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Hedging deal cost CPC over Rs. 9 billion loss: Auditor General
View(s):The Ceylon Petroleum Corporation (CPC) has incurred losses of more than Rs. 9 billion as a result of the disastrous hedging transactions, a report from the Auditor General’s Department says.
The CPC was cited as a party in arbitration proceedings pertaining to the hedging contracts entered into with several commercial banks.
In June 2013, US$ 60 million had been paid to the Standard Chartered Bank under a deed of settlement entered into between the parties.
“According to information made available, the total losses incurred by the Corporation as at 31 December 2014, including the travelling expenses of Rs. 5,261,827, was Rs. 9,780 million,” the report says.
Meanwhile, the Central Bank of Sri Lanka also incurred Rs. 571 million in legal expenses as a result of the hedging transactions. Of this, the CPC had reimbursed Rs. 568 million between 2011 and 2014.
“In addition to that, the CBSL had paid a sum of Rs. 379 million up to 31 December 2014 for the services obtained from the foreign lawyers who had appeared in the arbitration proceedings initiated by the Deutsche Bank against the Government of Sri Lanka,” the Auditor General’s report states.
The Government’s chief accountant has also commented on the CPC’s pricing strategy: “Even though an effective pricing strategy reflecting the international oil price movements and aligning with Government objectives had not been designed and implemented by the Corporation, domestic retail prices of petroleum products had been revised upward continuously up to September 2014 in order to address these financial difficulties of the Corporation.”
The financial difficulties referred to include inefficiency of refinery operations with low margins, poor yields and frequent stoppages, resulting in importation of refined petroleum products to meet the demand of the country; export of naphtha and furnace oil 1500 at a price below the refined cost; provision of fuel to SriLankan Airlines and Mihin Lanka at concessionary rates which were lower than the contract customer price; provision of fuel (furnace oil and naphtha) at subsidised rates to the Ceylon Electricity Board (CEB); poor maintenance of storage facilities; payment of demurrages; depreciation of the rupee value continuously against the US dollar, etc.
Then, in September and December 2014, and again in January 2015, the CPC thrice reduced the domestic retail prices of petroleum products.
But as international oil prices continued to be on a declining trend, even these price revisions did not fully reflect the actual reductions in international market prices.