Appeal Option

July 28, 2012 (LBO) – Sri Lanka’s state-run Ceylon Petroleum Corporation has lost an appeal against a London ruling that forced it to pay up on a complex oil derivative it bought in 2008, a media report said. “It has been reported that the order is against us,” Sri Lanka’s Attorney General Palitha Fernando was quoted as saying by Reuters.

“First of all we have to see what the order was, then we are looking at (the) possibilities of appealing in the House of Lords.”

Court had ordered CPC to pay 162 million US dollars plus interest on an options based derivative on which the firm refused to pay. The so-called ‘leveraged swap’ deals were ‘zero cost’ in that the oil firm did not have to pay an upfront premium to purchase.

The contract, which used premiums from multiple option sales to purchase an option giving upside protection, exposed the firm to severe losses if prices fell compared to small gains if prices rose.

CPC bought oil hedges because the state manipulated energy prices. Energy price manipulation drove the country into a balance of payments crisis in 2011.

CPC won an arbitration case in Singapore against Citibank for a similar deal.