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, an investigation by The Sunday Times Business Desk shows.

Initial investigations reveal that just before the hedging contracts were signed in 2007, 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, the Bank of Ceylon and People`s Bank, and transfer them to the Standard Chartered Bank (SCB) and Citibank.

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, informed sources said. 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. The then Secretary to the Ministry referred the matter to the Attorney General (AG) who overruled the CPC chairman, the sources said.

Incidentally Auditor General S. 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, in particular Minister Susil Premajayantha, were heavily involved in grilling CPC Chairman Asantha de Mel over the transaction.

The sources said at the hearing where Mr Premajayantha was armed with plenty of documents including articles from The Sunday Times, Mr. 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.

Hedging, not clear to many people in Sri Lanka, is like an insurance policy where one pays a premium to protect against any losses incurred in a business or individually. In the present CPC issue, 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 problem was that while the banks had to pay the CPC anything above $135 per barrel (and this payment was restricted to $1.5 million a month) and confined at this level, the CPC was forced to pay the banks any price below $100 per barrel. Thus even if the oil price falls to $10 per barrel, the CPC must pay a fixed rate to the banks.

The liability to the CPC ranges from 400 to 700 million dollars. Emerging evidence clearly shows that neither the Cabinet (barring Minister Fowzie) nor the CPC Board (barring Mr. de Mel) gave proper sanction to the contracts.

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, was not even given time to go through the Cabinet memorandum seeking approval of the Cabinet to go for oil hedging. The deal was made without any transparency, the sources said.

All decisions were taken by Minister Fowzie and the CPC Chairman and some officials in a room allocated to the Minister at the CPC, they said. Investigations reveal that normally Ministers do not have rooms in corporations but in this case an exception was made. Senior Ministry officials including the secretary were not consulted in the decision-making process of the CPC in this instance. The Sunday Times reliably learns that former Treasury Secretary P. B. 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.


De Mel
At the parliamentary committee meeting on Tuesday, The Sunday Times learns, Mr. de Mel was severely reprimanded by several senior Cabinet ministers for the deal.

When COPE members queried about the CPC`s `self-claimed` expertise in hedging, CPC Deputy General Manager (Finance) Lalith Karunaratne said he didn`t know much about hedging. Asked about his background he said he was formerly an accountant at Samuel & Sons which analysts said was a Rs. 350 million turnover company compared to the Rs. 350 billion turnover at the CPC.

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. de Mel and Mr. Karunaratne. 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.

Mr. 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.H.M. Fowzie.

Parliamentarians were also critical of the foreign banks for their role in this scandal saying it was swallowing the country`s valuable foreign reserves. 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.The day before (Monday), 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.

While Laugfs Gas Chairman W.K. H. Wegapitiya and a joint petition by three others, including UNP MP Ravi Karunanayake, were taken up in court on Friday, 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.
With oil prices going down sharply in the past few months, there is no change in local prices. The consumers are suffering, said Christine Perera, a public interest activist. This is a terrible situation.
The benchmark Brent world crude price was pegged at $49 per barrel on Friday, down by almost $100 per barrel from 143.33 dollars on July 11 this year.

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.

The issue is threatening to drain the country`s meagre foreign exchange resources, currently estimated at only around 2.7 billion dollars or equal to more than two months` worth of imports, and has put the economy under additional pressure at a time of global economic crisis.

Adding to the woes was the withdrawal of $400 million by foreigners who invested in Treasury Bills and bonds, according to Governor Cabraal. 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.

Businessmen and economists have warned that Sri Lanka, still not seriously affected by the international crisis, will feel the effects of the crisis in the coming months as consumer spending drops in key markets like the US, Europe and the Gulf region. Sri Lanka`s main exports are garments and tea while remittances, another key foreign exchange component for the country, are also expected to be affected.

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. The Opposition says taxes on fuel, as much as 50% of the shelf price, are also responsible for the high prices.

In court, the Chief Justice said the hedging contracts were in favour of the banks and according to the deals, the country would have to pay US$675.7 million to the banks in the coming months if this deal was allowed to continue.

Mr. de Mel has been accused of defending the banks in this fiasco, 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.

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, it is learnt.

Fowzie still there
Petroleum Resources Minister A.H.M. Fowzie last evening said he had so far not received any instructions from President Mahinda Rajapaksa about his status, after the Supreme Court on Friday recommended the removal of the minister from his portfolio.

Mr. Fowzie said he had no comment about the developments. 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.


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.

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, a charge vehemently denied by the banks.

On Friday, the Supreme Court hearing one of the petitions -- ordered the suspension of CPC Chairman Asantha de Mel and directed President Mahinda Rajapak...