Standard Chartered Bank clinches CPC oil hedging deal

The Ceylon Petroleum Corporation (CPC) together with the Central Bank has selected Standard Chartered Bank for oil hedging to counter swelling oil prices in the world market.

“Our proposal is according to the ‘zero collar structure’ where there is an upper limit and a lower limit that will be put on the price of oil,” a SCB official told The Sunday Times FT. He further explained that under such a contract, the minimum possible purchase price is equal to the floor price and the maximum possible purchase price is equal to the ceiling price.

Oil hedging will enable the government to take a position in a derivative instrument that gives an equal and opposite financial exposure to the underlying physical position to protect against major adverse price changes in the global marketplace. Petroleum Minister A.H.M. Fowzie said that oil hedging is a good option because when prices go up the government will not have to pass it onto the consumer. The country imports around 30 million to 35 million barrels of petroleum for a year. Hedging will help save US$5 a barrel. The SCB official said that through the zero collar structure, the CPC gains complete price protection from any prices above the ceiling price. “However any benefit from an oil price decrease below the floor price is foregone,” he explained, adding that this scheme allows for greater flexibility through market responsiveness.

CPC perused proposals submitted by Deutsche Bank and Citibank and found SCB’s offer the most attractive. SCB had quoted a maximum price of 72 (per barrel)and a minimum of 67.50, while the other proposals were not as attractive.

The government will test hedging oil prices at a small quantity for six months to ensure that the overall exposure to petroleum was in a manageable position. The country spent US$2070 million in 2006 for oil imports.