After learning a bitter lesson in 2007 by entering into disastrous hedging deals without proper foresight, Sri Lanka is not resorting to any kind of hedging to cushion rising oil prices which are similar to surging prices four years ago when hedging options were resorted to.
The oil crisis has been fuelled by unrest in the Middle East and Libya, Japan's nuclear crisis, petroleum authorities here said. They noted that hedging deals are like double edged swords as it can be used to reduce risks without completely eliminating it and this time they have decided against using these options though banks have made various offers.
The firm ‘No’ to hedging comes as the Sri Lankan government this week battled a non-payment claim for over $161 million in the London High Court action brought by Standard Chartered Bank (SCB), the main bank involved in the then hedging deals which turned sour. K. R. Suresh Kumar, Managing Director Lanka IOC PLC told the Business Times that banks are offering limited options of hedging but Sri Lanka should not enter into hedging once again in its rush to rid itself of the burden of high fuel prices.
On the other hand, fuel prices will not come down soon as the crisis in Middle East and Libya will drag on for some time. The demand for fuel will also increase due to Japan’s nuclear crisis, he said adding that the prices will go up in the coming years. However Lanka IOC is not considering any hedging agreement with local or foreign banks to counter the price hike but says that local prices need to be increased as the company is losing Rs.34 per litre on diesel and Rs. 15 per litre on petrol as the crude oil prices jumped to US $101 and the Brent to US$117 on Friday, he said.
Also rejecting the oil hedging option, Minister of Petroleum Industries Susil Premajayantha told the Business Times that the Sri Lankan economy can withstand the surge in oil prices so long as the increase is a short-lived one.
The state-owned Ceylon Petroleum Corporation (CPC) entered into contracts with five banks led by SCB in January 2007 to protect itself against rising prices which at that time were around $110-115. When prices went over $135 dollars per barrel in mid-2008, the CPC was benefited as it had sought protection on the upside.
But when the prices crashed, the Corporation was compelled to pay billions of dollars to foreign banks. “This situation will not be repeated by the CPC,” said Minister Premajayantha. He noted that no decision has been taken to increase the fuel prices as yet but discussions are underway with the Treasury to find a suitable solution to tackle the oil price crisis. Either a fuel price hike or a tax reduction is an option, he said. However he felt that unrest in the Middle East and Libya is likely to settle down soon as it is a political issue. Thereafter the oil rice will come down sharply, he predicted.
According to official sources the CPC is selling petrol, diesel, kerosene and furnace oil at a loss. CPC is losing Rs. 4.55 from the sale price of a litre of petrol, Rs.11.46 from diesel, Rs. 29 from kerosene and Rs. 33 from furnace oil. The average weighted import price paid by the CPC for oil jumped nearly 32 % from a year earlier to US$ 103.18 a barrel in February 2011 much before the Japanese crisis and deepening tensions in Libya, increasing 14.17 % since December 2010,a senior official of the Finance Ministry said.
"The CPC’s oil import prices are not directly comparable with spot prices for Brent crude oil in New York and European markets because CPC rates include freight rates and is the weighted average price of a different type of crude oil. A part of imports of CPC are on a term contract basis," he revealed. The average weighted price for a barrel of oil paid by the CPC in February 2011 was US$ 103.18. This was 14.17 % higher than US$ 95.33 paid in January and 31.89 % higher than US$ 78.23 paid in February 2010, he added.
|
E-mail
