Sri Lanka opposition to take cabinet, central bank to task over oil hedge

Dec 02, 2008 (LBO) – Sri Lanka’ main opposition United National Party says the cabinet of ministers and the central bank is also responsible for a hedging deal that has gone wrong, and would use parliamentary powers to take them to task. Zero cost instruments had been recommended by a study group formed in 2006, in which the central bank was included, after an audio visual presentation on “Introduction of Oil Hedging for Maintaining Stability in a Volatile Global Oil Market” had been made to the cabinet by central bank Governor Nivard Cabraal.

Cabinet approval had been given on January 14, 2007 after considering the observations of the minister of finance, the opposition said.

The hedging deals which had now gone wrong were a high-risk options strategy called a ‘Leveraged Target Redemption Swap’, which gave almost instant profits for no investment or at ‘zero-cost’.

One such deal, for 100,000 barrels of gas-oil (diesel) provided by Standard Chartered Bank, ran from June 02, 2008, till May 29, 2009. The contract had a strike price of 134 US dollar a barrel, a cap of 139 dollars and a floor of 124 dollars.

If the diesel price went above 134 dollars, CPC could earn 5 US dollars a barrel. But the entire contract would be ‘