Ceylon Petroleum Corporation Chairman Asantha de Mel last week told a press conference, hurriedly summoned to explain the losses CPC had taken over oil hedging contracts, that had the corporation not hedged and prices had gone up and not down, his neck would surely have been on the chopping block. Nobody would dispute this argument. When hedges worked in favour of CPC, the corporation was not shy about publicizing its achievement and the public was treated to a picture of a fat cheque for something like five million dollars being collected. It is very much a part of human nature to crow about successes and maintain a stony silence on failures. By last Sunday the news was out that CPC’s losses on hedging when oil prices plummeted was in the range of USD 27 million in October. But if profits made on previous hedges are taken to account, the net loss up to end October at USD 9 million was a third of that. Given that the oil market is yet on a downward roll, it looks like these losses will mount further this month.

De Mel socked home the point that whatever CPC’s hedging losses were, the country was benefiting hugely from the falling oil market. That too is something that nobody can or will dispute though the public, of course, has a quarrel with the government that the full benefit of the fall in prices has not been passed to the consumer. The government has countered that oil prices, particularly of kerosene and diesel, have long been subsidized and CPC has to recoup at least some of its losses now that the falling market has offered it a window of opportunity. There were reports that the corporation had defaulted on the payment of its hedging losses to the banks. This was strenuously denied both by the CPC Chairman as well as the CEOs of both Standard Chartered and Citi Banks, the main providers of hedging instruments, who were associated with de Mel at the news conference. The CPC chief made the point that given the profits he was making in the current market, he had no need to default. Also, default by a state-owned enterprise like the Petroleum Corporation will have serious implications for Sri Lanka’s national debt rating and this is something that all concerned will be too well aware of.

Simplistically, hedging can be likened to an insurance policy a motorist will take on his car. He will be paying the premium to the insurer and if no claim arises for several years, he may well consider such payment to have been wasteful expenditure. But should his car be wrecked in an accident and is a total write-off, having carried comprehensive insurance would be a Godsend rather than just a saving grace. So hedging, like insurance, is a measure of prudence where profits and losses depend on imponderables – will you meet with a serious accident as in the case of your motor car or the oil market move against you or in your favour as in the case under discussion. Merely because oil market movements have hit lows that even the best experts did not predict and caused hedging losses, CPC should not be faulted for its decision to hedge a relatively small 30% of its purchases. But big questions remain on whether the best possible hedge had been obtained and, most importantly, whether Sri Lanka has the necessary expertise to get what it needs through negotiations with more knowledgeable and sophisticated bankers whose eyes are fixed firmly on their own bottom line? There are many doubts on this score.

No clear answer was forthcoming at last week’s news conference on the kind of profits the banks had made on hedging. A reporter raised a pointed question on this subject pointing to published profit growth of one bank but de Mel, saying that the banks were really ``matchmakers’’ in this business, implied that there were no big bucks to be made by the banks on this score. Be that as it may, what is clear is that the kind of sophisticated expertise necessary for operations such as this does not seem to be available at CPC. Banks like other businesses are not into philanthropy and can be counted on to be hard-nosed in their quest for profit. As we have reported in this issue, the Central Bank had given the banks some directions into the parameters on which oil hedging could be done and are now checking on whether there had been strict compliance on this score by the banks that offered the instruments.