Negotiating with banks to mitigate losses:

CPC to restructure hedging

Hiran H. Senewiratne

Ceylon Petroleum Corporation (CPC) will restructure the hedging arrangements with all banks that have entered into hedging arrangements to mitigate losses arising from lower crude oil prices in the global market, its Chairman Asantha de Mel said.

Chairman CPC Ashantha de Mel gestures while CEO Standard Chartered Bank Clive Haswell, CEO of Citi Bank Dennis Hussey and Managing Director Com Bank, Amitha Gooneratne look on at the press conference yesterday. Picture by Sumanachandra Ariyawansa

“We are hedging 30 per cent out of the total oil exported and have negotiated with banks to mitigate losses every three to four months and have not defaulted any bills to these banks, which are Standard Chartered Bank, City Bank and Commercial Banks,” De Mel told at a press conference.

He said Sri Lanka’s total oil bill is around US$ 3 billion and the drop in international market prices would definitely be an opportunity for everybody, which has made arrangements to settle all bills on time.

He said due to the volatile nature of market prices, CPC has hedged around 35 per cent of its exposure. The balance is open to the market at the current lower prices. As a result, for current imports, our average price is only marginally higher than the market price.

He said at the time of entering into the current outstanding hedges, the general consensus of analyst and economist was hat crude will head towards the US $ 200 mark and that oil would remain above US$ 90 as expectations were that OPEC would defend the said level.

De Mel said the main objective of hedging is to keep oil prices stable in the country with low oil prices which is expected to up any moment due to the demand driven market condition. Banks will function as an intermediary between the oil producer and the buyer.

These risks have been fully explained by all the Banks. Downside risks are also given in a table, where based on different scenarios, possible payments from CPC to the Banks are highlighted.

As a result there is no question of mis-selling of these products by banks,” de Mel said. “Since starting our hedging programme, the different Banks have explained to CPC the various downside risks associated with each product and we entered into these deals with full knowledge of these risks,” he said.

“With crude reaching all time highs almost everyday, CPC entered into the current type of structures as they have a feature of knocking out effect when a certain amount is paid to CPC.

Therefore, the intention was that with each knock out, the CPC would analyse the market and then consider the next hedge, the Chairman,” he said.

Sri Lanka purchases 95 per cent of crude oil from Iran with six months credit and is purchasing at world market prices. With these price fluctuates, we have to be more careful on hedging arrangements to safeguard foreign reserves in the country, he said.

Citi Bank CEO Dennis Hussey said Sri Lanka has started the hedging process over a special Cabinet approval, which has been carefully documented.