Documents filed in the Supreme Court in the oil hedging cases have revealed that Standard Chartered Bank (SCB) and Citibank have entered into hedging deals not only with the Ceylon Petroleum Corporation (CPC) but also with SriLankan Airlines.
The documents filed in Court on the petitions by former PERC Chairman Nihal Sri Ameresekere in the CPC cases, disclose that SCB and Citibank entered into hedging deals with SriLankan Airlines on May 27, 2008. The SCB deal was for a period of 12 months commencing on June 2, 2008 and terminating on May 29, 2009 while the Citibank deal was also for a 12 month period, commencing on June 1, 2008 and terminating on May 30, 2009.
According to the details of the contracts, experts have estimated the losses for SriLankan Airlines to be around Rs.1.5 billion.
According to one expert, the termination of the SriLankan Airlines hedging contracts with SCB and Citibank have been subject to earlier determinations both by SCB and Citibank on a maximum payment of US$750,000 each on these deals to SriLankan Airlines. On the other hand, the maximum loss to the airline has been restricted comparatively to a level as much as US$9 million in each of these deals, continuing for the 12 month period.
Payments on these deals were to be computed to the NYMEX West Texas Intermediate light swift crude oil price movements.
The expert says these hedging deals do not appear to involve the purchasing of any oil at all but instead on speculative movement of oil prices. While in both deals, SCB and Citibank would pay in relation to a notional quantity of 25,000 barrels per month, SriLankan Airlines would have to pay in relation to double the notional quantity of 50,000 barrels per month.
The expert said that the following terminology needs to be interpreted and understood in terms of the workings disclosed in the respective transaction documents. He explained that according to the contract, the deals have been structured in relation to the NYMEX price movements per barrel. The SCB deal is with a strike price of US$115 with a cap of US$125, upper floor of US$110 and lower floor of US$95. The Citibank deal is with a call strike of 1 of US$114/50, call strike 2 of US$126/50, strike price of US$110 and put strike of US$95.
The expert added that these hedging deals were executed in May 2008 while current Treasury Secretary P.B. Jayasundera was serving in the same capacity and was also the Chairman of SriLankan Airlines. Dr. Jayasundera resigned from both these posts in September 2008 after the Supreme Court delivered its judgment on the case regarding privatization of Lanka Marine Services which was annulled by the Supreme Court as illegal and fraudulent.
The expert added that the massive claims against the government stemming from the CPC and SriLankan Airlines hedging deals are not disclosed in the Pre-Election Budgetary Position Report 2010, released by the Ministry of Finance last week.
According to the 2008-2009 Annual Report of SriLankan Airlines, there is a statement about the two fuel hedging contracts remaining outstanding as at 31 March 2009, the end of the company’s financial year. SriLankan Airlines CEO Manoj Gunawardena was overseas this week and could not discuss the matter when contacted.
The hedging cases involving the CPC and five banks (SCB, Citibank, Deutsche Bank, Commercial Bank and People’s Bank) are coming up in the Supreme Court on March 22 for support.