank & Commercial Bank of Ceylon of CPC
Hedging Deals
29-12-2008

Fitch Ratings Lanka has today said that People\'s Bank (Sri Lanka) (PB, \'A-
(lka)\' (A minus (lka))/Positive) and Commercial Bank of Ceylon PLC
(CB, \'AA+(lka)\'/Stable) are exposed to counterparty default risk following
the Supreme Court of Sri Lanka\'s ruling on 28 November 2008, suspending
payments due from Ceylon Petroleum Corporation (CPC) on hedging
agreements entered into with the aforementioned local banks and three
other foreign banks operating in Sri Lanka, namely, Citibank N.A.-Colombo

Branch (CITISL, \'AAA(lka)\'), Standard Chartered Bank, Sri Lanka Branch
(SCBSL, \'AAA(lka)\') and Deutsche Bank A.G.

Acting as intermediaries, the banks structured these transactions with
corresponding positions with offshore counterparties, earning a
fee/commission; thus carrying only counterparty default risk. CB\'s exposure
comprises payments due on a 70,000 barrel contract. PB\'s exposure
comprises payments due on a 100,000 barrel contract, including payments
due to CB on a 50,000 barrel contract. The payments due from state-owned
PB to its counterparties have been halted, as the bank has sought legal
advice on its obligations.

PB\'s \'A-(lka)\' (A minus (lka)) rating was last affirmed with a Positive Outlook
on 6 October 2008, contingent on a capital infusion from the Ministry of
Finance, and on the implementation of other measures to meet the
regulatory minimum capital adequacy ratios on a solo basis by end-2008.
PB\'s potential loss, based on current global oil prices, could, in Fitch\'s
opinion, result in compounding the delay in achieving the minimum capital
adequacy ratios as initially expected.

Fitch believes that CB\'s ratings are not likely to be affected, as the bank\'s
capital position is sufficient to absorb the potential losses (including
payments due from PB) that may arise based on current global oil prices as
estimated by management.

The crystallisation of the potential liability on CPC hedging agreements and
any potential ensuing rating actions are contingent upon the final Supreme
Court determination expected by early 2009.

The impact of CPC\'s hedging deals on CITISL and SCBSL\'s ratings are
addressed in a separate release, \"No Impact to National Ratings of Sri Lanka
Branches of Citibank & SCB from CPC Hedging Deals\", published on 29
December 2008.

http://www.dailynews.lk/2007/08/14/bus01.asp

Daily News: Tuesday, 14th August 2007

Risk management solution for CPC
Hiran H. SENEWIRATNE

Citi, one of the first foreign banks to enter Sri Lanka since liberalisation, has
structured a solution for Ceylon Petroleum Corporation (CPC) to manage its
price volatility and to provide relief in prevailing market conditions for a part
of its oil imports.

At the request of the CPC. Few years ago our oil price bill was around US$ 800 million and has gone up to US $ 2 billion for a year. he said. The funds will go to the hedging fund to provide subsidy for the general public. the Central Bank of Sri Lanka (CBSL) encouraged CPC to explore ways of mitigating this risk.es. The CPC has entered into hedging arrangements with Standard Chartered Bank apart from Citi Bank.500 by way of hedging with Citi Bank.000 crude oil and diesel which gained US $ 772. Sri Lanka is the net importer of both crude oil and refined petroleum products with an annual demand of approximately 3. which has structured a product that utilises CPC’s view on oil prices to be stabilised. CPC Chairman Asantha de Mel said. . As a result.8 million metric tonn. According to de Mel. Citi Bank closely examined the company’s requirements and specific market views using its global expertise. and jet kerosene). De Mel said. the months of December and January it is believed that the world oil prices would come down and this fact prompted the CPC to take this step. De Mel said at a media briefing to announce the City Bank’s tie up with the CPC for hedging arrangements.Concerned with the inflationary impact that high oil prices were having on the economy. The CPC commands a market share of 80 per cent of the downstream petroleum market (refi-ned products including petrol. In the meantime the world oil prices are expected to decline during the months of December and January.5 million from the transaction from February to May from both banks. De Mel said. CPC was able to gain more than US $ 1. In pursuance of the instructions of the CB the Ceylon Petroleum Corporation (CPC) has entered into six months oil hedging arrangement with Citi Bank. In the month of July the CPC hedged 200. causing crisis for the country’s economy. gasoline.

he said. De Mel also said that they are selling fuel to the Ceylon Electricity Board Rs.Sri Lanka's Supreme Court Tuesday terminated proceedings in a case against oil hedges by the state-owned refiner. 20 less than the fixed price to avert electricity price hike. http://www. de Mel said. The Supreme Court said it was terminating proceedings as the government did not comply with its orders to bring down fuel retail prices according to a pricing formula. Most of the profits are utilised to keep the sales on a subsidised rate in order to ease the burden of the public. This type of a hedging arrangement would definitely be able to control the inflation in the country. Dennis Hussey said that the CPC plays a pivotal role for the development of the country. Ceylon Petroleum Corporation. saying the government should first comply with order and then say if it has problems with it.dailymirror.php?nid=1424691571 Lanka Business Online Tue Jan 2009 Hedge Deal: Sri Lanka oil hedge case interim orders cease to be operative: court Jan 27. with all interim orders that suspended payments to banks ceasing to be operative. Citi Bank Country Head/Chief Executive Officer.lk/DM_BLOG/Sections/frmNewsDetailView. Lawyers representing the government argued in court that the government should be given more time to consider the order and submit a fresh pricing formula But the court rejected the argument.The CPC Chairman said that they are planning to enter into the bunkering and lubricant business in the country as previously.com/fullstory.lankabusinessonline. 2009 (LBO) .aspx? ARTID=39184 . http://www.

JVP Parliamentary group leader Anura Kumara Dissanayake alleged yesterday. JVP Parliamentary group leader Anura Kumara Dissanayake claimed powerful people in the government had received commissions in the hedging deal and that led to the rejection of the Supreme Court ruling. Front Page Friday. 80000 million. 2009 By Sumaiya Rizvi Hedging deals: JVP to go to courts The JVP yesterday vowed to take legal action against high ranking government officials who had allegedly benefited underhand from the controversial oil hedging deals. 80000 million to the Citi Bank and Deutch Bank. Dissanayake alleg “The Central Bank governor cannot say that the government doesn’t have to payback Rs. ”The Central Bank cannot issue an order binding on all parties to the Hedging deal. 000 million.” he said.2 per litre for other vehicles. 20 per litre of fuel for three wheelers’ while reducing only Rs.” he asked. “The President is the King of the jungle law since he chose to disregard the Supreme Court ruling to reduce the fuel prices. “ The Government decided to interpret the Supreme Court ruling to their advantage when they reduced Rs.The government cited a loss of Rs.The JVP alleged the project E-Government was another corrupt multi million dollar government venture and vowed to expose all parties and their underhand dealings soon. . January 30.” Dissanayake said. Only the Supreme Court can do so. 5720 million if it reduced petrol prices but now the hedging deal has caused a loss of Rs. Govt. “They know that the economy is crashing and without managing the crisis they are using the war to sell their election campaign. 80. Dissanayake said referring to the order given by the Central Bank. The government said the reduction of petrol prices would weaken the governments’ military effort but it has nothing to say about the loss caused by the Hedging deal. Are there any three wheelers’ that pump petrol at the new prices. “This is the first time in history where a government in the Southeast region has incurred a loss of Rs.” Mr.” Mr. “ he said. trying to exploit war victories: JVP The government is trying to cash in on war victories at the upcoming Provincial council elections in the wake of the deteriorating economic situation.

Dissanayake said.com/archive_09/January26144442RA. http://www. http://www. he added. Counsel Ravi Jayawardhana has filed a petition against the oil deal along with Chief Incumbent of the Nalandarama Vihara.html Petitioner of oil hedging deal threatened Monday. Nugegoda Ven. ColomboPage News Desk. The government is mindful that when the heat of the war victories goes down they will have no cover their economic mismanagement. And he said that the government is holding elections even in provinces under their control and that goes to show their fear psychosis to their chances of being re elected. “How can the government ask the people to be vigilant of terrorist infiltration to an area. January 26. he said. UNP MP Ravi Karunanayaka. CitiBank Two separate oil hedging deals between the Ceylon Petroleum Corporation (CPC) and Standard Chartered Bank (SCB) and CitiBank have gone wrong and about US$ 30 million was not paid by the CPC when the deadline (for the October payment) ended on Friday. He said the caller warned that he could be bombed or killed if he did not stop the judiciary action immediately. 2009. Sri Lanka. Colombo: Counsel Ravi Jayawardhana of 'Corruption Watch' who submitted a petition to the courts against the controversial oil hedging deal was reportedly threatened over the telephone to stop the legal action against the deal. The caller had threatened him to stop the legal actions immediately. According to the police Jayawardhana has lodged a complaint at the Welikada police yesterday. The Sunday Times reliably understands that the two banks were scheduled to .” he asked. informed sources said.colombopage.com/news/2008/11/34814_space. 14:44 GMT.lankanewspapers. Jan 26. 10 November 2008 . Theeniyawala Palitha Thera.html Crisis over oil hedging deals Monday. when there are thugs terrorizing people under the patronage of the government. Counsel Ravi Jayawardhana said.The Western provincial council has eight months to go before it expires but the Government chooses to follow its agenda and hold elections as and when they plan.1:37 AM SL Time CPC delays payments to Standard Chartered Bank.

somewhat smaller. de Mel told The Sunday Times there was a delay in the payments to CitiBank. The CitiBank Colombo CEO was also believed to have met the CPC chairman Asantha de Mel. either party has to pay the other when the oil prices fluctuate but in practice.M. one banker said. The sources said that during a meeting between CPC Chairman Asantha de Mel and SCB Country Head Clive Haswell on Friday. Another local bank which was requested by a foreign investment bank to get involved in a similar type of instrument (with the CPC) mid this year turned down the offer on the basis that the risk (to the CPC) was too high. He also claimed that there were no problems with the Standard Chartered Bank. a few days after the last day of the month.H. he said the Bank had a `very good and long-standing relationship with the CPC. (See details on the deals in The Sunday Times FT section). Under the hedging mechanism. If that happens. the local branches of these foreign banks may be under pressure to close. However. but on Monday the CPC planned to pay US $ 7 million to CitiBank. Fowzie who was also approached by SCB before the deal was finalized. Every month a payment is made. SCB`s Haswell told The Sunday Times that it was the bank`s policy to refrain from discussing dealings with its clients. last month`s liability ($16 million) could be reduced by half. did not respond positively to this offer. oil hedging contracts with Deutsche Bank and the Commercial Bank. Banking sources said the Colombo branches of these banks were putting pressure on the CPC to make the payments since any accumulation of these losses could reach millions of dollars in the coming months. the CPC has been doing all the paying as the downside risk was not properly calculated or the state petroleum distributor was not properly advised. in the two hedging deals where the CPC was either misled or not properly advised. Central Bank rules clearly state that authorized dealers must get an undertaking from customers that they clearly understand . citing it as a sovereign bond. alternative (hedging) instrument saying under this instrument.meet their ambassadors (Britain and the United States) to put pressure on the CPC to pay. and October`s due date was Friday but the payments to the two banks were not made. The CPC also has. according to Central Bank rules. This risk has not been clearly understood by CPC officials and also Petroleum Minister A. on the risks involved in this kind of instrument.` He said that the bank was supportive of the CPC`s activities and is working closely with them. When asked. the SCB had offered a new. The CPC. it is learnt. The biggest problem in the current hedging deals is that liability on the upside (SCB/CitiBank pays CPC) is limited while liability on the downside (when fuel prices fall and the CPC pays banks) is unlimited. given that fuel prices were unlikely to rise sharply above the US$ 58-80 levels. Mr.

` While the CPC has made a serious mistake in not assessing the downside risk. Some bankers also raised the issue of whether the CPC making risk-related foreign payments was a violation of exchange control regulations. etc. If the price of petroleum was below US$ 100. after payments were suspended by court. This means that during these three months. Source(s) http://www.000 barrels per month. However The Sunday Times learns that the CPC had during late last year expressed concern to this bank that any hedging mechanism should sufficiently protect the CPC and provide an exit clause in case prices fall sharply. They being the professionals.lk/081109/News/sundaytimesnews_20. The deal was announced in January 2007 and prices were low at the time. While the SCB is learnt to have acknowledged this concern. If the price rose above US$ 130 for three months. In its latest directions on Financial Derivative Products issued in July 2008.lk/fullstory. 2008 (LBO) – Sri Lanka's Commercial Bank says its liability to a counterparty under an exotic derivative deal arranged for state-run Ceylon Petroleum Corporation (CPC) is 982 million rupees. as they subsequently did.the nature of the product and `inherent risks. the hedge agreement terminates. All dealers should ensure that Board of Directors of corporations clearly understand the risks of the instruments and draw up/lay down adequate plans to mitigate the risks.lbo. a city banker noted. I blame Standard Chartered Bank.000 barrels per month.` one market trader said. Sri Lanka can only buy 100. The Bank has misled the country to make money. However oil rose sharply to a high of $134 per barrel in July 2008 and subsequently crashed to a low of $58 throughout last week. Under the 2007 deal. the oil price was capped at US$ 130 a barrel and the floor price was at US$ 100 a barrel. the agreement terminates only after 12 months during which Sri Lanka is committed to buy 200. . no attempt was made to alter the contracts to make sure the risk to the CPC was minimal.93mn Dec 05.html http://www. I wonder whether there is any violation here. they have norms and they are not supposed to sell a product to a customer or country if they are not sophisticated enough to understand.php?nid=711745482 Lanka Business Online Fri Dec 2008 Sri Lanka Commercial Bank exposure on hedge deal US$8. it is stated that. This has never happened before as this is a negative payment unlike the normal foreign exchange that goes out for imports.sundaytimes. The Central Bank in recent times is particular about the risks involved in these instruments.

based on WTI crude would expire on June 30. 125. He says that this los amounts to 15% of the national wealth and every citizen can be given fuel for 45 days free of charge with that money. He questioned if the Standard Chartered Bank had acted in line with the Central Bank instructions pertaining to the subject. the foreign reserves of the country will further collapse and the dollar will go high up to Rs. Ravi Jayawardhana Every citizen can be given fuel for 45 days free of charge (Lanka-e-News. bringing a peg with the US dollar under severe pressure.93 million US dollars.15 AM) Corruption Watch activist Ravi Jayawardhana says that Sri Lanka will lose US $ 400 million (over Rs.Commercial Bank of Ceylon said the contract. the liability was 8. Further. 40 billion if hedging agreement is not annulled. Brent crude fell below 46 dollars yesterday. Sri Lanka units of Citibank.com/English/news. Addressing the Corruption Watch media conference held yesterday morning (25) in Colombo. 9. Commercial Bank has a sold a target redemption forward on a notional 10. Did the bank make aware the Ceylon Petroleum Corporation (CPC) regarding the risky nature of the hedging deals? Did the Standard Chartered Bank bear the costs of business class air tickets to Singapore and Dubai and other expenses for some senior officials of CPC? . dollar to go high up to Rs.php?id=6741 Sri Lanka will lose Rs. he said. November 26. Court suspended payments under hedge deals last week. Standard Chartered and Deutsche have also sold derivatives to CPC. Commercial Bank said the calculation was based on an exchange rate of 110 rupees per US dollar. 2008. 125. http://www.lankaenews. Sri Lanka's central bank has been intervening in forex markets since September and injecting more than a 100 million rupees to the inter bank market in a 'sterilized intervention' campaign. counsel Ravi Jayawardhana stressed that the government should annul this treacherous agreement immediately. According to a document released to the media last week. 2009 and if the payments continued to be suspended with oil at 48 dollars. but Standard Chartered said last week that the local unit was not affected.000 barrels of WTI Light Sweet Crude which doubled when oil prices collapsed. He raised the following issues as well so that the Standard Chartered Bank to answer. 40 billion) unless the hedging agreement is annulled.

700 million during the past six months from hedging deals with CPC. Corruption Watch has taken steps to sue CPC Chairman and the other responsible persons pertaining to the hedging agreement http://www. is Rs.htm . 850 million.For what purpose? Did the CEO of the bank join this tour? Why? Was a job offered to the daughter of a top rank official of the CPC? (Lanka-e- News learns that this job has been given to the daughter of the CPC Chairman) Jayawardhana points out that this woman (the daughter of the CPC Chairman) was granted the employment while the discussion regarding the hedging deal was underway.000 metric tons of fuel has been stored in Muthurajawela storage by November 18. 600 million bonus last year.6 million that equals to 1468. Was the cabinet approval obtained for the hedging deal? Did the director board of the CPC approve the agreement? Did the Secretary of the Ministry of Petroleum and Petroleum Resources approve it? Was the agreement studied by the Attorney General? Ravi Jayawardhana pointed out that the economy of Sri Lanka is near collapse because of the treacherous hedging agreements with several foreign banks like Deusch Bank. Sri Lanka has incurred a loss of US $ 7. The loss to the country per each barrel of petroleum is $ 19 due to this deal alone. Chartered Bank alone has earned a profit of Rs. He was offered a Rs. City bank and Standard Chartered. The Corruption Watch raises the following issues as well. Hence the loss goes up as high as US $ 13.6 million that equals to Rs. Meanwhile. 22 million worth Range Rover by the bank. However. This is sufficient for seven months. Meanwhile.com/usubmit/2008/12/08/3841848. Lanka-e-News learns. 20 million. Lanka-e-News learns that the son of a top official of the Central Bank international credit agreement division in Chartered Bank's foreign debt section while the discussion for the hedging deal was underway. Rukshan Dias.000 metric tons of petroleum is due to arrive in Sri Lanka next week. (The actual price of a barrel of petroleum is $ 42 now. 2. 170.tmcnet.5 billion and he had withdrawn a Rs. that person is no more in Chartered Bank. Jayawardhana said that the Chartered Bank CEO?s upkeep expenses are Rs. This stock has been purchased $ 76 per barrel whilst a barrel of petroleum is $ 57 on the open market. another 50.8 million rupees. The bonus of the bank operator of the hedging deal.

If it falls to $25 dollars. since January 2007.C. But with prices crashing after that and now sitting at $41 per barrel. Putting further pressure on the controversial oil deal is a no-confidence motion being brought up against the government by the main opposition United National Party citing several corruption issues.As global oil prices dive. 8. who has been raising many issues of state corruption in the legislature. The government is under "severe pressure" over this issue. as . to protect itself against rising prices.[December 08. Sri Lanka. 2008 (IPS/GIN) -. are trying to restructure the hedging transactions with the government to minimize losses to the state. the Sri Lankan government finds itself saddled with a complicated oil hedging deal that could cost the country close to $1 billion. " The state-owned Ceylon Petroleum Corp. Dec. CitiBank and Standard Chartered Bank. However one proposal being prepared by SCB could worsen the state petroleum agency's plight. at current crude prices. and the latest liability could be as high as $1 billion by May 2009. State officials have been accused of high corruption over the deal with two foreign banks. said UNP parliamentarian Dayasiri Jayasekera. 2008] SRI LANKA: OIL HEDGING DEAL BECOMING BILLION-DOLLAR PROBLEM (English IPS News Via Acquire Media NewsEdge) COLOMBO. Banking sources said the foreign banks involved. the CPC ended up owing the banks. Weliamuna said the deals have exposed poor governance and corruption in the state mechanism. All that was brewing as a Sri Lankan group that advocates transparency prepared to mark Anti-Corruption Day on Tuesday. Neither the regulatory mechanism nor the Cabinet have grappled with them nor were they alert on questionable deals in the country. including the oil hedging deal and one over a bankrupt budget airline. When prices were over $135 per barrel in mid-2008. Transparency International-Sri Lanka's executive director J. the CPC benefited as it had sought protection on the upside. entered into contracts with five banks led by SCB.

TI is marking Anti-Corruption Day this week with a seminar in Colombo on Tuesday on governance issues relating to the global financial crisis and its impact in Sri Lanka. After the court's intervention the committee stopped functioning. "All these [hedging and Mihin Air] are gambles at a huge cost to the country.reported in the British Financial Times on Friday. the liability would be higher. are also on the committee. The Supreme Court. The court suspended the CPC chairman and asked President Mahinda Rajapaksa to consider replacing Mohamed Fowzie as petroleum minister. appointed a risk management committee to review all hedging contracts and minimize the losses. This corruption won't stop until the government shows political will to stem the rot. was to participate. Peter Eigen. "Should not such a committee have been appointed at the beginning. Fowzie has been accused of not properly supervising the CPC on the hedging deals. 17. on Nov. implicated in the deal. the government on Thursday reduced gasoline prices and said it was preparing a new fuel pricing formula. based on a report by investment bank Merrill Lynch. when hedging took place after January 2007? Isn't there a serious conflict of interest in appointing officials implicated in the deal?" one analyst asked. on Nov. were dealt with. But petroleum industry officials said this was like closing the stable after the horse has bolted and point to the fact that two CPC officials. alleging fraud and corruption in the hedging deals. The next hearing will be Dec. It is to be re-started this month with a fresh . After the crisis blew. 15. founder and former chairman of the Berlin- based anti-corruption watchdog. Under fire. Mihin Air is a government budget airline set up two years ago that has been swirling in debt of more than $50 million and was forced to suspend operations earlier this year. in response to criticism that the benefits of falling oil prices were not being passed on to consumers. the Cabinet. No one is accountable." Weliamuna said. temporarily stopped CPC payments to the banks until two petitions. 28.

a former chairman of the Ceylon Chamber of Commerce. Local bankers." one official said.injection of millions of rupees from the Treasury Department. say foreign trips paid for by foreign banks for CPC officials to learn about hedging were unethical. I don't think anything is wrong. unconnected to the deal. "If it is a proper commercial transaction. Chamal is aviation and ports minister. Chamal. said in a statement Friday that if the suspension of CPC payments continues. said the court has stopped payments only temporarily. "If the contract is determined to be void after the Supreme Court judgment. "If the court holds that the hedging agreements are tainted with grand corruption. then a contract is invalid. a local bank that has a smaller exposure in the hedging contracts. Gotabaya is defense secretary and Basil is presidential adviser.php? option=com_content&view=article&id=1397:ceylon-petroleum-corporation- hedging-deal-to-bribery-commission-&catid=1:political-news&Itemid=3 Ceylon Petroleum Corporation hedging deal to Bribery Commission Tuesday. you don't need to take the CPC chairman on foreign trips. Gotabaya and Basil. fraud or misrepresentation." Jayaratne said." Copyright ? 2008 Global Information Network http://www. Allegations of widespread corruption has dogged President Mahinda Rajapakse's government.thecolombotimes. 23 December 2008 00:50 . expressed the view that impropriety accusations in the hedging agreements entered into with SCB and CitiBank are valid. A senior banking industry official. If the CPC fails to make the payments. Chandra Jayaratne. the local branches of SCB and CitiBank may lose millions of dollars. Commercial Bank." On the question of whether the suspended payments could result in Sri Lanka being perceived as a country that defaults payments. The official added that head offices of these international banks should think twice before pursuing any legal action for non-payments because these are highly questionable deals and raise ethical issues. centering around his three brothers.93 million.com/index. bankers say. "our liability under our contract to make payments to our back-to- back market risk counterparty would total $8. who declined to be named.

Reportedly the Bribery Commission is to conduct further investigations into the controversial deal that was signed last year between the CPC and the Citibank Sri Lanka and Standard Chartered Bank when the fuel prices were higher in the global market.H.html Petrol hedge deals probed Sunday. five-man teams from the CB visited five commercial banks on Thursday and Friday and obtained all documents pertaining to the transactions. We will be looking at all the documents over the weekend.Following the Supreme Court order the Central Bank of Sri Lanka is planning to send its initial report on the Ceylon Petroleum Corporation (CPC) hedging deal to the Bribery Commission.com/news/2008/11/35170_space. As a result of a Fundamental Rights petition filed by Laugfs Gas Chairman K. Under the deal CPC locked in fuel prices at around US$ 125 per a barrel until June 2009. even as a government minister said there will not be any more hedging next year. As criticism grew over huge . a senior CB official said. http://www. criticized over mounting losses. 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. But the sudden drop in global fuel prices to about US$ 40 per a barrel now would cause the government to lose nearly US$ 300 million.lankanewspapers. Sources of the Central Bank confirmed that its initial report on the deal between CPC and two private banks is almost finished. 16 November 2008 . We believe there is a problem in the due process in these transactions and want to get to the bottom of it. Standard Chartered Bank (SCB) CEO Clive Haswell told The Sunday Times that CB officers `visited` the SCB on Thursday.11:48 AM SL Time The Central Bank (CB) has begun an extensive probe on the oil hedging deals by the Ceylon Petroleum Corporation (CPC). Wegapitiya against the deal. Earlier the Supreme Court directed the monetary board of the Central bank to probe this deal and to submit an interim report and this initial report follows it. the Supreme Court sacked the former Chairman of the CPC Asantha De Mel and asked the government to consider appointing a new petroleum minister. adding our report will be based on whether the due process in line with CB guidelines was followed .

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`. Deutsche Bank and People`s Bank.) 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. according to Mr De Mel. Commercial Bank. the CPC will be paying $300 million to the banks over the next six months. in an interview with this newspaper. de Mel also rejected The Sunday Times reports that the CPC may have been misled.5 million to the banks.H. 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. the other banks involved are Citibank. If current prices persist ($52-$60 per barrel). Citi and Commercial flanked 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. Mr. (A detailed report on the interview with the CPC chairman is in the FT section. Petroleum Minister A. saying the corporation was adequately informed of the risks and later. So far the CPC has paid out $38. 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. he said.M. 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. But this committee would be appointed only if the government decided to go ahead with oil hedging.monthly payouts by the CPC to the banks due to falling oil prices. 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. 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. Mr. . While the SCB is said to have the widest exposure with the CPC on the oil hedges. mainly SCB and Citi. Mr. 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. SCB. 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.

14:23 GMT.html http://www. January 27. Citi Bank. The Supreme Court earlier called an interim order on this controversial oil hedging deal suspending the Ceylon Petroleum Corporation (CPC) Chairman Asantha de Mel and CPC Deputy General Manager (Finance) Lalith Karunaratna. 2008. Commercial Bank. 15:08 GMT. Sri Lanka. but the Court refused the request. Colombo: Widening the problems at Ceylon Petroleum Corporation (CPC) further the Minister of Petroleum and Petroleum Development A. Standard Chartered. Sri Lanka. Dec 03.html Sri Lanka Supreme Court terminates the oil hedging deal Tuesday.colombopage. but the government has refused to do so. ColomboPage News Desk. Terminating the interim orders Chief Justice Sarath N. 100 per liter.Source(s) http://www.M. .H. Fowzie today told the Parliament that the oil hedging deal was a cabinet approved project. Silva said. 100 per liter. Colombo: Sri Lanka Supreme Court today terminated all the interim orders earlier issued on controversial oil hedging deal entered into agreement by the Ceylon Petroleum Corporation with some local and international banks. says Sri Lankan oil minister Wednesday. ColomboPage News Desk.html Oil hedging deal was not my concept. if the Executive did not comply with the Judiciary.colombopage. When the case was heard this morning counsel for the government asked for more time to study the implications involved in reducing petrol prices to Rs.lk/081116/News/sundaytimesnews_01. December 3. http://www. 2009. Under the interim order the Supreme Court ordered the government to reduce the petrol price to Rs.com/archive_08/December3142307RA. Deutsche Bank and People’s Bank.com/archive_09/January27150857RA. Additionally the Supreme Court has suspended the CPC foreign exchange payments due to five commercial banks. no purpose in proceeding with the case. Jan 27.sundaytimes.

28 January 2009 02:50 50 views (NIDAHASA News) Sri Lanka Supreme Court yesterday (27) revoked the interim order issued earlier suspending the hedging contract. http://www. Terminating the interim orders Chief Justice Sarath N.wordpress. Silva said.com/2008/12/15/standard-chartered-bank- all-about-its-frauds/ . the minister of petroleum and petroleum resources development. and Ashantha de Mell. Ceylon Petroleum Corporation (CPC). Oil hedging deal at Ceylon Petroleum Corporation is one of the burning issues in the country currently and former Chairman of the CPC Asantha de Mel had to resign on the orders of the Supreme Court. Meanwhile main opposition United National Party MP Lakshman Kiriella said if the Cabinet had approved this oil hedging deal all the Cabinet should resign as they are responsible for the losses now.Making a special announcement at the Parliament this morning the Minister stressed that the oil hedging deal was not his concept but it was a concept of the Central Bank Governor. to subject the Ministry of Petroleum to the jurisdiction of the President and to remove Ceylon Petroleum Corporation (CPC) Chairman Asantha de Mel from the post would also be repealed. no purpose in proceeding with the case. chairman of the state oil firm.com/news/news. he added. He pointed out that the Central Bank Governor has urged that hedging be commenced several times even before Cabinet approval was obtained for the deal. The government will have to pay 500 million US dollars to the foreign banks due to the revoke of injunction. According to CPC sources.H. Supreme Court also suspended A. if the Executive did not comply with the Judiciary. Ajith Nirvard Cabraal. it will have to pay around $ 18 million extra per month to banks for fuel due to hedging agreement. The orders to suspend the payments to the foreign banks.M.php?go=fullnews&newsid=679 Sri Lanka Supreme Court Terminates CPS's Hedging Deal Wed.nidahasa. http://srilankareports. Fowzie.

com/2008/11.Options Disable Get Free Shots srilankareports.wordpress. About Mahinda and Familly. About LTTE . intentional fraud . Sri Lanka’s Situation Reports:: 24 Hours News Update Reports Real Situation of Sri Lanka : War and Crime By Government and Paramilitary Groups ..well-conceived.the problems faced by innocents in Sri Lanka Standard Chartered Bank :: All about it’s Frauds HEDGING ..

Reiterating that hedging through derivative instruments is a separate speculative gamble— distinctly different from the purchasing of petroleum oil in a volatile market or otherwise— Ameresekere says it is completely unrelated and alien to the actual purchasing of petroleum oil.Commercial banks led by Standard Chartered Bank duped the Ceylon Petroleum Corporation. Nihal Sri Ameresekere also said the CPC was not authorized to hedge through derivative instruments and could only carry out activities referred to in the CPC Act—which is essentially and solely to deal with petroleum products. He says linking the two was a misleading deception that had resulted in a catastrophe. its former chairman Ashantha de Mel and others into unsuspectingly buying dubious deals in a well-conceived. when the Central Bank is expected to present a report on the controversial contracts. Citibank. intentional fraud on a government-owned statutory corporation. one-sided and unjust. He says it is misleading to call it ‘petroleum oil hedging’ when it is. Therefore. former Secretary to the Ministry of Finance and Treasury Secretary P B Jayasundera. The Supreme Court will take up the hedging deal again tomorrow. Filing an intervening petition in the oil hedge case which is currently before that Court. inequitable. Standard Chartered Bank. speculative business activity. Not petroleum hedging Ameresekere describes the nature of the agreement entered into between the CPC and the five commercial institutions as ‘hedging through derivative instruments’. a public interest activist told the Supreme Court last week. the Central Bank or cabinet could not have suggested that the CPC embarks upon or engages in such separate. Deutsche Bank. He also seeks to make Central Bank Governor Ajith Nivard Cabraal. in effect. Ameresekere urges the Supreme Court to declare the hedging derivative instruments entered into between the banks and CPC null and void and of no force or avail in law. He contends that this has nothing to do with the actual purchasing of petroleum oil by the CPC. . “speculating and/or gambling and/or betting on the movement of petroleum oil prices on ‘notional quantities’ through a scheme of hedging through derivative instruments”. He calls the instruments unfair.

Deutsche Bank.” he states. Hence.” Attached to the intervening petition are true copies of invoices from Hemas Travel (Pvt) Ltd charged to Standard Chartered Bank in respect of air travel of the relevant public officers. Notably. A bank is required to have ascertained whether the CPC was authorized and empowered to have dabbled in speculative business of hedging through derivative instruments. the European Parmalat bankruptcy was caused by ‘derivatives’ of the reputed US banks J. Ameresekere accuses the five financial institutions—Standard Chartered Bank. Banks A simple Internet search would have disclosed large-scale scams and frauds associated with hedging as well as derivative instruments. but on the other and to advise a customer to protect the very interest of the customer. Ameresekere’s petition states. and no professional ought to take undue advantage of such trust reposed in a professional. Commercial Bank and People’s Bank—of conduct unbecoming and unworthy of banks. it appears that Standard Chartered Bank has unprofessionally induced.Commercial Bank. “On the other hand.P. espousing hedging through derivative instruments ought to have been done with “utmost caution and with requisite specialized expertise obtained through due process”. . He points out that a bank carries a fiduciary responsibility not to cheat and/or dupe and/or to get the better of a customer. Citibank. and People’s Bank parties in the fundamental rights application filed by Laugfs Gas Chairman W K H Wegapitiya. Kapila Ariyarathne—head of corporate and institutional banking at People’s Bank—had also been a member of the ‘Oil Hedging Report Study Group’. People’s Bank subsequently entered into a hedging derivative instrument with the CPC. the specialized expertise. The government The petition states that a study group appointed by P B Jayasundera (as secretary to the ministry of finance and planning) had presented a report in November 2006 titled “Oil Hedging Report of the Study Group”. therefore. For example. The bills are dated 13 February 2008 and 29 September 2008. competence or exposure of the members of this study group to hedging through derivative instruments is not known. subject to regulation and supervision. Meanwhile. Morgan Chase Bank. However. enticed and compromised public officials to sell dubious deals. “A banker is a professional in whom reliance is totally placed by a customer. commercial banks operate under a Central Bank licence and are. Bank of America and Citigroup.

Ameresekere says that it should also have received individual approvals from the controller of exchange under and in terms of the Exchange Control Act. which meant that there was no question of retaining other experts to look into deals. Cabinet appointed negotiating committees and technical evaluation committee should have been set up. Approval had been granted for the proposals to be implemented without delay.php?nid=1465301196 . There should have been specific cabinet approval in the context of the monetary value of instruments entered into. it should have been handled—if at all—by a specialized financial agency with the input of specialist expertise and experience with due process. He also says that if the banks made money that could be found out by obtaining a court order to examine the bank’s books. He says he did not have to go back to cabinet each time he carried out a hedging deal because the hedging scheme had been approved by cabinet and there were specific instructions to carry out these instructions as expeditiously as possible. De Mel’s primary contention is that he was only an official carrying out instructions handed to him by the Central Bank.lankabusinessonline. De Mel’s version: This newspaper also contacted Asantha De Mel a former chairman of the CPC who was removed from his post by the Supreme Court for his role in the hedging affair.com/fullstory. He also says that oil trading is a volatile market. He said that the zero collar option was agreed to because if there was to be a cap at the lower end. His brief explanation for the entire hedging failure is that there was global financial meltdown which caused the oil prices to dip in a way that absolutely nobody expected. as suggested by the Central Bank of Sri Lanka. http://www.The cabinet of ministers had considered a memorandum based on this study group report which was submitted by Minister of Petroleum and Petroleum Resources Development A H M Fowzie. Flawed Ameresekere says that hedging through derivative instruments (involving high levels of public funds) ought to have been negotiated and entered into only with strict adherence to public finance circulars and guidelines. His choice he said was to obey instructions and go by the Central Bank advice. as the speculative business activity of hedging through derivative instruments could not have been undertaken by the CPC. after cabinet had approved the Central Bank’s hedging scheme. a premium had to be paid to the banks. In any case.

But when the position went against the utility. The hedged volume was about 33 percent of CPC's imports of 2. 2008 07:18:52 Sri Lanka CPC looks at capping hedge losses Nov 11. By writing more than one option. 09 March 2009 09:03:47 Zero Sum 11 Nov.5 million barrels of crude and refined products a month. De Mel said CPC had originally hedged "550. Zero Cost CPC has hedged about 30 percent of its imports through a zero-cost structure using options. De Mel says he bought in-the-money structures.000" barrels but leveraging in the swap contracts the utility has entered into had bloated volumes to 900. . But when the position went against it. But the banks insist that there was no mis-selling." says de Mel. Analysts say such structures can seem irresistible. The structure would have given CPC only three months of imports at a fixed price. CPC had to buy twice the volume till the middle of next year. when the spot price was already high. De Mel says he went into the contracts with eyes open. 2008 (LBO) – Sri Lanka's state-run Ceylon Petroleum Corporation is looking at ways to cap losses from hedges that went against it by entering into opposite positions. and getting multiple premiums." he said.Mon. I'll have to pay the balance. Zero cost structures operate with the CPC writing an option and using the premium to buy one. Chairman Ashantha de Mel said. if they start rising. "But the downside is I can’t defend that risk as the prices. CPC had 'leveraged' its zero cost structure.000 to 600." But CPC has also exhausted most of the lines with banks it deals with. Oil Bulls "People were saying oil would go up to 200 dollars a barrel at the time. "I can take a producers hedge where it is upside down compared to the normal one going up and I can collect on the downside. De Mel said.000 suddenly when oil prices collapsed. it had to buy twice the volume at a price higher than the market for a longer period.

5 million dollars being paid Monday.000 dollars Monday and a payment with Standard Chartered was falling due on November 14.000.De Mel says he had the chance to cut the position by paying a fee when oil prices started to come down but "everyone" including Goldman Sachs and Citibank was saying it would go up. by its former chief executive who happened to be the US finance secretary. Though "everyone" appear to say on the surface that prices are going only up. . The hedge contracts committed the utility to an average price of "about 100 dollars" a barrel. Commercial Bank was also paid 500. Goldman Sachs almost collapsed due to bad bets made in debt markets and was saved by being converted into a commercial bank. De Mel said.5 million dollars being settled on Friday and 7. CPC says was because "accounts had closed" or because "money had to be transferred". De Mel said. had been warning from the beginning of 2008 that the commodity bubble had to collapse after the underlying banking bubble collapsed (link)last year. In the first nine months of 2008 the hedge contracts went in CPCs favour as it made profits of over 20 million dollars but from October CPC had lost 27 million dollars. If the utility had bought plain vanilla options he would have been able to exit hedges but CPC had not been authorized to pay up front premiums by the cabinet. This means half the market needs to have the opposite 'view' to make the system work. Exit Option He said Citibank had been paid with a "small delay" with 6. Now oil was trading around 60 to 70 dollars a barrel. de Mel said. de Mel said.unlike the underlying commodity markets . and Commercial Bank 20. Classical monetary economists and the International Monetary Fund in particular (link).000. People's Bank 100.000.000 barrels. The delay.000 barrels. meaning one man's profit is another man's loss. derivative markets . Standard Chartered 300. The outstanding contracts with Citibank were 400. denying reports that CPC was planning to or was pressured to default on the contracts.are zero- sum games. Deutsche Bank 100.

When prices fall a price-formula also makes sure that Sri Lanka is cost competitive. There is also a peculiar belief in Sri Lanka that 'inflation' is a petroleum phenomenon and not a monetary one."At the time we told them and said we would like to go in and pay an upfront premium and do the hedging so we won't have the downside risk. When prices rise a price formula eliminates losses. It is duty of media to convey the right message that the concept of hedging is not wrong only the instruments used by CPC went wrong. We should look at developing a hedging strategy for the country in a time when there is a widespread interest of the concept called hedging. It’s an ideal time for Sri Lanka to look for sticking into long term proper hedging contacts. The selection of derivatives is not a trivial process and should be done by experts." de Mel said. There are lots of gray areas with regard to inputs used for pricing of these . macro-economic imbalances and inflationary pressures. "But the cabinet only gave us permission to do a zero cost hedging operation. The real benefit of heading with regard to petroleum is actually realised only now since the price has reversed to level where it stood three years before. eliminates pressure on the exchange rate and forces conservation." A plain vanilla option allows the utility to exit the contract if the position goes against it. not to pay any premium upfront. lasantha Dec 15 Now this country has unnecessary fear of hedging or use of derivatives that created by groups with different interest. Analysts say CPC got into trouble with the hedge because it was not allowed to market price products by politicians who wanted to buy votes by keeping fuel prices low. De Mel says options now trade around 11 dollars a barrel amid high volatility in prices. The utility was also forced to abandon a pricing formula by politicians. eliminates the build-up of credit. Of course with due approval process as required by the country’s legal system (may be by Attorney General or Supreme Court). Corrected .Citi/Standard Chartered volumes READER COMMENT(S) 13. CPC should get advice of risk management experts with regards to OTC derivatives after identifying the right hedging strategy for the country.

for him to gamble with the economy. Whole of UAE. It is laughing thing to say that Mr. the main issue is not with the hedging itself. 10. Today the markets are manipulated by big fund managers.rubber. De Mel or any other person is responsible. but with the way it was done. USA will collapse. There must be levels of responsibility and accountability. Mr. Some analyst were saying that it would go up to USD 200. Investment Banks. the traders and almost everybody else were expecting oil to go up. There is also the accusation that hedge funds backed up by oil producers were responsible for the hike in oil prices to compensate for the losses most financiers( big timers) racked up by investing in the property markets and equities. Dilshan Punchihewa Dec 01 I think. . the government entities are good in checking small issues like the late arrival of employees and forget the big issues. and industrial raw material . textile yarns etc to name a few 12.EURO/USD. different type of instruments ( even synthetic) to suite different movements in the markets most of which cannot be understood by ordinary people. Intentions are as important as results unless one thinks that there is some fraud involved. For example . Thats why the Americans are so nice to the Chinese. This is the New realty! 11. any individual should not be over powered by the system. such as many petroleum products (including aviation & marine fuel). if the Chinese Sovereign Wealth Funds sell all their US bonds. They have the clout to move markets. Had the oil prices turned the other way to $200.OTC options. lakshman Dalpadado Nov 29 It's not only Mr De Mel who got it wrong. there are lots of areas where we can use derivatives. GBR/USD.De Mel would have been regarded as a national hero. lakshman Dalpadado Dec 05 As I mentioned before we should not come down too hard on the people who were involved in CPC hedging contracts. cross currency . Kuwait. Finally. Without knowing full details I do not think it's appropriate to start any 'blood letting' As I said in my posting. It was done with good intentions although the results are a financial disaster for the CPC and the country. if he can not pay for the damage done by mostly as a result of a poor system. When property goes down equities go up . Unfortunately. before many in the oil trade including OPEC. Qatar. commodities go up. Intellectuals in the government hierarchies must serious think about this as their turn will come sooner or later. Also.when commodities go down OIl go up and the cycle repeats.when equities go down. electricity. hedge funds and most investments banks also got it wrong.probably backed up by speculators.

Bank or CPC. Please note that all your private contractors are getting together and quoting on prices for maintenance and construction projects so that CPC pays a huge premium which goes to certain people. it was plagiarized by Cabral. However. Introduction of the concept of Hedging is my initiative. Upul Nov 17 We all have clearly defined roles to play in the society. Bur Mr Ashantha De Mel did not know that there was a financial crisis in the making because he was more into cricket than BBC business News. UAE is going bankruptand the property market is going to collapse .. I was the one who made the proposal to the government. I personally know how much corruption is going on in at Ceylon Petroleum. While. 7. The question remains....do not listen to their hype. 9. the plan has now gone totally not in favour. the governor and tried to present it has if it was coming from him and he got caught in the act when he made a blunder at a presentation making a mockery of the concept. Dimantha Nov 13 A Typical old school manager trying to be smarter on Hedging. Well Mr De Mel. He is more of a cricketer and less of a Energy hedger and his able assistant Lalith Karunarathna with a rudimentary knowledge on the mechanisms of Hedging recommended the Zero Cost Collar. De Mel now claiming that he and his Lalih Karunarathna are the two hedgindg experts in Sri Lanka got exposed further when they had to pay out big money to the Standard Chartered Bank and the Citi Banks and not stopping at that went on to protect the Banks. Subhas Nov 29 Did the banks explain to CPC the potential losses that CPC might have to carry under the hedge if the petroleum rates were to come down? What is the position of the Central Bank re this hedge? 8. sam Nov 11 .Kuwait stock exchange was closed for several days and the government resigned a few days ago. De Mel has to be given due credit for implementing the concept of hedging. whose interest is De Mel Protecting. to get credit if the dollar value went to 200 Dollars. Help the society. he also has to be held accountable for getting involved with the local banks and buying into the wrong strategy "Zero Cost Collar" hedge. 6.. I think you should resign for your wrong Decision. All were betting oil to go up to 200 USD a barrel!. Act wisely.

Mohamed Nov 11 CPC has brought heavy burden on the public by not reducing fuel prices when world oil prices have come down drastically. 3. will he reimburse the losses ? 7. If the answers to the above questions are not satisfactory. 5. A. Jonny Nov 11 Country has to pay for the irrational moves of CPC? 4. Ashantha de Mel a competent person to hold the post of Chairman of a vital corporation like the CPC? 2. now seems a time not to be too careful.R. best is to take a producers hedge and source and set off the payments. Is Mr. The CPC has bought oil till middle of next year. it is high time the CPC is replaced with a qualified. Mr. Did he have any experience in the business of hedging in the oil trade and able to understand the agreements connected with it to engage in the business of hedging? 5. If he has messed-up the management and brought about massive losses to the company and also hardship to the general public with high fuel prices. . If Singapore can sell petrol at about Sri Lankan Rs 62 per Litre. What experience he has in the oil trade? 4.Some body may have to see if the banks made a excessive profit out of this (high fees) also what the qulifications of the people in SL who looked at this. De Mel without trying to convince the public of his knowledge about zero cost structures or producers hedge could do a great service to the nation by resigning from this post and go back to SLC or somewhere so that we do not have to suffer. So that is the reason the price cannot come down before May 2009 according to chairman. why can't Sri Lanka sell for atleast Rs 80/Litre? Public should not be asked to bear the burden for the mismanagement by the officials and polititions. 12M vs 3 M sounds fishy. Was relationship/political connection considered the main criteria to give the above post to him? 6. As regards mismanagement in the CPC it pertinent to ask the following questions: 1. competent and with a person who is knowledgeable in the oil trade. Bandula Nov 11 The cat is finally out of the bag. What is his highest academic qualification? 3.

Sri Lanka's supreme court has ordered the state-owned oil refiner. The CPC is also alleged to have not informed the cabinet clearly about the risks of derivatives trading. The probes were launched after revelations that the oil hedges had turned sour and that the CPC stands to lose hundreds of millions of dollars as it was locked into buying oil at prices far higher than current market prices.php?nid=342511919 Mon. Deutsche Bank and smaller contracts with two local banks could have ranged between 300 to 400 million dollars. De Mel should get a "check up from the neck Up' done before anything else. http://www. Ceylon Petroleum Corporation (CPC). to suspend controversial hedge payments to banks until a central bank probe into the matter is over. Under the CPC's hedging deal with banks. Ashantha de Mel.2. The ruling came in the wake of a controversy over the CPC oil hedges.5 million barrels of oil at around 100 dollars when the market price is half that. 09 March 2009 09:03:54 Oil Bets 4 Comment(s) 28 Nov. it is locked into buying about a third of its monthly imports of 2. Banda 1. . be replaced. The court also ruled that the chairman of the CPC. CPC chairman Ashantha de Mel has maintained that the deals were done on cabinet instructions which had not allowed the petroleum firm to make up front payments to buy less risky hedges. which are now the subject of a probe by both the central bank and a team of Cabinet ministers. 2008 (LBO) . A 5th grader is smart enough to understand how stupid the original hedge arrangement was.lankabusinessonline. Standard Chartered. It also ruled Friday that President Mahinda Rajapaksa should take over the petroleum ministry from minister A H M Fowzie.com/fullstory.. Estimates of losses in the contracts with Citibank. 2008 14:21:35 Sri Lanka court suspends petroleum retailer's hedge payments Nov 28. Banda Nov 11 I think Mr. Nov 11 Very well said.

Viraj Hewage Dec 04 Hedging/financial derivatives are a gamble and they are inherently flawed. Banks strike deals to make money .we get at least 3 calls a week from banks in UAE offering personal loans . So if CPC struck an oil futures deal two months back (when price was around $ 135 a barrel) to buy buy oil at $100 per barrel in January 2009 . Its hard to find an economic theory that could explain a $ 100 per barrel drop in oil prices in such short span leaving out the possibility of price manipulation. So there should be laws to prevent banks from engaing in unethical practices like bombarding people with all kinds of rosy offers uninvited. no deal.capitalist market mechanisms are inherently flawed and designed to make the rich even richer.they hang up. If you do hedging . hedging is permitted but gambling is not.we must not get caught. Banks are expert operators. I doubt if CPC staff had the necssary knowhow to strike a hedge deal on their own ( assuming they did it on their own). Having said that responsible organizations like the CPC must exercise due diligence at all times and never act unilaterially. not exploit.READER COMMENT(S) 4. The moral of the story is future is unpredictable and so are " futures " markets and therefore " futures" deals. if you dont know it . If banks repeatedly call me for personal loans i might eventually get tempted to go for a loan I cant pay back and end up in trouble. In the middel east . The point is powerful institutions like banks must serve society . dont do it. Banks sell well . For example . Paradox. Now that the oil price is around $50. . will the caller ( the saleperson) if default . On the otherhand oli plummeted from being 147 $ per barrel 6 weeks back to about 50$ per barrel ( the current rate). In general . It is an open secret that price of oil is artificially manipulted by vested interests (including banks). if there is no money . cover all your risks (bottom risks too .so I ask them .some pundits predicted it would reach $200. it would have been seen as a great deal because oil price was on the up .it depends on how one negotiates with the bank). obviousely CPC deal is severly scrutinized / critisized. It takes a real hedge player to strike a balanced deal. still it may or may not work in your favour.

1. eagle Nov 28 Thanks Mr. At the end of it all Sri Lanka must and will learn from its mistakes. less oil dependency . I know nothing about hedging. minister-lawyers . The only thing that appears to be not corrupt is the judiciary which is fast becoming the the only resort of the people. 04:47 PM S. but I have what those who created this debacle lacked .biz. Also the relevant counter parties should have ethical value rather than maximizing their profit. This decision will enforced to government officials to re think prior to use their power and also private sector should not always think about the profit. Its high time that our corrupt politicians realise that they cannot get away easily in the future.html Friday November 28.common sense. They should earn profit but it should not unreasonable. Nihal Wijethunge Nov 29 We as common people are lucky to have a chief justice like this who is not corrupt and bold enough to take strong decisions for the people.3rd world countries must strive to be self sufficient . Ashantha. 2. 3.yahoo. better public infrastructue . President for taking over the petroleum ministry from minister A H M Fowzie and bye Mr.com/28112008/323/s-lanka-court-suspends-oil-hedge- minister-lawyers.healthy living ( no smoking and drinking so people can meaningfully contribute to theirs and countries well being). We can learn from the ongoing chinese capitalism and russian capitalist socialism. Nuwan Nov 28 People should not suffer due to the unacceptable agreement entered by few of officials. Marry x-mas http://uk. In Mahinda Rajapaksha we have a leader with a vision who feels the nations pulse and I am confident that under his command Sri Lanka can and will get better.Lanka court suspends oil hedge.

Opposition politicians have questioned the hedging arrangements by the state-owned Ceylon Petroleum Corporation (CPC). Hedging analysts said the island nation would have to pay at least $300 million during the next seven months if global oil prices remained at current levels around $50 per barrel.' He said in a statement the bank was not directly affected. which were made in expectation that the oil prices would hit $200 per barrel. chairman of the Ceylon Petroleum Corporation.' said lawyer Uditha Egalahewa.news) in London said: 'As the matter is now sub-judice it would not be appropriate for us to comment on the interim ruling. .Sri Lanka's Supreme Court suspended the oil minister and halted payments to banks stemming from a hedging deal that could cost the state oil company hundreds of millions of dollars. Deutsche Bank declined to comment. The court has yet to issue formal notifications of its ruling. Lawyers said the court had suspended A. until the final judgement. Nov 28 (Reuters) . Standard Chartered Bank.' he told Reuters. with Citi Bank. lawyers said on Friday. Asked to comment. Prices have dropped instead and the hedges mean the country will not benefit while the banks do. Deutsche Bank (Xetra: 514000 . the minister of petroleum and petroleum resources development. A spokesman for Standard Chartered (LSE: STAN.L .H. Representatives of the CPC and the other banks involved could not immediately be reached for comment. who appeared on behalf of the petitioners seeking to cancel all hedging payments. Fowzie said he had heard of the court's decision. and Ashantha de Mell. 'The Supreme Court granted interim relief suspending all the hedging payments to the banks until the final hearing.news) and two local banks. 'I do not know what the final outcome will be.M Fowzie.COLOMBO.

SCB and Citibank have been accused of not properly informing the state petroleum supplier of the risks involved in the futures contracts.html Asia Times Nov 26. 'This might make it very difficult for Sri Lanka to borrow commercial loans in future as investors will be concerned over termination of contracts on those borrowings as well.7 billion or the equivalent of more than two months worth of imports . (Reporting by Ranga Sirilal and Shihar Aneez. but deny any . additional reporting by Steve Slater in London. following disastrous oil futures contracts between the banks and the state-owned Ceylon Petroleum Corporation (CPC).atimes.' Hedging analysts said the deal. had been done in such a way that CPC had to pay to the banks when the oil price fell below $100 per barrel.They have fallen from a record above $147 in July. designed to protect oil importer Sri Lanka against large movements in prices. 2008 Sri Lankan oil bet burns $300m hole By Feizal Samath COLOMBO . Financial analysts said the deal could impose a major burden on the $32 billion economy when Sri Lanka's foreign exchange reserves have declined more than a quarter since mid-September because of the need to protect the rupee. An analyst said the court decision might damage Sri Lanka's credibility in international financial markets. editing by Anthony Barker) Keywords: SRILANKA OIL/HEDGING http://www. who did not want to be named. 'Future agreements with any party are at risk and will have serious financial repercussions with possible increase of risk premium.The Sri Lankan government is grappling with a US$300 million payout to Citibank and Standard Chartered Bank (SCB).worth around $2.com/atimes/South_Asia/JK26Df01.' said the analyst. Sri Lanka's foreign reserves .are already under pressure from the global economic crisis.

Analysts recall that 15 years ago these two banks were implicated in a huge stock market scam following flagrant violation of the Reserve Bank of India guidelines on portfolio management services and ended up paying fines totaling $21 million. three others banks also followed suit .to get into oil futures contracts with the CPC. the benchmark Brent world crude price fell to $46.paid out just in two months . whenever the price rises between $100 and $135 per barrel.and is set to pay another $300 million (if the oil prices remain in the $50-$60 per barrel range) or more if it falls further. denied claims that the CPC planned to default while also saying the corporation was made fully aware of the risks by the banks.wrongdoing. the CPC gained $24 million (payment from the two banks) but lost $38.33 on July 11 this year. The Sri Lankan crisis came to the fore this month after newspaper reports hinted that the CPC may default on its October (monthly) payment to the banks due to a cash problem. After the SCB and Citibank got involved in the futures contracts. a drop of almost $100 dollars per barrel from $143.5 million . . De Mel admitted that payment at current prices would be over $300 million. The deals were made through a "zero cost collar" instrument where no premium is paid by the customer and the risks are shared with the banks. The CPC decision to hedge on oil as a protection against volatile oil prices came in January 2007 when there was speculation in the market that oil prices would rise to as much as $200 a barrel in the coming months. Any fall in prices below $100 (without any restriction unlike on the topside) means the CPC pays the banks. On Friday.on a smaller scale however . flanked by the CEOs of the two banks. Central Bank governor Nivard Cabraal said its guidelines in derivatives trading had not been followed. Negotiations are underway between the CPC and the banks to restructure the contracts and reduce the burden on the fuel supplier. the banks pay an agreed amount (up to a maximum of $1. Under the zero cost collar option.5 million a month) to the CPC. Overseas officials from the two banks have been in Colombo over the past two weeks on "damage control" visits. and that the banks had not properly advised the CPC on the risks involved in the hedging contract.47 per barrel. Since January. CPC chairman Asantha de Mel then called a press conference where.

Opposition legislator and member of the Parliamentary Committee on Public Enterprises (COPE). Rajapakse summoned de Mel for a meeting. Citibank Sri Lanka chief executive Dennis Hussey said the Sri Lankan government started the hedging process following a special cabinet approval. "This is what happened in this case." Arunajith. crude oil prices are poised to fall by another 15% in the next week while recording their lowest price since May 2005.was not consulted. ''Neither SCB nor Citibank are specialized energy traders nor do they have the wherewithal to provide a hedge to the CPC for a huge exposure of $2 billion''. Dayasiri Jayasekera. described the issue as serious. a political appointee and associate of President Mahinda Rajapaksa and Petroleum Resources Minister Mohamed Fowzie. a Sri Lankan who initially made a proposal to the Sri Lankan government at the end of 2002 to introduce hedging. and they accuse the banks of selling the wrong option and not advising the CPC of the risks. But CPC's board of directors said no such undertaking was given and are blaming de Mel. We will be fully questioning Asantha de Mel on Thursday to get to the bottom of this. demand growth has fallen to its lowest in 23 years due to the world economic crisis. Attorney General Priyadas Dep told The Sunday Times newspaper that his department . Upul Arunajith.which normally scrutinizes state contracts to check its legality . Newspapers and analysts have clearly indicated that the CPC went for the wrong hedging (futures) option where the payment on the downside (borne by the CPC) was unlimited while on the topside (liability for banks) was restricted. At de Mel's press conference. "I had personally informed them of the impending disaster. Issues of impropriety are also surfacing with claims that some CPC officials got favors from the banks." he told Inter Press Service. which has been carefully documented. Even though Organization of Petroleum Exporting Countries is cutting down production to stem the sharp price fall. "Someone must be accountable for this huge loss to the country. SCB's Sri Lanka chief Clive Haswell said the bank had received a written undertaking from the CPC that the latter was aware of the risks. A parliamentary committee had also summoned de Mel for a . said that there were warning signals that the zero cost dollar instrument was the wrong strategy.'' he said. international market analysts say. As pressure mounted on the government. told IPS by e-mail that if the wrong instrument is used. a derivatives specialist based in Canada. for taking decisions without full board authority. the hedge will sooner or later go in the wrong direction and will lead into a crisis.According to international news agency reports.

" one analyst said. the powerful CPC chairman's political connections will probably come to his rescue.com/article/marketsNews/idUSCOL4879920081128 S. seemed to relent later under pressure and are now guiding a re-negotiation of the payments. As demands are being heard from some sections of the government to default payment on the basis that the banks misled the CPC.L). with Citi Bank (C. Prices have dropped instead and the hedges mean the country will not benefit while the banks do. Political observers say while de Mel and the finance minister must take the rap for undertaking to use a hedging option where the downside risks were greater. Opposition politicians have questioned the hedging arrangements by the state-owned Ceylon Petroleum Corporation (CPC). lawyers said on Friday. Market analysts said that the two main foreign banks have hedged these instruments with the New York Mercantile Exchange (NYMEX). which were made in expectation that the oil prices would hit $200 per barrel. Standard Chartered Bank (STAN. including for costly war against separatist Tamil rebels in the island nation's north.Sri Lanka's Supreme Court suspended the oil minister and halted payments to banks stemming from a hedging deal that could cost the state oil company hundreds of millions of dollars. pressure has been mounting to pay up or face international repercussions.) http://www. requesting time for proper preparation.Lanka court suspends oil hedge. Deutsche Bank (DBKGn.DE) and two local banks. who had initially threatened to rap the banks for not following guidelines. This was clearly seen when central bank officials. (Inter Press Service. minister-lawyers Fri Nov 28. .N).reuters. 2008 11:32am EST COLOMBO. The government has resorted to large-scale borrowings in the international market over the past two years to fund state spending.hearing but the latter did not turn up. "Any default to the NYMEX by the banks will be perceived as default of a sovereign debt which will be disastrous to the country's international rating and jeopardize Sri Lanka's standing internationally to seek foreign commercial loans. Nov 28 (Reuters) .

chairman of the Ceylon Petroleum Corporation. Hedging analysts said the island nation would have to pay at least $300 million during the next seven months if global oil prices remained at current levels around $50 per barrel. until the final judgement.M Fowzie. designed to protect oil importer Sri Lanka against large movements in prices. "This might make it very difficult for Sri Lanka to borrow commercial loans in future as investors will be concerned over termination of contracts on those borrowings as well. and Ashantha de Mell. Lawyers said the court had suspended A. They have fallen from a record above $147 in July. Fowzie said he had heard of the court's decision." he told Reuters. A spokesman for Standard Chartered in London said: "As the matter is now sub-judice it would not be appropriate for us to comment on the interim ruling. who appeared on behalf of the petitioners seeking to cancel all hedging payments." Hedging analysts said the deal. "Future agreements with any party are at risk and will have serious financial repercussions with possible increase of risk premium. Financial analysts said the deal could impose a major burden on the $32 billion economy when Sri Lanka's foreign exchange reserves have declined more than a quarter since mid-September because of the need to protect the ." said lawyer Uditha Egalahewa."The Supreme Court granted interim relief suspending all the hedging payments to the banks until the final hearing. An analyst said the court decision might damage Sri Lanka's credibility in international financial markets. had been done in such a way that CPC had to pay to the banks when the oil price fell below $100 per barrel. who did not want to be named. "I do not know what the final outcome will be." said the analyst." He said in a statement the bank was not directly affected. Deutsche Bank declined to comment. The court has yet to issue formal notifications of its ruling. Asked to comment. the minister of petroleum and petroleum resources development.H. Representatives of the CPC and the other banks involved could not immediately be reached for comment.

4 percent.rupee.N: Quote.com/General/7931. Research). CPC officials have said. Research). Deutsche Bank (DBKGn.93 million if Sri Lanka's top court permanently suspends an oil hedging contract. among them CitiBank (C. . shares in Commercial Bank plunged nearly 7 percent to 69.Lanka's ComBank says oil hedge case risk is $8. oil prices CLc1 are hovering around their lowest levels in nearly 4 years. 28. Research) and state-owned People's Bank. Now in the range of nearly $44 per barrel. The hedging deal had been planned in expectations that oil prices would hit $200 per barrel. By 0738 GMT. The bank based its estimate on an exchange rate of 110 rupees per dollar and a WTI price of $48 a barrel. The island-nation's top listed private lender is one of five banks in an oil hedging deal with state-owned Ceylon Petroleum Corp (CPC). additional reporting by Steve Slater in London. due to expire on June 30. and about $100 off a record of more than $147 struck in July. Profile. The stock later pared some losses to 6. "If the suspension of payments continues. our liability under our contract to make payments to our back-to-back market risk counterparty would total $8.9 mln editor on 12 December. Profile.25 rupees a share.CM said on Friday its total risk would be $8.DE: Quote. the country's supreme court suspended the oil minister and halted payments to banks stemming from a hedging deal that could cost the state oil company hundreds of millions of dollars under a 'zero cost collar' contract. (Reporting by Ranga Sirilal and Shihar Aneez. their lowest in more than three years. editing by Anthony Barker) http://www.srilankanewsfirst. news that helped drive its shares down more than 6 percent." the bank said in a statement to the stock exchange. Standard Chartered (STAN.93 million. Other banks in the contract refrained from commenting. 2008 02:56:34 Commercial Bank of Ceylon COMB.html S.L: Quote. The bank has an outstanding West Texas Intermediate (WTI) crude oil hedging contract with CPC. On Nov. Profile.

I can fund the war for more than 3 months. Last month.CPC said on Nov 10 it had hedged 30 percent of its 2.html WEDNESDAY.com/2008/12/why-worry-about-cpc-sri-lanka- oil-hedge. DECEMBER 03. . all patriotic Sri Lankan are shocked by the biggest foreign exchange scam in the history of the country with a lead foreign bank making use of the poor risk management skills of the chairman of CPC.5 million) in the quarter to September from a year earlier. http://landlikenoother. 2. the bank reported a nearly 7 percent rise in group net profit to 937. With USD 400 million the government can provide the entire country 100% FREE fuel for 45 days.blogspot.My country's foreign reserves will shrink by a massive USD 400 million.5 million rupees ($8.With USD 400 million. I can provide the population of 19 million a subsidy of Rs 2.With USD 400 million.5 million barrel crude oil imports until end June 2009 with the five banks on 'zero-cost collar' deal. 3. 2008 Why worry about the CPC Sri Lanka oil hedge Scam? [Re-posting an anonymous chain email circulating around] Firstly. Nationalistic Sri Lankans are shocked and traumatized due to the following reasons.300 each month. What is the impact? 1.

5Bn to USD 2.My country has never been in need of foreign exchange more than now. 4.If we lose USD 400 million. SCB operates in more than 65 countries and was awarded with the Global Energy Risk Innovation Award for beginning this transaction in 2007 in Sri Lanka.5bn due to the intervention by Central Bank to maintain rupee stability.The biggest financial challenge for any Country amidst the on- going global financial crisis is to save the own foreign exchange. we can fund the new port or the coal power plant projects.This includes for you and me. This indicates no other country was stupid to buy such hedge products . our foreign exchange position has depleted from USD 3. We do not even get USD 300 million of foreign grants every year.Why not spend the USD 400 million. 6. Not to pay for a scam. The country will go into an economic crisis and this will be the starting point. 5. then the US Dollar against rupee will move from 110 to 125. How Did CPC get exposed? This was started by Standard Chartered Bank. Recently. 7.

Here are the reasons why it is unfair deal and why we should feel sorry for the Government. You decide whether you would enter into such a structure or even gamble against such odds. The smart Bank of Ceylon and HSBC refused to enter into such agreements as they understood the unfair structure. So.Any benefits the banks pay only for 2 months but. CPC has to pay banks for 12 months. Unfair. a cheat structure.except Sri Lanka. The hedge was one sided in favour of the bank – meaning there was NO floor for CPC to protect the down sided risk but. It is a huge wrong gamble that oil price will only go up up up and never down. unfair and this is not even a gamble but a cheat. if oil prices went up even double. Again." was the desire also for these banks. with a nice cap to protect the banks risks. CPC gets peanuts USD 3 Million per . Later Citibank and Deutsche and Commercial also followed the party influenced by the greed for profits – "why not we also make money. it truly happened. Sounds stupid but. not a gamble but. This is only a financial instrument and not a contract to buy oil. SCB started selling unfair deals using unethical means (explained later). 2.

For the bank. how can CPC say if price went up I would get the blame for not hedging??? 3. This is not gambling but cheating. as much as USD 400 million. if price goes down. for two months with a cap on the upside payment. Whereas the bank pays only for half the quantity hedged.This structure was called zero cost. 6.CPC pays for double the quantity hedged. if price goes up.Finally. for 12 months with no floor to cover the down risks. Because. Have you heard of such deals before? 4. CPC is betting on a card pack where all the cards in there favour are removed from the pack. its half the quantity. Amazing isn't it? So. the deal is CPC paying for double the quantity. You decide if this is a good deal! 5.Banks maximum exposure is USD 3 (THREE) million per transaction and CPC's unlimited. .contract. Actually the banks should have paid an up-front premium to CPC for entering into such transactions.

4 billion rupees.The expenses during the travel were millions of rupees for . It's a shopper's paradise with lots of other activities. the banks have reported more than US dollar 35 million (3.Alternatively. Dubai & USA several times on first class. 2. (5.The Chairman of CPC and a top decision maker travelled to Singapore.SLR 40 billion. The CEO of the foreign bank also joined them during these visits for entertainment and the travel never related to do with hedge.. Asantha De Mel told recently at a press conference that he travelled globally to learn about hedging. And the big payments have not started yet. if these are ethical practice and good governance. How Did CPC get scammed? Good question and we all wonder why? You decide. 1.6 billion rupees) in profits from such transaction and the head offices of these branches have earned more than USD 52 million.. The tickets were purchased by the foreign bank.) Central Bank and published financial records will indicate that these banks have already repatriated more than 27 million dollars during the past 9 months from the country to their head offices. Although Mr.. Dubai and Singapore are the most entertaining places in the world and you can imagine the fun.

Accounts were opened to the local decision makers in Singapore (Orchard Branch) and Dubai (Al Mankhool) which is the usual practice to say thank you for very large deals by international banks.. 5. . These were paid locally and also via the foreign branch offices. The Petrol hedge product was developed in this room. Additionally. 4.The bank not only employed government officials but also their family members. As a matter of fact government officials were employed by the bank. 3. Central Bank can verify this. A scrutiny of the local bank records will reveal this.entertainment plus – plus –plus. Miss Stephanie De Mel the daughter of the Chairman of CPC was provided employment at the Standard Chartered Bank dealing and Forex room a highly restricted area. He was given a handsome bonus including a vehicle for Rs 25 million.The losses started to build up in July 2008 and we all know that the derivative contracts are mark to mark on a daily basis by the banks and it is also a regulatory requirement. he was promoted as Head of the Corporate structure despite his own records for fraud in the bank. One of the marketing head responsible for selling this product in a foreign bank is the local pimp to the foreign CEO. which he even travels today.

But. 2. 6.There are violations to Central Bank directions and guidelines on derivatives. .. 4. The situation now! 1.The Central Bank did not know the facts or approve the transactions.It is industry knowledge that a few officers who had patriotic feelings towards the country raised the unethical practice within the bank. these employees were treated un-fairly and terminated without any reasons and justification. It was also mis sold to the cabinet and the Cabinet never knew about the unfair structure and the exposure to CPC.The Board of CPC did not know the facts or approve the transactions. the banks did not inform and advise CPC to exit timely given the greed to grapple extensive profits and bonuses for CEO.The Attorney General Approvals were not obtained for signing the any documentation including the ISDA Derivatives Contract. More Violations! 1. 5. A few of these employees have filed litigation.However.The Sri Lankan cabinet never approved this transaction.The CPC is exposed to payment of USD 400 million. 3.

. If CPC fails to pay.The CEO's of the banks are pushing to re-structure the debt claiming this is sovereign risk and willing to provide discounts and hair-cuts. 5. This is not sovereign risk as the Central Bank & Treasury did not approve the transaction. it will only serve to regularize the scam and still hundreds of millions of $ will have to be paid. 3. see why above. they will loose their jobs. It is not like a loan or bond. No one has interest about the country.CPC is defending the banks. The foreign banks are attempting to tarnish the image of the country by putting fear that this is sovereign default. It is not. Central Bank should declare transaction NULL & VOID. 4.The CEO's of the bank are putting pressure on the government. The legal fact! 1. 2.CPC need not pay a single penny since this was miss selling. Central Bank and CPC to pay.Some patriotic citizens are expected to file a fundamental rights case. It is a speculative instrument that has gone wrong like in the USA.If restructured.

Can the foreign Banks help the country for future foreign Debt? The CEO's of foreign banks are putting undue pressure and fear on the government and the Central bank saying that this is a sovereign default and the government will not be able to raise any debts in the future. Singapore and various other countries against such acts to protect governments and its citizens.The three foreign banks involved in this transaction have no commitment to the soils of Sri Lanka.2. Canada. 4.There is ample evidence for miss selling. . The Government can do the same structure with other local banks as well as other foreign banks. USA.Citibank and Standard Chartered Bank shares have crashed by over 60% and they are looking for help for themselves to survive from governments. The proof is that all of them do not have a single branch outside Colombo although they have been milking the country for over 100 years.The recent debts raised by the foreign banks are in fact.There are ample court cases where court never favored mis selling and have pronounced that these transactions are null and void. international syndicate loans and these banks only acted as brokers and there participation is less than 5%. 3. There are legislative laws in the UK. the governments are helping them with bail out plans. 1. 3. 2.The current global financial crisis is expected to continue for atleast for the next two years. In this situation several foreign banks are getting bankrupt and in fact. They have no liquidity and risk appetite.

6.Why should the government pay USD 400 million which had no benefit to the country to repay a new USD 200 or 300 million of debt. 4.Do not allow the opposition parties with vested interest to take advantage and include the government also a party to this scam. 6.Legally punish for the offense and save the country's foreign exchange.In the present global financial crisis and Sri Lanka's low credit rating.Central Bank has started investigation but. Government didnt know.Appoint an independent committee to investigate into the mal practices. Do not allow the foreign banks to take shelter under sovereign risk. First. better save the reserves you already have. there is severe external pressure on them to close their eyes. What should the Government Do! 1.The Bribery and Corruption Department and the CID to investigate. . 5.5. Standard Chartered was involved in a similar case (Harshad Mehta) in India in March 1992. save what you have in your hands. So. it is anyway not possible to borrow more overseas at acceptable rates. 2. This is not sovereign risk but mis selling and scam. The Government of India took a serious stand against unethical practice and Sri Lanka should do the same. 3.

LOCALLY AND INTERNATIONALLY WITH THE INTENTION OF SAVING THIS COUNTRY'S FOREIGN RESERVES AND THERE BY BUILD A BETTER FUTURE FOR ALL THE CITIZENS OF THIS COUNTRY AND THE FUTURE GENERATIONS. The Government has no obligation as per proven case laws to oblige for mis selling and corrupt deals as per international laws and practices. 8. the instrument that was supposed to save Sri Lanka millions of dollars on the import bill became a burden when the markets took a downward turn.Take serious action against any institute.riunit. person that try to tarnish the sovereign image of this country to shelter from mis selling. Since then hedging has become the worst nightmare of Ceylon Petroleum . http://www.We should communicate to the international world that we cannot be taken for foolish financial rides. 7. We are a trustworthy honourable country. If you love your country pass this on to put pressure to government not to pay out our precious dollars on this treason scam THIS IS WRITTEN BY AN INDUSTRY EXPERT WITH EXTENSIVE KNOWLEDGE ON HEDGE PRODUCTS AND EXPERIENCE IN FINANCIAL SERVICES BOTH.com/news_det. However.The Government should not under any circumstance agree to any re- structure or hair-cut thinking this is sovereign default.asp?newsid=122 RIU: Research Intelligence Unit Sri Lanka: Over The Hedge? Sri Lanka went through a historical milestone in the financial markets when they first used a tailor-made oil hedge for purchasing crude oil.

Risk mitigation In order to find out how this blunder materialized we need to first understand what hedging is all about and how hedging can be used effectively for financial gain from a transaction. Corporations are exposed or subject to various types of fluctuations of prices due to the interest rate changes. Governments and multinational companies use different types of tools or derivatives to hedge themselves or to minimise their risk in their future positions and transactions. There are a variety of risks involved in future transactions of any commodity such as micro-economic exposure. Whilst this type of financial instrument has been around in our local markets for a long time. Commodities have always been subjected to price fluctuations due to whatever prevailing market conditions determine supply and demand. Lahiru Mudunkotuwa outlines the ins and outs of the deal. Hedging is the mechanism for covering risk and derivatives are the instruments that are used to do this. the actual use of hedging for oil imports by the CPC took place in 2007. political stability exposure and transaction exposure. macro- economic exposure. In layman’s terms. To reduce the amount of exposure to volatile market conditions hedging is used widely amongst the oil importing nations of the world.Corporation (CPC) and associated ministries fuelling the nation. Oil is a product which is highly volatile and this is mainly due to various additional political-economy and security factors which affect the market price. hedging is a way of covering your self from market fluctuations. exchange rate variations and / or commodity price fluctuations. Therefore most firms have a treasury department with highly qualified personnel to manage this risk which is a much specialised area of corporate management. Unless these factors are managed efficiently and effectively companies are exposed to the risk of huge losses and / or solvency. . The question that arises is whether this has been practiced adequately at the national level in Sri Lanka.

three months. Options: Options are contractual arrangements giving the owner the right to buy or sell an asset or a commodity at a fixed pre-agreed price on or before the given date. Futures are only traded in financial exchanges and are also a forward contract for a future date. Forwards: When a party agrees to buy or sell at a future price and enters into a contract with another party the transaction is referred to as a forward. Futures: These defer from forwards in two ways. These can be as interest rate swaps or currency swaps. It is a right of the owner to buy or sell and they are not obliged to exercise the transaction if they feel the market is against them. From the very basic definition of options. So any transaction beyond this is considered as a forward transaction. it is accepted that the buyer pays the premium and keeps the right to buy or not to buy with themselves. Risky jargon Swaps: A swap is a transaction whereby one party buys at a shorter date and sells at a forward date in the same transaction or vice versa. For being able to do this the owner of the option pays a premium to the party underwriting the option similar to an insurance policy. Swaps are used almost all over the world for minimising exchange or interest rate related risks. They are traded only on standard durations . Miss-calculation . A forward can be dealt on any odd dates as well as on any standard dates of trading. There is a huge risk involved for the company undertaking to provide the facility because they may be subject to any type of market volatility. six months and one year.one month. we need to refresh ourselves on some of the key financial instruments that are central to the practice of risk minimization.In order to have any chance of getting to the bottom of what happened in the Sri Lankan oil hedge bungle. Standard market dealings are usually valued as spot deals (there and then) or valued for two working days from the time of transaction. Still if they are willing to take a calculated risk they will charge the risk premium from the party taking the option.

Moreover. There is no steady trend of rise or decline in any of the available exchanges around the world. with the election of Barak Obama as US President. But considering the huge premium involved. the world’s second and third largest oil producers coupled with perhaps further trouble in the Nigeria’s oil producing Delta region. for oil prices to continue on its record spike several other geo-political factors would have had to come into play such as some type of US led conflict with Iran or Venezuela. we are all in the same boat as all across the board are affected by these decisions. or unfortunately for the CPC. but due to this error it will also influence our foreign exchange reserves which are already declining as a result of . Moreover. the world has a chance of entering into a more stable phase which will serve to calm the markets. we have not opted for the simpler version of the option and by using this tailor made complex package of zero option we have exposed or gambled heavily on oil prices remaining at their highest levels ever and a continuous rise in the prises.So what went wrong with the Sri Lankan deal? We went for a zero cost option which was tailor made for our very own transaction of purchasing oil for Ceylon Petroleum Corporation. these markets are already depressed by the global down turn that has witnessed all commodities across the board falling due to stifled demand. However. When the oil prices were high we have received a payment of over $20 million from the facilitator of the oil hedge. it is clear that all prices fluctuate. This would have been ok had Sri Lanka inked the deal some five years before when the oil price hike was gathering momentum especially following the US invasion of Iraq. the geo-political factors were either not considered or totally miss-calculated. But when these prices declined we are to pay a huge sum and we have to purchase double our requirement as part of the agreement. Moreover. We will not only have to buy high priced oil. If anyone has been following commodity prices for even a short period of time. As consumers of fuel in Sri Lanka. the nightmare global scenarios did not take place. So how it was assumed by our decision makers that oil prices will only be faced with a scenario of continuous rise is yet unknown. Fortunately.

What happened will be a bitter lesson for all Sri Lankan’s using crude oil products. “The hedge is very good news . We also have a right as citizens of Sri Lanka to ask those truly responsible for this miss-calculation to be held to account. said the trades appeared to have occurred in late August and early September. Mexico’s finance ministry declined to comment on Monday but said in its latest quarterly report that its oil income stabilisation fund spent about $1. The world’s sixth biggest oil producer hedged almost all of next’s year oil exports at prices ranging from $70 to $100 at a cost of about $1. traders said. . Mexico is taking steps to protect itself from the oil price remaining below $70 a barrel in the clearest sign yet of the concerns of producer countries at the impact of the global economic slowdown on their revenues. as part of the measures taken for risk management”.5bn on “financial investments. Mexico’s programme could have added some downward pressure to spot oil prices as banks involved in the deal – Barclays Capital and Goldman Sachs – offloaded some of their risk. Last year. In late afternoon trading in London on Monday.controlled intervention of the (pegged) rupee. © 2004 RIU. The cover is far higher than the country – which relies on oil for up to 40 per cent of government revenue – usually seeks. selling futures.86 a barrel.5bn is immaterial relative to risks. 2008 at 07:07 pm Non OPEC member and world’s sixth biggest oil producer. a strategist at UBS in Mexico City.5bn (£961m) through derivatives contracts. oil fell 18 cents to $60. But it was part of a learning curve for Sri Lanka and we need to rectify our costly mistakes and need to introduce a more efficient and reliable system. ALL RIGHTS RESERVED.” he said. takes measures to guard off the impact of declining world prices and recession. Oil prices hit an all-time high of $147. http://www. Signs that a big producer was hedging emerged over the summer as traders in New York noted a significant surge in options for December 2009. Tomas Lajous. Mexico.nowpublic. Neither bank would . By Javier Blas in London and Adam Thomson in Mexico City. according to bankers familiar with the deal. Published: November 10 2008 23:38 | Last updated: November 10 2008 23:38. .com/world/mexico-hedges-almost-all-its-oil-exports Mexico hedges almost all of its oil exports Share: by rahul | November 10.27 a barrel in July but have since fallen to less than $65 as the global economy cools. The solution is not to blame the hedge but to use correct instruments for the hedge so that costly mistakes like this would not be repeated in future. Mexico hedged 20-30 per cent of its exports. a presumed cost of some $1.

Without the hedge. he pointed out that the government’s stabilisation fund had a $10bn cushion.” he said. Among the reasons. 09 March 2009 09:03:47 Trading Friday 05 Dec.Sri Lankan shares headed down Friday on low trading volumes with Commercial Bank falling sharply after it revealed a sizeable exposure in an crude oil hedge deal whose payments have been suspended on a court order. which expires in June 2009.12 points) to end at 1.17 while the more liquid Milanka dropped 3.comment. “We should be in good shape.54.lk/fullstory.28 percent (36. told the Financial Times in an interview that he had been stunned by the fall in oil prices. Com Bank down after oil hedge exposure revelation Dec 05.” Fitch. Source: ft.lbo. The said in a stock exchange filing that its exposure on the Ceylon Petroleum Corporation oil hedge deal is 982 million rupees with oil at 48 dollars a barrel.php?nid=473938104 Mon. the ratings agency. 2008 16:32:31 Sri Lanka shares fall. The All Share Price Index fell 2.64 points) to end at 1.740.39 percent (61. Commercial Bank.567.com http://www. Mexico’s finance minister. the recent price falls would have been a serious concern for Mexico. it cited were lower oil prices. fell over six percent (4. The government has already revised its budget. . lowering its oil price target from $80 to $70. 2008 (LBO) . the most actively traded stock. after payments were suspended by court.50 rupees. Last month. Brokers said turnover was only 56 million rupees and that the outlook remained gloomy given difficult economic conditions and high interest rates that made equities less attractive. Agustín Carstens. was based on an exchange rate of 110 rupees per US dollar. However.75 rupees) to close at 69. cut the outlook on Monday on Mexico’s sovereign debt from stable to negative. The bank said the calculation on the contract. “What we have seen is amazing.

000 barrels of fuel with Citibank which has structured a solution for CPC to manage its price volatility and to provide relief in prevailing market conditions for part of its oil imports.Bartleet Mallory Stockbrokers said they would trim the profit forecast for Commercial Bank based on the disclosure about the hedge exposure. 42 .50." In other trading on the Colombo bourse.50 rupees) to end at 27. The Corporation bought diesel at a price of 87 dollars per barrel recently after Citibank came in and the bank has reimbursed the balance $5.000 barrels of diesel for six months at a fixed price of 81.lk/070819/FinancialTimes/ft328.0531 Sunday. “If the fuel price skyrockets above that price specified by the futures contract.50 dollars a barrel and a maximum of 90 dollars a barrel with Citibank. the hedge .50 during the day. will raise bank’s liability and vice versa. The CPC has entered into a new 6-month hedging arrangement for 200.html The Sunday Times Online: ISSN: 1391 . Augest 19. below 48 dollars a barrel.50 after hitting a low of 20. "If the entire amount is to be made as a provision in the FY08 income statement then BMS Research would trim the forecast profit of 4. 2007 Vol. "A further drop in oil price.58 billion rupees. http://sundaytimes.12 billion rupees in its recent research report to 3." It said the extent of the bank's liability would vary based on global oil price movements.” CPC Chairman Asantha de Mel told a media conference this week. “The corporation has adapted a structured risk mitigating strategy which includes fuel hedging as it is a technique not by which you will make money but by which you can reduce potential loss.No 12 Financial Times CPC to hedge oil prices with Citibank help The Ceylon Petroleum Corporation (CPC) is continuing to resort to hedging to reduce its exposure to price fluctuations in the world oil market. dropping 19 percent (6. It said in a research note that the bank's actual liability could be around 540 million rupees after deducting for taxes. CPC has hedged 100. Lanka Tiles suffered the sharpest fall.

Fowzie. At the news briefing. I'm also awaiting details.html FINANCIAL NEWS Tuesday January 27. the minister of petroleum and petroleum resources development. http://uk. De Mel said.H. CPC is still obligated to pay the price in the contract and actually would have been better off not hedging.500 to the CPC Chairman who said this would be credited to a separate hedge fund. It also suspended A.” De Mel said. CEO Citibank Sri Lanka Dennis Hussey handed over a cheque of $772. had earlier offered to withdraw it. . and Ashantha de Mell.' said oil minister Fowzie. officials and lawyers said. chairman of the state oil firm. Ceylon Petroleum Corporation (CPC).Sri Lanka's Supreme Court on Tuesday terminated a court battle over oil hedging payments to banks that could cost the state oil company hundreds of millions of dollars.biz. Sri Lanka spends $2 billion on fuel imports and this sum would go up to three billion oil prices rise up to $100 per barrel which would be unbearable as the country’s foreign exchange reserves are very low at present.yahoo. However. if the price goes down. Lawyers said the group that launched the case. The Supreme Court in November suspended the oil hedging payments to banks and ordered the government to reduce retail petrol prices in line with falling global oil prices.will have paid off because CPC will save money by paying the lower price.Lanka court drops oil hedge case.M. referring to the court case. 09:52 AM S. effectively ending the suspensions. But the court terminated the case on Tuesday. Jan 27 (Reuters) . comprising a businessman and some opposition politicians. 'They have dismissed the case.com/27012009/323/s-lanka-court-drops-oil-hedge-case- minister-suspension. minister suspension COLOMBO.

' Opposition politicians have questioned the hedging pact by the CPC. minister-lawyers 2008-11-28 16:47 (UTC) COLOMBO. Local and international hedging analysts have estimated the island nation would have to pay at least $300 million during the next five months if global oil prices stay around $50 per barrel. Deutsche Bank and two local banks. . Nov 28 (Reuters) . Crude prices have dropped instead.xe. Opposition politicians have questioned the hedging arrangements by the state-owned Ceylon Petroleum Corporation (CPC). Standard Chartered Bank. the lawyer representing the petitioners. to stand around $47 a barrel on Tuesday.Lanka court suspends oil hedge. 'As a result of that.com/news/Fri%20Nov%2028%2011:47:00%20EST %202008/100629. with Citi Bank.' said Uditha Egalahewa. Deutsche Bank (Xetra: DBK. made at a time of expectations that oil prices would reach $200 per barrel. Standard Chartered Bank. Editing by Clarence Fernandez) Keywords: SRILANKA OIL/HEDGING http://www. which were made in expectation that the oil prices would hit $200 per barrel. with Citibank. (Reporting by Ranga Sirilal.'The chef justice has terminated the proceedings of the court case. Financial analysts said the deal could impose a major burden on the $32 billion economy at a time when Sri Lanka's foreign exchange reserves have declined more than a quarter since mid-September because of the need to protect its rupee currency. all interim orders will be vacated. and the hedges mean the country will not benefit while the banks do.Sri Lanka's Supreme Court suspended the oil minister and halted payments to banks stemming from a hedging deal that could cost the state oil company hundreds of millions of dollars. or about 70 percent below their July record high above $147. who had sought to cancel the hedging payments.DE . lawyers said on Friday.htm?categoryId=1&currentPage=1 S.news) and two local banks.

H. who appeared on behalf of the petitioners seeking to cancel all hedging payments.' he told Reuters. A spokesman for Standard Chartered in London said: 'As the matter is now sub-judice it would not be appropriate for us to comment on the interim ruling.M Fowzie. Hedging analysts said the island nation would have to pay at least $300 million during the next seven months if global oil prices remained at current levels around $50 per barrel. until the final judgement.' .' said the analyst.' said lawyer Uditha Egalahewa. The court has yet to issue formal notifications of its ruling. 'This might make it very difficult for Sri Lanka to borrow commercial loans in future as investors will be concerned over termination of contracts on those borrowings as well. An analyst said the court decision might damage Sri Lanka's credibility in international financial markets. who did not want to be named. Asked to comment.Prices have dropped instead and the hedges mean the country will not benefit while the banks do. Representatives of the CPC and the other banks involved could not immediately be reached for comment. chairman of the Ceylon Petroleum Corporation. Fowzie said he had heard of the court's decision. Deutsche Bank declined to comment. Lawyers said the court had suspended A. 'I do not know what the final outcome will be.' He said in a statement the bank was not directly affected. 'The Supreme Court granted interim relief suspending all the hedging payments to the banks until the final hearing. and Ashantha de Mell. 'Future agreements with any party are at risk and will have serious financial repercussions with possible increase of risk premium. They have fallen from a record above $147 in July. the minister of petroleum and petroleum resources development.

designed to protect oil importer Sri Lanka against large movements in prices.lankabusinessonline. Reuters Messaging." the bank said in a prepared statement to press queries. +94-112-375-903.com@reuters.aneez@reuters. we always seek to comply with relevant local and international laws and regulations. shihar. Financial analysts said the deal could impose a major burden on the $32 billion economy when Sri Lanka's foreign exchange reserves have declined more than a quarter since mid-September because of the need to protect the rupee.aneez. additional reporting by Steve Slater in London. "Standard Chartered Bank welcomes further investigation and is confident of a favorable outcome as more details are revealed. recognized globally for our high levels of governance.net) COPYRIGHT Copyright Thomson Reuters 2008." . 2008 (LBO) . had been done in such a way that CPC had to pay to the banks when the oil price fell below $100 per barrel. "As an international bank.lk/fullstory.php?nid=1383536281 Mon. Sri Lanka's Supreme Court Friday ordered the country's central bank to probe the deal which it said was 'iniquitous' and propose remedies.Hedging analysts said the deal. 2008 13:38:04 Sri Lanka Standard Chartered says not directly affected. welcomes hedge probe Nov 29. All rights reserved. (Reporting by Ranga Sirilal and Shihar Aneez.reuters.com. http://www. 09 March 2009 09:03:18 Hedge Saga 5 Comment(s) 29 Nov. editing by Anthony Barker) Keywords: SRILANKA OIL/HEDGING (shihar.Sri Lanka's Standard Chartered Bank unit says it was not directly affected by a court order which halted payments due under a hedge it arranged for a state-run oil distributor and said it welcomed a probe into the deal.

Court also ordered the chairman of CPC removed and the ministry of petroleum to be taken over by the President of Sri Lanka. Bank had earlier been looking to stretch the payments to ease the cash flow of CPC. It could be the case that CPC did not have the expertise. SCB & Citi could.stiking deals at $100-$120 level when oil was at $140." Standard Chartered said. Court said the halt on payments would stay in place until a probe by central bank is completed. but the court. Citibank. Sri Lanka's state-run Ceylon Petroleum Corporation found that oil hedges made under a complex options structure went against it when oil prices suddenly collapsed and it was faced with payments of around 30 million dollars a month. Upul Arunajith Dec 01 . Amal Fernando Dec 04 I just have one question? While Standard Charted and Citi bank have no affiliation to Sri Lanka been foreign banks why do the most accepted and year on year award winning bank. READER COMMENT(S) 5. Now one hedging went wrong and all hell broke loose. Analysts say banks may not themselves carry a position and it is customary to match counterparties in hedge contracts. Earlier this month Mexico engaged Goldman Sachs to hedge most of its oil output. a private bank had also sold options structures to CPC. by ordering a stay order may be risking a sovereign default (not to mention cross-default in other foreign loans).The court order came after a cooking gas supplier and petroleum users including an opposition politician filed public interest petitions. "Standard Chartered Bank is not a party to the application made to Supreme Court and is not directly affected. 4. The counterparty could be a hedging speculator or a supplier of oil. no one spoke a word when the CPC made profits in hedging . Deutsche. Prem Elapatha Dec 03 I fail to understand one point. take the sovereign to international courts! 3. in fact. Commercial Bank do such an irresponsible deal just for profits. state-run People's Bank and Commercial Bank of Ceylon.

friendly customer service and a comprehensive network across America. It is such similar trading activities in the international world that had wreaked havoc with Banks & financial houses such as Barings in the distant past & Bearsterns.but in Sri Lanka they have sold CPC officials a rotten deal. why did it take advantage of the CPC ignorance and sell them a wrong product.This is white-collar corporate crime. but is that what's really keeping them on top? Partially. they've got a pretty interesting business model. Southwest. Francis Peiris Nov 29 I think this is the first instance where a court has ordered a halt to these kind of speculative trading transactions in the world. has prevailed in staying profitable for the last few years. How have they done this? Sure. Purchasing their fuel at rock bottom .one rotten apple can spoil the whole barrel http://www. It's more got to do with the oil hedge that the airline locked in well before it spiked up to $140 a barrel.gadling. That being the case. is quite obvious at not having fully disclosed the parameters of the downside in speculative trading. Standard Chartered Bank although a widely accepted international bank. Why did they misuse soft dollars to gain undue advantage by giving CPC management overseas trips. one lone airline.com/2008/10/18/hows-that-oil-hedge-working-out/ How's that oil hedge working out? by Grant Martin Oct 18th 2008 @ 10:00AM With airlines in their worst state since 9/11 and bankruptices posting left and right. The crippling effect on the state of such trades would have been evident if CPC had to cough out millions monthly. Why did they open up bank accounts in Singapore? Why did they organize a media conference to justify CPC/SC deal when they knew they were at the fault? 2.. True the SC is a recognized international bank operating in Sri Lanka. Bertram Nov 29 Standard Chartered is recognized globally for high levels of governance. Merril Lynch & several other leading institutions in the lead up to the present financial bailout in the US & Europe. Its a simple case of leading banks manipulating the financial system to their utmost benefit.. 1. with the connivance of a public official.

93 million if Sri Lanka’s top court permanently suspends an oil hedging contract. not instill any crazy baggage or superfluous fees and still make a profit while the others were getting crushed. shares in Commercial Bank plunged nearly seven percent to 69. They could set their fares at lower prices (thus forcing the competition to match).instead of paying the now $70/barrel of light sweet crude. Now in the range of nearly $44 per barrel.25 rupees COLOMBO: Commercial Bank of Ceylon said on Friday its total risk would be $8.they've got a business plan that's built around paying for jet fuel at that hedged price.4 percent. build their aviary and prepare themselves for the future. our liability under our contract to make payments to our back-to-back market risk counterparty would total $8. among them CitiBank. And lets face it -.25 rupees a share. Standard Chartered. Now that oil has come down from the stratosphere though. Once oil rebounds and demand increases again. so all they have to do is keep cooking. And this last quarter. The stock later pared some losses to 6.prices while the competition had to pay through the nose helped give Southwest the competitive edge.pk/default. The island-nation’s top listed private lender is one of five banks in an oil hedging deal with state-owned Ceylon Petroleum Corp (CPC). Southwest finally broke and actually posted a loss. Deutsche Bank and state-owned People’s Bank. 2008 Sri Lankan bank says oil hedge case risk is $8. The hedging deal had been planned in expectations that oil prices would hit $200 per barrel.com.” the bank said in a statement to the stock exchange.asp?page=2008%5C12%5C06%5Cstory_6- 12-2008_pg5_37 Daily Times: Saturday. http://dailytimes. So does this mean that the glory days of Southwest are now over? I doubt it. “If the suspension of payments continues. they're still pinned to their commitment. Southwest will be right back up on top. By 0738 GMT.9 million * Bank’s share plunges nearly seven percent to 69. the oil hedge can actually work against them -. Yesterday's Marketplace has an interesting piece to this effect. and about $100 off a record of more than $147 . oil prices are hovering around their lowest levels in nearly 4 years. The airline had several consecutive quarters where they could stockpile cash above the competition. CPC officials have said. December 06. their lowest in more than three years.93 million. news that helped drive its shares down more than six percent.

000 barrels worth deals that will expire next year. We bought protection at different levels." managing director R Ramakrishnan said. Reuters http://www. The bank has an outstanding West Texas Intermediate (WTI) crude oil hedging contract with CPC.struck in July. on oil derivatives to Citibank. . 28.000 barrels outstanding with Commercial Bank and the balance with Citibank." he said. Lanka IOC says it has also bought downside protection for the deals at different levels for remaining contracts. 2008 (LBO) . the bank reported a nearly seven percent rise in group net profit to 937. the country’s supreme court suspended the oil minister and halted payments to banks stemming from a hedging deal that could cost the state oil company hundreds of millions of dollars under a ‘zero cost collar’ contract." Lanka IOC imports about 300. Commercial Bank and state-run People’s Bank. a top official said. Other banks in the contract refrained from commenting. "We wound up some contracts. due to expire on June 30. but is left with 70. CPC said on Nov 10 it had hedged 30 percent of its 2." Sri Lanka’s petroleum and banking sector is in turmoil after the island’s Supreme Court halted payments to banks from state-run Ceylon Petroleum Corporation (CPC). On Nov.html The Island Online Sri Lanka IOC unit says oil derivative exposure ‘manageable Dec 06. There was also protection at 70 dollars.000 barrels of refined products a month.The Sri Lanka unit of the Indian Oil Corporation has unwound some oil derivatives it bought earlier in 2008.5 million) in the quarter to September from a year earlier. "The majority of contracts expire in June and July and some in August. The bank based its estimate on an exchange rate of 110 rupees per dollar and a WTI price of $48 a barrel. Ramakrishnan says the remaining contracts include ones based on WTI oil at around 90 US dollars.5 million rupees ($8. "We did a lot of balancing. "It is manageable. Last month.island. Standard Chartered. It has 10. Lanka IOC says it is honouring all contracts.lk/2008/12/07/news18.5 million barrel crude oil imports until end June 2009 with the five banks on ‘zero-cost collar’ deal.

Non- hedges have to be marked-to-market and taken to the profit and loss account. Leveraged target redemption forwards have resulted in spectacular losses in recent turmoil. But the derivative is based on a structure used in securities markets known as a target accrual redemption note (TARN). the oil distributor wrote an option. earned a premium and used it to buy an option giving upside protection. They are also known as leveraged target redemption forwards or swaps. a Hong Kong-listed Chinese firm. or no payment was involved. CITIC Pacific lost on a forex deal. though oil prices have now fallen further. when the Australian dollar plummeted. In Sri Lanka. because it was limited by the cabinet to ‘zero-cost’ instruments. By doubling the downside risk (leveraging) the upside benefit could be increased. . The attraction for an oil distributor was that it was ‘zero-cost’. CITIC Pacific said in a stock exchange disclosure that. The upside risk was capped for taking on a downside risk. But it got ‘knocked out’ after accumulating about five dollars a month a barrel for three months. leveraged forward contracts did not qualify for hedge accounting and had to be marked-to-market resulting in hundreds of million of dollars in losses. rather than commodities. The contracts were also ‘in-the-money’ or profitable from the start. Analysts say such benefits cannot be given without taking substantial downside risks. under Hong Kong accounting rules. banks have been blamed for selling a complex product with no downside protection or a ‘knockout’.Exotic Derivatives Lanka IOC had bought protection in consultation with banks by paying a premium. CPC however had no permission to pay premiums. including at CITIC Pacific. Under ‘hedge accounting’ a derivative can be adjusted against the balance sheet and only the un-hedged portion brought to the profit and loss account. International accounting rules says ‘hedges’ could be adjusted against the balance sheet to reduce the impact on the profit and loss account. Under a ‘zero-cost’ structure.

’ Sri Lanka had no foreign exchange ‘shortages’ until a central bank was created in 1950. oil distributors did not have a certain future retail price to ‘hedge’ against. Lanka IOC is a public listed ‘private’ firm ultimately controlled by the Indian government. In an interim ruling court also said oil imports will have to be done by the government of Sri Lanka. The Singapore wholesale price of refined petrol is only 25. which Sri Lanka’s cabinet did not allow CPC to do under its mandate. But options require up front money." Balance of Payments But economists have pointed out that balance of payments crises develop from central bank ‘accommodation’ (or money printing) of forex outflows. On Friday the government said the retail petrol price has been brought down by 20 rupees a litre to 122 rupees.Lanka IOC’s Ramakrishnan said he was not able to comment on the accounting treatment of the derivative exposure without checking with the finance department. State-run CPC was originally advised to use oil derivatives by Sri Lanka’s central bank from a foreign exchange perspective. However a price formula is expected to be presented to court on December 15. . In that scenario analysts say the only reasonable hedging instrument Sri Lankan distributors could use were plain options. petroleum prices are set by politicians and not a price formula. Hedge What? In Sri Lanka. The central bank said in a statement Friday it advised the government to hedge because it believed a rising oil bill would "exert severe pressure on Sri Lanka’s balance of payments and the exchange rate.50 rupees a litre according to Central Bank data. Analysts say even if oil distributors did not use exotic products and only used straight forwards. in a process known as ‘sterilized intervention. to defend a dollar peg. they would have been hit by a clamour for price reductions. As a result. abolishing a currency board that had kept the currency stable under colonial rule.

A.com/index. not SCB or Citibank over oil hedge-Fitch Monday. CPC went in for exotic derivatives structures because it was not allowed to pay premiums to buy plain vanilla options or forwards by paying a premium and was confined to ‘zero cost’ instruments which compelled it take on a downside risk to get upside protection. given that they are both branches and part of the same legal entities as Citibank N. due to central bank peg defence. CB's exposure comprises payments due on a 70.Sri Lanka is now in the middle of a severe balance of payments crisis despite oil prices plummeting. and SCB.000 barrel contract. these banks structured these transactions with corresponding positions with offshore counterparties. http://www. respectively.thecolombotimes. Fitch said the national long-term ratings of Colombo branches of SCB and Citibank have are not affected. To get more upside protection and an ‘in-the-money-position’ where it got protection around the spot price it had to take more downside risks. Fitch's view is that timely support would be made available to the two foreign banks from their respective head offices in order to meet their depositor and creditor liabilities in the event such support is needed. 29 December 2008 15:43 Fitch Ratings Lanka said today People’s Bank and Commercial Bank will be affected by the suspension of payments in the controversial oil hedging agreement with the Ceylon Petroleum Corporation (CPC) unlike Standard Chartered Bank (SCB) and Citibank who could receive support from their overseas headquarters over the payment issue. ComBank affected. and sterilization of reserve losses. PB's exposure comprises payments due on a 100. This support is. dependent on any regulatory restrictions or delays in remitting money into Sri Lanka.000 . While the final court decision will not be known until early 2009. however. In this context. none of which is envisaged at the moment.php? option=com_content&view=article&id=1529%3Apeoples-bank-combank- affected-not-scb-or-citibank-over-oil-hedge-fitch-&Itemid=3 People’s Bank. thus carrying only counterparty default risk. In the case of People's Bank (PB) and Commercial Bank (CB). earning a fee/commission. Acting as intermediaries. The International Monetary Fund has already advised Sri Lanka to abandon its peg. the two local banks are exposed to counterparty default risk.

most industries are not operative in full swing. based on current global oil prices. The payments due from state-owned PB to its counterparties have been halted. http://www. which influenced a slash in the oil prices at around US$ 60 per barrel. could. Ceylon Petroleum Corporation (CPC) Chairman and Managing Director Ashantha de Mel said. including payments due to CB on a 50. in Fitch's opinion. Senewiratne HEDGING: World crude oil prices are likely to increase next month with the conclusion of the Chinese New Year. 22 February 2007 Lanka’s first oil hedge against price instability STANDARD CHARTERED IN GROUND-BREAKING ROLE: Hiran H. Fitch said PB's potential loss. It said that CB's ratings are not likely to be affected.barrel contract. as the bank's capital position is sufficient to absorb the potential losses (including payments due from PB) that may arise based on current global oil prices as estimated by management. result in compounding the delay in achieving the minimum capital adequacy ratios as initially expected.asp Daily News Online: Thursday. as the bank has sought legal advice on its obligations.dailynews. their New Year this month. Picture by Sumanachandra Ariyawansa Therefore. China is the largest consumer of petroleum LAUNCH: CEO Standard Chartered Bank Clive products and are celebrating Haswell with Chairman CPC Ashantha de Mel at the launch of the hedge.lk/2007/02/22/fin01. .000 barrel contract. Therefore it would have a direct impact on local petroleum prices.

The CPC Chairman addressing the media conference noted that in efforts to maintain the price of petroleum products and minimise the impact of escalating prices on the economy CPC made hedging arrangements with the Standard Chartered Bank. In December the Bank structured Sri Lanka’s first USD option clearly indicating its capability and leadership in introducing innovative new products in the local market. “As a leading international bank with a long heritage and presence in Sri Lanka we are firmly committed to working with regulators and industry leaders to make Sri Lanka on par with other big regional financial markets and in playing a pivotal role in contributing to the development of the country.000 crude oil barrels per month besides looking at its workability. with Standard Chartered Bank picked to transact the country’s first oil hedge. which hedges their exposure to diesel for a quantity of 150.000 barrels per month for a period of three months. Clive Haswell said that the Bank is delighted to structure the first commodity option in Sri Lanka. It noted that flexibility and quick manner in which Standard Bank has responded and was working in addition to being persistent qualified the bank to be selected for oil hedging. CEO.According to de Mel there is a high probability of local oil prices increasing during March and the Government is taking many precautions such as hedging to cushion the impact. Haswell said. he said. This is carried out with the CPC.50. starting March 1.000 barrels in the future. This is the first oil hedge to ensure stability in a sector that is prone to price fluctuations. At present Sri Lanka imports 900. de Mel said. They intend making hedging arrangements with a few more banks to purchase another 300.Standard Chartered Bank. The cap strike at the upper limit is US$ 72 while the lowest is US$ 67.000 crude oil barrels from Oman at US$ 55 per barrel which is a little less than normal international prices. . Initially they will make hedging arrangements for 150.

9th March 2009 S. The stock later pared some losses to 6. CPC officials have said. our liability under our contract to make payments to our back-to-back market risk counterparty would total $8.co. and about $100 off a record of more than $147 struck in July.25 rupees a share. Deutsche Bank and state-owned People's Bank. On Nov. news that helped drive its shares down more than 6 percent. the country's supreme court suspended the oil minister and halted payments to banks stemming from a hedging deal that could cost the state oil company hundreds of millions of dollars under a 'zero cost collar' contract. 'If the suspension of payments continues. By 0738 GMT. The island-nation's top listed private lender is one of five banks in an oil hedging deal with state-owned Ceylon Petroleum Corp (CPC). Now in the range of nearly $44 per barrel.9 mln 5-DEC-2008 10:03 COLOMBO.asp? ArticleCode=hzwldj0sfxh9615&ArticleHeadline=slankas_combank_says_oil_h edge_case_risk_is_$89_mln LSE: London South East Politics News Monday.uk/PoliticsNews.' the bank said in a statement to the stock exchange. oil prices are hovering around their lowest levels in nearly 4 years. their lowest in more than three years.lse.93 million if Sri Lanka's top court permanently suspends an oil hedging contract.93 million. The bank based its estimate on an exchange rate of 110 rupees per dollar and a WTI price of $48 a barrel. The bank has an outstanding West Texas Intermediate (WTI) crude oil hedging contract with CPC. The hedging deal had been planned in expectations that oil prices would hit $200 per barrel. among them CitiBank.http://www.4 percent. due to expire on June 30.Commercial Bank of Ceylon said on Friday its total risk would be $8. shares in Commercial Bank plunged nearly 7 percent to 69. Dec 5 (Reuters) . .Lanka's ComBank says oil hedge case risk is $8. Standard Chartered . 28.

com@reuters. a top official said. "The majority of contracts expire in June and July and some in August. CPC said on Nov 10 it had hedged 30 percent of its 2. shihar.000 barrels outstanding with Commercial Bank and the balance with Citibank. Posted: 01:41 AM COLOMBO.net) COPYRIGHT Copyright Thomson Reuters 2008.5 million) in the quarter to September from a year earlier.site/news/Stock%20News/2070169/ INDIAN OIL CORP'S SRI LANKA UNIT SAYS OIL DERIVATIVE EXPOSURE MANAGEABLE Mon. Lanka IOC says it has also bought downside protection for the deals at different levels for remaining contracts.IOCOF | Quote | Chart | News | PowerRating -.5 million rupees ($8. "We wound up some contracts.thomsonreuters. the bank reported a nearly 7 percent rise in group net profit to 937. Reuters Messaging." managing director R Ramakrishnan said.com/. but is left with 70.Other banks in the contract refrained from commenting. Editing by Clarence Fernandez) Keywords: SRILANKA COMBANK/HEDGING (shihar. +94-11-237-5903. http://www. It has 10.tradingmarkets. All rights reserved.10 Sri Lankan rupees) (Reporting by Shihar Aneez. There was also protection at 70 dollars.aneez@thomsonreuters. .aneez. Last month. We bought protection at different levels.5 million barrel crude oil imports until end June 2009 with the five banks on 'zero-cost collar' deal.000 barrels worth of deals that will expire next year.com." Lanka IOC imports about 300.000 barrels of refined products a month. December 08. 2008 (AsiaPulse via COMTEX) -. Dec 08. 2008.The Sri Lanka unit of the Indian Oil Corporation (IOC) (BSE: 530965) has unwound some oil derivatives it bought earlier in 2008. Ramakrishnan says the remaining contracts include ones based on WTI oil at around 90 US dollars. ($1= 110.

CITIC Pacific lost on a forex deal." he said. when the Australian dollar plummeted. a Hong Kong-listed Chinese firm. Commercial Bank and state-run People's Bank."We did a lot of balancing. The upside risk was capped for taking on a downside risk." Sri Lanka's petroleum and banking sector is in turmoil after the island's Supreme Court halted payments to banks from state-run Ceylon Petroleum Corporation (CPC). because it was limited by the cabinet to 'zero-cost' instruments. including at CITIC Pacific. Standard Chartered. In Sri Lanka. The attraction for an oil distributor was that it was 'zero-cost'. By doubling the downside risk (leveraging) the upside benefit could be increased. earned a premium and used it to buy an option giving upside protection. "It is manageable. But it got 'knocked out' after accumulating about five dollars a month a barrel for three months. Non- hedges have to be marked-to-market and taken to the profit and loss account. Lanka IOC says it is honoring all contracts. Lanka IOC had bought protection in consultation with banks by paying a premium. leveraged forward contracts did not qualify for hedge accounting and had to be marked-to-market resulting in hundreds of million of dollars in losses. rather than commodities. Leveraged target redemption forwards have resulted in spectacular losses in recent turmoil. CITIC Pacific said in a stock exchange disclosure that. The contracts were also 'in-the-money' or profitable from the start. on oil derivatives to Citibank. or no payment was involved. under Hong Kong accounting rules. CPC however had no permission to pay premiums. They are also known as leveraged target redemption forwards or swaps. Under a 'zero-cost' structure. banks have been blamed for selling a complex product with no downside protection or a 'knockout'. though oil prices have now fallen further. International accounting rules says 'hedges' could be adjusted against the balance sheet to reduce the impact on the profit and loss account. But the derivative is based on a structure used in securities markets known as a target accrual redemption note (TARN). Analysts say such benefits cannot be given without taking substantial downside risks. . the oil distributor wrote an option.

In Sri Lanka.' Sri Lanka had no foreign exchange 'shortages' until a central bank was created in 1950. and sterilization of reserve losses. oil distributors did not have a certain future retail price to 'hedge' against." But economists have pointed out that balance of payments crises develop from central bank 'accommodation' (or money printing) of forex outflows. Analysts say even if oil distributors did not use exotic products and only used straight forwards. which Sri Lanka's cabinet did not allow CPC to do under its mandate. As a result. in a process known as 'sterilized intervention. The Singapore wholesale price of refined petrol is only 25. . But options require up front money. due to central bank peg defence. The central bank said in a statement Friday it advised the government to hedge because it believed a rising oil bill would "exert severe pressure on Sri Lanka's balance of payments and the exchange rate. abolishing a currency board that had kept the currency stable under colonial rule.Under 'hedge accounting' a derivative can be adjusted against the balance sheet and only the un-hedged portion brought to the profit and loss account. Sri Lanka is now in the middle of a severe balance of payments crisis despite oil prices plummeting. However a price formula is expected to be presented to court on December 15. In that scenario analysts say the only reasonable hedging instrument Sri Lankan distributors could use were plain options. they would have been hit by a clamour for price reductions. On Friday the government said the retail petrol price has been brought down by 20 rupees a litre to 122 rupees. Lanka IOC is a public listed 'private' firm ultimately controlled by the Indian government. petroleum prices are set by politicians and not a price formula. Lanka IOC's Ramakrishnan said he was not able to comment on the accounting treatment of the derivative exposure without checking with the finance department. to defend a dollar peg.50 rupees a litre according to Central Bank data. State-run CPC was originally advised to use oil derivatives by Sri Lanka's central bank from a foreign exchange perspective. In an interim ruling court also said oil imports will have to be done by the government of Sri Lanka.

under current prices quoting documents submitted to court.zibb. (LBO) Copyright (C) 2009 Asia Pulse.com/article/4787636/SRI+LANKA+OIL+HEDGE+CASE+INTERI M+ORDERS+CEASE+TO+BE+OPERATIVE+COURT SRI LANKA OIL HEDGE CASE INTERIM ORDERS CEASE TO BE OPERATIVE: COURT COLOMBO. with all interim orders that suspended payments to banks ceasing to be operative. All rights reserved News Provided by COMTEX . To get more upside protection and an 'in-the-money-position' where it got protection around the spot price it had to take more downside risks. Jan 28. Ceylon Petroleum Corporation. CPC went in for exotic derivatives structures because it was not allowed to pay premiums to buy plain vanilla options or forwards by paying a premium and was confined to 'zero cost' instruments which compelled it take on a downside risk to get upside protection. Lawyers representing the government argued in court that the government should be given more time to consider the order and submit a fresh pricing formula But the court rejected the argument. (LBO) http://www. 2009 (AsiaPulse via COMTEX) -- Sri Lanka's Supreme Court Tuesday terminated proceedings in a case against oil hedges by the state-owned refiner.The International Monetary Fund has already advised Sri Lanka to abandon its peg. saying the government should first comply with order and then say if it has problems with it. The Supreme Court said it was terminating proceedings as the government did not comply with its orders to bring down fuel retail prices according to a pricing formula. Court said total payments under the derivatives could be over 600 million US dollars for CPC.

000 tonnes a day. Deutsche Bank and Standard Chartered Bank -.Citibank. the banks will pay us 5 dollars.html The Sunday Times: Sunday December 14. The country has forecast this year's oil bill to hit 1. 07 Feb 2007 06:55 By : Agencies COLOMBO (XFN-ASIA) .The government said it plans to stabilise its oil bill by hedging payments through several foreign banks. However. 'Long-term contracts are good for us. Fowzie said. referring to prices for futures contracts. based on monthly price averages. Three foreign banks with local branches -. 'If oil prices go up from 72 dollars to 77 dollars per barrel. afp http://sundaytimes. 2008 Hedge now – in a proper way By D. 'We are looking to save around 300-400 million dollars on our oil import bill this year.co.' Petroleum Minister A.M. 'We will first start by shortly hedging diesel imports because we use around 4. mainly via long-term contracts with Iran. Sometimes we even buy through concessionary credit lines.' Central Bank governor Nivard Cabraal said.' Fowzie adds.have been hired to hedge up to 25 pct of Sri Lanka's total oil purchases for a six month period. let me be the devils advocate and extol the . unethical and sleazy nature of this deal and the subterfuge used to dupe the Nation and the dreadful drain it would be on our meagre foreign reserves.8 bln usd. Saudi Arabia and Malaysia. Sri Lanka imports around 2.uk/news/07200719137. 'We are currently buying diesel at 70 dollars a barrel.abcmoney.htm Sri Lanka to hedge oil purchases Published : Wed. If it goes down to 68 dollars a barrel. we will pay the banks.lk/081214/FinancialTimes/ft310.H. Your paper exposed the amateurish. while the post-mortem is still going on.' Fowzie said.http://www.' he said.2 mln tonnes of crude oil each year. with six month prices fixed at around 72 dollars a barrel. Kulasiri Ranaweera Hats off to The Sunday Times for blowing the lid off the disastrous CPC hedging fiasco. it gives us security.

Hence. It even violated our own Central Bank code of practice and kept CPC`s own board of directors in the dark.P. The benefit of hedging is most heightened when a volatile commodity is ‘pegged’ at its lower-end. with their newly acquired wisdom . Even the critics of the ‘dodgy-deal’ and the Central Bank. It is unfair to blame Zero- cost-collar method . the renowned international investment bank. We should be able to hedge oil at 60 to 65 dollars a barrel for two years with a renowned International Energy Trading firm (since local banks do not posses the potency or the financial ‘clout`) in Geneva or Amsterdam via a reliable broker probably from Singapore. You reap the benefits when the price begins to climb.which is cheaper to initiate . the natural tendency for oil prices is up than down.after closely witnessing the ‘phenomenon of hedging`- accept that hedging can be beneficially utilised to secure assurance against future price increases on oil. The hedging method used could be the now favoured ‘Option.Premium Model` or even the wrongly derided and vilified ‘Zero-cost-collar method` with proper ‘downside’ escape clauses in place. Although the temporary lack of demand is halting the surge. The agreement was so one- sided that even the two banks agreed unusually to renegotiate the `hedge’ halfway into the contract and opted to accept reduced payment.for the` debacle’ the CPC brought on itself by entering into an agreement heavily ‘loaded’ in favour of the banks and to the detriment of the nation. Within a few months. In January 2007 the barrel price was just below $60 and climbed rapidly to around $95 by December and then to that unprecedented $147 by the end of July 2008 and remained around these levels until September. Although the recent surge in oil prices were halted abruptly by the world monetary crisis and the ensuing ‘meltdown`. intervened accepting the flaws in the agreement.confirms this.Morgen. its only a matter of time that it will creep up again. now is the time to hedge rather than wait until it rises again. The Southwest Airlines fuel hedging programme which it conducted when the oil price was down at 20 dollar a barrel in 2001 was a great example of this .bar the last three months . Oil price behaviour for the last two years . Most of the major airlines abroad have used hedging wisely for quite some time to successfully arrest the fluctuating volatility of oil prices. I firmly believe that the new CPC leadership under the guidance of the Central Bank and consultation with competent advisors use this narrow window to its advantage and hedge now. the most volatile of commodities. when financial rescue packages worldwide take effect and help to turn the tide. Saudi Arabia recently demanded its ‘pound of flesh` by stating that it wants the oil price at $75 a barrel and opted to reduce production forthwith. the oil price will begin its customary climb. With oil at around 45 to 55 dollars a barrel at current rates. Given these mysterious circumstances some even profess that the Bribery Commissioner should have a say. It will not be prudent to discard the entire concept of hedging on one bad experience.virtues of hedging and disclose a window of great opportunity. Even J.

Asantha De Mel.asp Sunday Observer: Sunday. 19 August 2007 Petroleum Corp.500 to CPC Chairman.000 barrels of crude oil and diesel imported by CPC.sundayobserver. $32 in 2006. Product Specialist Citi Singapore. Country Head and CEO Citi Sri Lanka Dennis Hussey said that the CPC plays a vital role in Sri Lanka's economy as one-fifth of the country's imports bill consist of oil. It is a way forward if inflation is to be curtailed. Therefore we are very happy to be involved in this trailblazing hedge as this will help reduce the oil price. Therefore hedging will keep the prices down within the next six months. Hussey said this money goes to the people of Sri Lanka and it is very rare that a Sri Lankan corporation adopts these innovative methods. Presenting the cheque for US$ 772. http://www. The ‘hedge’ helped them to peg the price of a barrel at $26 a barrel in 2005. and $35 in 2008/09. So hedge now or repent . This will help CPC to save valuable foreign exchange and also give subsidies to the people and organisations such as CEB. It is difficult to predict when oil prices will increase or decrease as geo politics play a major role. Under the agreement Citi will hedge 100. Citi in hedging contract The Ceylon Petroleum Corporation (CPC) has entered into a hedging contract with Citi to manage the price volatility and provide relief for a part of its oil imports. $31 in 2007.strategy. Anath Doraswamy described the hedge as trailblazing adding that prices will drop because of the hedge. . (The writer is a London-resident financial adviser who returned to Sri Lanka recently and witnessed the saga of hedging unfold).lk/2007/08/19/fin05.

This tie-up was a result of it. which is a big advantage for us.8 mln metric tonnes.G http://www.html Oil hedges Ceylon Petroleum Corporation Chairman Asantha de Mel last week told a press conference. he said. CPC 's refinery provides 50% of its own sales volume and caters to about 40% of the annual demand in the country.A. Sri Lanka branch commenced operations in December 1979 as a full service branch of Citibank N. that had the corporation not hedged and prices . He said that prior to this they did a crack margin hedge with the Standard Chartered Bank for six months as well.lk/2008/11/16/editorial. Economies are driven by commodities and therefore if commodities are hedged it reduces inflation.A. New York and has been a part of Sri Lanka's active financial market since its inception. Sri Lanka is a net importer of crude oil and refined petroleum products with an annual demand of approximately 3. One option was fuel hedging.island. De Mel said that the CPC has the option of adjusting the hedged price as well. S. CPC commands a 80% market share of the downstream petroleum market (refined products including petrol. He said that the Central Bank is concerned with the impact of the high oil prices on inflation and called upon the CPC to look at ways to reduce the risk. the national oil corporation (Refiner and Retailer) is fully owned by the government. Citibank N. He said that the CPC only hedged diesel and crude oil because they did not see the need for hedging petrol. diesel and jet kerosene).He said the future goal of Citi is to move into commodities in a big way in the markets we operate. hurriedly summoned to explain the losses CPC had taken over oil hedging contracts. CPC.

who were associated with de Mel at the news conference. particularly of kerosene and diesel. There were reports that the corporation had defaulted on the payment of its hedging losses to the banks. the net loss up to end October at USD 9 million was a third of that. he had no need to default. CPC should not be faulted for its decision to hedge a relatively small 30% of its purchases. The government has countered that oil prices. It is very much a part of human nature to crow about successes and maintain a stony silence on failures. default by a state-owned enterprise like the Petroleum Corporation will have serious implications for Sri Lanka’s national debt rating and this is something that all concerned will be too well aware of. Also. the main providers of hedging instruments. He will be paying the premium to the insurer and if no claim arises for several years. whether Sri Lanka has the necessary expertise to get what it needs through negotiations with more knowledgeable and sophisticated bankers whose eyes are fixed firmly on their own bottom line? There are many doubts on this score. This was strenuously denied both by the CPC Chairman as well as the CEOs of both Standard Chartered and Citi Banks. it looks like these losses will mount further this month. By last Sunday the news was out that CPC’s losses on hedging when oil prices plummeted was in the range of USD 27 million in October. Nobody would dispute this argument. have long been subsidized and CPC has to recoup at least some of its losses now that the falling market has offered it a window of opportunity. the corporation was not shy about publicizing its achievement and the public was treated to a picture of a fat cheque for something like five million dollars being collected. Simplistically. of course. De Mel socked home the point that whatever CPC’s hedging losses were. most importantly. That too is something that nobody can or will dispute though the public. hedging can be likened to an insurance policy a motorist will take on his car. like insurance. Merely because oil market movements have hit lows that even the best experts did not predict and caused hedging losses. When hedges worked in favour of CPC. But if profits made on previous hedges are taken to account. has a quarrel with the government that the full benefit of the fall in prices has not been passed to the consumer. his neck would surely have been on the chopping block. he may well consider such payment to have been wasteful expenditure.had gone up and not down. So hedging. Given that the oil market is yet on a downward roll. the country was benefiting hugely from the falling oil market. is a measure of prudence where profits and losses depend on imponderables – will you meet with a serious accident as in the case of your motor car or the oil market move against you or in your favour as in the case under discussion. The CPC chief made the point that given the profits he was making in the current market. . having carried comprehensive insurance would be a Godsend rather than just a saving grace. But should his car be wrecked in an accident and is a total write-off. But big questions remain on whether the best possible hedge had been obtained and.

helping stabilise earnings amid high and volatile prices. refiners such as Indian Oil Corp can mitigate the chances of a fall in global prices reducing the . http://economictimes. the Central Bank had given the banks some directions into the parameters on which oil hedging could be done and are now checking on whether there had been strict compliance on this score by the banks that offered the instruments.com/News/Economy/Finance/RBI_grants_refi ners_to_hedge_oil_inventories/articleshow/2564914. As we have reported in this issue. saying that the banks were really ``matchmakers’’ in this business. we must not forget that the Lanka Indian Oil Corporation (LIOC) which is the second player in Sri Lanka’s petroleum distribution market appears to have done better than CPC in its oil hedges. Be that as it may. REUTERS NEW DELHI: RBI has granted state refiners license to hedge half of their oil inventories for the first time. He confirmed that his corporation was not contractually locked into a situation which would cost it hugely in the currently falling market and exit options are being looked at. was indicative that relations between CPC and the banks are good if not cozy. By buying and selling crude oil and fuel swaps or futures. The global financial meltdown played its own part in pushing down prices with paper traders in the various oil exchanges taking a heavy blow. Everything that was said at the news conference. A reporter raised a pointed question on this subject pointing to published profit growth of one bank but de Mel. what is clear is that the kind of sophisticated expertise necessary for operations such as this does not seem to be available at CPC. implied that there were no big bucks to be made by the banks on this score. Banks like other businesses are not into philanthropy and can be counted on to be hard-nosed in their quest for profit. Nevertheless. 1519 hrs IST. company officials said on Friday. it is unlikely that the present oil prices favouring the buyer is for all time. We would tend to tilt to the latter point of view. We lack expertise in many areas and it is necessary that we maximize our resources to meet the many challenges that confront us every day.indiatimes.cms RBI grants refiners to hedge oil inventories The Economic Times 23 Nov 2007. It is well worth knowing whether this was just a matter of luck or greater sophistication and expertise. where de Mel did most of the talking.No clear answer was forthcoming at last week’s news conference on the kind of profits the banks had made on hedging. Also.

" IOC's director of finance S V Narasimhan told media. fuel oil. It later clarified that the 50 per cent limit applied to volumes for the preceding quarter. Bharat Petroleum Corp says besides managing its inventory risk. you have to trade daily..25 million tonnes. OTC is a fixed period.crude is up more than 40 per cent since mid- August ." said Rohit Nagraj. the new guideline will also help its Indian clients lock in a fixed price for future oil product deliveries." its director of finance S K Joshi said.. although the growing demand for risk management tools is a boon for giants such as Morgan Stanley. have also been cleared since last year to hedge a small portion of their overall refining margins. the Reserve Bank of India (RBI) granted a long-standing request of refiners to hedge 50 per cent of their inventory in international markets to limit earnings volatility. We hope to begin OTC sale of our inventory by January. CUSHION With oil prices swinging widely . or ICE or NYMEX. not value of the holdings." he said. He added that IOC would likely use over-the-counter (OTC) swaps rather than trading directly on international exchanges such as the New York Mercantile Exchange (NYMEX). Indian officials declined to say which banks they would choose to help hedge their fuels." he said. which would cause profits to appear lower. research analyst with Angel broking. "It requires lots of procedural activity to trade on these exchanges. allowing them to lock in profits years ahead. "It will be possible for us to offer Indian customers structured products for naphtha. Indian state-owned refiners. Air India . enough to meet about 15 days of demand and worth an estimated $6 billion at current prices. host to the world's most active oil futures contract for US light. It will be a cushion to the companies facing revenue losses because government fixed prices. IOC normally keeps inventory of 7-8 million tonnes (nearly 60 million barrels). and aviation turbine fuel for managing their cost better. "This year we target to hedge 5 percent of our total production. In its mid-term appraisal of credit policy last month. so right now we have no plans to trade on these exchanges. Barclays Capital and Citibank. next year we hope it will be around 10 percent.value of their stockpiles. who operate two-thirds of the country's 2. "This will enhance their operational efficiencies. sweet crude. "We will enter into simultaneous back-to- back contract with OTC. "We will seek board approval by the end of this month or early next month. around 2.8 million barrels per day capacity.refiners are exposed to sharp rises or falls in the value of their stockpiles over the quarter." Narasimhan said.

given that they are both branches and part of the same legal entities as Citibank N. dependent on any regulatory restrictions or delays in remitting money into Sri Lanka. Fitch's view is that timely support would be made available to the two foreign banks from their respective head offices in order to meet their depositor and creditor liabilities in the event such support is needed. Fitch said the national long-term ratings of Colombo branches of SCB and Citibank have are not affected. Fitch said PB's potential loss. In this context. as the bank has sought legal advice on its obligations. Acting as intermediaries.was allowed to hedge its jet fuel prices for the first time last year.com/General/8215. It said that CB's ratings are not likely to be affected. in Fitch's opinion. respectively. earning a fee/commission.A. none of which is envisaged at the moment. http://www. thus carrying only counterparty default risk. This support is. while Sri Lanka was the first Asian country to attempt to protect itself from rising costs with derivatives. the two local banks are exposed to counterparty default risk.srilankanewsfirst.000 barrel contract. could. based on current global oil prices. these banks structured these transactions with corresponding positions with offshore counterparties. 2008 07:56:32 | 374 times read Fitch Ratings Lanka said today People’s Bank and Commercial Bank will be affected by the suspension of payments in the controversial oil hedging agreement with the Ceylon Petroleum Corporation (CPC) unlike Standard Chartered Bank (SCB) and Citibank who could receive support from their overseas headquarters over the payment issue.000 barrel contract. While the final court decision will not be known until early 2009. The payments due from state-owned PB to its counterparties have been halted.html People’s Bank. ComBank affected. . result in compounding the delay in achieving the minimum capital adequacy ratios as initially expected.000 barrel contract. and SCB. CB's exposure comprises payments due on a 70. PB's exposure comprises payments due on a 100. as the bank's capital position is sufficient to absorb the potential losses (including payments due from PB) that may arise based on current global oil prices as estimated by management. including payments due to CB on a 50. In the case of People's Bank (PB) and Commercial Bank (CB). not SCB or Citibank over oil hedge-Fitch Editor on 29 December. however.

http://www. De Mel himself mentioned a “small delay” with regard to a Citibank payment which he dismissed as “just a day’s”. CPC only anticipated a downside of a $90 floor at most . .lankatimes. The Cabinet was concerned about rising prices and so the CPC’s hedging arrangements were geared to limiting risk here. Ceylon Petroleum Corporation (CPC) Chairman Asantha De Mel took great pains to explain the situation regarding the oil price hedging issue that has involved several institutions since the Financial Times comprehensively broke the story last week in our ‘Special Report’. and DGM Finance of CPC Lalith Karunaratne. Citibank. any other available (safer and more transparent) tool such as futures options via international exchanges. why the Cabinet might have forced a zero cost option was not known. Also present were the Chief Executive officers (CEOs) of Standard Chartered Bank. though the brunt of the deals concerned only the foreign entities (one local bank had turned it down as it felt the risk too high). (In our analysis of November 5th. Citibank. although it seems that the Government might have baulked if it had been asked to pay what CPC terms as expensive premiums if a non-zero cost option . as we had queried in our report. Deutsche Bank and the Peoples’ Bank.com/fullstory. De Mel pointed to his remit from Cabinet where the latter had specifically ordered the CPC to “undertake a zero-cost option” and not. in his view. we understood that Standard Chartered was the lead bank and information on others .perhaps a futures option - had been promoted instead. These products had been floated by several banks including the Standard Chartered Bank (SCB).not the $60 levels seen recently. not possible to hedge on the upside of oil price increases as well as the possible downside: “You can’t have your cake and eat it” the CPC Chairman asserted. Cabinet Framed the CPC’s Hedging Mandate The CPC Chairman outlined that it had been actively involved in hedging operations since February 2007 but insisted that it was “not out to make profits” or squander national foreign exchange on such efforts. Commercial Bank.php?id=13112 CPC hedges on its hedges? At a swiftly-organized press conference on Monday that was organized in the wake of mounting public interest.was both patchy and conflicting). Clive Haswell. The CPC Chairman stated (and in a joint press release several present banks corroborated) that the payment deadlines had not been breached although market and media sources earlier had spoken of missed deadlines. Dennis Hussly and the Managing Director (MD) of Commercial Bank Amitha Gooneratne – the three banks that had offered CPC hedging solutions.as indeed the full extent of CPC’s hedging . De Mel categorically denied that the CPC was in debt to any bank due to any inability to honour hedge fund agreement products running into millions of dollars. while at the then state of market information. His main point was that it was. Moreover.

” While the intentions of banks are often honourable (and we note that the CPC Chairman himself took special effort to support the actions and sentiments of the banks offering him these hedge solutions). In the FT analysis. The issue at stake was the cost of the 30% of oil imports hedged by CPC and whether adequate care – either by the Cabinet or CPC – had been taken as prudently informed entities on limiting the downside of sliding oil prices. As with all products sold by us. In the joint bank statement issued on Monday. nor why CPC had not got one done. The only possible explanation is .” The recommendations formed by the special government Sub-Committee which advised on this subject is also said to have been made in 2006. A cautionary Central Bank document (Financial Derivative Products) of July 2008 (after some deals were done) does raise a rather timely warning: “All dealers should ensure that Board of Directors of corporates clearly understand the risks of the instruments and draw up/lay down adequate plans…to mitigate the risks. But Banks Slow to Change Terms? All contracts must also account for an exit strategy upside or downside: we were told that CPC did voice this concern to SC in late 2007 but it was unclear why SC had not gone out of its way to offer an exit option earlier. we pointed out that it was an ethical duty of banks to ensure that institutions such as CPC or Cabinet that went in for hedge products from private banks clearly understood what they got themselves into as national resources were involved.he did not want to become a scapegoat if he exited his hedge and then found that prices increased dramatically. In other words. to whom and when.The political unviability of this was something De Mel pointed out. CPC is permitted to go for zero cost structures…”. the upside risks was greater than potential exiting when things were going badly with falling prices. rather a long time ago in view of very fast changing financial circumstances globally. It is clear as we have outlined last week that the CPC could not have reliably predicted oil price increases or drastic decreases like a clairvoyant. The FT is not entitled to view the relevant Cabinet paper. however the issue of the cost of the 30% still remains.FT) was made on the part of any of these banks. “The . we note that the CPC press release talks of “Amongst other things. De Mel’s counterstatement that the rest of our 70% oil imports benefitting from low current prices is well taken. it says: “We wish to clarify that no mis-selling (a curious word and not mis-spelling.as de Mel reiterated several times. we believe CPC and its Chairman tried to act in good public interest though not necessarily transparently. It is also clear in the FT article that no expectation of CPC being accused of “profit-making” was made. customers are provided the fullest awareness on the product as well as downside risks. it is not possible to judge here how fulsome their explanations have been. meaning the common man would have been aghast at the thought of spending precautionary millions in advance. as this may average out our total bill.

000 and 400. Quite what this means is uncertain although it is clear to the banks present as well as those players involved that hedging issues and packages will not be taken lightly by the government or the general public. when resources are at stake and we urge CPC . A Lack of Transparency The issues we have highlighted in the FT Special Report have.or indeed if any other non-CPC institutions were involved. We were not able to obtain what percentage of this extraordinary profit might have come from hedging with CPC . alright then.structures that have been offered to our clients are in line with what has been allowed by the Government. made public institutions aware of possible lacunae in decision making. The CPC Chairman. stated broadly that “maybe it [profits .000 barrels) and thus is not engaged in making significant profits from hedging. At the end of this press conference.000 barrels of oil respectively) remained tight-lipped when the Financial Times pointed out that the Standard Chartered Bank published a 145% profit increase from “Non-interest foreign exchange commission” (Rs 702 million) for the six month results ending June 2007 versus June 2008. Standard Chartered Bank and Citibank (which it was revealed had hedged 300. it is doubtful if banks would enter into deals that are unprofitable or marginally profitable or indeed at a social cost. While we do not expect banks to divulge exact numbers. the current behaviour of irresponsible entities abroad do not endear any foreign or local institutions here overreaching their pockets when scarce foreign reserves are at stake. with other subsequent newspaper media. As a public corporation perhaps CPC’s and the banks’ official assertions of rigorous scrutiny of hedging options can be shown in some more . especially foreign banks that only recently advertised as priding themselves on aggressive exchange profiting activities. It further remains that a far greater transparency be offered especially by our public institutions. the foreign banks.” Oh. when asked about large profits made by the foreign banks on hedging. had undertaken a very small hedge (20. Tightlipped Bank Profits on Oil Deals At the press conference. He went onto highlight that Sri Lanka had never yet defaulted on any “sovereign” payment and seemed to remind us of the gravity of it breaching international norms. Standard Chartered Bank CEO Clive Haswell re-emphasised that the CPC had not defaulted on any obligation to any banks and spoke of rigorous internal ethical vetting of their sales products (hedging packages). Allegations on Sri Lankan airlines are floated and the Bank on Thursday intimated multiple hedges taken place and some were “under discussion”. While banks are respected institutions in this country. Commercial Bank. the only local bank present and one with a large local business footprint.and the Government . the CPC included.to be open and honest.FT] came from some other avenue” and that the banks did not want to undertake “unnecessary risk”.

sulekha. The CPC Chairman himself ended the press conference on a brighter note that it was possible “now” to look at some new options to the existing hedging agreements to save money (hedging plus paying premiums). KPMG. this episode has put the CPC and its Chairman between a rock and a hard place in a national issue. the CPC states that the “CPC is committed to make the payments as and when they fall due. fearing they would end up buying gas at the higher price and be forced to sell . the County was eventually able to resettle much of its creditors and although it still had to repay debts for years to come. declaring Friday that soaring fuel prices would remain unchanged. Industry sources also suggest that some banks were talking of newer cost saving hedging products. with many other institutions also paying up. Morgan Stanley Dean Witter and nearly 30 other securities houses. which could have serious consequences…” While we agree. With these payments (over $864 million).com/newsitem/apnews/2008/12/sri-lanka-dispute- over-gas-price-creates-shortage. accountancy and law firms for misdirected advice give to officials who were not sufficiently knowledgeable about the instruments they were sold and not adequately regulated or overseen. a possibly convenient face saver.transparent and accessible ways. Remember Orange County In all fairness. did not fill tanks Thursday. The standoff between the court and the government has created an artificial fuel shortage and long lines at the pump. unsure what price to charge. Merrill Lynch was held most responsible for steering the County’s (financially unsophisticated) Treasurer (who claimed he had been misled about the riskiness of the instruments) towards what the County deemed were risky and unsuitable securities. Mistakes. Merrill Lynch finally agreed to a $400 million settlement to avoid further litigation. Source :dailymirror. The County successfully sued Merrill Lynch. we can also remind CPC of the bankruptcy of Orange County in Southern California in 1994 to the tune of $1. but it may be time for the players to move on.htm Sri Lanka: Dispute over gas price creates shortage COLOMBO. This constituted the largest financial failure of a local government in US history. Many filling stations. Sri Lanka (AP) — The Sri Lankan government ignored a Supreme Court order to reduce state-set gas prices.lk http://newshopper. There is no question of defaulting on these payments. we feel have been made.6 billion due to a hedging of that county’s investment portfolio that went unexpectedly wrong (-a wrong-way bet on interest rates). A default by CPC will be as good as a sovereign default. In its press release.

com/business/200711/10347.asp. a university teacher. said he stopped driving his car because of the shortage. Chandana Alutge. the Supreme Court ordered the government Wednesday to immediately reduce the state-set price of gas from 122 rupees to 100 rupees (about $1). economist Harsha de Silva said. Stations across Colombo ran out of fuel. The government ignored the order. 12:80 GMT Government is exploring the possibilities of hedging crude oil prices. the price of oil has plummeted to under $50 a barrel. With oil prices plunging. Posted: 3 months ago (2008 / 12) Copyright 2008 The Associated Press. expecting oil prices to continue climbing. The court has made no comment on the dispute. 12 November 2007.myjoyonline. In recent months. broadcast. The government. rewritten or redistributed http://topics. agreed earlier this year to buy all of its fuel at the price of $134 a barrel until next summer. The court has said it delivered the ruling to the appropriate government officials. "This is not good for the country.it at the court-ordered discount. All rights reserved. as part of measures to minimize the impact of the risk of exposure to world crude oil prices on the economy. But instead. however. with Trade and Consumer Affairs Minister Bandula Gunawardena saying the Cabinet can't act because it never received an official copy of the court order. and lines stretched into the streets for those that had some left. The opposition United National Party claimed the government won't reduce the gas prices so it can use the extra profits to cover the losses from the oil hedge. A recent document submitted in court estimated the deal could cost as much as $775 million. This material may not be published." he said. Gov’t to hedge crude oil prices Last Updated: Monday. . the court's efforts have created a black market that sent the price in some places skyrocketing to 145 rupees a liter.

government thinks it is time to explore the grey area which is extensively harnessed by countries in Europe and Asia. Sarpong asked. Kwadwo Baah- Wiredu noted that the outlook for the economy remains positive. as OPEC has projected decline in production. the Minister of Finance and Economic Planning. At its last review last week. It has also projected demand for crude oil to increase by 100. US sanctions against Iran. interest rates.5 percent after maintaining it at 12. considering its resilience to the recent energy shocks. outlined the areas where hedging is needed at TOR as interest rates. the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) increased the prime rate to 13. and the US. the reason being the threat the crude oil prices pose to domestic price levels. Hedging is a financial instrument that can be used by government or the private sector to minimize the risk of exposure to commodity prices.000 barrels per day in the fourth quarter. In his address. "With the gloomy overhang." stakeholders drawn from government. private financial and business sectors agreed to put in all necessary structures and systems to support the development of the derivatives market in Ghana." Dr. Baah-Wiredu said. except for the exposure to the soaring crude oil prices. He said the company has not hedged because of its Board's knowledge of distasteful experiences at the Ghana National Petroleum Corporation (GNPC) ." Mr. buoyant commodity sector and GDP growth set to hit the budget target of 6. The surge in the crude oil prices is expected to continue. where are we going to get that kind of money from. "Why Derivatives are the Next Step in the development of the Financial Markets in Ghana. to be caused by falling output in Mexico and Brazil. opposition.5 for three consecutive times. would accrue tremendous gains to consolidate micro and macroeconomic stability. Sarpong. K. K. indicating the need for hedging. due to stock piling for the winter season. the time cannot be riper for Ghana to begin exploring hedging crude oil prices.5 percent. At a roundtable discussion in Accra supported by Standard Chartered Bank (Stanchart) on the topic. and exchange rates. equity prices.With the spate of rising international crude oil prices amidst speculations that the price would cross the all time US$100 per barrel mark before the close of the year. the geo-political tension between Turkey and the Kurds and. "TOR spends at least US$100 million monthly on crude oil purchase. Dr. foreign exchange transactions and crude oil prices. which I believe when well managed. The CEO of Tema Oil Refinery (TOR).

yet to be brought to account for unethical and supposedly ignorant banking practices which initially raised billions in profits but have now cost tax paying consumers and the US economy dearly. Rs 157 for Octane 90." he said. He cited a case of Sri Lanka. Yet the prices paid by Sri Lankans at the petrol station have been unchanged since May 24th 2008 at Rs 170 for premium Octane 95 petrol. Secondly.and Anglogold Ashanti (formerly Ashanti Gold Fields). This comes at a time when firstly. a Senior Manager on the Commodity Marketjng Desk of Stanchart. It turned sour as gold prices rather picked up.5 million annual production for 20 years. it requires harnessing of the appropriate knowledge. decided to hedge gas oil prices through its National Oil Company.com/?p=2907 Sri Lanka . The international ramifications are still unknown and smoldering. when it was by then quoted at US$60 per barrel. Banks and Self interest – But Whose Bad decision making by the Government and potentially unethical profit taking by a foreign bank offering select price hedging solutions for Sri Lanka’s oil imports are now costing an already impoverished consumer an extraordinary Rs 16 billion or much more upto June 2009. In 1998. the price of crude oil has dropped from a peak US$ 147. the Ashanti Gold instrument was not managed well enough. Anglogold gets US$615 for each ounce of gold. For him. Singapore explained that hedging is a risk but depending on the way it is managed. Amit Juneja. Presently. being the average of hedge and unhedged price while the market price stands atUS$850. it can be very useful against volatility.27 a barrel (early July 2008) to today’s US$ 60-63 levels. Anglogold Ashanti hedged 600 ounces of its 1. betting that the price of gold will continue to fall over this period. However.linkingpeopletogether. competence and expertise to manage properly against the downside risk. So who benefits and for how long? . the global financial crisis has already unseated at least 10 heads of giant American financial corporations. Source: B&FT http://www. Rs 125 for Super Diesel and Rs 110 for ordinary diesel as at today. "Once you ascertain that you have an exposure which is linked to international prices. in June last year when the government initially resisted but upon understanding of the market operations through competent advice.Oil Deals. hedging is worth considering.

available to the country under all potential circumstances for the oil market (rising prices and falling prices). As our chart depicts. we need to be aware of the forces at work in the global oil industry (see box). would have carefully evaluated all oil price limiting options . unavailable to the public. in June. The price of crude unrefined oil in June was about US$ 130. national foreign exchange reserves are dwindling and today stand at about US$ 2. The Ceylon Petroleum Corporation (CPC) signed an agreement with a foreign bank to limit the country’s exposure to volatile oil prices . The Committee duly discussed what would have been a strategic response to an issue where millions of dollars of increasingly scarce Sri Lankan foreign exchange was involved.such as hedging. the balance refined petrol and diesel). and fully understood the nature and consumer implications of the specific risk package that was offered by the foreign banker. Moreover. it is the cost of the hedge to the country that is an issue. been aware of tools used by other countries in similar predicaments. Their decision.Thirdly. as any ethical banker might be obliged to do. with a foreign bank.26 billion). Trafigura Pte Ltd. (Singapore) which has allegedly been linked to oil-for-food scams in Iraq. recommended the Cabinet to enter into an oil price hedging agreement. we expect that a risk solution commensurate with our means would have been selected. . hedging being one of several available instruments.but mainly upward volatility and it seems not downward! The committee. the Cabinet endorsed the hedging instrument to try insure the country against upward spiralling oil prices. The country can ill afford to gamble on its thinning vaults. Accordingly. taking protective measures through minor import exchange restrictions on October 31st may be overlooking the larger issues at stake.6 billion. This triggered concern in the Cabinet and a special committee was hurriedly appointed to find solutions to the vexing question of how we finance our oil imports. the Daily Mirror learns that this may not quite be the case. not downwards. Sri Lanka being a small country with currently dwindling foreign exchange resources (US$ 2. and the deals are hedged through a local branch of an established foreign bank. Though market sources say only about 30% of all oil imported is hedged. the chosen bank was deemed more technically aware and better able to field risk limiting hedging products. we believe that the onus would have been on any foreign bank that submitted such a price hedging financial package (or “banking product”) to fully educate the recipients on what their package cost to the country both for the upside and downside of oil price movements. To understand where Sri Lanka stands with our oil imports (imports are said to be about 30 million barrels per year in 2008: 15 million crude. we believe. However. For an explanation of some commonly used risk instruments. Sri Lanka currently buys oil from a private company. oil prices were only recently spiralling upwards. It is not yet clear on what basis such a bank was selected but we presume that in the absence of a reputed local risk management unit at any government institution (despite several hedges being done todate). please see our box. futures and exchange opportunities .

284.000 barrels per month. according to market information the total receivables for this foreign bank was $24 million dollars for October 2008. 21.000 barrels per month but 200. Thus on a downside in oil prices.9 billion) until June 2009. If the price of oil went above a $145 ceiling (“cap”) set by the bank package. we are potentially tied into an unfavourable deal for almost a year. a modest Rs 253. These obligations allegedly translate into Sri Lanka needing to pay US $12 million for October 2008 (being $125 floor price minus $65 spot price in October x 200. Moreover. thereby soon relieving the oil producer from obligations for future supply at this rate. our purchase quantity was 100. It was contractually obliged to buy crude oil at between US$125 and $145 a barrel.2 million) was attributable to this one foreign exchange area. Bottom Line . then the CPC was obliged to buy not just 100. such foreign exchange commitments seem to be of questionable benefit to our citizens. as indeed whether it is a hedge or a gamble.According to market sources on the specific agreement offered by the foreign bank (details are publicly unavailable and not disclosed on the outdated CPC website).2 million mainly from “forward foreign exchange deals done in 2008” (its footnote).75% in the same accounting period. Should the price drop below US$125. By way of parallel indication on the same newspaper.4 million) with a Operating Profit of Rs 2259 million made a net gain of only 30. 1. the CPC undertook a hedge solution from the assortment of international options available. Sri Lanka could buy at the prevailing international market (“spot”) price but in fixed quantity.000 barrels per month at the difference between US$ 125 and the spot price for the balance period on contract i.970.000 barrels). or $144 million (Rs 15. deemed by hedging industry as a long time. we have to pay $12 million (Rs. the CPC was entitled to buy a specified quantity only for two months at $145.e presumably June 2009. A Very Profitable Deal A look in a local newspaper of August 29th 2008 at the 6 months’ published P&L accounts of a foreign bank (Interest Income: Rs. irrespective of world market prices. a full Rs 702 million (say US $6. the “floor” price.9 million.3 billion) x 12 months. If prices remain for example at $65. While the bank’s entire Operating Profit for that first half of 2008 was Rs 1393 million. a much larger leading local bank (Income : Rs. Any layman might question whether such contracts constitute a hedge for the country or the producer. While the business of a bank is to make profit in as much as the business of government is to offer its citizens a better cost of living. this is only one contract out of several presently. 4791 million) indicates that the bank made a very commendable gain of 145% in “Non-interest Income/ Foreign Exchange Income” from Rs 484 million at June 30th 2007 to Rs 1186 million by June 30th 2008. Interest Income Rs 17. If the price was between $145 and $125.

html SRI LANKA: Oil Futures Gamble Burns 300 Million Dollar Hole Monday.We believe the country will need to consider very substantial foreign exchange payments over the next year as a result of these hedging deals. lack of transparency on the nature and number of deals undertaken and the performance of oil prices in the next few months. June 25 2007: Chairman CPC declares a Rs 1 billion loss).e not political. cross-subsidization or temporary relief ploys for cosmetic reasons but based on prudent good decision making? • Indeed can the Government now afford to give relief? • Was the Cabinet aware that it may have effectively recommended hedging the producer ? • Will the Government be able extricate itself from binding contracts that seem to benefit the bank who promoted and negotiated the appropriate or inappropriate hedge risk product for this country? • It is ethical for responsible banks to profitably milk the country of scarce reserves on a large scale when on October 31st 2008 the Central Bank hurriedly imposed import curbs on 44 “non-essential” items (from chocolates to electrical items) to thwart dwindling reserves ( Sunday Times headlines)? It is the small businesses that will suffer too. with local fuel prices fixed from May 24th 2008. 24 November 2008 . with possible effects on our deficit.lankanewspapers. • While current low oil prices (if obtained through contract) and high Lankan pump prices may help CPC cushion itself from its huge past debts incurred (Daily News. • In this scenario. the pressing question is will any price relaxations be real i. the exact amount can not be determined due to confidentiality. Certainly billions of Rupees will need to be committed unless such deals are terminated or a lucky credit line becomes available as the government has enough other cash problems to boot.8:37 PM SL Time The Sri Lankan government is grappling with a costly 300 million dollar payout to Citibank and Standard Chartered Bank (SCB). will the Sri Lankan consumer be afforded any relief from the price he or she pays at the pump till late next year? • There are indications that the Government may be considering some relief.com/news/2008/11/35610. when will the ordinary consumer benefit? http://www. following a disastrous oil futures contract between the banks and the state-owned Ceylon .

Any fall in prices below 100 dollars (without any restriction unlike on the topside) means the CPC pays the banks. denied claims that the CPC planned to default while also saying the corporation was made fully aware of the risks by the banks. De Mel then called a press conference where. three others banks also followed suit -.worth around 2.Petroleum Corporation (CPC). and that the banks had not properly advised the CPC on the risks involved in the hedging contract.to get into oil futures contracts with the CPC. SCB and Citibank have been accused of not properly informing the state petroleum supplier of the risks involved but vehemently deny any wrongdoing.paid out just in two months -. flanked by the CEOs of the two banks. Negotiations are now underway between the CPC and the banks to re-structure the contracts and reduce the burden on the fuel supplier. Central Bank (CB) governor Nivard Cabraal said its guidelines in derivates trading had not been followed. De Mel admitted that payment at .and is set to pay another 300 million dollars (if the oil prices remain in the 50-60 dollar per barrel range) or more if it falls further.5 million dollars -. Sri Lanka`s foreign reserves -. Under the zero cost collar option. The CPC decision to hedge on oil as a protection against volatile oil prices came in January 2007 when there was speculation in the market that oil prices would rise to as much as 200 dollars a barrel in the coming months. Since January the CPC gained 24 million dollars (payment from the two banks) but lost 38.is already under pressure from the global economic crisis. After the SCB and Citibank got involved in the futures contracts. the banks pay an agreed amount (upto a maximum of 1.7 billion dollars or the equivalent of more than two months worth of imports -. whenever the price rises between 100 dollars and 135 dollars per barrel. Overseas officials from the two banks have been in Colombo over the past two weeks on `damage control` visits.on a smaller scale however . Analysts recall that 15 years ago these two banks were implicated in a huge stock market scam following flagrant violation of the Reserve Bank of India guidelines on portfolio management services and ended up paying fines totalling 21 million dollars.5 million dollars a month) to the CPC. The deals were made through a `zero cost collar` instrument where no premium is paid by the customer and the risks shared with the banks. The Sri Lankan crisis came to the fore two weeks ago after newspaper reports hinted that the CPC may default on its October (monthly) payment to the banks due to a cash problem.

According to international news agency reports.` he told IPS. a Sri Lankan who initially made a proposal to the Sri Lankan government at the end of 2002 to introduce hedging. which has been carefully documented. `Someone must be accountable for this huge loss to the country. said that there were warning signals that the zero cost dollar instrument was the wrong strategy. he said. Upul Arunajith. demand growth has fallen to its lowest in 23 years due to the world economic crisis.47 dollars per barrel. Even though OPEC is cutting down production to stem the sharp price fall. Opposition legislator and member of the Parliamentary Committee on Public Enterprises (COPE). On Friday. `I had personally informed them of the impending disaster. a derivatives specialist based in Canada. a political appointee and associate of President Mahinda Rajapaksa and Petroleum Resources Minister Mohamed Fowzie. the benchmark Brent world crude price fell to 46.current prices would be over 300 million dollars. Dayasiri Jayasekera. international market analysts say. crude oil prices are poised to fall by another 15 percent in the next week while recording its lowest price since May 2005. the hedge will sooner or later go in the wrong direction and will lead into a crisis.` Arunajith. for taking decisions without full board authority. At de Mel s press conference Citibank chief Dennis Hussey said the Sri Lankan government started the hedging process following a special cabinet approval. Newspapers and analysts have clearly indicated that the CPC went for the wrong hedging (futures) option where the payment on the downside (borne by the CPC) was unlimited while on the topside (liability for banks) was restricted and accuse the banks of selling the wrong option and not advising the CPC of the risks. We will be fully questioning Asantha de Mel (chief of CPC) on Thursday (at a COPE meeting) to get to the bottom of this. SCB s Sri Lanka chief Clive Haswell said the bank had received a written undertaking from the CPC that the latter was aware of the risks. a stunning drop of almost 100 dollars per barrel from 143. But CPC s board of directors said no such undertaking was given and are blaming de Mel. described the issue as serious. told IPS over e-mail that if the wrong instrument is used.33 dollars on Jul. `This is what happened in this case. 11 this year. Issues of impropriety are also surfacing with claims that some CPC officials . Neither SCB nor Citibank are specialised energy traders nor do they have the wherewithal to provide a hedge to the CPC for a huge exposure of two billion dollars .

got `favours` from the banks. The government has resorted to large scale borrowings in the international market over the past two years to fund state spending. Market analysts said that the two main foreign banks have hedged these instruments with the New York Mercantile Exchange (NYMEX).which normally scrutinises state contracts to check its legality -.reuters. which guarantees the government it . `Any default to the NYMEX by the banks will be perceived as default of a sovereign debt which will be disastrous to the country`s international rating and jeopardise Sri Lanka`s standing internationally to seek foreign commercial loans. A Parliamentary committee had also summoned de Mel for a hearing but the latter did not turn up.` one analyst said. Rajapakse summoned de Mel for a meeting. 2007 12:56pm GMT By Simon Gardner COLOMBO. seemed to relent later under pressure and are now guiding a re-negotiation of the payments. This was clearly seen when CB officials.was not consulted. Feb 7 (Reuters) . http://uk. including for costly war against separatist Tamil rebels in the island nation s north. pressure has been mounting to pay up or face international repercussions. the powerful CPC chairman`s political connections will come to his rescue. requesting time for proper preparation.Sri Lanka's state oil company Ceylon Petroleum Corp.com/article/oilRpt/idUKCOL16516120070207 INTERVIEW-Sri Lanka Ceypetco aims to hedge diesel at $67-$74 Wed Feb 7. who had initially threatened to rap the banks for not following guidelines. As pressure mounted on the government.2 million barrels of diesel on Singapore's OTC market over the next three months at between $67 and $74 a barrel. Political observers say while de Mel and the finance minister must take the rap for undertaking to use a hedging option where the downside risks were greater. Attorney General Priyadas Dep told The Sunday Times newspaper that his department -. As demands are being heard from some sections of the government to default payment on the basis that the banks misled the CPC. it said on Wednesday. Chief Financial Officer Lalith Karunaratne said the "zero cost collar". an option contract without a premium to be paid. is poised to hedge up to 1.

. Standard Chartered (STAN.hitting 14. The amount of diesel to be hedged on Singapore's over-the-counter (OTC) market -. The hedge will enable the state -. The government said this month seismic data showed more than a billion barrels of oil lie under the sea off Sri Lanka's northwest coast. but Karunaratne said he was thinking of dividing the business up between the three as it was the company's first ever such deal. and $72-$74 the upper part of the band. So what is the bottom price I can give up?" Karunaratne said in a telephone interview.which produces no crude oil of its own and had to fork out $2." he added. DIVIDING UP THE BUSINESS Deutsche Bank (DBKGn.to be sure of its financial commitments in worst and best case scenarios. "We decided a sort of a band -..can buy fuel within a specific price range. .8 percent in January as measured on a 12-month moving average -. aimed at insulating it from international oil price volatility." "We thought of giving all three banks quantities . "I am really looking at the bottom at the moment for the next three months of $67-$68 (per barrel of diesel). which has been hard for the economy to cope with. It is set to launch exploration tenders in April. "By the latest it will be tomorrow morning. would be sealed by early Thursday at the latest. Inflation is running at its highest level in over four years -.represents around 40 percent of Sri Lanka's overall diesel requirements.L) and Citibank (C." he added.N) are each competing for the business. It is the first such hedging operation by the Sri Lankan state.8 billion or less. because of this first deal. "The price is unbearable.000 barrels per month over three months -.DE)." he added. "We are waiting for the final confirmation from the banks. Central Bank Governor Ajith Nivard Cabraal hopes the hedging will help curb inflation and stabilise the rupee and wants to see the annual oil bill brought down to $1." he said.and the Central Bank is scrambling to find ways to brake it without having to raise interest rates. really I get hurt.07 billion on oil imports in 2006 -.a cost collar.400. Sri Lanka is the first Asian country to announce openly that it will hedge.

and lines stretched into the streets for those that had some left. did not fill tanks on Thursday. The government ignored the order. a university teacher. Chandana Alutge. the Supreme Court ordered the government on Wednesday to immediately reduce the state-set price of gas from 122 rupees to 100 rupees (about RM3. Dec 20 — The Sri Lankan government ignored a Supreme Court order to reduce state-set petrol prices.php/business/14549-dispute- over-petrol-prices-in-sri-lanka-creates-shortage Dispute over petrol prices in Sri Lanka creates shortage Monday March-9-2009 COLOMBO. A recent document submitted in court estimated the deal could cost as much as US$775 million. however. the price of oil has plummeted to under US$50 a barrel. . to supplement hydroelectric output that suffers from cyclical droughts. Many filling stations. Stations across Colombo ran out of fuel.my/index.Any proven oil find would be welcome relief for a land that has become increasingly reliant on diesel generators. with Trade and Consumer Affairs Minister Bandula Gunawardena saying the Cabinet can't act because it never received an official copy of the court order.com.70 rupees) http://www. In recent months. fearing they would end up buying gas at the higher price and be forced to sell it at the court-ordered discount. The court has said it delivered the ruling to the appropriate government officials. economist Harsha de Silva said. agreed earlier this year to buy all of its fuel at the price of US$134 a barrel until next summer. (US$1 = 108. declaring yesterday that soaring fuel prices would remain unchanged.themalaysianinsider. expecting oil prices to continue climbing. which are costly to run. said he stopped driving his car because of the shortage. With oil prices plunging. the court's efforts have created a black market that sent the price in some places skyrocketing to 145 rupees a litre. The government. The standoff between the court and the government has created an artificial fuel shortage and long lines at the pump.60). But instead. unsure what price to charge.

lk WEDNESDAY. 27. The court has made no comment on the dispute.M. Sripavan terminated all proceedings in respect of the impugned deal to revert to the earlier position. Justices Shiranee Tilakawardane and K. others too would follow suit. Fowzie tells Parliament hedging deals will continue o Nov." he said. yesterday. 21. 26.19.php? option=com_content&task=view&id=904&Itemid=52 Fuel crisis SC annuls all interim orders Source : dailymirror.H.11. vacated the said interim order issued in respect of the impugned hedging deal implemented bythe Ceylon Petroleum Corporation."This is not good for the country.com/index. 28 JANUARY 2009 o Nov. and if the State did not comply with the concerned interim order.Cabinet discusses oil hedging deals o Nov.CPC Chief comes under fire from ministers o Nov. The opposition United National Party claimed the government won't reduce the gas prices so it can use the extra profits to cover the losses from the oil hedge. the Supreme Court. The Chief Justice said there were a number of interim orders issued in this matter.CPC says hedging deals will be restructured o Nov. — AP http://srilankatoday. .Cabinet reviews oil hedging deals o Nov. 28-SC takes up petition filed against hedging deals and delivers dramatic judgment o Dec 17-SC issues interim order directing to reduce the price of petrol to Rs100 a lire In view of the persistent non compliance with the interim order directing the reduction of the price of petrol to Rs 100 per litre.Minister A. Bench comprising Chief Justice Sarath N.Silva PC.

in view of the non compliance with the interim order. The Chief Justice said that the pricing formula was prepared by the Treasury Secretary and the Court had made the interim order based on the said formula. and moved for time. and decided to reduce the price of diesel. The Supreme Court. the Cabinet had decided that the benefit to be passed on to the people should reach a larger segment of the public. The Chief Justice observed that. at a meeting on December 30. the executive had not complied with the interim order and that no papers had been filed by the Treasury Secretary and the chairman of the Ceylon Petroleum Corporation on the basis of the said interim order on the reduction in the price of petrol. if the Executive did not implement the interim orders issued by Court relating to this case. Having heard the submissions. on December 17. Justice Shiranee Tilakawardane said that the State must first comply and then complain.Court had also granted time till January 17 for the Deputy Solicitor General Sanjay Rajaratnam. under Article 118 of the Constitution. who appeared for the Treasury Secretary. Petitioners informed Court that they had filed their application in the interests of the public and. submitting that he needed time to consider the modalities and structures of the formula for a price tariff. the Chief Justice had said that the Executive could not interpret decisions made by the Supreme Court and that. on the basis of a formula worked out pursuant to the direction of Court. on January 13. they did not wish to pursue their application. Deputy Solicitor General Sanjay Rajaratnam submitted at the outset that there was a possibility of reducing the price of petrol from the present price tariff. Court would set aside all of the interim orders and terminate the proceedings to revert to the earlier position. He had also said that.The Chief Justice said that the pricing formula was submitted to the executive but there was no indication of the executive complying with the said pricing formula. submitted that the Cabinet of Ministers had taken cognizance of the interim orders made by the Supreme Court on December 17 and. this relief package would be given to the people and that there was substantial compliance with the Supreme Court order. had said that. issued an interim order directing that the price of petrol be reduced to Rs 100 per litre. to obtain instructions as to whether or not the interim order made by the Court could be complied with. the Supreme Court shall be the highest court. The Supreme Court had earlier issued interim orders halting the impugned hedging agreement and restraining the Ceylon Petroleum Corporation from . although one months' time had been given. as a result of the Court order. kerosene and furnace oil by Rs 10. Deputy Solicitor General Sanjay Rajaratnam had. The Chief Justice. on January 13.

Uditha Egalahewa appeard for W. Although the price soared as high as US $ 157. the deputy general manager of the CPC.Wegapitiya who is chairman of Laugfs Holdings Ltd. Ikram Mohamed PC appeared for the CPC chairman. the CPC hedged purchases of petroleum products. According to the hedging agreement. The hedging deal was concluded by the CPC in February 2007 and under the said deal. oil price was capped as US $ 130 a barrel and floor price was at US $ 100 a barrel. The Fundamental Rights application seeking the reduction of oil prices and petroleum related products in keeping with the prices prevailing at the world market was supported by Viran Corea instructed by G. M. the petitioners stated. refined.M. Deutsche Bank.They stated that as the cost of imports of oil rises. Export Development & International Trade Minister G. CitiBank. at present.K. from the international market.000 barrels per month at a price of $ 100 as the hedge agreement only . 35% and 100% of out of the total imports of respective items were being produced locally out of oil imported in crude form by the CPC. In a bid to minimize the impact of the soaring prices.Sumanthiran appeared for the intervenient petitioner Vasudeva Nanayakkara. distributed and sold on its pricing formula and the prices of these items depend on the price in the world market and various charges imposed when the importing the same and taxes levied by the government. 75% and 100% of the country’s necessity of petrol. sells and distributes 70%. Court had also issued interim orders suspending the services of Lalith Karunaratne. Faisz Musthapha PC appeared for the Petroleum Minister. who was one of the signatories to the controversial hedging agreement.H. it directly impacts upon the country’s foreign exchange reserves which are. Thiniyawala Palitha Thero. its chairman Ashantha de Mel.L. and Mr. Ravi Karunanayaka MP and Ravi Jayawardena of “Corruption Watch” filed the petition.Peiris and the Attorney General as respondents. the CPC had never paid more than US $ 130 per barrel of crude oil.000 barrels per month at a price $ 130 whereas the CPC is compelled to buy 200.Arulpragasam.Fowzie.making any payments to Standard Bank.A. The Ven. if the price rises above $ 130 for 3 months. till the downward trend in the price started in July 2008. Petitioners stated that the CPC imports. diesel and kerosene respectively and that the 70%. only sufficient for imports for 3 months. People’s Bank or any other bank or institution on the impugned hedging agreement. The CPC decides on the prices of petroleum products imported. the Ceylon Petroleum Corporation (CPC). World oil prices had been soaring for 18 months or so. Asantha de Mel from the office of chairman of the CPC.H. Treasury Secretary Sumith Abeysinghe. Petitionera cited Petroleum & Petroleum Resources Development Minister A.G. both crude oil and refined products. the hedge agreement terminates allowing the CPC buy only 100.

The Supreme Court that reviewed the situation has cancelled all interim orders given in this regard. causing huge loss to the CPC. the fuel prices remain very high and the benefit of the low prices prevailing at present in the world market were not passed on to the public. They also complained that oil procured in terms of an agreement from the Iranian Oil Company has worsened the financial situation and increased the debt of the CPC. and argue that the CPC had made an ill considered decision to enter into hedge deals without properly evaluating and understanding the risks involved. They maintained that. Sri Lanka is bound to suffer a loss of about US Dollars 700 million. Earlier the Hedging deal was suspended by a court order. They also maintained that according to the current hedging agreements. But with the cancellation of the interim orders the Hedging deal will resume again. They also stated that the CPC had increased the oil prices since 2004. arbitrary and irrational. It added that disregarding Court decisions by the Executive and the Legislative set a very bad precedent for the future. unreasonable. when the price of oil was increased inconveniencing the public. liability on the upside is limited while liability on the downside is unlimited. and violative of their fundamental right to equality and equal protection under the law. Govt. and despite its claims.JVP The JVP charged yesterday that the government should take full responsibility for the financial loss that the country would suffer due to the cancellation of the interim order given against the Hedging deal by the Supreme Court. The statement from the JVP Politburo said: “The government did not act to implement the order given by the Supreme Court regarding the petrol prices. the oil price had decreased drastically in the world market owing to the global financial crisis and it was hovering below $ 50 per barrel as at November 10 as compared to the high of $ 157 per barrel in late June 2008.responsible for financial loss . They contended that the failure to reduce the fuel prices in keeping with the decrease in the price in the world market was illegal. Petitioners contended that therefore the CPC was obliged to continue with the current hedge agreements till June 2009 which would end up with the CPC paying as much as $ 300 million. Due to the Hedging deal that was signed in a hugely disadvantageous manner to the country.terminates after lapse of 12 months if the price of oil were to dip below $ 100. owing to the taxes imposed by the government and the mismanagement of the Petroleum Minister and the CPC. The country is . since July 2008. They said that. the price had not been adjusted in line with the current world market price and that there were seven occasions in 2007 alone and two in 2008.

British Airways.100 after the government side itself showed that it was possible.PHP INTERNATIONAL HEROLD TRIBUNE Airlines find it difficult. The government ignored the court order after giving various excuses such as that they had not received the court order and that it could be considered later. Disregarding Court decisions by the Executive and the Legislative sets a very bad precedent for the future. and perhaps unwise. ceding the opportunity to lock in fuel prices that have fallen to 22-month lows.COM/ARTICLES/2008/11/13/BUSINESS/AIR. It sets a bad precedent in the law and order situation of the country.” HTTP://WWW. 2008 Major European airlines are deciding not to seek new fuel hedging agreements for next year because the global credit crisis and the collapse of Lehman Brothers have raised the cost of such deals.IHT. “The government disregarding court orders would only belittle the laws of the country. a big player in the market. Ryanair and Lufthansa have said their hedging deals will be significantly reduced in the new year. especially after the collapse of Lehman Brothers. Analysts and airlines have said that it is far harder and more expensive to make new hedging deals with banks during the credit crisis. Such a political crisis was created in Pakistan some time ago due to the differences between the President and Supreme Court of that country. The country would slide towards a sad situation if the government continues to disregard court orders and act in an arrogant manner. Oil has come down from highs of $147 a barrel in June to around $55. We believe that the government is absolutely responsible for the financial loses due to ignoring the court orders in an arrogant manner. It could lead to a major political crisis. to hedge fuel prices By John Bowker Reuters Published: November 13. “We urge the government to respect the laws of the country and protect democracy. leaving current airline hedging policies for the price of oil at around $90 looking well out of date.bound to lose a large amount of money due to this in the future. Democracy. discipline and the law and order situation in the country would move towards a crisis due to the actions of the government. and call on the concerned public to come forth to defeat the sad situation that has arisen. . “The Supreme Court gave an order to reduce the petrol price to Rs.

" said Andrew Fitchie. an analyst at the Dublin brokerage firm NCB. at an average of $91 a barrel.47.65." Air France-KLM uniquely hedges five years in advance. said he agreed with British Airways' policy of making no major changes to existing hedging policy. deputy chief executive at Ryanair. Lehman became the biggest investment banking casualty of the credit crisis in September. Neil Glynn. so when we go to hedge it's not as easy as just making a phone call. said jet fuel itself had become much more expensive in relation to the price of crude.it's hard to find a counterparty in the deal. One pound is worth $1. "There is a far less liquid market for futures in all parts. Lufthansa said that its hedging for the current year had been cut to 72 percent from 85 percent of its total fuel bill as a result of the loss of a contract with Lehman Brothers. the finance director." said Mark Thompson. Its hedging for 2009 is down to 57 percent. including oil. In releasing its third-quarter results late last month." Cawley said. an airlines analyst at Morgan Stanley. "The oil price is connected to economic downturn. from around £3 billion this year. despite the changing conditions. Keith Williams.8 billion in the 2009-2010 fiscal year. . British Airways' finance director. British Airways has had 35 percent of its fuel bill for next year hedged at $100 a barrel since the summer. The spread between the two has in recent weeks widened from the historic norm of 27 percent to as much as 60 percent."The hedging market is very illiquid at the moment . but when it released its half-year results last week the airline said it remained hedged at less than 40 percent of its total fuel bill. an analyst in London for Collins Stewart. and that takes the pressure off. said that if oil averaged $75 a barrel and the pound was worth an average $1. but at a recent informational sessions for investors. "The airlines are mindful that the economic outlook is looking substantially weaker. Philippe Calavia. the carrier would lower its fuel bill to £2. Michael Cawley. confirmed the banking crisis had affected the type of deals the airlines could get. Many airline hedging deals collapsed when the firm filed for bankruptcy.

where at least one mobile phone network has no signal at all. HTTP://NEWS. it quite often becomes a source of contention. a positive factor for the economy and the group.UK/2/HI/BUSINESS/7464258. is based next door to the golf club in Wimbledon. is now proving to be an asset. but is willing to leave the rest to chance. "The absence of fuel hedging. But his employer. so long a handicap for profitability. . The company then hedged at triple figures a barrel for the current quarter. an analyst for Cazenove. said in a note to investors of Ryanair. The Irish airline has a hedge for 25 percent of its fuel needs for the first half of the 2009-10 fiscal year at an average $77 per barrel. Tuesday.and on family holidays. Lionhart Investments.CO. Tony Tresigne works in a quiet spot.BBC. "I have a mobile phone that rings all the time ." the company "will pursue its hedging policy. BBC News It makes a certain amount of sense for a hedge fund to be based somewhere leafy. It is a relaxed environment on the edge of Wimbledon Common. losing millions of euros as oil reached new highs over the summer." he said. but is now switching back to an unhedged approach because of the sharp fall in oil's price. Hedge funds tend to be based well away from London's financial hotspots such as the City and Canary Wharf. in districts such as Mayfair." he says. 24 June 2008 00:48 UK What is it like working for a hedge fund? By Anthony Reuben Business reporter.STM Page last updated at 23:48 GMT. Ryanair was about a year too early with its strategy of not hedging fuel. He added that any future hedging contracts would reflect the recent fall in prices."In spite of the recent drop in the oil price. but even by usual standards. but do not let that fool you." Edward Stanford.

" Tony says. "You have to recognise when you're moving from a point where you're actually trading to where you're. so I do love volatility ." Normal day Tony generally gets to the office at about 0630 in the morning. Like most hedge funds. . "If I say that my five-year-old son knows how to use a Bloomberg screen." Tony says. punting . but if you get in a force 10 gale. but market conditions have been very unusual of late. "What you've seen over the last few months is different to volatility. you'll know what I mean. The funds are currently in a defensive state. "I'm from more of a trading background than a research background. "Volatility is Bear Stearns moving 7% in a day. because you've seen an almost systematic collapse of the financial system. which they believe will rise or fall significantly. The way it does that is that people like Tony identify investments such as shares. something catastrophic happens in the markets that requires my presence on conference calls. such as the overall market falling.it's my favourite days in the office when we get volatility. there are no ties to be seen. Then they take out other investments to hedge against the risk of other factors coming into play. almost regardless of what else is going on in the market. Jeans and untucked shirts are the uniform. as would be the case with other funds. Enjoying volatility That is the theory in a normal market. in the vernacular."It's a standing joke with my wife that every time I go on holiday." There is certainly the impression around the office that there is no frantic trading going on. a hedge fund manager can isolate the effect he or she is predicting and make money if it happens. "You can be the best sailor in the world.where you really have no idea where things are going to end up. not falling 100%. your mast might break. In that way." Managing risk The idea of a hedge fund is that it will judge itself on the absolute amount of money it makes for its investors. with the amount of money borrowed low and everyone concentrating on their research. not the amount it makes relative to the way markets have gone up.

because they tend to have so much of their own money invested in their funds. property investors may miss it." He also needs to catch up with what his colleagues at the fund's other offices in Toronto.The office is small. Tony runs home through the park. Like many office workers. I understand the regulatory process. such as restructuring programmes or takeover deals. has an asset that's not directly related to property." Running home At the end of the day. who have given them at least $1m (£500. "You may find if a company that's involved in property. "When you come in in the morning." He may speak to brokers. the first job in the morning is to wade through the e-mails that will have turned up during the night. or he may call on the services of consultants. for example. it is time to move onto the next stage." he says. "The vast majority of the mornings are really about controlling information flow. 'Well. It is easy to see the attraction of the relaxed surroundings. I can look at the valuation of the company and say that there's a chance of a counter-bid. .000) of their money to trade with. researchers and the staff paid to talk to the investors. He says that happens particularly often in diversified companies. you'd really be inundated with information from hundreds of sources. 'Money to be made' He specialises in trading in companies in what are called special situations. "It allows the traders who are developing the strategies to get away from the noise. analysts or journalists. so the next thing to do is look at any big deals that have been done." says investor relations manager Greg Froese. shared with the other European trader. industry insiders or technical experts." Once he has focused on areas in which he's interested. is talking to people.' so there's money to be made. "You can look at it and say. But hedge fund traders can never really be relaxed. I understand the people involved in this. He also looks for companies that he believes have been incorrectly valued by the market. New York and Singapore have been up to. because you never really know what's going to be important for a particular deal. "A lot of what special situations is.

200 million dollars.' The Central Bank said Sri Lanka's oil bill went up by 37 percent in 2005 to 1. to hedge oil prices 30 September.com/Financial/103. older traders say that the current market conditions are a good thing for them. http://www. "Such forward contracts or hedging arrangements would have to be entered into with international banks of high reputation. which was equal to 31 per cent of export earnings compared to 17 per cent in 2002. Economists have pointed out that Sri Lanka's policy of heavily subsidising oil since 2004 has boosted demand and blunted the incentive make better use of energy by sending the wrong price signals. Crude oil is imported in Sri Lanka by the Ceylon Petroleum Corporation.655 million dollars on top of a 45 per cent in crease in 2005. many in the industry will be relieved when things settle down a bit. getting a cap for oil imports. who have the experience and ability to manage risks of this nature. which is a state-owned enterprise.html Central Bank advises Govt." Tony complains. which if left unchecked." the Bank said. As percentage of imports. or go for other hedging mechanisms that gives protection within a price band or a 'collar'. this market has become so unpredictable as to almost cease to function as a market. "I feel in certain points." the Central Bank's Economic Research Department said in a statement Thursday. Nonetheless. "In such a situation. the country need not to pay a higher price even if world market prices reach US$ 100 per barrel or beyond. The Central Bank said it had made a presentation in early September to the President and Cabinet of Ministers to explain schemes available in the global market to hedge oil prices. by entering into contracts with foreign banks. the Bank is projecting the oil bill to rise to 2. it would be imprudent for any organisation or a government not to pursue an insurance scheme such as a hedging mechanism. Sri Lanka would be free to purchase oil at the prevailing . "For example. under this mechanism. In 2006.srilankanewsfirst. the country's Central Bank said in a statement.Privately. if Sri Lanka purchases a cap at (say) US$ 60 per barrel. 2006 01:30:00 COLOMBO: Sri Lanka should hedge oil prices to mitigate negative effects on the economy. when dealing with a highly volatile market. because they have highlighted the value of their experience. could result in a high foreign exchange drain that could even destabilise the entire economy. only imports refined products. while a subsidiary of the Indian Oil Corporation which has a third share of the market. the share of oil is expected to rise to 21 per cent in 2006 (13 per cent in 2002). The Bank said it had made the presentation to the government because. 'in the view of the Central Bank. Central Bank said Sri Lanka could either pay a premium and buy futures contracts.

"However. Another mechanism is a "Zero-cost Collar" that can provide similar protection without Sri Lanka having to pay a premium. "With the easing of certain pockets of geopolitical unrest. as that would lead to greater economic stability. India and USA. 2008 02:50:52 The Supreme Court on Monday suspended a second senior Ceylon Petroleum Corporation (CPC) official and ordered the Central Bank. The court. The 3-judge bench directed the Treasury Secretary Sumith Abeysinghe to devise a petroleum pricing formula to pass the benefit of the suspension of payments due to banks. with the assistance of the Criminal Investigation Department if need. are still present. to protect documents at two foreign banks pertaining to favours given to CPC officials in the controversial oil hedging case. which could raise oil prices. also ordered that petrol prices should not exceed around Rs 100 per litre based at the rate of $56 per barrel of crude oil. orders bank documents to be protected 16 December.html SC suspends another CPC official.market price if prices fall below US$ 60 per barrel. December 17. The new pricing formula is to be submitted to court on Wednesday. Earlier CPC Chairman Asantha de Mel was suspended by court. below which Sri Lanka would not benefit by the reduction." the bank said. in this method." http://www. Sri Lanka would have to commit to a minimum price. "In that background. oil prices seem to have declined but several other factors.com/General/7982. The Court suspended CPC Deputy General Manager (Finance) Lalith Karunaratne as counsel for the petitioners in the case expressed concern that there is a risk of concealing evidence of oil hedging by officials involved in the deal. it would be prudent for Sri Lanka to contract for oil at a reasonable price with a protection from future increases." Collars can be built by selling an option at one price and using the proceeds to buy an option at a different price. capacity limitations in refineries. headed by Chief Justice Sarath N Silva. . and reduced oil prices. The Bank said oil prices have risen with high demand from China." the Bank said.srilankanewsfirst. supply disruptions in some oil exporting countries and general geopolitical unrest.

015. 2009 09:08:50 The Colombo share market saw a slight climb.srilankanewsfirst. The Sunday Times two weeks back brought to the fore how the oil hedging deals have gone wrong with the CPC now facing a possible payout of $300 million in the next few months.11. CB officials said. Standard Chartered Bank (SCB).03 points at the time. Deutsche Bank. showing early gains at Thursday’s opening on low-priced shares.24 with the Milanka at 2. Standard Chartered. “Right now People’s Bank is said to be at a bad liquidity position and this is the main reason this speculation is in the market. Citibank and Commercial Bank – who issued a joint statement last week saying the CPC was well aware of the risks – will be asked to explain which CB guidelines were not followed in the transactions.html Colombo indices high on low-priced shares 29 January.http://www. has affected the Commercial Bank’s share price as there is speculation that they may not recover the money People’s Bank owes them amounting to Rs.html CB to meet banks on controversial hedging deals 19 November.893 million on the reverse hedge. The newspaper stories in the past two weeks has triggered a CB investigation and led to a series of high . 2008 08:46:05 The Central Bank (CB) has summoned three commercial banks including Standard Chartered this morning (Wednesday) for separate meetings to ascertain why the ‘due process’ was not followed in hedging deals with the Ceylon Petroleum Corporation (CPC). up 5. The All Share was 13 points up at 1. “Retailers are highly active on low priced shares such as Lanka Cement. Proper risk management procedures were not followed.com/General/8784. brokers said.825. People's Bank and Commercial Bank) had entered into. He said that Lanka Cement was the main contributor to the Rs 55 million turnover during the early hours with Rs 19 million.” an analyst said. Analysts said that following the Supreme Court order on the oil hedging deal by the Ceylon Petroleum Corporation (CPC) and the Central Bank’s subsequent statement saying that it found "substantial non-compliance" with its prudential directions on derivatives and "non-compliance with best market practices and prudential norms generally applicable to such transactions on the said deal that the banks (Citibank.srilankanewsfirst. CB officials say.com/General/7522.” a broker said. http://www. Commercial was Rs 1 down to Rs 95 during early trades. which is likely to be seen throughout today.

Use Zero-Cost Collar as the hedging instrument with the upper bound based on market developments. the Secretary to the Treasury selected several officials to study and submit a report on the governor`s presentation to the cabinet. Commence hedging with smaller quantities for shorter period and . 2. It was initiated by no less a person than the Governor of the Central Bank himself.H.lankanewspapers. In terms of the decision. the Ministry of petroleum and petroleum Resources Development. telling Parliament today. 3 December 2008 . This Study Group came out with the following recommendation and submitted its report to the following recommendations and submitted its reports on the Secretary Ministry of Finance on 16th November 2006.com/news/2008/12/36104_space.M.Ajid Nivard Capral the governor of the Central Bank made a presentation personally to the Cabinet on 6th Sept 2006. He advised to the Government to enter into hedging arrangement.00PM) Petroleum Minister A. CPC to hedge purchase of petroleum products. I am grateful to you for giving me the opportunity to place before the House of the true position relating to the now much maligned hedging arrangements. 2008. http://www. Thereupon the Cabinet decided that the subject should be further studied by a group of officials from the Central Bank of Sri lanka . Let me at the outset say that the oil hedging concept was not my concept at all. December 03.html Hedging Deal .Minister Fowzie Hits Back At Ajit Kabarala of Central Bank Wednesday. Mr.7:24 PM SL Time Minister Fowzie exposed hedging deal in parliament (Lanka-e-News. 3. Ministry of Power and Energy and other agencies and present a report to the Cabinet. 6. the Ministry of Finance and Planning. Fowzie has distanced himself from the concept of hedging. both crud oil and refined products in the international market. 1.level meetings to ascertain why proper risk management procedures were not followed.

Grant authority to CPC to change instruments based on the development in the market. the no-faith motion by the opposition would be against the finance minister and all other members of the cabinet. said Mr. Fowzie on 24th January 2007.Grant authority to the CPC to call for quotations for oil hedging. 200. 01st) that the cabinet-approved pact results in each Sri Lankan citizen getting into a Rs. The Mahinda Rajapaksa regime will definitely have to go for a general election to cover up the hedging agreement that takes the national economy to further ruin and squanders a massive amount of public funds. after the hedging agreement. said opposition leader Ranil Wickremesinghe.000 million in debt. According to him. already Rs. he said. On the 17th. He told the media today (Dec. the cabinet deferred its decision for the next meeting awaiting the observations of the Finance Ministry. 10. As the cabinet had given its consent to the paper presented by Petroleum Minister A. On 24th January . . the cabinet decide that oil hedging be implement without delay as suggested the Central Bank of Srilanla. 4.srilankanewsfirst. I would draw the attention of the House to that part of the Cabinet decision that the suggestion be implemented without delay as suggested by the Central Bank.html No-faith motion against cabinet over hedging deal – Ranil 01 December. 2008 14:28:30 Monday.com/General/7736. Wickremesinghe. the CPC. Said Fawzi Source(s) LeN http://www. will have to be either sold or closed down. decide on future prices and purchase instruments from reputed banks 5.000 debt.H.gradually increase the quantity and the duration.M. 01 December 2008 16:39The UNP will move a no-confidence motion against the entire government over the hedging agreement signed between Ceylon Petroleum Corporation and private foreign banks. January 2007 .

according to what we have found out.M. Fowzie in January 2007. H. The opposition leader said. Petroleum and Petroleum Resources Ministry and the CPC. Thenuwara. However. I requested the Speaker today to take measures to protect all documents relating to this agreement at institutions like the Finance Ministry. writing on behalf of the Central Bank. it proposed that hedging activities should begin and advised the use of 'zero cost collar' method for the purpose. not only minister Fowzie." "We also have come to know about an attempt to destroy important documents relating to this hedging agreement. Wickremesinghe said." "Thereafter. Weerasekara.W." On 01st January 2006. Kanthi Wijetunga of the Ministry of Petroleum and Petroleum Resources. had informed him about the receipt of his letter." "Then. chief finance officer of Bank of Ceylon Saliya Rajakaruna. Kanagasabapathi. This person called Upul Arunjith had again spoken with the Central Bank governor about this hedging deal on 05th October. "We accept the Supreme Court ruling that suspends the hedging agreement signed by the CPC that prevents a reduction of local prices when world market prices decline. without exposing corrupt deals like the hedging agreement.Most media had been attempting to whitewash the government. Dr." Mr.N. "This agreement was based on a letter written by one Upul Arunjith on behalf of Concept Development Consortium of Canada to economic advisor Ajith Nivard Cabraal on 30th December 2005. 2006. on 06th September 2006. Therefore. Thenuwara." . Wickremesinghe also said." Mr.H. In that. submitted to the Cabinet a proposal on how to maintain stability in the face of rising fuel prices in the world market. H. Dr. Central Bank.B. P. "Accordingly. and that no outside help or advice is needed. the cabinet paper for its implementation was submitted by minister A. another letter to Ajith Cabraal asked that the hedging agreement be implemented. but also the entire cabinet had known about it. Ajith Cabraal. he charged.N. deputy director (finance) of CPC Lalith Karunaratne and finance management consultant of Finance Ministry V.M. Jayasundara. since the Central Bank has all the knowledge needed to act in this regard. head of People's Bank's corporate banking Kapila Ariyaratne." "The cabinet decided to appoint a special committee to inquire into this. It comprised assistant governor of Central Bank Y.B." "This committee submitted its report in November 2006 to Dr.

'Daily Mirror' had to follow suit.N. Ganegala. the entire cabinet. 'Daily Mirror' has become the official newspaper of the JHU today. After 'The Sunday' Times' reported about it. Wickremesinghe said. Weerasinghe. additional director of Central Bank R. I would like to ask the media about what it had written about the hedging deal. R.A." "In the meantime. P. It is true the SC has ordered the suspension of payments to the banks.S. deputy general manager of CPC Lalith Karunaratne and others. chief economics advisor to Central Bank Dr. 200. Petroleum Ministry. It is also clear that CPC is Rs." "This Rs. as the Central Bank had proposed." "Therefore. deputy secretary of the Treasury Dr.H. to be implemented immediately." "The cabinet said it had approved the agreement." "As matters stand thus. Fowzie submitted a cabinet paper on 13th January 2007 and the cabinet approved it. Amaratunga. 200. minister A. Finance Ministry and all others are involved in this deal. Widanagamachchi. Central Bank governor Ajith Nivard Cabraal had advised Asantha de Mel to begin the hedging activities with immediate effect. Central Bank.000 m has to be paid by the innocent. Kesara Gunawardena of 'Daily Mirror' writes that I am a weak leader. Fowzie submitted a cabinet paper on 17th November requesting the appointment of a committee to inquire into the situation that has arisen. the Cabinet. as the finance minister." "The president. He writes that the UNP cannot gain power under my leadership. This hedging agreement is very disadvantageous for us.D. minister A. such corrupt agreements will not continue. Everything will be terminated. ." Responding to a question. the Central Bank and the person who holds an unofficial ministerial portfolio are responsible for this agreement that brings massive loss to the country. suffering people of this country. it is clear that the entire cabinet is to blame for this. on 10th January 2007." he added.Before that. CPC chairman Asantha de Mel. director of the Public Accounts Department D.M. Jayalath. "Under a UNP regime." "Even after questioning about the steps under a future UNP regime." "Thereafter.000 m in debt.A.H.M.H." This committee comprised ministry secretary W. Mr.

12.http://kaputunews. The CBSL was responding to allegations by Petroleum Resources Minister AHM Fowzie that the concept of hedging was initially suggested by CBSL Governor. . admitted that the Cabinet granted the approval for hedging deals but Minister Lakshman Yapa Abeywardene has repeatedly told media that no such approval was granted. “Let me at the outset say that the oil hedging concept was not my concept at all.” he told the parliament on Wednesday. It was initiated by no lesser person than the Governor of Central Bank himself. Cabinet 'granted approval' The minister however.” Minister Fowzie added.com/article/politics/455/ Cabinet 'approved' hedging deals Saturday. the CBSL says. The court made the interim ruling after considering petitions against controversial hedging deals signed by the CPC chairman to control increasing fuel prices. once the Cabinet approval was granted. Ajith Nivard Cabraal. He made the special announcement after the Supreme Court suspended the services of the chairman of the Ceylon Petroleum Corporation (CPC) and recommend President Rajapaksa replace Minister Fowzie. In a statement issued on Friday. the advisory role was completed and the CPC was the sole authority to carry out its implementation. the court was told.5) Central Bank of Sri Lanka (CBSL) says that the controversial hedging deals on purchasing fuel were approved by the Cabinet of Ministers. Sri Lanka is losing millions of dollars as a result of the deals.2008. However. 'Economic advisor' The CBSL does not deny Minister Fowzie’s remarks that it advised the government to enter into hedging deals “as the economic advisor to the government”. the CBSL says the Cabinet granted approval to hedge purchase of petroleum products on 13 January 2007. “The Governor of Central Bank urged in writing even before the Cabinet approval go for hedging. 07:39am (GMT+5.06. who "safeguarded corrupt officials".

“Accordingly.5:10 PM SL Time The controversial oil hedging crisis has taken a new turn with reports of a possible multi-faceted complicity between foreign banks and Ceylon Petroleum Corporation (CPC) officials where in one case there was an attempt to transfer all CPC accounts to the two foreign banks now at the centre of a Central Bank probe. BBC Sihnala. Initial investigations reveal that just before the hedging contracts were signed in 2007. The sources said at the hearing where Mr Premajayantha was armed with .” it said. and transfer them to the Standard Chartered Bank (SCB) and Citibank. in particular Minister Susil Premajayantha. informed sources said. involved in the hedging transactions of the CPC. the Bank of Ceylon and People`s Bank.” the CBSL statement said. It added that the CBSL has taken steps to examine the role of the commercial banks in hedging transactions. since hedging related issues are the subject of matter of judicial proceedings. the CPC chairman without the consent of its board of directors had taken a decision to withdraw all its deposits from the two state banks.html CPC tried to transfer all accounts to foreign banks Monday. the CBSL would refrain from making any comments in relation to current investigations. Swarnajothi was summoned before the Parliamentary Committee on Public Enterprises (COPE) earlier this week for the hearing into the oil hedging crisis but his evidence was not recorded as opposition and government legislators. and indeed did not need to be. It has also been revealed that the CPC Chairman had submitted a paper with legal advice claiming that the CPC was not covered under the Finance Act and therefore its financial transactions and accounts were not under the purview of the Auditor General. at present. were heavily involved in grilling CPC Chairman Asantha de Mel over the transaction. “Nevertheless. the sources said.lankanewspapers.com http://www. the CBSL was not. Incidentally Auditor General S. The then Secretary to the Ministry referred the matter to the Attorney General (AG) who overruled the CPC chairman. 1 December 2008 . This request was turned down by President Mahinda Rajapaksa after considering objections made by a senior official of the Petroleum Resources Ministry during a meeting of the National Economic Council chaired by the President.com/news/2008/12/35980_space. an investigation by The Sunday Times Business Desk shows.

De Mel At the parliamentary committee meeting on Tuesday. Jayasundara and Central Bank Governor Ajith Nivard Cabraal had given their fullest backing to the CPC Chairman to go ahead with the controversial hedging deal and they spoke in favour of the deal at top level official meetings claiming that that oil prices would rise to as much as $200 a barrel in the future.plenty of documents including articles from The Sunday Times. Senior Ministry officials including the secretary were not consulted in the decision-making process of the CPC in this instance. Investigations reveal that normally Ministers do not have rooms in corporations but in this case an exception was made. de Mel and other CPC directors had appeared to be surprised at the understanding of hedging and the contracts that were shown by the committee. was not even given time to go through the Cabinet memorandum seeking approval of the Cabinet to go for oil hedging. Mr. not clear to many people in Sri Lanka. they said. de Mel was severely reprimanded by several senior Cabinet ministers for the deal. All decisions were taken by Minister Fowzie and the CPC Chairman and some officials in a room allocated to the Minister at the CPC. B.5 million a month) and confined at this level. the sources said. Asked about his background he said he . de Mel) gave proper sanction to the contracts. the CPC must pay a fixed rate to the banks. Emerging evidence clearly shows that neither the Cabinet (barring Minister Fowzie) nor the CPC Board (barring Mr. the hedging mechanism required no premium but a payment by both parties (CPC and the banks) when oil prices swing either way up or down. The Sunday Times reliably learns that former Treasury Secretary P. In the present CPC issue. Mr. The liability to the CPC ranges from 400 to 700 million dollars. The deal was made without any transparency. The Sunday Times learns. Thus even if the oil price falls to $10 per barrel. the CPC was forced to pay the banks any price below $100 per barrel. is like an insurance policy where one pays a premium to protect against any losses incurred in a business or individually. When COPE members queried about the CPC`s `self-claimed` expertise in hedging. Hedging. The problem was that while the banks had to pay the CPC anything above $135 per barrel (and this payment was restricted to $1. CPC Deputy General Manager (Finance) Lalith Karunaratne said he didn`t know much about hedging. Our investigation also reveals that the Ministry of Petroleum Resources had not been properly informed about the CPC`s decision to hedge on oil. The then ministry secretary who is also the chief accounting officer of all institutions coming under the purview of the ministry.

7 billion dollars or equal to more than two months` worth of imports. down by almost $100 per barrel from 143. there is no change in local prices. With oil prices going down sharply in the past few months. de Mel and Mr.was formerly an accountant at Samuel & Sons which analysts said was a Rs. Parliamentarians were also critical of the foreign banks for their role in this scandal saying it was swallowing the country`s valuable foreign reserves. Karunaratne.The day before (Monday). . 350 million turnover company compared to the Rs.H. The consumers are suffering. de Mel had said board approval was given to him and Mr Karunaratne to go ahead with oil hedging based on only a Cabinet memorandum submitted by Minister A. according to Governor Cabraal. The benchmark Brent world crude price was pegged at $49 per barrel on Friday. SCB representatives from India and the bank`s local global markets head made a presentation to the CPC board and a Cabinet risk committee with a restructured hedge structure which refers to an extended payment of $250 million. The committee was also of the view that Central Bank Governor Cabraal should also bear the responsibility for recommending oil hedging to the CPC and should be questioned on this matter. Prices were reduced in the November Budget by the Government but consumers say it was a cosmetic reduction triggered by political consideration and consumer demands rather than proper decision-making. Adding to the woes was the withdrawal of $400 million by foreigners who invested in Treasury Bills and bonds. Fowzie. were taken up in court on Friday. While Laugfs Gas Chairman W. The CPC Chairman had given an assurance to COPE that they will renegotiate the hedging deal in consultation with the Cabinet sub-committee and the CPC board of directors. at least two other public interest groups are preparing to go to court saying this `national calamity` has worsened the plight of the ordinary consumer. He was ordered to submit all documents pertaining to the deal while the banks are being asked to submit details of bank-funded overseas trips of Mr. said Christine Perera. 350 billion turnover at the CPC. including UNP MP Ravi Karunanayake.K. a public interest activist. This is a terrible situation. currently estimated at only around 2. Wegapitiya and a joint petition by three others. He says the Government is appealing to the Sri Lankan diaspora to invest in Sri Lanka in a bid to raise around $500 million to ward off bigger repercussions from the international economic crisis.33 dollars on July 11 this year. Mr. H. and has put the economy under additional pressure at a time of global economic crisis. The issue is threatening to drain the country`s meagre foreign exchange resources.M.

Fowzie still there Petroleum Resources Minister A. Both Standard Chartered Bank (SCB) and Citibank have been accused of misrepresenting facts and not adequately informing the CPC of the risks involved in this transaction. The Opposition says taxes on fuel. Mr.Businessmen and economists have warned that Sri Lanka. are also expected to be affected. Such a statement at the November 10 news conference which was called by the CPC but sponsored by SCB also annoyed officials at the Central Bank. Massive forex drain Growing public interest and a flurry of fundamental rights petitions against the controversial oil hedging deals by the Ceylon Petroleum Corporation (CPC) are turning into probably the biggest-ever foreign exchange scam in Sri Lanka involving two foreign banks and the CPC. Europe and the Gulf region. as much as 50% of the shelf price. The Supreme Court on Friday ordered the Government to submit a report within a week on the possibility of reducing local fuel prices by reviewing the taxes levied on petroleum products. still not seriously affected by the international crisis. after the Supreme Court on Friday recommended the removal of the minister from his portfolio. the Chief Justice said the hedging contracts were in favour of the banks and according to the deals.H. Mr.ordered the .7 million to the banks in the coming months if this deal was allowed to continue. Fowzie last evening said he had so far not received any instructions from President Mahinda Rajapaksa about his status.M. the country would have to pay US$675. a charge vehemently denied by the banks. the Supreme Court hearing one of the petitions -. another key foreign exchange component for the country. The Supreme Court on Friday also ordered the removal of Ceylon Petroleum Corporation (CPC) Chairman Asantha de Mel and that all petroleum activities including purchases and distribution be handled by the government. and at one point during the Supreme Court hearing he admitted that it was the banks which had asked him to state at a news conference and in later statements that any default of the payments would be considered a sovereign debt. In court. are also responsible for the high prices. Sri Lanka`s main exports are garments and tea while remittances. it is learnt. Fowzie said he had no comment about the developments. de Mel has been accused of defending the banks in this fiasco. will feel the effects of the crisis in the coming months as consumer spending drops in key markets like the US. On Friday.

whose advise was not sought in the first place as one would expect when contracts like this are signed. how CPC officials and ministers were taken on fully- paid.with the exception of a few. Source(s) http://www. and agreeing to pay off the banks who are demanding its share of the pie.lk/090222/FinancialTimes/ft307. virtually vacation-trips. As fresh winds blow over the saga. While the two officials at the CPC involved in these transactions – former CPC Chairman Asantha de Mel and former Deputy General Manager (Finance) Lalith Karunaratne – are on the mat and have not been re-appointed or returned to their positions after the Supreme Court dismissed the case. 2009 CEOs of the five commercial banks involved in the disastrous oil hedging deals with the Ceylon Petroleum Corporation (CPC) must be rubbing their hands with glee these days.suspension of CPC Chairman Asantha de Mel and directed President Mahinda Rajapak. For all purposes it points to the government ignoring the serious ramifications of the one-sided deals. All this will be consigned to the dustbin of history even though the careers of some of these officials have been sullied by these happenings.. acutely absent is corporate governance. transparently and accountability that every Dick. The Attorney General. The article below on the hedging fiasco lists out the ‘unethical’ canvassing that took place to get these lucrative contracts. they want the CPC to keep their bargain of the agreements and one has also filed action in an international tribunal. other bank officials involved in the deal are going scott free. Commercial and People’s – are concerned.lk/081130/News/sundaytimesnews_02. Tom and Harry in the corporate world likes to talk about and professes to practice. and so on. how banks funded officials in other banks on joyrides.html Hedging banks on top The Sunday Times: Sunday February 22. Citi. Deutsche. As far as the five banks – Standard Chartered.html http://sundaytimes.sundaytimes. Soon . Where were these obligations in the hedging deals -.. national-minded citizens who didn’t want the country and its people taken for a costly ride? The Central Bank has clearly said banking regulations have been violated and that the agreements should not be proceeded with. has recommended that the CPC should refrain from making payments which may be as high as $800 million – even though the Supreme Court has vacated all interim orders in the case.

has not been called upon to explain to the committee on its decision. the CEOs of Standard Chartered and Citi met President Mahinda Rajapaksa to canvass their case for CPC repayments to be made. Deutsche was also interested in a meeting. L. it is understood. Dr Sarath Amunugama and A. the other view is that the state interfering in a regulatory function sets a bad precedent and could have serious repercussions in the future. It is like saying. The committee’s mandate is to settle a matter in which a group of banks have been accused by the Central Bank of violating the rules. From a near zero position after the Supreme Court suspended payments and – after the Central Bank said the contracts were flawed.” The Central Bank. The oil hedging fiasco will ultimately go down in history for two reasons – where the government failed to implement orders of the Supreme Court and interfering in the functions of the Central Bank. even if the CPC didn’t pay up. Fowzie. The committee. After all they have also hedged with an overseas party and that payment has to be made. http://www.lankabusinessonline. While one school of thought recognises the fact that holding back payments to foreign banks (or foreign investors) is bad for business and sentiment particularly at a time when Sri Lanka needs many friends overseas.com/fullstory. If it’s illegal. it is learnt. “okay … they have committed a crime. worried about international repercussions over the issue. People can get annoyed only if there is a deliberate attempt to stall payments without any valid reason. Thus.H. one fails to understand why the government got involved instead of allowing the issue to be dealt with by the correct authority – the regulator (Central Bank). As repeatedly stated in the past. it’s illegal. Let’s make it clear … an amicable settlement means the CPC has to pay and ‘an encouraging response’ from the banks is more that what the government can expect.php?nid=1113196271 Mon. told reporters on Thursday (through Prof Peiris) that they met the banks this week and was trying to come up with an amicable settlement of the issue. whose chief spokesman is Prof G. There are two ways of looking at the issue of repayment. but let’s be lenient.” he was quoted as saying. the banks must be relieved that they will get their money.M. “The response from the banks is encouraging. a step which should have been done – amd still not too late. had referred them to a ministerial committee appointed to investigate the issue.after the court case ended. non implementation of contracts due to flawed deals cannot offend the international community. 09 March 2009 11:03:24 Domino Effect . Peiris and includes Nimal Siripala de Silva. Rajapaksa.

The burden of paying an estimated 400 to 700 million dollars in payments over the next nine months has now passed from CPC to the banking sector. a deal between Commercial Bank and People's would have been as good as gold with transactions worth hundreds of million rupees being closed verbally. 2008 (LBO) . But the banks themselves were not party to the court action and are exposed to counter-parties. A senior Commercial Bank official also declined to comment. Market players say ordinarily. Ratings . hurting capital. Standard Chartered and Deutsche as well as state-run People's Bank and public listed Commercial Bank providing oil derivatives to Ceylon Petroleum Corporation. CPC chairman Ashantha de Mel said outstanding exposures of Citibank to CPC were 400.000 barrels. to the duration of the contracts which run till next year.000 barrel deal which had gone to CPC via People's. on the basis that a dealer's 'word' is their 'bond'.000 and Commercial Bank 20.000 barrels. Standard Chartered 300. pending advice from the Attorney General. The crisis began with three foreign banks. market participants say.08 Dec. Two weeks ago. market participants fear that the integrity of interbank transactions would be damaged if People's Bank finally fails to make payment. information filtered into financial markets that state-run People's Bank had not made a payment to Commercial Bank on a 50.The effects of a payment halt on derivatives by a state- run oil distributor is spreading far into Sri Lanka's banking sector. A spokesman for People's Bank said the bank had no comment to make. 2008 08:39:11 Sri Lanka oil derivatives crisis spreads into banks Dec 08. With shock waves from the oil derivatives now spreading to the domestic market. including a state-run bank. Interbank Integrity After close of business Friday. interbank transaction integrity and international relationships. Estimates of the total marked-to-market exposure to banks' counterparties abroad have been estimated at between 400 to 700 million US dollars. Citi. The crisis began when payments under exotic derivatives bought by state-run Ceylon Petroleum Corporation (CPC) was halted by court to foreign and local banks.

Fitch Ratings has earlier put the outlook on People's Bank's A-(lka) rating on 'positive'. Market participants say one bank that had a narrow escape. which was already a big financier of CPC.000 barrel deal.000 barrels of contracts outstanding. Analysts say exposure to People's Bank could be around 1." Fitch Ratings chief Chanaka Wickramasuriya said. Earlier Commercial Bank shares fell after it disclosed to the Stock Exchange that it owed a foreign counterparty 982 million rupees (8. The bank however has capital to cover the possible loss. Commercial Bank has AA+(lka). The impact on the ratings of the concerned banks is not yet known. "We are awaiting greater clarity on the financial impact and accounting nature of these liabilities." People's Bank's capital has been depleted due to past bad loans but the bank had worked hard over the past few years to steadily strengthen its capital. according to market sources.5 billion rupees or slightly higher.5 million barrels of petroleum a month.and were not entertaining alternative proposals. Both Commercial Bank and People's Bank are rated by Fitch. "We are also awaiting the final Supreme Court ruling. People's Bank also had another 50. It was saved because a derivative deal for CPC had been shot down by its chief financial officer. . Emerging information suggests that there is at least 820.a leveraged target redemption forward .000 barrel contract.000 barrels each with CPC. CPC imports about 2. according to market sources. was state-run Bank of Ceylon.Meanwhile another crisis is brewing. pending a possible upgrade. just one notch below. with one contract going through Commercial Bank. The People's Bank had two contracts of 50. Standard Chartered and Citbank local branches also have top AAA (lka) ratings. Zero-Cost Market players believe local banks were asked to provide hedges because foreign banks had run out of limits to the CPC. CPC was also looking for a particular type of 'zero-cost' instrument from local banks .9 million dollars) on a 20. a former Citibanker. Saliya Rajakaruna.

by a cabinet directive. Commercial Bank and foreign banks may still demand payment. Even if the transactions are proved to have been mis-sold. They say non-payments can trigger automatic cross-default clauses in banks after their head office credit departments fully assess the impact of halted payments. A top importer says questions are being asked by foreign suppliers about the reliability of banking transactions in Sri Lanka. taking on even more downside risk. Correspondent Banks Meanwhile another crisis is brewing. Central Bank says it is looking into the deals and is examining the banks' books. This may affect the future credit access of CPC.CPC was also limited to 'zero-cost' derivatives which carried downside risk. If banks do not pay. and the liability would fall on the capital of Sri Lanka's banking sector rather than the CPC. their credit standing as well as the general perception about banks in Sri Lanka could be hurt. By going for 'in-the-money' structures its upside had been limited. . the banks were not party to the case. To get extra upside protection CPC had 'leveraged' the deals. which believed hedging would help foreign exchange management. with 'leveraging' which eventually doubled the notional value of the contract from 15 percent to about 30 percent of volumes. analysts say the foreign counterparties of People's Bank. on the advice of Sri Lanka's central bank. Market players say at least one foreign bank may have closed-off or 'crystallized' the transactions. Available information suggest that all the transactions were structured in the same way. bankers say. with oil prices expected to fall further. Market players say banks have always considered Ceylon Petroleum Corporation to be a good risk as it had long years of banking history despite going through various cash flow crises. due to political manipulation of prices. There have been reports that the derivatives violated central bank guidelines. especially for oil imports could increase transaction costs. A demand for confirmed letters of credit. especially related to letters of credit. While the court ruling affected Ceylon Petroleum Corporation. Relationships built with foreign correspondent banks over decades both by state and private banks in Sri Lanka are also at stake.

the last thing we need now is a banking crisis.T. Now we can all sing Roll out the barrel. There are also fears that jittery commercial lenders to Sri Lanka may pullout money either using put options or MAC (material adverse change) clauses in loans and credit lines. 3. but please keep in mind.At least some of the deals could also end up in courts in other countries. bankers say.J. READER COMMENT(S) 5. for the gang's all here 2. There is no one above law let us respect the Supreme Court judgement. The damage to the local banking sector may be 'irrevocable' one banker said. not to safeguard any particular entity even when caught with their hands in the cookie jar. they chose NOT to be transparent.Kaviratne Dec 20 Corruption will not last long at last the cat is out of the bag.. we've got the banks on the run Zing boom tararrel.. W. unless the problem is resolved early. Power hungry politicians have ruined Sri Lanka 4.S. DocK Dec 08 Bankers are worried about the effect of the Supreme Court ruling on the local banking system and the local banks' standing in the international financial markets? Why were these bankers not worried and much concerned about the effect on the welfare of the nation as a whole when CPC was poised to enter in to a clearly lopsided deal? why did not these bankers point out that CPC/Sri Lanka was clearly at a disadvantage in these 'deals'? did they lack the guts to stand up against any authoritarian persons? did they not want transparency in the transactions? were they blinded by greed? The Supreme Court is there to safeguard Sri Lanka and its people. all this mess could have been avoided if the banks had the guts to be transparent in these hedging transactions. etc etc 1. Some contracts have specified English law. we'll have a barrel of oil Roll out the barrel. are they now crying because of the consequences? . Jack Point Dec 09 This is a serious problem. Polkichcha Dec 09 Roll out the barrel.. ring out a song of good cheer Now's the time to roll the barrel. Polkichcha Dec 09 Hurrah! He's solved all our problems. roll out the barrel of fun.

However one proposal. If it falls to 25 dollars.. including the oil hedging deal and one over a bankrupt budget airline. When prices were over 135 dollars per barrel in mid-2008. being prepared by SCB could worsen the state petroleum agency’s plight.. Banking sources said the foreign banks involved.net/wordpress/2008/12/08/sri-lanka-oil-hedging-deal- turning-into-billion-dollar-scam/ SRI LANKA: Oil Hedging Deal Turning Into Billion-Dollar Scam December 8. CitiBank and Standard Chartered Bank (SCB).Sri Lanka’s executive director J. Dec 8 (IPS) . 2008 Global Geopolitics Net Sites / IPS Feizal Samath COLOMBO. the CPC was benefited as it had sought protection on the upside. the Sri Lankan government finds itself saddled with a complicated oil hedging deal with two foreign banks that could cost the country close on one billion US dollars and has brought charges of high corruption upon state officials. if you do the crime. UNP parliamentarian Dayasiri Jayasekera. told IPS. Neither the regulatory mechanism nor the cabinet have grappled with them nor were alert on questionable deals in the country. Weliamuna said the deals have exposed poor governance and corruption in the state mechanism. . who has been raising many issues of state corruption in the legislature. Putting further pressure on the controversial oil deal is a no-confidence motion being brought up against the government by the main opposition United National Party (UNP) citing several corruption issues.since January 2007. do the time Hopefully this particular court ruling will act as a deterrent to the banking system in Sri Lanka not to do shady deals with the government in power to the detriment of Sri Lankan citizens.as the saying goes. But with prices crashing after that and now reigning at 41 dollars per barrel.As global oil prices dive. &# 148. The state-owned Ceylon Petroleum Corporation (CPC) entered into contracts with five banks led by SCB. the CPC ended up owing the banks and the latest liability could be as high as 1 billion dollars by May 2009. are trying to restructure the hedging transactions with the government to minimize losses to the state. to protect itself against rising prices.. at current crude prices. Transparency International (TI) . The government is under ‘’severe pressure” over this issue.C.. http://globalgeopolitics.

alleging fraud and corruption in the hedging deals. the liability would be higher. The next hearing is on Dec. Gotabaya and Basil. Mihin Air is a government budget airline set up two years ago which has been swirling in debt of more than 50 million dollars and was forced to suspend operations earlier this year. bankers say. were dealt with. you don’t need to take the CPC chairman on foreign trips. Local bankers. No one is accountable.on Nov.” one official said. 15. After the court’s intervention the committee stopped functioning. Under fire. The Supreme Court. 28 temporarily stopped CPC payments to the banks until two petitions. The court suspended the CPC chairman and asked President Mahinda Rajapaksa to consider replacing Mohamed Fowzie as petroleum minister. the government on Thursday reduced petrol prices and said it was preparing a new fuel pricing formula. the cabinet. on Nov.as reported in the British Financial Times on Friday. appointed a risk management committee to review all hedging contracts and minimise the losses. who declined to be named. . The official added that head offices of these international banks would think twice before pursuing any legal action for non payments since these are highly questionable deals and raise ethical issues. centering around his three brothers. A senior banking industry official. Fowzie has been accused of not properly supervising the CPC on the hedging deals. It is to be re-started this month with a fresh injection of millions of rupees from the Treasury Department. implicated in the deal. This corruption won’t stop until the government shows political will to stem the rot. expressed the view that impropriety accusations in the hedging agreements entered into with SCB and CitiBank are valid. TI is marking Anti-Corruption Day this week with a seminar in Colombo on Tuesday on governance issues relating to the global financial crisis and its impact in Sri Lanka with the participation of Peter Eigen. the local branches of SCB and CitiBank may lose millions of dollars. in response to criticism that the benefits of of falling oil prices were not being passed on to consumers.” said TI’s Weliamuna. But petroleum industry officials say this was like closing the stable after the horse has bolted and point to the fact that two CPC officials. Gotabaya is defence secretary and Basil is presidential advisor. Chamal. ‘’Should not such a committee have been appointed at the beginning when hedging took place after January 2007? Isn’t there a serious conflict of interest in appointing officials implicated in the deal?” one analyst asked. Allegations of widespread corruption has dogged President Mahinda Rajapakse’s government. based on a report by the investment bank Merril Lynch. ”If it is a proper commercial transaction. 17. After the crisis blew. unconnected to the deal. are also on the committee. ”All these (hedging and Mihin Air) are gambles at a huge cost to the country. founder and former chair of the Berlin-based anti-corruption watchdog. Chamal is aviation and ports minister. If the CPC fails to make the payments. say foreign trips funded by foreign banks for CPC officials to learn about hedging were unethical.

fraud or misrepresentation. Nevertheless. then a contract is invalid. said in a statement on Friday. 01:29 PM UPDATE 1-S. ‘’If the Court holds that the hedging agreements are tainted with grand corruption. responding to the supreme court's ruling earlier in the day. said its investigation revealed the hedging deal did not comply with central bank rules about derivative transactions. 'The hedging transactions were materially affected and substantially tainted. Chandra Jayaratne.html Wednesday January 28.Sri Lanka's central bank on Wednesday said oil hedging payments to five banks that would cost the state oil company at least $300 million cannot proceed despite a court ruling saying they should.” All rights reserved. 'Our view is. 'The Supreme Court made an order terminating the judicial proceedings. 2008. IPS – Inter Press Service.yahoo.' Central Bank Governor Ajith Nivard Cabraal told Reuters.biz. ‘’our liability under our contract to make payments to our back-to-back market risk counterparty would total 8.com/28012009/323/update-1-s-lanka-banks-demand- hedging-payments-cbank. a former chairman of the Ceylon Chamber of Commerce said the Court has only stopped payments temporarily.Lanka banks cannot demand hedging payments-cbank By Shihar Aneez COLOMBO. I don’t think anything is wrong. The case has been closely watched because it has raised questions about the validity of commercial contracts in Sri Lanka. or insist they be scrapped. http://uk.' Cabraal said. that if the suspension of CPC payments continues. He declined to say whether the central bank would allow any renegotiation of the terms of the hedging agreements to allow a compromise.” Jayaratne said. such tainted contracts should not go through. It is not a question about the validity of all commercial contracts in Sri Lanka. On the question of whether the suspended payments could result in Sri Lanka being perceived as a country that defaults payments. Jan 28 (Reuters) . the instructions and directions issued by the central bank to . local and global financial analysts have said. a local bank which has a smaller exposure in the hedging contracts.93 million dollars”.Commercial Bank. in the interest of transparency and good governance. The central bank in a statement late on Tuesday. ”If the contract is determined to be void after the Supreme Court judgment.

while CitiBank was not available for comment.M.the respective banks in accordance with the law will continue to be in force. 2008.com/English/news. ordering it to drop the fuel prices according to a formula the court specified. non-cabinet Ministers and Central bank Governor Ajith Nivard Cabral are answerable for the hedging deal that caused a multi million rupee loss to the country. Standard Chartered Bank and Deutsche Bank in Sri Lanka declined comment. The zero-cost collar hedging deal between CPC and five banks -. which had no downside protection and only anticipated higher crude prices.' it said. Deutsche Bank (Xetra: DBK.php?id=6773 President and Central Bank Chief linked to corrupt hedging deal. December 02. The Supreme Court on Tuesday made good on its ultimatum to terminate the case if the government did not adhere to its November ruling. Fowsie. 16 had instructed the respective banks not to demand payments owed to them worth millions. is state-owned and did not comment.DE . after oil prices dropped and put the state-owned Ceylon Petroleum Company (CPC) out of money on the hedges.H. The Supreme Court in November suspended the oil hedging payments to banks and ordered the government to reduce retail petrol prices in line with falling global oil prices. . Standard Chartered Bank. The central bank on Dec. Ranil exposes (Lanka-e-News.15 AM) Opposition Leader Ranil Wickramasinghe charges that the President as the Minister f Finance. The Opposition Leader stated that a no confidence motion would be brought by the opposition against the government in this regard. (Editing by Bryson Hull) Keywords: SRILANKA OIL/HEDGING http://www. all cabinet Ministers including Minister of Petroleum and Petroleum Resources A. They had argued that the government had not cut fuel prices in line with falling global crude prices to pay for the hedges. Mr. The other bank.ended up in court after opposition parties sued to get the government to cut fuel prices. 9.lankaenews.Citibank. said it is still studying the impact of the central bank's decision to halt payments. Wickramasinghe made these comments at a press briefing held in the office of the Opposition Leader to expose the corrupt hedging deal and the proponents of it.news) and two local banks -. People's Bank. Commercial Bank of Ceylon. One of the local banks involved in the deal.

On January 09. Using audio visual equipment. Thenuwara. A cabinet paper was submitted and the cabinet decided to appoint a committee of officials to study it. Central Bank Chief Financial Officer Saliya Rajakaruna. H. assisted by two other Central bank officials. 2006. Upul Arunjith replied the Central Bank boss in October 2006 and the letter went to the hands of Central Bank?s Economics Adviser Dr. CPC Deputy Finance Secretary Lalith Karunarathna and Finance Ministry Adviser on Financial Regulation V. . The letter in this regard was sent to the former Secretary of the Ministry of Finance P. 2006.B. 2005 sent to the President?s Economics Adviser Ajith Nivard Cabral by a Sri Lankan origin Canadian called Upul Arunjith regarding hedging and a reply written by Cabral on June 01.M.W. 2007. He said that he made a special request to the Speaker through a parliamentary privileges question to protect the documents of the Finance Ministry. Kanakasabapathi recommended ? zero collar method? for hedging. The cabinet paper was endorsed.H. Central bank Governor instructed over the phone to the CPC Chairman Asantha de Mel to hasten the hedging business and a directive was sent in writing in this regard on January 10. made a presentation to the cabinet prior to its agenda was taken up on September 06.He thanked the trade unions including Jathika Sevaka Sangamaya for exposing the corruptions of the Ceylon Petroleum Corporation (CPC) that had led to the corporaton to near bankruptcy. People?s Bank?s Kapila Ariyarathna. He informed the authorities that the expertise for hedging is available in Central bank and no outsourcing was needed.M. the Opposition Leader said that not only he but also the President in his capacity as the Minister of Finance.M. On the invitation of the President Mahinda Rajapakse. 2006. Thenuwara. Central bank Governor Ajith Nivard Cabral. On January 13. he explained the ways the petroleum prices could be sustained amidst rising fuel prices in the world markets. Fowsie tabled a cabinet paper stating that the Ministry would agree with the committee recommendations to commence hedging on the instructions of the Central bank Governor. A committee comprised of Central Bank Assistant Governors Y. the Central bank and CPC that are pertaining to the hedging deal since they are prone to be destroyed. Weerasekara. Jayasundara. The report in this regard was sent to the Finance ministry Secretary on November 16. Additional Secretary of the CPC Kanthi Wijethunga. Opposition Leader Ranil Wickramasinghe stated that he tabled in the parliament a letter dated December 30. the Minister of Petroleum and Petroleum Resources A.M. Accepting the Supreme Court ruling that Minister Fowsie was responsible for this corrupt deal. the entire cabinet and the Central bank Governor were aware of this deal and they were responsible for it. Dr. H.V.

Annexture 02: A copy of the endorsed cabinet paper tabled by Minister of Petroleum and Petroleum Resources A.On November 17. . This amount is as big as Rs. 2008.A.S. Now. In this equation. CPC Chairman Asantha de Mel. it will save CPC Chairman Asantha De Mel and his organisation: if it continues to fall as seen in recent weeks. due to debt to the Iran and Indian oil companies and due to the debt the state institutes owe to the CPC. the debt burden on the shoulder of the CPC is now Rs. Treasury Deputy Secretary Dr. Director of Fiscal Department D. 218 billion. Annexture 01: A copy of the letter sent by Central bank Governor Ajith nivard Cabral to the CPC Chairman Asantha de Mel instructing to commence oil hedging without delay. said the Opposition Leader.html CPC hedging: The drama continues The Sunday Times: Sunday November 30. Wickramasinghe. Wijesinghe to the President. Samarathinga. what kind of rational explanation is this . Ministry Secretary W.B. Ganegala. one may ask.M. The president would have to go for an election to cover this massive fraud since war would not provide enough cover for it. Vidanagamachchi. pointed out Mr. Due to hedging agreements.000 per head of Sri Lanka?s population and the CPC has to be auctioned to settle it. Central Bank Additional Secretary R. the prime Minister and the secretaries of the Ministries. Fowsie seeking appointment of a forward risk management committee.A. Annexture 03: A copy of the letter pertaining to the cabinet decision regarding the consultation of Central bank Chief Ajith Novard Cabral on the invitation of the President Mahinda Rajapakse. http://sundaytimes. 10. R. sent by Cabinet Secretary D.lk/081130/FinancialTimes/ft305.H. 2008 If fuel prices rise. the CPC debt will continue to zoom. The Opposition Leader said that the deal is linked with corruption and nourishment. devoid of white vans but oil vans.H. The cabinet collectively endorsed these appointments.. jayalath and CPC Dputy Manager of Finance Lalith Karunarathna were appointed the committee. the consumer doesn’t benefit: either prices going up or coming down. Minister Fowsie submitted another cabinet paper seeking appointment of a committee to manage forward risks. he said.

Much of that would also be dealt with in the raft of fundamental rights petitions already filed or being contemplated. as they claimed! The problem in the present case is that the CPC resorted to the wrong hedging instrument and there lies the story. Hedging is like an insurance policy – taking a policy so that if things go bad for the business or an individual. “Could you provide a simple explanation of hedging” or “do you have details of the contracts” were some of the questions asked as more groups prepared to appeal to the Supreme Court to exercise their right.M. Name one person who has had this exposure? Our politicians. What is clear then and now is that few people (apart from a few experts) had no clue about hedging. one is protected. Hedging is not a bad idea and used extensively across the world mainly in commodity trading but the problem here was that the CPC lacked expertise apart from De Mel and CPC DGM Lalith Karunaratne. the whole fiasco has opened a can of worms with the newspaper being privy to ‘unheard of’ happenings at the CPC that would further stun this nation. How do I . De Mel continues to say that he was misquoted in an interview with The Sunday Times over the lack of understanding of hedging by the Ministers. After hearing one case. he (Mr Karunaratne) and I have the most experience in hedging today. Education Minister Susil Premjayanth in particular. Apart from the oil hedging scam which essentially is because the CPC was sold an instrument that was heavily weighed in favour of the banks. which if properly explained (as we have learnt now) is not difficult to understand. our government has not understood hedging. The Sunday Times FT desk has been besieged with calls ‘for action’ from consumers and citizen rights’ groups seeking more information on this saga. this is what he says (from the newspaper’s verbatim recording of the interview): “In hedging. Across The Sunday Times today there are more details of this episode – in which among the main issues are the lack of transparency and accountability – in addition to a series of events that unfolded this week.Simply put … this is how the controversial oil hedging deal has been structured that has created a storm across the island. Calls for De Mel’s resignation are growing as the government grapples with a near $400 million payout if oil prices remain at current levels while equal pressure is on to stop payment to the banks who have been accused of misleading the CPC. the Supreme Court on Friday called for the suspension of both Minister A.H. While the enormity of the problem is just seeping in – all due to the efforts of this newspaper to raise awareness over an economic calamity – the CPC chairman was stumped by a deep understanding of oil hedging at a recent probe meeting where he was summoned in the presence of several ministers and opposition legislators. armed with stacks of documents which included a detailed version of The Sunday Times exposure of this one-sided deal. For the record. literally pounced on the chairman with facts and figures to which the latter had little answers. Fowzie and De Mel.

While. the Central Bank wishes to issue this statement in order to set the record right. the consultative committee?” De Mel says he got cabinet approval – waving a paper at the ‘infamous’ press conference flanked by CEO’s of Standard Chartered Bank. sets out this position: . has issued a statement defending its actions. the governor.lk/fullstory. the treasury. under fire for advising a state- run petroleum firm to hedge oil imports using derivatives in the belief that it helped the balance of payments. the CBSL does not respond to individual statements. http://www. 2008 (LBO) – Sri Lanka's central bank. Neither did the board of directors give approval. (1) Towards the latter part of 2006. its members told the committee. Ajith Nivard Cabraal. The full statement is reproduced below: Hedging : A Clarification re.explain to them? We have gone and explained to the president. oil prices started to increase sharply and that resulted in Sri Lanka's expenditure on petroleum imports to rise from US dollars 837 million in 2003 to an estimated US dollars 2. since the tone and nature of some of these remarks and analysis appears to impute impropriety of the conduct of the Governor and certain other officials of the CBSL and thereby to tarnish the image and credibility of the institution. the Central Bank’s Role The attention of the Central Bank of Sri Lanka (CBSL) has been drawn to recent media reports wherein it had been claimed that the government was trying to protect certain officials including the Central Bank Governor. The banks – who claim to have informed the CPC of the risks -- shouldn’t also be allowed to go scott free for a deal that has dearly cost the country. Citibank and Commercial Bank – and expressed the same point at The Sunday Times interview by providing a cabinet memorandum as proof. The following Table that was prepared around end 2006. it has brought together both the government and opposition in seeking the truth – for the public good.1 billion in 2006. Ministers at this week’s probe committee confirmed that no approval was given. While the issue triggered a series of developments. 09 March 2009 13:03:15 Hedge Statement 6 Comment(s) 05 Dec. 2008 14:52:43 Sri Lanka central bank defends itself from hedging fire Nov 05.lbo. as a policy.php?nid=322594399 Mon. the minister.

The predictions in the market towards end 2006 were also that the oil prices would increase further in 2007 and beyond in view of the high demand from the China and India and this development was expected to exert severe pressure on Sri Lanka’s balance of payments and the exchange rate. If the market price is below the lower collar price. as follows: (a) Crude Oil Cap CPC sets the maximum price: i. the Cap. If the market price rises above the Cap. No premium is involved.. In line with such view and the CBSL’s role as the Economic Advisor to the Government. Ministry of Petroleum and Petroleum Resources Development and CPC be appointed to study the subject further.e. Ministry of Finance & Planning. the CBSL was of the view that it would be useful to introduce hedging techniques within the CPC. If the market price is above the higher collar price. the CPC may need to enter into forward agreements for future oil imports with reputed banks or pay a premium so that agreed prices could be held firm. CPC needs to pay a premium for each barrel. (3) Consequent on the presentation. (2) Accordingly. the hedging bank will pay the CPC. in which the importance of hedging to achieve stability in oil prices was highlighted. If the market price drops below the Cap. that there are financial instruments to reduce exposure to risk from volatile commodity prices and that in order to do so.e. Two possible hedging instruments were also specifically proposed in that presentation. (b) Zero-cost Collar CPC sets the maximum price: i. Bank of Ceylon. the hedging bank will pay the difference to the CPC. the bank sets the floor price: Lower Collar. As consideration. the difference between the higher collar price and the market price. to the Cabinet of Ministers on the subject ‘Maintaining Stability in a Volatile Global Oil Market’. CPC is free to buy from the open market. People’s Bank. In that presentation. in order that the Ceylon Petroleum Corporation (CPC) would be able to withstand the impending worldwide oil shock. the Cabinet of Ministers decided that a committee comprising officials from the CBSL. the difference between the lower collar price and the market price. the Higher Collar. the CPC will pay the hedging Bank. In response. the Governor of the CBSL made a presentation that was prepared by the Economic Research Department of the CBSL. the CBSL explained to the Cabinet. on 6th September 2006. .

and to present a report to the Cabinet. in the interest of the national economy. Accordingly. dated 10th January 2007. 2006. (5) On 13th January 2007. the Governor of the Central Bank responded on 16th January 2007 by stating that the CBSL is pleased that the CPC is “working out the necessary details in relation to implementing the hedging processes as quickly as possible”. this may appear to be the opportune time to enter into suitable arrangements to hedge at least a part of our country’s total requirements. it is clear that the advice cannot.” Such advice to the country’s largest single importer was obviously. we note that the CPC has so far not been able to enter into any form of hedging or other acceptable financing arrangement to ensure that Sri Lanka’s petroleum bill will be at manageable levels in 2007. In fact. The Central Bank has also made available to the CPC. Subsequently. This committee. at that time in January 2007. both crude oil and refined products in the international market. the Governor sent a letter to the Chairman of the CPC. the Hon Minister of Petroleum and Petroleum Resources Development presented a Cabinet Memorandum setting out the recommendations of the study group seeking the approval of the Cabinet. the events of 2007 and 2008 clearly indicate how vital and important this advice had been. However. . it was highly desirable and opportune for Sri Lanka to make use of the depressed prices to commence hedging. on 11th January 2007. certain technical details and options for hedging. (4) By early January 2007. the Chairman of the CPC. As you may agree. In response. the Central Bank of Sri Lanka was instrumental in promoting hedging as a means of purchasing petroleum and made a presentation to His Excellency the President and the Cabinet of Ministers on 6th September 2006. I would urge you to take the necessary steps to ensure that expenditure on fuel prices will not cause undesirable effects on the macro-economy in 2007. be considered imprudent or irresponsible. approval was duly granted by the Cabinet for the following actions: (i) CPC to hedge purchase of petroleum products. duly studied the subject and presented a report to the Secretary to the Ministry of Finance & Planning on 16th November. Hence. sensible and timely. petroleum prices have now reduced to about US $ 55 per barrel. in which he stated as follows: “As you are aware. (ii) Use Zero-Cost Collar as the hedging instrument with the upper bound based on market developments. To such letter. assured the CBSL that the CPC is “in the process of working out necessary details in getting the hedging process expedited as quickly as possible”. Such a response was made in the context that. since hedging had still not commenced and Sri Lanka’s vulnerability was increasing. in any way.

the CBSL has already taken several steps in the effective fulfillment of its role as the regulator of the commercial banks. but mainly protecting from losses that could arise from adverse price fluctuations. At the same time. decide on future prices and purchase hedging instruments from reputed banks. In fact. it should also be noted that the CBSL regularly provides policy advice to the government and government institutions by way of observations to Cabinet Memoranda and the September 15th Report prior to the announcement of the Budget. the CBSL published a Technical Box Article in its Annual Report of 2006. in order to create greater awareness among the public. The following extract from the Box Article confirms that hedging. involved in the hedging transactions of the CPC. (iv) Grant authority to the CPC to call for quotations for oil hedging. in complete contrast to the allegations and insinuations made.(iii) Commence hedging with smaller quantities for a shorter period and gradually increase the quantity and the duration. if properly carried out. hedging is used to protect against unexpected negative events. the CBSL would refrain from making any comments in relation to its current investigations. (v) Grant authority to CPC to change instruments based on the developments in the market. was completed. well before any petition or plaint had been filed in Courts. the responsibility of either implementing or not implementing such proposals. and indeed did not need to be. the CBSL was not. since hedging related issues are the subject matter of judicial proceedings before the Supreme Court. it would be clear that the Governor and other officials of the CBSL have carried out their duties and responsibilities in a prudent and professional manner. the role of the CBSL in this exercise which it initiated as the economic advisor to the Government. the CBSL discussed the many aspects of hedging as well as the generally available instruments worldwide. on the topic: Hedging Oil Imports against Price Volatility. (8) After the recent developments in relation to hedging were known. In this context. the CBSL had commenced its examinations into the banks’ roles in hedging transactions in early November 2008. Upon the acceptance or otherwise of such policy advice. Nevertheless. This does not prevent the negative event from occurring. at present. could still be a useful instrument to mitigate the impact of adverse price fluctuations: “Like an insurance policy. but if it does happen and if it is properly hedged.” (7) From the above actions of the CBSL. issued on 31st March 2007. Accordingly. In conclusion. Thus. (6) Once the Cabinet of Ministers approved the concept of hedging and permitted the CPC to commence hedging operations. lies entirely with the implementing agency. In this article. the CBSL wishes to assure the public that it would discharge its duties in accordance with the law and the directions that have been issued to . to undertake hedging. the impact of the event is reduced. (Vide Page 47 of the Central Bank Annual Report 2006). the hedging is not aimed at generating profits.

. He was all the time asking me who is going to provide protection when the price ofthe commodity is going up. Hedging is not gambling. Upul Arunajith Dec 06 Dr Dahanayake This was discussed with the present Governor end of 2005 when he was in charge of SEMA. Future Banker Dec 07 I can't understand why so many people are against hedging in this country.the Monetary Board by the Supreme Court. We can learn something from the whole episode. 1) Why do you'll think it's better for CPC to be privatised? 2) CBSL Governor has done more economic damage to the economy than the terrorist Prabakaran .can you please share the calculation you used in coming to this conclusion. 5. Ideally CPC should have retained the upside by entering into a option contract.Reason being this is something that I had discussed with the former chief of SEMA Mr. READER COMMENT(S) 6. If the prices went up to say $200 these officials could have been viwed as heros. we get so many project propsals and I can put your hedging proposal too in that category and see what can be done but hold no guarantees. based on what economic logic have all of you'll made your allegations. It is a way of reducing uncertainity/risk of adverse impacts. However. and Mr Cabraal taking over SEMA assuming that he was a very forthright and above all a professional I discussed the proposal. 4. Tittawela who was to implement this mechanism under a world bank funded ERTA project.. fair and forthright manner. "Future Banker" even if oil prices had hit USD200 these officials would have never been viewed as heroes. in a professional. SLs very sparingly give due credit to the government. he once said that Upul.not just pointing fingers. Eventually to get me over his back. I would like to hear others comments on this. It took me almost six months to convince him of the validity of Hedging. Having said that I do not think that the Zero cost structure was the best alternative. with his departure. but are extremely quick and persistent on catching onto every mistake and making mountains out of moulds. . TRUTH Dec 08 I'm curious. By removing risk/uncertainity officials can plan for better.

But. But fools don't take advice and smart people don't need advice. it is one of the worst deals that was ever done! If this was not there. I gave him detailed papers that gave the fundamentals and no sooner he became the governor he went public with the Propsal as if it was coming from him and not from me. I had advised them all that the Zero Cost was wrong and the local banks cannot provide hedge to the CPC. what puzzles me is why these goons permitted CPC to engage in Zero cost structures. The Zero Cost Collar hedge is his idea and he is accountable for this wrong advice. If he was smart. we will not be in this dire state today. Jack Dec 06 What the!! How stupid is it to come up with a 'Hedging' concept at this scale.However. Above all gone against all established ethics. 3. No doubt the CB is to be blamed if it advised the Petroleum Corporation to hedge its oil imports. That is how bad this person is. marti Dec 06 Since the minister of petroleum fowzie has gone on record to say that hedging of oil was done as per the directive of CBSL . needless to say that the governor was unaware of these deals or presumably done with his blessings. the price of a liter would have been less than 80 rupees. while I was at the CPC with the Chairman.. While there are so many forms of hedging instruments to cap oil exposure. when things go wrong he is not assuming responsibility but do the "blame game' and point fingers at others.. As the project architect. but at a time where the fuel price went up and down even when the deals were made. where the liability on the upside ( banks pays CPC) is limited while liability on the downside (when fuel prices fall and the CPC pays banks) is unlimited? Since these deals were entered with the blessing of CBSL and now that CPC has to cough up USD750 mio. with CPC writing an option and using the premium to buy one. . it appears that governor has done more damage to the economy than the terrorist prabakaran! 2. Hedging would have worked out in some countries with certain other industries.. Mr Cabraal sent a fax and hand delivered a letter around the 9th Jan 2007 instructing the CPC Chief to immediately implement Hedging as per the the discussion discussion held with Cabraal and if it is not done on a timely manner that he will be held accountable if the price went up. Dr Sirisena Dahanayake Dec 06 This is what happens when a government tries run a business that could be better handled by the private sector. 1.

com/fullstory. http://www. a senior Treasury official says. “We are increasing the taxes to trim the extra profits the two petroleum companies are making with the sudden drop in world energy markets.” says Attygalle. to 48 dollars a barrel. “We have removed the 10 rupee duty waiver on petrol. After his appointment. and diesel at 80 rupees per litre.” The government's budget for 2009 reduced the price of petrol by 15 rupees which included a 10 rupee duty waiver The price of diesel was reduced by 30 rupees.I can remember reading some time back that the present CB Governor having proposed petroleum import hedging.php?nid=475292913 Mon. Currently.” says S R Attygalle. 2008 15:11:12 By Riyad Riffai Sri Lanka hikes tax on petrol imports Nov 21. Pricing woes . If he was behind the hedging proposal. Director General Fiscal Policy of the Treasury.lankabusinessonline. the SLCB has lost its credibility. This phenomenon is known as a deflationary price collapse where commodity markets collapse after bubbles created in the financial system due to excessive money printing by central banks such as the Federal Reserve. the retail price of petrol is at 142 rupees. 09 March 2009 13:03:31 Gravy Train 1 Comment(s) 21 Nov. 2008 (LBO) – The Sri Lankan government has increased the customs duty on imported petrol by 10 rupees per litre to 35 rupees from yesterday. “This will not have an impact on the price of petrol at the pump. From the day of the budget speech two weeks ago global energy prices have dropped by a further 10 dollars. I think he sould resign. He is a political appointee with no adequate previous monetary policy experience.

Citibank. Peoples money However Sri Lankan policy makers can not pass on the full benefit to its citizens of lower energy prices due to ballooning budget deficits that have . insurance. The hedging deal that was inked with Standard Chartered Bank. retailers' margin and profits. This would put the Cost Insurance Freight (CIF) value for a litre of petrol at 29. Diesel would cost 46.5 rupees. says an industry official. at 110 rupees to the dollar. Commercial Bank and People's Bank covers 30 percent of Sri Lanka’s fuel imports. Sri Lanka on average imports 550 million litres of petrol a year which would bring in 40. The treasury says Sri Lanka’s annual fuel consumption is 700 million litres of petrol and 2000 million litres of diesel. which would generate a further 18 billion rupees to the government.6 rupees per litre.80 dollars a barrel for diesel.90 dollars and 65. Deutsche Bank. In Sri Lanka diesel is sold cheaper than petrol Currently state owned Ceylon Petroleum Corporation is losing nearly 30 million dollars a month on a hedging contract that had not taken into account the downside risks. "If prices drop to levels that were seen a decade ago we’ll end up paying more for the hedge than the oil. If global energy prices continue their downward spiral the CPC’s hedging loss payments would increase. According to Central Bank data the Singaporean Platt price (foreign selling) for a barrel of petrol is 40. Other costs would include domestic distribution costs. Almost 50 percent of the country’s diesel is imported.With the latest increase in import tax the government would earn 73 rupees on a litre of imported petrol and 18 rupees for a litre of diesel oil. financing costs.15 billion rupees into government coffers. according to an analysis of import volumes and tax rates. A barrel can hold approximately 160 litres of fuel." says a senior banker. Transport and insurance costs are on average two dollars a barrel.

by re-structuring the original hedging deal. though the implications would be appalling. As he further explained. the same day oil price increases in Sri Lanka sharp at midnight. is for both parties to go for a negotiated solution. I totally agree with the writer who wrote in one of our national newspapers . Talk about altruism http://www. they point out.lk/2009/02/01/busi1. Nazim Nov 22 Indication that a petrol price hike on the pumps is in the offing. Quote. The budget for 2009 has allocated 41 billion rupees as subsidy and Samurdhi welfare payments.quote "When the world market price on oil increases. which can more or less be called a win-win situation.htm The Nation: Re-negotiations the only way to come out of hedging pit By Indika Sakalasooriya The Ceylon Petroleum Corporation (CPC) and the banks involved in the controversial hedging deal. given the current situation of the country’s external . told The Bottom Line. When the world market oil prices are reduced - the same day oil price increase sharp at midnight. analysts say. These are both extreme choices that would harm either party negatively” “The third solution. should resort to a negotiated solution as the country’s Supreme Court last week terminated the interim order that ruled the hedging transactions null and void.financed subsidies and social safety nets that have done little to uplift living standards of the rural poor. Subsidies are used as a populist method to grab votes in rural constituencies even though it costs billions of tax payer’s money. or it can just walk away from it.nation.000 metric tons of rice from Burma as domestic rice retail prices neared to an unheard of 100 rupees per kilo. CPC will have three options to choose from. READER COMMENT(S) 1. Despite the subsidy payments Sri Lanka imported 8. “CPC can either honour the hedging deal that it entered with five banks and which is due to expire in May 2009.” an analyst who preferred to be unnamed.

both the banks are exposed to counter party risks” said.” De Silva said. with offshore counterparties. brought out the point that a possible non-payment as proposed by the Monetary Board can even trigger a systemic effect given the nature of inter-bank dealings the two Lankan banks had with other banks related to the hedging deal. The stance of the Monetary Board of the country. they had transferred the risk associated with the deal with one or several counter-party financiers. Another analyst who too wanted to be unnamed. In other words. Dr. For example the People’s Bank entered the CPC hedging transactions through ComBank” he said. one of country’s most vociferous economists told The Nation Economist that he believes it is unlikely that international counter- party financial transactions will be reneged as the country is seeking to raise increased funds from foreign markets in order to tackle its impending Balance of Payment crisis. According to a Fitch Rating report a couple weeks back. the Treasury is unlikely to opt for the first choice by paying the hedging contracts as agreed. which is of course. Harsha De Silva. However so far there have been no claims either by the ComBank or the people’s Bank over an inter-bank transaction with any other local bank pertaining to the hedging deal. We don’t know how these banks have dealt with the risk element involved with the transaction. which was expressed in a press release issued by Central Bank last week. They might have transferred the risk element partially to several other local and international banks and institutions. said the transactions CPC has entered with a number of banks were “materially affected and substantially tainted”. “Therefore whether we like or not. Commercial Bank and People’s Bank are exposed to when entering the hedging transactions with CPC. the banks involved in the hedging deal were acting as intermediaries. earning a fee or commission and carrying only counterparty default risk. So the interesting question is can they not honour these inter-bank relationships?” he remarked. As the above analyst further pointed out. . “But we are yet to know the complexities the two Sri Lankan banks. the hedging transactions have to be re- negotiated with the participation and corporation of both parties involved in it.reserve position. Standard Chartered Bank and Citi Bank and Deutsch Bank branches in Colombo can hold on to the Monetary Board decision as they’ll be able to settle the transactions with their mother banks relatively easily. as the banks structured the deals with corresponding positions. But it would be interesting to see whether these banks can go by this directive as when they entered into to these hedging transactions. estimated to be a whopping USD 300 to 500 million. “This directly tells the banks not to proceed with hedging transactions until further notice.

Daham Wimalasena : The CPC signed eight hedging transaction contracts. . the Bank disclosed on December 2.000 million. Deutsche Bank.000 barrels of oil. People’s Bank and Commercial Bank. Standard Chartered. CitiBank. Though earlier it was understood ComBank had a relatively low exposure to the CPC hedge.He also pointed out that if the CPC resorts to not paying the banks.000 million if the decline of crude oil prices to $25 per barrel were to occur as now projected by Merrill Lynch Energy Research. The traded cost of oil on transaction dates are estimated at over $2. In addition ComBank subsequently disclosed that People’s Bank which entered hedging deals through ComBank also failed to honour its November and December 2008 payments.lk/081214/FinancialTimes/ft320. totalling 14.160. that it was liable to pay its international counter-party to the hedge a sum of USD 8. Impact on ComBank According to a research report issued by CT Smith Stock Brokers last week the total counter-party exposure of the ComBank would amount to approximately USD 25. The transactions have exposed the CPC to financial obligations that could range from a low of $700 million to as high as $1. recommended by the Central Bank (CB) has been adopted recklessly by the Ceylon Petroleum Corporation (CPC).html The Sunday Times: Sunday December 14. not understanding the limitations and not including safeguards to protect the CPC's interests.93 million in order to honour its position.53 million (including the November and December dues based on a WTI crude oil price of USD 35 per barrel) if People’s Bank continue to dishonour its payments in the counter-party hedge agreement. 2008 Reckless oil hedging by the CPC – experts report A committee of experts analysing the recent oil hedging debacle says in its report that the zero collar hedge. the three international banks. http://sundaytimes.93 million. like Prima Ceylon Limited did recently. to Combank in respect of this counter-party hedge agreement amounting to USD 3. Deutsch Bank and Citi Bank can even seek the assistance of an international arbitration court. covering 12 calendar months with Standard Chartered Bank (SCB). Here are extracts of the report that was compiled and edited by Mr.

The group examined the steps and processes leading to the potential
debacles and likely remedies.
Rising prices
In September 2006, faced with the rapidly increasing price of crude oil and
petroleum products, the Governor of the Central Bank (CB) made a
presentation to the Cabinet of Ministers to identify strategies to 'Maintain
Stability in a Volatile Global Oil Market.' Oil-costs hedging instruments were
proposed. Commodities hedging is a useful tool in the commodities trade but
should be engaged in with great caution.

On 13th January 2007, the Minister submitted a Cabinet paper requesting
approval for the following:
- CPC to hedge purchase of petroleum products both crude oil and products in
the international market.
- Use zero-cost collar as the hedging instrument with the upper bound based
on market developments (the floor prices are set by the Banks-please see
definition of floor price below)
- Commence hedging with smaller quantities and gradually increase the
quantity and duration.
- Grant authority to the CPC to call for quotations for oil hedging, decide on
future prices and purchase hedging instruments from reputed banks based
on market developments.

- Grant authority to the CPC to change instruments based on the
developments in the market.
The Cabinet approved the Ministers request on January 24th 2007. The
Minister and CPC Chairman thereupon arrogated the procurement of hedges
and circumvented established procedures on the basis of authority granted to
the CPC to call for quotations for oil hedging, decide on future prices and
purchase hedging instruments from reputed banks based on market
developments.

Strategy
The option recommended by the CB was to adopt a strategy referred to as a
"Zero-Cost Collar" hedge. Under this strategy the CPC would set a maximum
price and if the market price were to exceed this ceiling, the Banks would pay
the difference in price multiplied by the quantities hedged.
With regard to the lower limit, the Banks would set the price, referred to as
the floor price and if prices were to fall below the floor price the CPC would
pay the difference in prices multiplied by the quantities hedge to the Banks.

There is no crystal ball to set either price but this is generally based on
knowledge of global conditions such as economic, political and petroleum
supply and demand. There is much uncertainty in the oil markets due to
ongoing wars in Iraq and Afghanistan and political tensions in the Middle
East. The CB suggested the zero collar hedging but the details were left to
the CPC to develop.

Under normal and required procedures the CPC, since it did not have the
necessary expertise, should have engaged consultants to develop the terms
of reference and establish the ceiling and floor prices and review contracts.

The CPC Chairman apparently decided this was not necessary and he and the
Deputy General Manager (Finance) trained themselves as 'experts' by
attending seminars and meetings with representatives of the very banks who
were potential sellers of hedge instruments and claimed that he and his DGM
have become the foremost experts in the company on hedging instruments.

Upper limit
The CPC Chairman set the upper price limit. The Banks stipulated the
maximum dollar risk they would bear and also specified a contract life time
limit of three months if events were not to favour the banks' position. The
Banks set the floor price and other conditions also specified that the
quantities hedged would double if it is in their favour without a dollar limit.

The contract periods in all transactions were 12 months. The potential loss on
current prices because of the structuring of contracts is over $1,000 million
based on December 5, 2008 prices. None of the risks was explained to the
Cabinet, the CPC Board or any other party or approved by the Cabinet. The
CATB (Cabinet Appointed Tender Board) was totally ignored.

Mandatory Procurement Procedures
The authority granted by the Cabinet was to the CPC and not to the CPC
Chairman. The CPC is required to follow cabinet approved procedures for
procurement of crude oils and products for which purposes a permanent
CATB which comprises the Deputy Secretary to the Treasury, Secretary
Petroleum and an Assistant Governor of the Central Bank, is established to be
convened when required. The CATB also has to consult the TEC (Technical
Evaluation Committee) before making a decision after which the decision is
sent to the Cabinet for approval.

The CPC Chairman dispensed with these procedures relying on the Cabinet
decision wherein the CPC was authorized to negotiate hedging contracts. The
mistake here was that the Chairman's apparent interpretation that CPC is
synonymous with Chairman and the authority was granted to him. In the light
of the procedures described in the preceding paragraph, how could the CPC
Chairman who is not even a member of the CATB, undertake hedging
instrument purchases on crude oil and gas oil which are enormously higher in
value and riskier than those considered by the relevant CATB without the
final approval of the Minister and the Cabinet? The Minister had no authority
to do so and also did not seek Cabinet approval of the terms negotiated by
the CPC Chairman outside accepted purchase procedures.
It would appear that the exposure now faced by the CPC is a result of lack of
experience and knowledge on the part of the Chairman and the Chairman
identifying himself as the CPC. Decisions were taken by the Chairman
unilaterally, presumably with the blessings of the Minister, who has defended
every action of the Chairman. The Minister and Chairman have hence to bear
sole responsibility for the hedging debacle and not shift the blame for

recommendations to hedge to either the Cabinet or the Central Bank. It is not
hedging that is at fault but what was in the hedging contracts – the terms and
conditions. The Chairman entered into eight contracts unilaterally, without
the approval of the Cabinet, the CPC Board and the Attorney General.

CATB/TEC
The Chairman is not synonymous with the CPC. The CPC could make
decisions as listed in cabinet resolution but the decisions have to be
consistent with CPC procedures and limits of financial responsibility vested in
the corporation and hence should have followed established procurement
procedures, which the Chairman did not. As far as the Chairman was
concerned it appeared that the CATB and the TEC did not exist.

The permanent CATB is to procure crude oil and products and the TEC is to
provide transparency and the necessary checks and balances to safeguard
the public interest. The hedging instruments ultimately totaled 14.16 million
barrels of oil with an intrinsic value between $1,500 million and $2,000
million. How could the Chairman have unilaterally signed contracts
aggregating over $1,500 million? The transactions should have been
processed through the CATB and the TEC.

The CPC team worked directly with the Minister of Petroleum and the Banks,
made decisions without informing the CATB and did not obtain Cabinet
approval. The Minister became a one-man Cabinet. As pointed out by the
Chief Justice, there was no supervision by the Minister of the activities of the
CPC Chairman. Belatedly, when the hedging debacles made headlines on
November 18th 2008, eleven months after the purposed approval in principle
by the Cabinet of the hedging concept proposal, the Minister of Petroleum
submitted a memorandum seeking approval for the appointment of a
Hedging Risk Management Committee – please note that eight hedging
contracts with five banks had by this time been signed between April 2008
and completed November 2008.

Costly mistake
Not working with the CATB and the TEC was a costly mistake both in financial
terms and propriety. It is a well known fact that hedge funds compensate
their managers based on performance. Bonuses on large transactions run to
millions of dollars. On the CPC transactions, if the Banks were to prevail and
the CPC has to pay, bonuses to hedge fund managers could range from $50
million to $100 million or more depending on the quantities to which the CPC
has foolishly committed and market prices. Fund Managers are known to
wine and dine their clients. Spreading part of their bonuses around also is not
uncommon. Considerations such as these should have weighed heavily for
the protection of the officials, the CPC, the Minister and the transactions'
integrity. The Minister should have followed accepted procedures and
directed the Chairman to work with the CATB.

In summary the financial claims facing the CPC result primarily from the
following reasons:
- Circumventing the CATB and the TEC

.- Stability in a Volatile Global Oil Market' as explained by the CB. not more than 3 months and certainly not 12 months for a product that is the most volatile of all commodities. Volatility is measured by how rapidly crude oil and product prices change. With a vigilant press misdeeds cannot be supported for too long. .Understanding the nature of oil markets and that oil is one of the most volatile of any commodity.Approval for hedging was given primarily for the purpose of 'Maintaining . The hedging disasters have exposed the deft circumventing of procedures that may never have been revealed if not for media vigilance. a major cleansing of the CPC may be needed from the top down.Signing relatively long term contracts for a highly volatile commodity –oil. . In the interest of the President’s good name and for the country's sake. judging from the several instances of malpractices that have been reported in the media.The total lack of appreciation of market developments by the CPC team and the Minister who acted as a one-man Cabinet. -Developments in the oil markets globally and price perturbations should have been continuously and rigorously monitored – not even the CPC Commercial Manager was consulted.. Lessons to be learnt: The CPC appears to have over the past three years systematically dismantled established procurement procedures. . Lack of an affordable exit strategy. In order to monitor volatility and take preventive action the following precautions should have been taken: -Contracts should have been short term.Unrealistic Floor Prices in Hedging Contracts that safeguarded and enhanced the profits to the Banks. There are two other reported cases of likely improper procurement already committed or in the process of being hatched. . These are rumoured to be a proposed refinery project and a bunkering deal.

http://www.thebottomline.lk/2008/11/26/index%205.htm

The Bottom Line: Wednesday, November 26, 2008

‘CPC loses over hedging deals’: They lost ‘how’ … Doing ‘what’?

By Chrishmal WarnasuriyaBA (Colombo), P Dip. (Hons), LLM (Hons)

(London)
When newspaper headlines carry such titles in large, bold font, naturally (of
course, greatly assisted by the fact that we are by pedigree a ‘chat friendly’
people) almost every conversation countrywide appears to centre round this
new topic – ‘hedging deals’of the Ceylon Petroleum Corporation (CPC). The
latter, of course, has constantly been the subject of discussion since the CPC
and its actions (as indeed that of all fuel producers/distributors) has by and
large a direct correlation to our everyday lives one way or the other; be it the
fuel we pump into our vehicles, the liquid petroleum gas that lights up our
dinner, the electricity that is primarily generated by turbines run on fuel, or,
even in the simple case of citizens ‘Bandara, Silva or Sinnadurai’ (as the case
maybe, separated only by geographical location but certainly not by their
need for basic necessities) who purchase that one pint of kerosene oil to light
up the solitary kuppi lampuwa in order that their kids may read their lessons.
But what the dickens is this ‘hedging’ that they have apparently gone and
done? How exactly did that cause a loss to state coffers? I’ve noticed from
several conversations that ‘hedging’ appears to be new lingo for many. It
would have been utter French to an everyday town idiot like myself as well a
few years back, if not for the gracious intervention of fortunate education on
the subject, which I felt I must share with my fellow citizens; at least for a
basic elucidation of the area of ‘derivatives’ or commonly used hedging
mechanisms, particularly in the larger financial capitals, together with some
passing references or ‘hints’ at how to minimise our own ‘risk’ when dealing
with these ‘risk instruments.’

Given the fact that I am not privy to the specific details or terms upon which
the CPC contracted and my understanding of their particulars are therefore
minimal and limited to what I have gathered from the news, I shall endeavour
to refer to the subject more generally allowing the reader to relate that
‘theory’ to whatever details known by them. You will also note that the term
‘derivative’ and ‘hedging’ have been used loosely and interchangeably
although technically, as for instance where a contract based upon the future
delivery of a product is intended, the term ‘derivative’ is not generally used
since it is more a ‘financial contract,’ as there is ‘actual delivery’ envisaged; a
‘derivative’ does not contemplate such a ‘physical delivery.’ However, for our
instant purposes, we do not need to get bogged down by such academic
intricacies, general references will suffice. Also, most references may be to
UK and US practices particularly where reference is made to documents like
ISDA (International Swaps and Derivatives Association), since these are what
I am familiar with mostly and I admit in all humility that I am unaware of any
similar regime dealing with the derivatives market locally.

There is also another ‘legal angle’ that I’ve touched on whilst on this subject
of ‘government expenditure’ (or cases of losses caused to the State). Modern
democracies have seen a radical transformation of the traditional relationship
between the individual and the state, making the citizen a consumer and the
State a service provider, or in most cases the state becoming a facilitator for
the provision of required services; as for instance the CPC that carries out
certain functions on behalf of the government. Whilst the government
decides on the benefits through an ‘appropriation bill’ (policy), its distribution

and administration are handed over to such agencies (implementation). Most
of these agencies are not run by ‘public servants’ in the traditional sense but
officers such as Chief Executives. Therefore a question lies as to their
‘accountability’ and the ability of a citizen to reach them by way of traditional
administrative law remedies and review?

What are ‘Derivatives’?
For a keen reader wishing to gather more ‘technical’ knowledge on the
subject, I recommend ‘Law of derivatives’ by Simon Jones or ‘Henderson on
Derivatives’ by Schuy Henderson. For the moment, let us attempt to discern
a basic insight and define derivatives by reference to some of their common
features as below:

Derivatives are commonly used to protect against a risk or to take on risk;
They are financial instruments/transactions, usually a bilateral
contract/payments exchange mechanism ‘deriving,’ as the name implies, its
value from an underlying asset, rate or index.

It is a hedge mechanism against market risk such as interest rate volatility in
the financial markets or, as in our case, oil price fluctuation.

These risks are generally economic (such as commodity prices) BUT legal
issues may also form the basis for such derivatives.

The ‘reference asset’ is the source from which the derivative derives its
existence and usually precedes the name, such as a ‘security derivative.’

The derivatives market usually comprises of:
Those seeking to hedge an underlying risk (e.g. Sri Lanka or the CPC)
Those trading in derivatives (bank or other financial institution), and the
speculators who deal in them with a view to gaining a profit (could be
individuals, corporate entities and various others).

The theory, though not this simple in operation, could perhaps be explained
at a basic level through a few examples. A person may wish to borrow money
six months into the future for some purpose (say for a wedding of their
daughter) but fearful of prevalent economic trends or inter bank lending rate
fluctuations may wish to ‘fix his interest rate’ now, at some figure that he
would like to borrow against six months hence and therefore could use an
instrument referred to as a ‘swap’ or an ‘option’ to lock that interest rate.
Similarly, a producer who expects his product to be ready for sale in 6
months but fearful of market conditions at the time, or speculating a drop in
price, may wish to secure a fixed market price now and thus enter what is
referred to as a ‘futures contract.’ The latter is technically a ‘financial
contract’ and not a ‘derivative’ per se as stated above, since physical
delivery of an item is actually intended; however the principle of operation
remains the same.

the change in the index (or stocks) would be measured and netted off against the sum due on the LIBOR. then he would guarantee either the stock (at a price) or the FTSE fluctuation for 6 months. and as regards the interest rates he does not expose himself to a floating rate of the bank directly. they could enter what is referred to as a ‘Swap’ in reference to a notional amount of borrowing.’ at least one of which is determined by reference to the performance of a particular stock or more frequently a stock index (e. technically.’ something similar to the ‘CRIB’ here) could borrow at floating rate of LIBOR +0. FTSE).25%. to get an idea on how these derivatives operate. For our present discussion. however. let us now turn to commodities dealing.’ They follow the same pattern of other swaps. which may loosely be categorised as: Exchange traded futures and options – those traded in exchanges such as the LSE OTC – over the counter risk solving derivatives.25%. in return for a 6 months guarantee on the LIBOR of that time. thus either party gaining with a benefit of 0. whereby ‘Y’ would end up paying ‘X’ only LIBOR + 0. therefore.5%. where it would agree with the dealer on a ‘fixed rate’ for a notional quantity of oil.75% and at a fixed rate of 8% interest. In doing so.’ Although in the case . Equity Swaps These do not involve an exchange of principal like in a currency swap but there is an ‘exchange of cash flows. without going through the process of selling stock here and buying it there. an investor in the stock markets wishing to move away from the Sri Lankan exchange and invest in the UK could. it may be of interest to note some discernible criteria of the following OTC’s. a series of payments based on the price of a commodity.The ISDA recognises several kinds of derivatives. say for instance in ‘Oil. An alternative. thus whilst actually receiving or paying on the ‘spot rate’ (or prevailing price). enter into a swap for the change in the FTSE index for a change in the equivalent Sri Lankan index. if Company Y which has better credit ratings (in commercial capitals your borrowing ability is dependant on your ‘“credit rating. He can therefore borrow the money he needs without actually disposing of his stock.25% through their swap.’ if for instance his stocks mirrored the FTSE. but at the end of say every 6 months. In this situation. he would naturally open himself out to market commissions as well as possible taxations. Similarly. Similarly. An example could be of an investor needing cash flow and wishing to realise some of his stock for this purpose. If prices go up as seen they would ultimately regain that difference between the ‘spot rate’ and the ‘fixed rate. would be to enter into a ‘swap on his equity. Interest rate swap Say for instance Company X operating in London enjoys facilities to borrow money at a floating rate of LIBOR (London Inter Bank Offer Rate) + 0. and at a fixed rate of 7. An airline (or indeed a ‘Petroleum Corporation’) could ‘hedge’ itself or insulate themselves against an un-estimated future rise in fuel costs by entering into a swap.g. Commodity Swaps Having thus gained a basic idea of ‘hedging’ mechanisms.

’ There is also provision to provide ‘termination events’or for ‘early termination’ under which certain circumstances allow the derivatives contract to be terminated. unless the dealer is your uncle or grandfather (which they obviously were not) you still have to pay at the rate which you have agreed to pay. it will even things out if things go according to your plan. what advice they obtained beforehand and whether in fact . and advocates concepts such as ‘termination netting’ or ‘close out netting. depending on what they actually contracted on) and when that happens. as we are well aware (more so in this paradise isle of ours) things don’t always seem to go right do they? What you do in hedging in my opinion is take on a ‘calculated risk’ at most. it borders on attracting ‘anti gambling/gaming regulations’ due to its very nature based on speculative gain (or loss to another). As to how exactly CPC fixed the price are details unknown to me. the ISDA Master Document provides its own ‘Risk Reduction Methodology’ for financial derivative products and several ways in which a party can provide for events such as counterparty bankruptcy or your own insolvency. So. which refers to the spot price per barrel of oil at a future. There is also a concept referred to as a Floating Price Index (FPI). set off or netted. or this ‘speculative element’ as much as possible. the bottom line being that these are funds invested based on ‘speculation. For instance. which in fact is now below the actual rates prevailing in the market.of many other swaps the price is fixed on a given date. we still end up paying the difference (or that gain if you like) back to our dealers with whom we have contracted to hedge our risks. Silva or Sinnadurai’ might actually equate it in common village parlance to nothing but a ‘Suuduwa’(gamble). semi annual rate. now we have a situation where although we are in effect buying our oil at lower rates. and the rights and obligations standing as at such date be settled. though I hasten to reiterate that I have absolutely no idea on what terms the CPC contracted with their dealers and/or others. thereby alleviating room for sudden upward or downward movements that may be unrealistic on the longer scale. in some countries they refer to it as ‘speculative dealing/trading’ and in some others. thus if things go smoothly as per your speculation then you gain by what you have provided for. Similar methodologies are also available in commodity risk hedging. and they may not be far wrong. is that you ‘hedge’ that risk of having to pay more in the future by an upward price fluctuation in the market by agreeing to some other rate (be it at FPI or fixed rate) at present. These concepts could perhaps be illustrated as follows: So how do you ‘hedge’ against your ‘hedging risks’? The idea. it does ultimately end by cleaning you up at the roulette table. So what happened? Based on news reports instead of the upward fluctuation predicted by CPC the prices fell even below the fixed rate (or the average or FPI.’ Our above referred citizens ‘Bandara. The derivatives market itself has come up with certain solutions allowing its players to negate their own risk. Hedging does not completely remove the risk of what you fear. it is common for commodities such as Oil for the prices to be fixed by reference to an average over a period of time. as in the above example. however. but if they don’t as on this CPC instance.

’ its converse the ‘Call Option.’ ‘Knock In’ or ‘Knock Out’ etc which possibly may be a digression of our present theme. thus not allowing ourselves to be placed in a situation where we would end up losing our advantage of the hedging itself and not having to pay the difference between a steep fall in future. This. if someone anticipates a need to purchase a particular currency in the future and wishes to hedge against any depreciation. There are several hybrids of this type of hedging referred to by wonderfully attractive terminology such as ‘Put Options.their particular kind of dealing allowed them to provide for these mechanisms in their contract. we could hedge for that risk by ‘Capping’ it and we could also ‘Floor’ it.’ As in our earlier example. you are usually charged a premium by whoever underwrites that option. if he were to enter into an ‘Option’ it would allow him to purchase that currency if he still needs to. What you do (in laymen terms) is that you decide on advice available as to what you would estimate the price to fall at its lowest and name that as your ‘Floor’ rate. Caps. as at such predetermined day when the derivative is deemed to materialise. And what can ‘citizen ME’ do other than ‘just watching’? This brings us to an interesting juncture. however. In view of this added flexibility in this type of hedging. but it is still better than losing more at the end. the dealer will only have to pay that difference between that ‘capped amount’ which you have pre-designated and the actual rate of the day. Floors and Collars A ‘Cap’ is where in the event the index (interest rate. but for whatever reason (such as market depreciation) he is disinclined to do so. commodity price etc) exceeds a specified limit. as such. If indeed there is some financial mismanagement or failure to adopt sufficient safeguards in government spending. For instance.’. such as providing for oil prices making a downward fluctuation beyond a predetermined price.’ I am simply noting down below a few methods by which the risks inherent in derivatives (not necessarily oil alone) can be minimised: Options An option is a right (to buy or sell) but does not constitute an obligation. A ‘Floor’ is the converse of the above. which is a combination of the ‘Cap’ and the ‘Floor. or if indeed it is felt by some citizen that such ‘speculative dealing’should not have been ventured into at all by the State or one of its organs. I am not entitled to state. however. In contrast. would oblige him to purchase that currency and not avail him the benefit of any appreciation in the intervening period. if we were to hedge against the oil prices moving upwards beyond what we perceived to be an unmanageable amount. These two can also be used together and is referred to as a ‘Collar. he may enter into a ‘Forwards’ agreement. then he can exercise his ‘Option’ not to buy same. a hedging mechanism to provide for that commodity index falling below a specified amount. nor do I wish to be an armchair critic and pontificate on whether they could have ‘done this and not that. ‘what do you do’ (as that movie ‘Speed’ repeats ad nauseum)? Does . based on a notional principal amount.

However. which ideally must be left in the hands of the executive and legislature (government) who have been elected for such purpose by the people. Goonesekere has ended up his oration at the recently concluded 60th anniversery celebrations of the Law Faculty at Colombo. other ‘policy issues’ will generally remain a ‘no go area’ for courts and judges. Spending of what is voted/approved – if voted in favour then the Executive proceeds to spend the monies in the manner stated and approved by us. have maintained that unless based on accepted grounds of review such as illegality. until such time a democracy gets the obvious choice of voting it out? Can one question such spending before Courts of Law? What is the rationale behind that? These are obvious mumblings in several corners these days. irrationality and procedural error.” the sentiments with which Deshamanya Dr. latterly.’ There has been an advent of innovative approaches such as ‘public interest litigation’ (PIL) where the traditional levels of locus standi or ‘standing to sue’ is not evaluated as rigorously at a threshold level as it was the case at one time. which expenditure is also incurred by Corporations such as the CPC.W. and I daresay this article would be incomplete without at least a passing reference to these questions. an equally cogent but contrary argument lies that the citizen has specifically vested all powers of adjudication in the judiciary of a country. R.K. Theories behind ‘Public Expenditure’ in a Democracy? Public Money is generally (in theory) spent by an elected government in a Parliamentary democracy involving the following basic steps: Expenditure planning by the Executive – where limited resources are allocated to their best possible use on a scale of competing interests. especially English Administrative Courts. Parliamentary debate and approval – our (elected) representatives (and therefore in theory the people) then evaluate it and either grant approval to the ‘Appropriation Bill’ (budget – in common parlance) or defeat it. Although traditionally. There has always been a ‘policy argument’ of constitutional impropriety based on the principle of separation of powers – that courts must not adjudicate upon the merits or demerits of policy.an everyday citizen like you and I have any control over government spending? Is there a way in which we can hold it accountable in the interim. . thus allowing even reasonably affected parties (such as citizens) to bring ‘public matters’ before courts exercising administrative jurisdiction over public authorities. the law on its own has found timely ways of counteracting various attempts by governments to immunise themselves against review by courts by shrouding behind this ‘policy argument. Then arises the question “Quis custodiet ipsos custodes. which is not limited to disputes between private individuals but also includes the acts of the State.

by institutions such as the Treasury. But what of the ‘legal basis’ for incurring this expenditure of public funds. ex p. should not also the expenditure of such Corporations and whoever it is that functions as its Chief Accounting Officer be subjected to similar review? Changing Function of Judicial Review: As noted earlier the ‘policy argument’ conventionally left to government alone.’ with due deference to ages of traditional rectitude displayed by generations of judges who have seldom indulged in such review. and whenever they did. who have been prompt to act with the changing times.’ A similar line of argument is perhaps the ‘Public Trust’ doctrine that has been adopted by their Lordships of the Supreme Court in recent Fundamental Rights applications challenging primarily uneconomic or non-transparent transactions relating to public monies or assets. the Executive is expected to be called upon to account for money that was spent. with extreme reluctance and caution. As regards possible ‘review’ of public spending. shouldn’t someone or some process afford legality to this spending? There is a theory of a Constitutional principle behind this spending through the appropriation bill. An extension of this theory is that legality for spending derives from the votes of Parliament.Accounting for monies spent – thereafter.there is no material distinction between questions of propriety and regularity and questions of economy and efficiency of public expenditure…” thus equating ‘uneconomic spending’ to the level of ‘illegality. as to whether it was utilised in the manner they sought and obtained permission to spend it. that any government spending must be authorised by law and law on this occasion being Parliamentary approval. permanent legislation such as the Ceylon Petroleum Corporation Act No. has gradually given way in favour of more intervention by Courts. the argument being that dealings with public assets even by the Executive must be carried out ‘in . Movement reported at (1995) 1 AER 611. and that Courts have generally left such spending to the checks by the system itself. whilst it sets out the quantitative parameters for spending. 28 of 1961 (as amended) provide the qualitative legal basis for that authorisation of spending. more popularly known as the ‘Pergau Dam Affair’ where the applicants successfully challenged governmental expenditure which Courts held as being “… so economically unsound that there is no economic argument in favour of it…. The appropriation bill alone does not attribute this legality. If that is so. yet treading cautiously between lines of ‘policy’ and ‘justiciability. whilst Parliamentary expenditure is subjected to review by the Auditor General etc. Public Accounts Committees and the Auditor General. The review of a government’s dominium powers conventionally excluded by courts in UK was first given a different interpretation in the case of R Vs Secretary of State for Foreign Affairs. World Dev. The ‘power over the purse’ (of the government) provides the legal basis for this constitutional subordination of the executive to Parliament. the general assumption has been that rules that are not statutory (such as treasury authorisation for spending) must remain matters of convention or practice.

they were always left alone as matters of policy. Senewiratne Standard Chartered Bank will go ahead with the oil hedging arrangement with the Ceylon Petroleum Corporation (CPC) despite the current volatile oil prices in the international market. so as not to endanger the very fabric of a Constitutional democracy (such as the separation of powers) upon which our systems of governments have been built.’ This must be a welcome change in Sri Lanka. S T A N D A R D C H A R T E R E D ARRANGEMENT BENEFITS CONSUMERS: Hiran H. always ensuring to bring such actions within the purport and ambit of the Law. Chief Executive Officer Clive Haswell said. for very good reason. "When the market is highly predictable and volatile only are the oil hedging arrangements important.dailynews.’ thus forming ‘a ground of judicial review. we as citizens exercising this ‘weapon’ over governmental expenditure must also tread with extreme caution in seeking such review. Decisions such as Pergau above have brought ‘uneconomic spending’ to the same level as ‘illegality. 29 April 2008 Oil hedging to continue CPC. if so whether the State (or its officials) should be held accountable and if so to whom and through what mechanism at the instance of whom – I suppose all this only time will unravel in due course.trust’ for and on behalf of the peoples of this Republic and where there is a failure to do so. Such an unhealthy trend may ultimately end up being no different to the actions complained of against an arbitrary and free spending government or their officials in the first place. using bases of audit etc as a ground for review.asp Daily News: Tuesday.lk/2008/04/29/bus01. the CPC has a good relationship with us . Therefore. traditionally ‘economy and efficiency’ have seldom been typical language of Courts. Perhaps we must also bear in mind that whilst being strengthened by the ‘leap’ of judicial and public activism on checking governmental spending. Conclusion As to whether the reported losses to CPC as a result of the hedging contracts entered would be construed as uneconomic expenditure. the judiciary would be prompt to rectify such fault. to use ‘the Law’as a basis for seeking such review and not for ourselves also to act arbitrarily in our own self interest. http://www. However.

which they hope to continue in the future," Haswell told the Daily News
Business.

Oil struck a record high of more than US$ 118 boosted by a jump in oil
demand last month from China, the world second biggest energy consumer
and worries about supply from key producers Russia and Nigeria.

Haswell said their bank has customers and where the oil industry is a huge
market we are dealing with international companies.

Therefore, the CPC has short to medium term perspective for oil hedging
arrangements to provide petroleum at a competitive price, he said.

Haswell said many companies investing in oil features, depreciation of US
dollar and increase of consumer pattern in India and China have contributed
to international oil prices to jack up.

Meanwhile, Citi Bank Sri Lanka successfully structured a fuel hedging solution
for CPC in February this year. CPC has made hedging gains of US$ 5.4 million
from these transactions for the month of March and these gains have
contributed to their efforts in maintaining local price stability.

These structures helped CPC to manage its price volatility and provide relief
from the prevailing high oil price environment, for a part of its oil imports.

Minister A. H. M. Fowzie said CPC has earned US$ 10 million through hedging
and this has helped CPC to cover some of its losses. However CPC has made
a Rs. 7 billion loss from January to April this year.

"We had our last price increase in January and till April CPC did not go for any
price increase even though the oil prices increased by US$ 20. CPC is making
a Rs. 31 loss from every diesel litre and Rs. 40 loss from a kerosene oil litre.
CPC is making Rs. 5 profit through every petrol litre but it is not sufficient in
covering our losses, the Minister said.

At the request of CPC, Citi Bank examined the company's requirements and
specific market views, and using its global expertise, worked with CPC to
structure a number of solutions that utilised CPC's view on oil prices.

Under these solutions CPC is able to buy oil at lower prices at the prevailing
global prices while assuming risks to an extent if prices should fall below
certain levels.

http://sundaytimes.lk/081123/FinancialTimes/ft331.html

The Sunday Times: Sunday November 23, 2008

Tender procedures deviated in oil deals
By an Industry Analyst

“Crisis over oil hedging
deals and CPC in debt
up to $20 million a
month” were the
headlines, respectively
in The Sunday Times
and The Sunday Times
FT on November 9.
Chairman/CPC Asantha
de Mel in response had
admitted the existence
of the hedging
contracts with the
banks and also that
CPC was fully
“educated by the
banks” of the consequences of such hedging contracts. He also had accepted
that several millions of US Dollars were due to the banks as a result of
hedging contracts and that such contractual obligations would be honoured
by the CPC. Therefore the concerned banks cannot be accused of any
unethical and/or sharp practices as implied in the articles at issue.

The banks had marketed their products and the CPC had purchased them
with the full knowledge of the implications inherent in such deals. The
doctrine “Caveat Emptor” holds good in this case as well. The fact is that the
officials of the relevant committee, who recommended the “Hedging
Contract”, had not recommended to the Cabinet the most suitable option -
the correct “Instrument” - obviously due to ignorance and had thereby
created the present financial crisis at the CPC as well as the country as a
whole. The present crisis will worsen when the CPC starts settling the
payments due to the Iranian government for the crude oil the CPC had
purchased several months back on deferred payment basis, which will be
within a couple of weeks.

When purchasing petroleum products the CPC is expected to follow a certain
tender board procedure. For the CPC to go through the formalities of the
procedure and to purchase a parcel of petroleum products from a foreign
supplier it will at least take a minimum lead time of a month. According to the
procedure the purchase price of a petroleum product will be based on the
prices prevailing in Singapore on the date of the Bill of Lading of the Tanker
carrying the particular cargo. As an example I may point out that in the
declining market if the CPC was able to arrange purchases of petroleum
products, without a hedging contract of course, to be loaded, say in the
second week (for example October 17), the position would have been as
follows:

The Singapore based FOB prices of Gas Oil (Diesel) and Gasoline (Petrol) on
Friday 17-10-2008 were:

1.Gas Oil (Diesel) with 0.25% sulphur content was US$79.70 a barrel FOB.
Assuming the freight cost would be US$2 per barrel the landed cost of a
barrel would have been approximately US$81.70, which when converted to
rupees at Rs.109 a US Dollar the landed cost of a barrel of Gas Oil would have
been Rs.8905.30. Therefore, a litre of Gas Oil would have cost the CPC
approximately Rs.56.

2.92 RON Unleaded Gasoline (Petrol) was US$71 a barrel. Assuming the
freight cost would be the same as (1) above the landed cost of a barrel would
have been approximately US$73 which when converted to rupees at Rs.109 a
US Dollar the landed cost of a barrel of Gasoline would have been Rs.7957.
Therefore, a litre of Gasoline (Petrol) would have cost the CPC approximately
Rs.50.
A “barrel” of products contain 42 US gallons and a US gallon contains 3.785
litres. Therefore, 42 x 3.785 = 158.97 litres for a barrel – say 159 litres.
Another contributory factor for the crisis at the CPC is due to resultant
adverse effects of deviations from time-tested tender procedures followed by
CPC for several decades. The said procedures ensured the credibility of the
suppliers that the CPC was dealing with. With the assumption of office by the
current Chairman/CPC, these time-tested tender procedures were changed
and/or amended to suit certain “dubious suppliers of Petroleum products and
Ship brokers”, who presumably enjoyed the patronage of certain
unscrupulous politicians. The very first deal the Chairman/CPC put through
having deviated from the time-tested “Petroleum products purchasing tender
procedure”, which ensured the credibility of the suppliers, was a disaster to
the CPC, the details of which appeared in The Sunday Times FT of October 7,
2007, under the caption “CPC to lose Rs.1.5 billion in one year”. The supplier
concerned - Titis Sampurna of Indonesia- , who was not pre-qualified and with
whom CPC have had no previous dealings, failed to perform the contract.

The CPC entered into a 1-year contract in August 2008 for the carriage of
crude oil from Kharg Island, Iran to Colombo at a rate of US$12.20 per MT.
That was the best rate received for the subject tender at that time but was a
price that CPC is contractually obliged to continue paying until July 2009, i.e.,
for fourteen (14) voyages. While the average prices received for the previous

at prices below the imported cost of the fuel thus making a loss to the CPC.654 million at the current rate of exchange. Certain remarks made by Chairman/CPC to the media in justification of the formation of the aforesaid JV are given below: 1. neither the Chairman/CPC nor Minister Fowzie. Has the Chairman/CPC achieved the above objectives? Items one and two above have been fulfilled. has been able to achieve the desired results. the incumbent Chairman/CPC. The CPC never earned a profit.CPC will provide fuel. who is said to have blessed the project. Ltd. 2.000 MT cargo.. That deal it is understood had been rejected by the relevant Cabinet Appointed Tender Board but the incumbent Chairman/CPC having by-passed all the relevant procedures had obtained the assistance of the then Secretary to the Treasury. In the “Bunker Delivery Notes” prepared by Interocean Pvt.65 million for the same freight until July next year. which carry the emblem of the CPC. Today the price the world over will pay for a Suez Max size parcel. Ltd.. So far only two voyages had been completed against this contract and with the performance of the balance twelve (12) voyages CPC will stand to lose around US$6 million or Rs. to steer through successfully another questionable Cabinet Paper.GAC Shipping will provide barges and do the marketing 3. in his wisdom. had thought it proper to enter into a long term contract without any proper knowledge of future markets. 135. whereas the CPC is contractually obliged to pay US$1. who was unceremoniously unseated from that prestigious seat at the Finance Ministry. perhaps misleading the Cabinet of Ministers too. whether a small margin or otherwise. However. Another apparent miscalculation by Minister Fowzie and Chairman/CPC – a coincidence or by design? A joint venture – CPC/GAC Shipping – came into being and its activities are to supply bunker fuels to ships calling at the Colombo Port. A perusal of the average freight rates for similar size vessels during the past years will prove this point. and to obtain the Cabinet approval for that questionable award.CPC will have a small profit margin and as a result the price of bunker fuel in Colombo will come down and the bunker sales will be increased.years for the same purpose were much less than the aforesaid rate. for ”Kharg Island – Colombo” is less than US$ 1 million. for the purpose of delivering bunker fuels to seagoing vessels it is shown that the delivery of fuel is being done “For and on Behalf of Ceylon Petroleum Corporation” thus binding the CPC for the transactions . CPC delivers the bunker fuel to Interocean Shipping Pvt. the local arm of GAC Shipping.

effectuated by this third party. When a 13. 98 million to Rs. 131 million every month. Can a third party thus bind the CPC? This note is the proof of physical supply of bunker fuel to a vessel.2 Metric Tons) is delivered to a ship by a CPC Tank Truck as aforesaid CPC earns no profit but merely incurs a loss.200 litre load of Gas Oil ( 11. for more than 50% of the bunker deliveries transacted by GAC Shipping is being currently done by making use of CPC/CPSTL owned Tank Trucks installed with Power Take-off Pumps. The Chairman/CPC should clarify as to on whose authority the Interocean Pvt Ltd displays the CPC emblem on their invoices/correspondence and as to how Interocean Pvt Ltd transacts business “for and on behalf of the CPC”. . Can anybody imagine the amount of money that the CPC is thus losing and the resultant profit earned by GAC Shipping/Interocean in supplying and delivering about 3000-4000 Metric Tons of Gas Oil monthly on a regular basis. No reconciliation of Bunker fuel sales by CPC to GAC Shipping vis-à-vis bunker fuel sales by GAC Shipping to seagoing vessels is done at the CPC. necessary for these operations. such as barges. Asantha de Mel as to why the bunker delivery operations were handed over to GAC Shipping/Interocean had been that the CPC was lacking the necessary infrastructure. it is understood that such Bunker Delivery Notes or their copies never reach the CPC for any further action. For further clarification I may point out that the Gas Oil sold to GAC Shipping in August 2008 by CPC based on the “July 2008 MOPS prices” was at US$1. In turn GAC Shipping had sold Gas Oil as bunkers to vessels at US$1355 per MT thus making a whopping profit of US$298 per MT. The loss to the CPC will be around Rs.109 for a U. Currently it is understood that GAC Shipping buys Gas Oil from CPC at US$990 per MT and sells to seagoing vessels at US$1300 per MT thereby making a huge profit of US$310 per MT. This position of both Minister Fowzie and Mr De Mel cannot be possibly true.057 per MT whereas the price at which Gas Oil was sold to the local public was at US$1207 per MT (at Rs. cannot be ruled out. such as terrorist organizations. especially after the formation of the aforesaid JV.00 at the current rate of exchange.945. On the other hand CPC by selling Gas Oil as bunker fuel to GAC Shipping makes a huge loss when compared to the “Hedged” price at which CPC imports Gas Oil.S. However. but GAC/Interocean earn a profit of US$300 X 11. Who benefits by all these? The lame excuses given by Minister Fowzie and Chairman/CPC. Another interesting question that Chairman/CPC should answer is as to why he had permitted the daughter-in-law of Minister Fowzie to attend ‘Stock Review Meetings” of the CPC. This shows to what extent the CPC has been politicized with Minister Fowzie assuming the Ministerial position covering “Petroleum”. Therefore the possibility that bunker fuels. passing on to unauthorised hands. such as Gas Oil.2 = US$ 3360 = Rs 366. thus sold. Dollar).

incompetence and lack of foresight of those square pegs in round holes. will be forced to buy its crude at a higher cost than the $90 per barrel at which price it purchased crude oil in February. domestic fuel prices will be controlled due to the various profits made by the CPC over the past few months.In the face of the recent Supreme Court judgments. for which the public is committed to pay for the arrogance. the government should scrutinize those long term contracts entered into by public officials of the calibre of the incumbent Chairman/CPC. He said that the CPC had received Rs.lk/080316/News/news0010. which purchases crude oil at a monthly average rate. had been exposed of corruption. International crude oil prices hit a high of US $111 per barrel on Thursday before settling a little below $110. The CPC. where several high profile public figures. 2008 Vol. CPC Chairman Ashantha De Mel told The Sunday Times that despite the worrying trend in the world market. mainly attributed to the interest rate cuts in the US and the weakening US dollar. http://sundaytimes. including a one time Head of State. 42 .600 million in revenue due to futures hedging while an additional profit of around Rs.html The Sunday Times: ISSN: 1391 – 0531 Sunday March 16.600 million from the refinery .No 42 Oil hike likely as world prices soar By Malik Gunatilleke Record breaking international crude oil prices spark concern for local consumers as the Ceylon Petroleum Corporation (CPC) will purchase fuel at a much higher cost in March and April.

The CPC purchases its fuel at an monthly average price which is bound to increase due to the rising international oil prices which Mr.200 cheaper than its competitors in the domestic LPG market. he said that the trend in the international market shows that the crude oil prices could well rise above the $120 mark in the near future.13 billion while subsidizing the rates at which diesel and kerosene should be sold. However.“Still.” he said. However.55 on a litre of petrol. the CPC will take efforts to begin production as soon as possible as it has already ordered 10. Petroleum and Petroleum Resources Minister A.250 million had been invested in the project while its initial target would be to produce 10% of the domestic demand.18 above the market price helping the CPC rake in Rs. Addressing a media gathering. Petrol consumers pay Rs.47 per litre of diesel and Rs. LGPL currently purchases 30% of its base product from the CPC while the rest is imported with added freight charges.“We currently have some stock which we purchased at lower rates than the current prices and we will take a decision on whether to revise the prices after the New Year depending on the world market. DeMel said would be a huge increase from February. the consumption of diesel has sky-rocketed to as much as 145 million litres a month while petrol consumption is only 40 million litres causing even greater losses for the CPC.” he said. through its refinery and hedging profits and would assess the situation in April.1. with the CPC producing only 10% of the market . However. The CPC loses Rs. He said the CPC would cover what losses it would make from keeping the current prices. Fowzie said that the prices will not be revised until after the Sinhala- Tamil New Year in April. with the profits we have been making we will be able to keep the current prices unchanged.H.000 cylinders while an additional 40. CPC Chairman Ashantha DeMel said that he is confident that the project will take off by May or June while stating that the profits of the LPG business will be put into further subsidizing fuel for domestic consumers.18.750 million in profits while petrol consumers also play the dual role of subsidizing diesel and kerosene.M.50 per litre of kerosene while making a profit of Rs. The CPC announced that Rs. LGPL will be forced to increase its prices to even higher than Shell Gas as it would be forced to import 100% of its product. Despite fervent protests by Laugfs Gas Pvt Ltd (LGPL).11. Small mercies from CPC The CPC announced that it will be able to sell its brand of LP Gas at around Rs. With CPC entering the LP Gas market.000 cylinders will be imported in two months.15.would help the CPC cut down losses of Rs.

Fuel is the single largest imported commodity to the island.demand and targeting 40% of demand in another three years. "We want to put a press advertisement in all the papers and explain to the public how it works. so that everybody knows the formula." de Mel said. an official said. Ceylon Petroleum Corporation (CPC) Chairman Ashantha de Mel says a cabinet sub-committee on energy had agreed to monthly price adjustments. "Last month the price increased. which was made worse by fuel subsidies.com/fullstory. http://www.php? newsID=219541551&no_view=1&SEARCH_TERM=4 Mon. and the last price increase was made on that basis. "The sub-committee agreement was that the price of fuel would be adjusted on a monthly basis." Sri Lanka devised a monthly price formula as part of a strategy to bring the country out of a balance of payments crisis in 1999 and 2000. which is expected to reduce exchange rate pressure and avoid the build-up of macro-economic imbalances. the bulk of the consumers may be forced to purchase gas at higher prices. 2007 07:38:46 Sri Lanka to adjust fuel prices monthly July 16. "There is nothing for us to hide.lankabusinessonline." Transparent De Mel says the formula would be published in newspapers and price adjustments made at the beginning of every month. 2007 (LBO) – Sri Lanka will adjust fuel prices monthly on a transparent formula to cut losses in petroleum utilities. ." he said. and it will go on a formula. 09 March 2009 14:03:21 Monthlies 16 Jul.

Diesel is sold at 71. while the cost is 70. De Mel says the airline has been given time to settle.2 billion rupees with 9. Economists point out that under-pricing fuel for which dollar payments have to be made and funding losses with rupee bank-debt creates pressure on the exchange rate.90 rupees per litre but is sold at 111.6 billion rupees unpaid for more than a year.00. Debtors The CPC has debtors of 30. Reducing losses at CPC will also prevent pressure building up on the exchange rate. but the new formula will give just 1. but losses in the power utility Ceylon Electricity Board (CEB). remains a worry.00 while the cost is now 74. Sri Lanka promptly went into a balance of payments crisis again with reserves dwindling.00 rupees.00 indicating a loss of 3.1 billion rupees followed by independent power producers who owe 3. . but it was abandoned in 2004 under pressure from the Marxist- Nationalist Janatha Vimukthi Peramuna which called it a 'plug' to the world market. though it only has a bank guarantee to cover 20 million rupees worth of fuel. a unit of Indian Oil Corporation which has a third of the market.5 percent. while the rupee fell from 96 to the dollar to 105 and inflation shot up from almost zero to double digits within months as the government printed money to import oil. Sri Lanka's rupee has been under pressure in the last two months and the Central Bank had to intervene in the market to keep the rupee stable. owes the firm 50 million rupees.8 billion due for over six months and 4. Formula The earlier formula gave a margin of five percent to petroleum firms.In 2002 and 2003 economic stability was restored partly with the help of the formula.8 billion rupees and the Sri Lanka Navy which owes 3 billion rupees. CEB is the biggest debtor with 17. giving an extra 1. De Mel says CPC is now operating by setting off a part of the losses with refinery profits which is about 200 million rupees a month. Kerosene is sold at 67. The controversial state-owned airline Mihin Air.00. which has not been allowed to raise tariffs.60.10 rupees to state-owned CPC and also Lanka IOC. Petrol now costs 109.

while diesel is used by businesses. . The government says electricity tariffs would not be adjusted till the end of the year. The policy has come under fire from critics.CPC is also forced to sell diesel to CEB 25 percent below cost. who point out that petrol is used largely by motorcycle users and small cars. and richer sections of society who can afford large diesel SUVs including politicians. Sri Lanka already overcharges petrol users in order to under-price diesel. De Mel says the cost will have to be recovered by overpricing other products if CPC is not allowed to market price products to CEB.

All other countries in the region are moving ahead but our masters are still on the mats playing games and watching price hikes fuel wastage in traffic jams. Car numbers changed from original English to Sinhala and changed back to English again. The Petrol Tax should be gradually reduced and the same increased ( again gradually for political reasons) for diesel and other oils. comes again and may also go off again. In energy. pricing formula came in. introduced subsidies. Jul 20 They should cover at least the cost of all products. restrictions. Can anyone rise and stop these nonesense and try to pull the country up by saving energy. use of road ways for holding meetings. parking at will anywhere they wish. Why on earth administrators play games of this sort? They are supposed to be experts with good literacy rate capable of reading and understanding to introduce the best way of managing the economy. There are thousands to support such efforts. abolished. indiscipline driving. V U Ratnayake Jul 17 Sri Lanka seems to be moving in circles in all spheres of activities. now moving back to do without the subsidy. 2. Khizer Jul 16 Finally.READER COMMENT(S) 4. Dr. Now its time to clean up the CEB. I think we are moving in the right direction. However the taxes also shold be of a reasonable and equitable percentage. Prices were earlier based on market prices. selling goods and all human activities on the road side which is meant only for transport. Wouldn't life be simpler if we were consistent in our infrastructure policies? Wouldn't it be civilized to admit error in throwing out the formula in the first place? 1. some sort of sense has got into the heads of these people. . 3. Recall who opposed it? Hint: same person who promised to pull the plug from the world economy. Rohan Samarajiva Jul 16 Deja vu. cross cutting lanes. Recall when the formula was introduced? 2002. private busses dragging feet and holding others.

http://www. Wickremesinghe said.Ranil vows in a press meet Tue. most media have stopped short of exposing corrupt deals like this hedging agreement in an attempt at whitewashing the government. "We have also found out about an attempt to destroy important documents relating to this agreement and I have requested the Speaker to take action to protect all these documents at the Ministry of Finance. going into details said that. that under a future UNP regime all such corrupt agreements will be discontinued. (Asiantribune. 2008-12-02 05:33 By Ruwan Weerakoon – for Asian Tribune Ranil WickramasingheColombo.200.com/?q=node/14503 UNP to censure the Government . Minister A. Central Bank.000 million in debt. And he further asked whether the Daily Mirror belongs to the Wijaya Group or the Jathika Hela Urumaya. Ranil Wickramasinghe said that DM journalist Kesara Abeywardena had called him an ‘ineffectual leader’ and said that this journalist had written that “UNP cannot gain power under my leadership and I would like ask the media what they had written about this hedging deal”. 02 December. Mr.00 each and that the CPC is already Rs. .asiantribune. Taking a snipe at the media he said that. the UNP will move a no confidence motion against the entire government.Fowzie submitted the cabinet paper on the 13th January 2007 and the cabinet approved it. they now have all the documentary evidence to prove that all the Cabinet Ministers including the President as the Finance Minister were aware of this story of the “Hedging Deal” before it was signed and therefore. CPC may have to be sold or closed down and also that this money will have to be paid the innocent people of this country.000. In replying to a question. The opposition leader. He said that. he says.10. The opposition leader further said that. Responding to another question by the Daily Mirror.com): The leader of the opposition Ranil Wickramasinghe.H. As such. in a press conference held today pointed out that. Ministry of Petroleum Resources and the CPC". they accept the Supreme Court ruling that suspended the hedging agreement signed by the CPC as this deal prevents the lowering of local prices when world market prices decline. He also gave details of many other letters and documents sent by one official to the other regarding this deal.M. due to this deal every Sri Lankan citizen will be in debt for Rs.

an order the government turned down. The cabinet of Ministers led by the President decided to grant Rs. 100. In line with the interim injunction. The Chief Justice further said that the hearing of the fundamental rights petition against fuel hedging would be suspended. In relation to the hedging agreement signed by the Chairman of the CPC. January 27. The orders to suspend the payments to the foreign banks. the Supreme Court ordered the price of a liter of petrol be reduced to Rs. hedging ban suspended since people were not given relief (irida-peraliya-News.com/ Hard response from Supreme Court. According to CPC sources. 95 per liter of petrol until June 2009. 20 subsidy for four liters of petrol per day limited to 70 liters maximum per month to the trishaw owners and to reduce the general retail price of petrol by two rupees. the government has to pay Rs. .He further adds saying ‘he has more to tell the DM editor but that. Further $ 48 a barrel should be paid for the last month and $ 48 per barrel for the previous month. The government will have to pay 500 million US dollars to the foreign banks due to the revoke of injunction. to subject the Ministry of Petroleum to the jurisdiction of the President and to remove Ceylon Petroleum Corporation (CPC) Chairman Asantha de Mel from the post would also be repealed. he doesn't want to tell it at that moment and place’ and left us guessing.Asian Tribune - http://www. Silva said that the interim order was revoked since maintaining that injunction was pointless in the context the executive ignoring the judiciary rulings. Current price of a barrel of petroleum is $ 45. Petroleum price last month was $ 35 per barrel.iridaperaliya. Petroleum price declined to $ 37 two months ago. .40 PM) Supreme Court today (27) revoked the interim injunction against fuel hedging. it will have to pay around $ 18 million extra per month to banks for fuel due to hedging agreement.000 barrels of fuel per month. 2009. The CPC will have to pay a surcharge of $ 50 per barrel this month in accordance with the agreement with the hedgers. 4. Chief Justice Sarath N. CPC has to purchase 200. said the Chief Justice.

“It is an order from Sri Lanka’s highest court. 122 a litre. 100 a litre. Non-Cabinet Media Minister. a spokesman for the Government. In marked contrast to the actions of the Indian-owned company. CPC distributors will also turn to LIOC to obtain their stocks.” he said. We had to comply with it. “If the Government does not bring down the price of petrol. joined in the fray by demanding that the Government should comply with the Supreme Court order. the state- owned Ceylon Petroleum Corporation (CPC) is yet to comply with the ruling and is selling petrol at Rs. CPC fuel stations shut The Government’s dilemma over enforcing a Supreme Court order to lower the price of petrol worsened yesterday as the Lanka-India Oil Company (LIOC) recorded unprecedented sales after it complied with the order and reduced the price to Rs. 2008 Lanka’s petrol price crisis blazes Indian move compounds Govt. Ganegala to apprise him of the LIOC’s decision.html The Sunday Times: Sunday December 21. a combined body of trade unions.J.sundaytimes. . Kumar added that he had met Petroleum Resources Ministry Secretary W. Lakshman Yapa Abeywardena. Yesterday. the artificial shortage of petrol continued countrywide yesterday with almost all CPC fuel distribution outlets remaining closed. Mr.http://www. most distributors said yesterday they were worried they would suffer a loss if the prices changed soon after they acquired new stocks.lk/081221/News/sundaytimesnews_01. He said the matter would be taken up at the weekly Cabinet meeting on Wednesday and not earlier.” Union Secretary D. Instead. The Government yesterday utilised the services of the Police to persuade CPC fuel stations to replenish their stocks and sell petrol at Rs 122 a litre. told The Sunday Times there would be no change in the price of petrol distributed by the CPC. the Ceylon Petroleum Common Service Union. As a result.B. They have also been warned by CPC officials that their dealerships would face cancellation if stocks were not immediately obtained. Rajakaruna warned.’s dilemma. LIOC Managing Director Suresh Kumar said yesterday a copy of the Supreme Court determination was delivered to him on Friday afternoon.

a subsidiary of the CPC. Ganegala who is also the secretary of the Ministry of Petroleum Resources on Friday visited the premises in Kolonnawa. Ganegala time for a discussion. As risk exposure reduces the producer’s appeal to investors and makes gaining access to debt markets more difficult. W. if we cannot sell them?” “The motorists will go to LIOC outlets where the price is cheaper. but said they were willing to have a discussion with him at the ministry in his capacity as secretary. This exposure to such risk is enough to increase a company’s costs or dramatically reduce its profits. they had cancelled them later. http://www. the need to efficiently manage . but employees refused to allow him into the office. Although 73 CPC dealers had placed orders for petrol stocks. They said that having two separate chairmen could complicate the functions of the corporations and they would consider strike action if the new chairman was not removed by Tuesday. One of them who spoke on condition of anonymity asked: “What is the use of our buying new stocks. Officials there warned that the refinery might be forced to shut down until stocks remaining in the tanks were moved out.” he said.sempracommodities. The distributor did not wish to be identified for fears of his dealership being cancelled – a warning which the Marketing Division of the CPC has reportedly issued to its outlets.asp Hedging Strategies for Oil Producers Oil producers operate in an environment subject to adverse price movement in the international oil market. The union claimed there was no need for a separate chairman as the CPC chairman could oversee duties of the company which played a vital role in fuel distribution.com/oil_producers.B. Unions add fire to fuel over new boss Ceylon Petroleum Corporation (CPC) unions have set a Tuesday deadline for the government to remove the newly-appointed Chairman of the Ceylon Petroleum Storage Terminals Ltd (SPSTL). The union leader on Friday also refused to grant Mr. The new Chairman.Compounding the issue was the surplus production at the Sapugaskanda Oil Refinery. Distributors of CPC fuel products were reluctant to obtain new fuel stocks.

Why Hedge? Figures 1 & 2 show recent historical volatility of crude prices. Fixed for Floating Swaps Participation Swaps Spread Swaps Caps and Floors Collars Hybrid Strategies Figure 1. Secures company objectives Enables management to measure performance Doing nothing to manage risk is in itself a risky move. A comparison of crude and heating oil historical volatilities with those of metals or financial assets shows that oil is one of the most volatile of all commodities. we discuss several swap and option based strategies that oil producers can use to manage their market risk.exposure to fluctuating commodity prices is clearly one of the greatest challenges facing an exploration and production company today. In this presentation. Hedging periods and protection levels can be customized to fit any maturity and price level. ("SET") can also offer hedgi ng instruments in other major currencies. All of these strategies can be structured for a variety of international crudes and products. dollars. Reduces cost of capital 2.S. WTI 20-Day Moving Average: 1996-2007 . forward crude prices are extremely difficult to predict and subject to rapid and significant change. As can be seen from these figures. Sempra Energy Trading ® Corp. • Stake holders prefer companies that perform as planned • Hedging stabilizes cash flows 1. While the examples in this presentation are denominated in U.

Average of 20-Day Historical Volatility (In Percent) .Figure 2.

http://www. Nov 28.com/2007/11/28/stories/2007112850990900 .htm Business Daily from THE HINDU group of publications Wednesday. B. Kapali The sharp rise in oil and other commodity prices over the past several months and its possible adverse impact on inflation/inflation expectations has been a matter of deep concern to governments and policy makers the world .thehindubusinessline. 2007 Why not hedge away oil price shocks? T.

Blind alley The oil companies possibly are bearing the brunt of the policy-makers’ reluctance to subject the domestic price level to the full force of international/market prices. In a complex social and political environment. Indeed. Indian crude imports were around 90 million tonnes. The exercise to attain that. To be sure. In 2006-07. alternative solutions. even though the global oil derivatives markets provide a very good platform for hedging for both oil producers and consumers — with contracts stretching out as far as 10 years — the use of this market for hedging has been historically limited.over. for instance. may also be market-related. de facto. . This concern has been particularly acute in emerging economies such as India. How to reconcile the soaring energy requirements of a rapidly expanding economy and the inevitable price pressures brought on by such surging demand with the objective of non-inflationary growth? As has been pointed out by the Reserve Bank of India. But what is surprising about the oil debate is that there seems to be not much of a focus on interim. Debate and discussion on oil pricing is endless. it is surprising that the oil companies have not attempted to more fully hedge the risks of rising raw material prices and attempted to fix their input costs. though. though it seems futile as all debate finally zeroes in on a market- driven pricing mechanism as the only panacea. Hedging input costs In a scenario where there are constraints on end-product prices on the selling side. It (market-determined end product prices) may be the ideal solution. the greatest challenge now is to manage the transition to a higher level of economic growth without entrenching higher inflation expectations. could be painful for many economic agents in the interim — such as the Indian oil companies for instance. it does not appear conceivable that the oil pricing mechanism will move to a market-driven format any time soon. which. was officially dismantled earlier in this decade but is now again well in operation. Double-digit economic growth and stable/low inflation (around 4 per cent) may not be mutually exclusive objectives. incidentally. the hedging ratio of Indian companies is no different from what prevails globally. The APM. An analysis of petroleum statistics shows that only around 3-4 per cent of the total imports of crude oil are being hedged by the oil companies.

Against that. On the production side. Costs and calculation It is this divergence between the futures curve and realised spot prices which should provide a powerful incentive for big consumers such as India to have a . as far as consumers are concerned. has proved that the futures price curve — for assets which carry a high degree of positive systematic risk — may be significantly understating the expected future spot price of the asset. as on November 7. the curve does not necessarily capture the future spot price to any degree of accuracy. 2007. in a competitive environment. it does not make sense for individual companies to do so. many countries with state-owned producers also do not hedge their future production. the total volume of outstanding futures contracts (the open interest) for various forward maturities up to December 2008 on the NYMEX and the ICE amounted to around 1. Airline companies. while oil (because of the high convenience yields associated with holding physical stocks) displays an inverted forward price curve (backwardation). As far as consumers are concerned. crude production in the next 12 months will be around 30 billion barrels (assuming a production of 85 million barrels per day – the current figure) giving a hedge ratio of around 6 per cent. do not have forward markets for airline tickets. This has been the case historically also. Reasons for low hedging There are a number of structural reasons for the low level of hedging by both oil producers and consumers globally. Where input price pressures can be passed on to the selling side. the incentive for hedging is weak. indicated the forward price for maturities up to December 2007 to be in the range of $60/62. Also.8 billion barrels. the price of airline tickets will vary in future with the spot price of oil. This is quite understandable given the structural trend in oil prices over the past many years. Companies which do not follow industry practice will be subjecting their earnings to greater variability.For instance. More generally. Indeed. the futures price curve in February 2006. That is. oil. for instance. Even commercial oil producers such as an Exxon or BP are not in the market for hedging in any noticeable way. For instance. But where are spot prices now? And such divergences between the futures curve and the realised spot prices have occurred many times in the past also. the absence of hedging markets with respect to their end products on the selling side inherently limits their hedging. when spot oil was quoting around $53/55. more than possibly any other commodity. unless all players in an industry hedge their consumption of oil.

These are his personal views. 2009 Oil hedging fiasco – need for a bigger probe . the input oil costs would have been hedged and fixed based on the futures price curve which prevailed in February/March 2006. (The author is Vice-President (Research). of course. The “industry competitors” argument does not anyway apply here because of the constraints in end- product pricing. Shriram Group Companies. of course. This margin deposit would have earned some interest (say 3. the entire Indian import of 90 million tonnes in 2006-07 would have involved a margin outlay of around $4.sundaytimes.lk/090222/FinancialTimes/ft309. And unless oil prices fall. the companies would have been able to take back a good part of the margin deposits as mark-to-market profits on the futures positions (over and above the maintenance margins). is quite easy in hindsight to point out all this. will be immediate. It is also important to remember that hedging need not always provide the most optimal solutions.) http://www. More had been issued in the earlier years also. It may have been possible then to hold the line on end-product prices as the hedging on the input side effectively lowers the costs relative to the prevailing spot market. And. on the other hand. who is to fund the cash outlay on the margins required on long futures positions? Note that the Government issued oil bonds worth at least Rs 12. A policy of “no hedging and issuing oil bonds”. the absence of a debate on how India as a big consuming nation can hedge its oil price risks is somewhat disconcerting.5/4 per cent) and given the structural trend in prices. still.structured hedging programme in place.000-13. Chennai. The cash outflow for placing margins. Most importantly. What are the costs of hedging? Assuming the current margin costs of around $6500 per contract of 1000 barrels. based on the then spot price of around $55. But.html The Sunday Times: Sunday February 22. And there may be a number of operational issues (key among them being the level of hedging interest among oil producers) to be tackled before Indian companies can institute a structured hedging programme. A hedging policy could mean that. the importer is able to fix his costs.000 crore in 2006-07. The advantage still is that with hedging. an equivalent amount of money goes into margin deposits. means that the quantum of bonds (to be) issued could be open-ended.5 billion – that is around Rs18. instead of oil bonds. It.000 crore – if Indian companies had taken long hedges on the NYMEX in early 2006. there would be no more cash outflow on account of margin calls.

The period during which these niceties and goodies have exchanged perfectly coincide with the brooding and hatching of this heinous operation. No action appears to have been taken against these officers despite the fact that such activities constitute unethical practices which warrant a reprimand and severe punishments under disciplinary codes. the public vigilantly watching the episode are badly disappointed. The modus operandi has been heavily canvassed by the banks on behalf of their hedging principles behind the scene with very generous ex-gratias. including foreign trips. Although the impugned activities warrant immediate reprimand nothing of the sort seems to be happening. The relevant authorities appear to have ignored and disregarded these pronouncements. While the reason for not initiating disciplinary action against them is not known. Standard Chartered. a court order to reduce the price of petrol. entertainments and bribes to others. .By T.. sumptuous meals and hosting for other nefarious activities seem to have crossed the borders.” situation! The impugned oil hedging agreements with five banks viz. culprits responsible for the sordid transactions walking away ignoring public opinion and escaping the legal net – all in relation to the oil hedging imbroglio is now part of the history of this country. There is also enough proof in the form of payment vouchers of the air tickets provided to certain public officials. Money has allegedly flown in to ‘grease’ those responsible for making the necessary recommendations from top to bottom. golf games in Singapore. Deusche. Rusiripala Stunning revelations about an unprecedented deal running into millions of dollars. Whether the case will be consigned to the political dustbin is a matter for conjecture. The fact that this expenditure bill has been footed by one of the banks involved in the deal is of noteworthy significance. night clubs. Ministerial tours. Further it has come to light that these agreements made CPC a casualty making it liable to pay millions of dollars to the counterparts due to lack of built-in safeguards to cover the risk exposure of the CPC. The Central Bank of Sri Lanka (CB) too has pointed out several lapses and short comings on the part of the banks in this regard. Commercial and People’s have been concluded after lengthy and protracted negotiations preceding the sealing stage. The Supreme Court in no uncertain terms has held that the agreements were flawed and the role of the officials involved were questionable. Citi. For the banks these agreements were like –“ heads I win and tails you lose…. Will the tax payers finally pick-up the bill for clearing up the mess? The deal It is no secret now that the CPC (Ceylon Petroleum Corporation) entered into several questionable agreements with some foreign and local banks in respect of oil imports to the country.

The resulting loss to the country will be huge and unbearable.2008. . The CB. the agreements have become valid once again. But the immunity they seem to enjoy appears to be strong to provide them the protection for a scot. The CB has stated that these non – compliances extend to directions issued by the Controller of Exchange too.The huge liability accruing due to these agreements continue to grow to huge amounts. Two of the payment voucher copies happened to be in respect of air tickets issued to two senior officials of the Peoples Bank both of whom are directly involved in the hedging transactions. The landmark order of the Supreme Court was welcomed with a sigh of relief by the general public.Particularly the aspersions cast by the CB on the role of the People’s Bank. A proper investigation will no doubt trigger events that may lead to shocking violations and gross dereliction of public duty on the part of the officials involved for obvious personal reasons. in terms of Section 29(1) of the Monetary law Act about the hedging agreements between the CPC and several licensed commercial banks. banks have not been fully compliant with the provisions in their directions issued as far back as December 2005 on financial derivative products. Unless they are specifically declared ab-initio bad in law. After the Supreme Court vacated interim decisions made in the hedging case and dismissed the petitions due to the failure of the government to implement the court decisions relating to fuel pricing. People expected the government to take immediate appropriate action to safeguard the public interest but unfortunately it did not so happen. Their validity continues in some cases till Nov 2009. null and void. . all parties become liable under these agreements. which are said to be one sided and heavily in favour of the banks.free walk away.Failure to communicate to CPC the risks of using the underlying hedging contracts for speculative purposes. The sordid affairs underlying the transactions as revealed caused shock waves throughout the country. Effects of hedging agreements The agreements entered into with five banks remain in force to date.Failure to carry out the Credit risk. The Central Bank has indicated the following lapses on the part of the banks-: . being a state owned institution are serious. Market Risk and Operational Risk assessments. has pointed out that as Authorized Dealers. following a initial examination which commenced on 17th Nov. As reported the current commitment of the CPC is well over $800 million.

But according to the circumstances if the agreement has to be abrogated or cancelled it is a different story. According to newspaper reports the CB has arrived at the conclusion that the CPC should not honour its hedging obligations. Whether paid immediately or on a staggered basis. There is no reason for international investors or donors to get offended on a issue like that. There are instances where the banks had to abandon claims on customers due to faulty documentations.Failure to adhere to meet the required eligibility criteria (in the case of the PB only) . . It is also rumoured that the banks are pursuing the possibility of securing these payments even on a delayed basis by offering to reschedule the liability on a restructuring plan.Failure to ascertain CPC’s ability to fulfill its obligations arising from the downside risks associated with these hedging contracts. If it is found that the banks have violated some regulation or practice those officers responsible for the matters would be dealt with by the banks but the banks cannot refuse to absorb the underlying risk liability in such instances. Banks are reacting differently in order to get their share and demanding the commitments due to them by the CPC. Some economists and experts have opined that a default in these payments by the CPC could shake the investor sentiment in Sri Lanka leading to negative repercussions internationally. This is not a tenable argument. the loss to the country on these faulty contracts remains the same. norms. It is not an uncommon thing or experience for banks whether local or international to face such eventualities. . The ostensible extension of a so-called facility to stagger the repayment has to be understood in its correct perspective. They may also be applying pressure on the authorities to decide in their favour.. A private bank committing an error in the preparation of an agreement enforceable in law will have to face the consequences of such lapses or errors when the matters are challenged. practices and even directives by the . In fact in this instance it is very clear that both banks and CPC have violated procedures. Whether the CB ruling is strong enough to stop the payments due to the banks on these agreements is yet to be seen. The CPC too as reported has not followed proper procedures before entering into hedging contracts such as by not consulting the AG and obtaining his opinion before going ahead with the sealing of these contracts. In the first place no one is suggesting that the CPC should default the payment.Failure to ensure a high level of transparency with respect to risks and other parameters associated with the contracts.

From what has transpired so far in this regard. It is best that the parties to the agreements resolve the issue amicably among them mutually.com/fullstory. It is difficult to exaggerate the severity of the continuing effects of these faulted agreements and the adversity of their direct impact to the economy of the country. lower by 0. 17 March 2009 16:03:09 Flat Rate 06 Mar. While a cancellation may not lead to any crisis or calamity as made out by some. Now a ministerial committee has been appointed to look at the possibility of a re-negotiation of the hedging contracts. Rule of Law excludes the existence of arbitrariness of prerogative or wide discretionary authority on the part of the government.lankabusinessonline.8 percent to 43. http://www. the powers of the government will best be exercised with the Golden Rule of Law as opposed to the uncertain and much doubted cord of discretion. 2009 18:50:51 Sri Lanka Commercial Bank net flat in 2008 Mar 06. On the other hand if due to some public interest intervention a court has to declare the agreements are flawed.9 billion rupees. foolhardy action taken by interested parties together in connivance to defraud the country not amounting to a genuine step to safeguard either public interest or even the business interest of the CPC. 2009 (LBO) – Commercial Bank of Ceylon group has reported profits of 4. with revenues growing 24. and President of the People’s Bank Pensioners Association). what can the parties to the agreements do. bad in law and therefore not valid. the continuation of the agreements would definitely be disastrous to the country.7 percent. It is a unilateral.making the agreements bad with regard to their acceptability.9 million rupees for the year ended December 2008. The contagion that spread with the revelations of the underlying corruptions related to these transactions is having a worse international critical impact compared to the consequences of an abrogation of such a tainted contract.regulating authorities.118. .php?nid=2020506078 Tue. (The writer is a former chairman of the Bank of Ceylon and the National Gem and Jewellery Authority.

" Gooneratne.44 percent to 24.1 percent to 1. The bank said a charge of 692. Commercial Bank's loan loss provisions increased 28.87 percent." Commercial Bank managing director Amitha Gooneratne said in a statement. .71 billion rupees and other income grew 84. "Trying to carry this same performance into 2008 and to push the bar even higher was a tough task.3 percent to 12. much higher than most other countries and contrary to international best practices.3 billion and net interest income grew 11." Foreign exchange income grew 70.5 million rupee profit came from the sale of a stake in Commercial Leasing Company. "Higher provisioning for debt.19 percent and its cost to income ratio had risen to 50.461 percent from 47. a slower growth in advances and a significant increase in Financial VAT (value added tax) slowed our growth rate.39 billion rupees including 699. interest expense grew 28.63 billion rupees. The bank's Bangladesh unit brought 1.019 million rupees at pretax level and 539 million rupee after tax to the bottom line. and a 405.1 percent to 2.5 percent interest on defaulted payments of 21.96 per cent to 5.9 percent to 37.Group interest income grew 21. The exposure on oil hedging deals were valued at 3.2 billion rupees. The non-performing loans ratio increased from 2.4 percent to 2. fees and commissions grew 13.9 percent to 2. Banks in Sri Lanka are subject to a high incidence of tax. despite a solid performance in some other areas.02 million US dollars.27 billion rupees. "We posted a strong performance in 2007 despite the unfavorable economic and political climate. State-run Ceylon Petroleum Corporation (CPC) stopped payments under oil hedges to Commercial Bank and state-run People's Bank also stopped paying Commercial Bank on a derivative re-sold to CPC.89 billion rupees.1 million rupees was made for petroleum derivatives.397 million rupees by December 2008. People's Bank had gone to court to stop Commercial Bank setting off a 15 million US dollar deposit and claim 1. In Sri Lanka banks pays a so-called 'financial VAT' which is non-recoverable de facto income tax.7 million rupees in bad debt recoveries.

UNP Kandy District MP and former Plantation Industries Minister in the abridged 2001 -2003 Ranil Wickremesinghe Government.79 billion rupees.2 billion rupees.2 billion with a further US$ 1 billion needed for the repayment of short term debts. which it unreservedly condemned while in Opposition. He also charged that the Current Account Deficit by the end of the year would be an estimated US$ 2. (Asiantribune.8 billion rupees. The MP also noted that the economic scenario would be further dimmer by mid 2009 with the export revenue and foreign remittances likely to take a . Lakshman Kiriella told a news conference.Loans and advances grew 4. Addressing journalists at the party’s Marcus Fernando Mawatha. Colombo 7 office this morning.6 percent to 26. 2009-03-11 15:12 By Ravi Ladduwahetty – From Sri Lanka Colombo. Total deposits grew 9. the very same IMF which it chased out of Sri Lanka three years ago.the United National Party today charged that the United People’s Freedom Alliance Government of President Mahinda Rajapaksa was bankrupt and rock bottom without the International Monetary Fund. (Error corrected/Total revenue) http://www. Gross assets grew 4. "The Government members are outright hypocrites as they said that the they would never seek the assistance of the international donor community but they had to go to the IMF with the begging bowl.com/?q=node/16020 Sri Lanka: UNP berates on the Governments fiscal policy and current monetary situation Wed.1 percent to 199. There is a further US$ 800 million needed by the Ceylon Petroleum Corporation’s payments to the banks as per the Hedging Agreements for petroleum contracts which will totals to US $ 4 billion.9 percent to 281.7 percent to 167. 11 March.asiantribune. he said that the Government was in absolute desperation as it needed US$ 4 billion to meet the 2009 expenditure and had no alternative but to go to the IMF in the light of the banks refusing to lend money to the Government and also the state being unable to draw the remittances of the expatriate employees in the Gulf.5 billion rupees and net assets grew 7.com): The main Opposition Party.

sundaytimes. he charged.93% in 2007. and an inflation rate that hovered around 20 % for most of the 2008. which is an outright joke. Kiriella claimed.further dip while the international oil prices were likely to have a further increase. said it has once again demonstrated its resilience in the financial year ended December 31. .96% in 2008 compared to 0. He also reminded that 52 donors pledged US$ 4. has been caught lying through his teeth.633 billion mainly due to higher gains realized from forward foreign exchange deals transacted during the year and also due to depreciation of the Rupee against US Dollar by 3.lk/090315/FinancialTimes/ft326. He said that the UNP will go public when the conditions of the IMF package would be released.46% to reach Rs 2.Asian Tribune - http://www. he charged. . The Central Bank Governor Ajit Nivaard Cabraal. a Bank press release said. The Government turned towards India and China and when that too failed it is now turning to Libya. 2009 Commercial Bank resilient in 2008 The Commercial Bank of Ceylon PLC. Foreign exchange profits recorded a phenomenal growth of 70.html The Sunday Times: Sunday March 15. when he is now saying that it is the IMF which offered the assistance without the Central bank and the Government even asking. The Government also borrowed US$ 500 million from HSBC which it lapped up in a fortnight and they asked for a further US$ 600 million from the expatriate community and the Government was unable to raise even 1% of that. 2008 despite global and local volatilities. who pledged that the Government would never ever seek the assistance of the IMF even two weeks before the funds were pledged.5 billion to the Ranil Wickremesinghe Government after the Cease Fire Agreement was signed and it was this very same Government while in Opposition which alleged that the UNF was compromising the interests of the country.

The bank’s Managing Director/CEO. said in the annual report that this profit was one of the highest in the entire banking industry for 2008 and said that given the circumstances these earnings were a "remarkable achievement.2% over the previous year mainly due to profit made on disposal of shares of Commercial Leasing Company PLC. a lean organisational structure and a motivated management team and workforce. a former associate of the Bank.html Record earnings for the year. a fully owned subsidiary. Mr. Rajendra Theagarajah. The Bank with its well-structured processes. The pre-tax profit of the Bank has been arrived at after charging Rs 692.531 million in profit on sale of Bank’s stake in its shares of Commercial Leasing Company PLC. were less by Rs.16 % over the pre-tax profit for the previous year. its highest ever in the year ended December 31. that the Bank has managed to perform.” he added.104 billion recorded in 2007. said.162 million in payments made on account of oil hedging transactions and after recognizing Rs 405.268 billion compared to Rs 4.520 billion for the year. and HNB Securities which was 50. The Bank’s profit after tax and financial VAT stood at Rs.815 million or 12. disciplines and work culture will ride these rough seas and continue to deliver value to all our stakeholders. and perform creditably in these years is satisfying. 2008.4. it said. http://www. and due to higher recovery of loans provided in previous years. product innovation.2 billion. This was due to the divestiture of HNB Stockbrokers. the war and low business confidence have made things hard for the industry. optimum liquidity.3.01% owned by the bank to a newly formed joint venture with DFCC Bank which .” the Chairman of the Commercial Bank Mahendra Amarasuriya said.Other income recorded a growth of 99. up from Rs. “Although the operating environment in Sri Lanka has been tough for many years where rising oil prices. Commercial Bank reported a profit before tax and after financial VAT of Rs.2 million than that of the bank. as expected.7. up by Rs. healthy capital adequacy ratios." Theagarajah said that the group earnings.3 billion a year earlier despite the many constraints and challenges faced during the year.lk/2009/03/08/business1. high inflation.island. regional expansion in pipeline HNB claims one of the highest commercial banking profit in 2008 Hatton National Bank (HNB) has posted an after-tax profit of Rs.333.“The Bank is confident it can ride crisis situations by sticking to the fundamentals: strong reserves.

The bank is also awaiting clearance for an application to open shop in Bangladesh once it is cleared by the Central Bank of that country. from the prospect of peace in the North and the East. which would require a faster grasping of opportunities. we may see accelerated development of the economy. concentrating on remittance business "for the whole of Pan Asia. Rienzie Wijetilleke. with its well established branch network. in a reference to the oil hedging experience. The bank’s Chairman.’’ He saw new opportunities for the bank. Majan Exchange LLC in which HNB has a 40% stake." Theagarajah said.had released Rs. reported "a robust performance" in 2008 despite an uneven and negative background.475. Wijetillake noted. Mr. he said. commented that Sri Lanka had been unable to benefit from the steep decline in the world market price for oil due to some ``irrational decisions creating medium term commitments at exorbitant rates. they have signed a Memorandum of Understanding with the City Union Bank of India and were now awaiting regulatory clearance from the Reserve Bank of India and the Securities and Exchange Board of India to commence investment banking operations." he said. "Our bank’s inherent strength and values maintained over the years. Theagarajah also reported that HNB was continuing efforts to expand its presence overseas with their joint venture in Oman." he said. "However. Wijetilleke. . "We believe the economic meltdown permeating across the region slows regular processes but we have ample faith that we will get the necessary approvals and clearance to start operations soon as HNB has met the required criteria. we are confident that given the change of political regime.5 million by way of profit on disposal and dividend income. The process has been slowed as a result of political turmoil experienced there for most of 2008 that had slowed down the system." he said." "We have just completed regulatory formalities for two more similar operations in the UAE and Canada with the launch of commercial operations due to begin in the first half of 2009 for both. helped the bank to perform well above normal expectations. In South Asia. This would open a window for participation in the development of these areas.

M.77% through Standard Finance Limited while the Stassen interest was via CBD Exports (6. Basic earnings per share had grown to Rs. Stassen Exports (5. He also recommended that Sri Lanka should make an effort to obtain. Milford Exports (6.3. a statutory reserve fund of Rs. . Rajendra Theagarajah (MD/CEO).16 billion provisions for loan losses. The directors of the company are: Messrs. Rienzie T.53%).5 billion in its books. Seevaratnam. Jayawardena.7 million.K.9 million the previous year.7 billion the previous year. The bank’s net interest income for the year at Rs. Wijetilleke (Chairman). Vittachi and Mr.8. surplus goods and services available in China.29% on its own account and 4. died during the year under review shortly after they had tendered their resignations due to ill health.907.4 per share against Rs. Theagarajah.53%). Cooray. Sri Lanka Insurance Corporation Life Fund (4. Customer deposits had grown to Rs.982.186. Sivaratnam.66%). V.1 billion the previous year. HNB’s leading shareholder was the Deutsche Bank Trust Company Americas with 15% but the Browns Group and the Stassen/Distilleries Group were also major shareholders with member companies holding stakes. Browns have 7. D.12.1. V. These could be utilized for rural infrastructure development here creating economic activity in those areas.53%).He urged that the authorities should have in place strategies and a plan for accelerated infrastructure development for the newly liberated areas and get private sector institutions to play a role promoting economic activity particularly in agriculture.S. HNB has a stated capital of Rs.P.90%) and the Distilleries Company (2.50 per share paid the previous year.06 billion.67 from Rs.3 billion and other reserves of Rs.175.11.2008) and R. R.11.2008). Pamela C.H. retained earnings of Rs.83 and the directors have recommended a dividend of Rs.8 billion from Rs. on favorable credit terms or as grants. It has made Rs.13. Dr. Japan and India due to their decline in exports to the West. up from Rs.4. Two directors of the bank.V. Sivaratnam (resigned 24. Ms.5.Obeyesekere. small and medium industry and trading.7 billion was up from Rs.P. Vittachi (Resigned 21.12. R. R.