Sri Lankan public have to bear the oil hedging losses

July 14, Colombo: Sri Lanka’s main opposition United National Party (UNP) says that the public and the government would have to bear the losses incurred through the oil hedging deal and that the local fuel prices were likely to be increased to compensate for the loss.

UNP parliamentarian and an internationally recognized development economist, Dr. Harsha de Silva says that the order on the Ceylon Petroleum Corporation (CPC) made by a UK court to pay US$ 162 million to Standard Chartered Bank as dues for the hedging deal would have a negative impact on the country’s reputation when considering future international investments.

Addressing a media briefing, the legislator said the refusal to pay would deter future investors and they will be hesitant to invest in the country. The incident will leave a black stain on the country’s reputation, the MP added.

Dr. de Silva, who is a 2011 Eisenhower Fellow with a Ph.D. in economics, said that hedging deals were similar to gambling, and in the CPC case it is done with public funds. Therefore, the losses would have to be borne by the public.

According to de Silva, the losses in the hedging deal would result in the increase in local fuel prices.

Ceylon Petroleum Corporation, Sri Lanka’s petroleum authority is to appeal the order given by the Commercial High Court in London to pay US$ 162 million (Rs 17.8 billion) along with interest to Standard Chartered Bank for non-payment of dues linked to the hedging deal.

The CPC in 2007 entered into a hedging agreement with five local and international banks to buy crude oil at a capped price of $130 per barrel. The deal went sour when the oil prices fell below US$ 50 in the world market and CPC stood to lose nearly US$ 500 million.

Sri Lanka’s Supreme Court intervened and in November 2008 the Court ordered the CPC to suspend the controversial hedge payments to banks until a Central Bank probe into the matter is over.

The three foreign banks, CITI Bank, Standard Chartered Bank and Deutsche Bank sought redress with the arbitration panel in Singapore and Commercial High Court in London.

Earlier this year, efforts by the government at the arbitration panel in Singapore had failed leaving no other option for Sri Lanka but to pay the three banks in full with interest.

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