Re-negotiations began before ruling - Fowzie

KOTTE: Minister of Petroleum and Petroleum Resources Development A.H.M. Fowzie stated in Parliament yesterday that the Ceylon Petroleum Cooperation had begun re-negotiating the hedging arrangements with the relevant banks before anyone resorted to court action.

The Minister stated that as a benefit of oil hedging one million US dollars was saved in 2007 and 24 million US dollars between March and August 2008.

It was unpredictable that the price of a barrel of crude oil would drop from 147 US dollars to 47 US dollars within three months and it was expected that the price of a barrel of crude oil would increase to 200 US dollars.

The Minister stated that oil hedging was initiated with all good intentions and in the interest of the country.

The Minister made this observation making a special statement in Parliament.

Minister Fowzie stated that indeed, he had the highest respect and

confidence in the Judiciary. However, there has been frenzied media speculation surrounding the order of the Supreme Court. Certain elements within the private media at the instance of vested interests, are seeking to misrepresent the order of the Supreme Court and engage in character assassination.

"The reports in certain media that the Supreme Court had removed me are baseless. In view of this sustained misrepresentation and slander campaign against me, I owe an explanation to this House and to the nation," the Minister said.

The Minister stated that the oil hedging concept was not his concept at all. It was initiated by no less a person than the Governor of the Central Bank himself.

Towards the latter part of year 2006 oil prices in the world market were showing a sharp and rapid increase and there was huge pressure on our foreign exchange reserves.

However, Ajith Nivard Cabral, the Governor of the Central Bank made a presentation personally to the Cabinet on September 6, 2006.

He advised the Government to enter into hedging arrangements. Thereupon the Cabinet decided that the subject should be further studied by a group of officials from the Central Bank of Sri Lanka, the Ministry of Finance and Planning, the Ministry of Petroleum and Petroleum Resources Development, Ministry of Power and Energy and other agencies and present a report to the Cabinet.

In terms of the Cabinet decision, the Secretary to the Treasury selected several officials to study and submit a report on the Governor's presentation to the Cabinet. This Study Group came out with the following recommendations and submitted its report to the Secretary Ministry of Finance on November 16, 2006.

The recommendations were the CPC to hedge purchase of petroleum products, both crude oil and refined products in the international market, Use Zero-Cost Collar as the hedging instruments with the upper bound based on market developments, Commence hedging with smaller quantities for shorter period and gradually increase the quantity and the duration, Grant authority to the CPC to call for quotations for oil hedging, decide on future prices and purchase hedging instruments from reputed banks and Grant authority to CPC to change instruments based on the development in the market. In terms of these recommendations, a Cabinet Paper was submitted.

On 17th January 2007, the Cabinet deferred its decision for the next meeting awaiting the observations of the Finance Ministry.

On 24th January, 2007, the Cabinet decided that oil hedging be implemented without delay as suggested by the Central Bank of Sri Lanka. The Governor of the Central Bank urged in writing even before the cabinet approval to go in for hedging.

Expression of interest was called from international and local state banks.

The local banks did not respond. But, Standard Chartered Bank, CitiBank and Duetch Bank came forward.

Their proposals were studied as to what extent they could ensure the best interests of the country.

The CPC started oil hedging in a small way and made a profit of 1 million US dollars in 2007.

In the year 2008, the quantum of oil hedging was increased since oil prices were escalating sharply upwards. All of you are aware that crude oil prices went up to US Dollars 147 per barrel and the prediction at that time was that it would go up to US Dollars 200. The market was volatile and the whole world was panic stricken.

As a benefit of this hedging CPC made a hedge gain of US Dollars 24 million between March and August 2008 for six months.

Then came the sliding down of the prices beginning in September, which none of the experts in the world was able to foresee.

Even the reputed international researchers such as Goldman Sachs and EIA failed to forecast the unprecedented downward trend in oil prices.

The Minister said he was saying all these things to show the CPC have been acting in good faith of mitigating the impact of escalating oil prices and to curtail the huge outflow of the foreign exchange from the country. Had the price increase gone up to US dollar 200 as predicted by dealers world over nobody would have complained.

"What if that had happened and prices actually shot up to US dollar 200?" the Minister inquired.

Serious consequences would have followed and our country's foreign exchange reserves would have been depleted or else all development, industrial and economic activities would have come to a grinding halt without adequate fuel supply.

In fact, as originally aimed, actual gains have been recorded and the losses are due to the sliding down of prices after eight months resulting from the totally unforseen and unforeseeable events. These were done on the advice of the Governor of the Central Bank and the approval of the Cabinet."I can understand the Opposition that is waiting to make political gain by creating a crisis situation," the Minister said.