Issue goes up to highest level of govt., Governor meets the banks
CPC`s November oil hedge loss estimated at $ 35 mn.

The Ceylon Petroleum Corporati-on`s oil hedging liabilities are expected to rise to USD 35 million or more in November, up from USD 27 million the previous months, but talks towards restructuring the agreements to bring down the cost to CPC by 40 45 percent and now going on, well informed banking and political sources said.

While commercial banking sources estimated the liability at around USD 35 million, other estimates said the liability is likely to be closer to USD 50 million given the continuing fall in oil prices.

Central Bank Governor Ajith Nivard Cabraal met representatives of the five banks that entered into hedging arrangements with the CPC last week, after the regulatory authority visited the banks and began investigations to establish whether all aspects of directives given with regard to derivative instruments have been complied with.

The meeting last week, interpreted by some sources as an attempt by theCentral Bank to apply pressure on the commercial banks not to push for their pound of flesh, but denied by others, had been followed by some bankers going right up to highest government levels to canvass their point of view.

With the hedging contracts valid till May next year, CPC`s hedging liability in the context of the currently depressed global oil market, can go as high as USD 500 million some sources said. That is unless there is a radical restructure of the deal to ensure that the liability is mitigated.

The Central Bank had at the meeting with bankers impressed on them that there must be full compliance with the relevant directives. Some analysts believe that the willingness of the banks to negotiate a restructure indicates a degree of flexibility although the banks have taken the view that any default by the state-owned CPC may be considered a sovereign default by the world at large.

The five banks that arranged the hedges where, according to banking circles the major share of the profit or loss will accrue to oil producers taking the instrument rather than the banks who are mere ``arrangers,`` are Standard Chartered, Citibank, Deutsche, Commercial Bank of Ceylon and People`s Bank with the foreign banks handling the major share.

Commercial banking sources insisted that the documentation for the hedge arrangements were all in order but there were indications, though with no confirmation, that the Central Bank held a contrary view.

``The hedging started in March 2006 and there were at least 16 deals,`` a commercial banker said. ``If something was not in order, did it take the regulator 16 months to find that out?``

But an analyst said that unless there was an ``issue,`` and one arose when the CPC began having to pay out big bucks on account of the hedges, there was no reason for a regulator investigation.

The commercial banks agree that CPC, with several billion rupees owing from its state sector customers, has cash flow problems. ``We will try to make some arrangements to mitigate those,`` one source said.

According to top government sources there will be no default but there will be insistence that there has been full compliance with the regulatory direction that have been given.