CPC’s gamble of fuel hedging pays off

The Ceylon Petroleum Corporation‘s gamble of fuel hedging with the Citi bank Sri Lanka has paid off with a gain of Rs. 585 million (US$5.42 million) last month but the Petroleum Resources Ministry says that its benefits cannot be passed onto consumers - as yet -- due to heavy fuel costs.

Petroleum Resources Minister A.H.M Fowzie told The Sunday Times FT that he has no alternative other than recommending another fuel price hike soon as the CPC has incurred a loss of Rs. 1656 million in the first 15 days of this month. He added that the corporation is incurring a loss of Rs 40 per litre of kerosene, Rs 31 per litre of diesel and they were getting a marginal profit of Rs 5 per litre of petrol. The total loss incurred by CPC from the January 1 to April 15 was Rs.7231million, he said.

Fowzie pointed out that the management of the CPC headed by Asantha De Mel is adopting strategies like fuel hedging solutions which has helped CPC to manage its price volatility and to provide relief from the prevailing high oil price environment, for a part of its oil imports. He noted that the CPC should sell petrol at a price of 150 per litre, diesel at Rs 120 per litre and kerosene at Rs 110 per litre to make some profits but the government has no intention of burdening the consumers with such high price hikes. He disclosed that the corporation will implement the Sapugaskanda oil refinery expansion project with Iranian assistance by the end of this month and it will resort to more hedging in the months of April and May to ease the burden of consumers.

Speaking to The Sunday Times FT on the side lines of the handing over ceremony of the fuel price hedging cheque of US$ 5.42 million by Citi bank Sri Lanka, CPC Chairman De Mel said that he and his management team had taken a risk by resorting to fuel hedging with Citibank Sri Lanka and Standard Chartered Bank as no one can predict the oil price fluctuations in the world market.

Therefore they had to monitor world oil prices almost daily, he said. “If the fuel price skyrockets above the price specified by the futures contract, the hedge will have paid off because CPC will save money by paying the lower price.

However, if the price goes down, CPC is still obligated to pay the price in the contract,” De Mel said. He pointed out that certain opposition MPs in parliament had branded him as a gambler when he entered into fuel hedging with two leading foreign banks. But now it has been proved that his decision has helped to maintain local fuel price stability and the CPC had earned more than US$7 million in hedging contracts with these two banks, he said. Driven by increased demand, refinery capacity shortages and speculative interest, global oil prices reached unprecedented levels in early parts of this year with crude oil reaching highs of US$115 per barrel. Prices continue to remain at over US$100 levels. De Mel noted that concerned with the inflationary impact that further increases in local retail oil prices will have on the economy, the management team of CPC decided to manage the price risk using other risk management tools such as fuel hedging.

CEO Citi Bank Dennis Hussey said that Citi closely examined the company’s requirements and specific market views, and using its global expertise, worked with CPC to structure a number of solutions that utilized CPC’s view on oil prices (crude and refined products). Under these solutions CPC is able to buy oil at lower prices than the prevailing global prices while assuming certain risks to an extent if prices should fall below certain levels.

He noted that CPC management team’s strong understanding of the global oil markets and hedging products facilitated quick decision making allowing them to enter in to transactions at the right levels. Creative collaborative effort by the senior management teams at CPC, and Citi, working across countries and time zones to provide a quick turnaround in a volatile market, sets apart these trades for its innovation, teamwork and results.