SCorders suspension of Fowzie, de Mel and CPChedging payments

The Supreme Court yesterday ordered the suspension of Asantha de Mel as Chairman of the Ceylon Petroleum Corporation and this office to be taken over by the Secretary to the Treasury, until the President appoints a suitable person.

The Court ordered that the activities of the Ceylon Petroleum Corporation, be taken away from the Minister of Petroleum A. H. M. Fowzie and be placed directly under the President of Sri Lanka. Article 44 of the Constitution of Sri Lanka provided for this. All petroleum related activities are to be managed by the State.

The Court said that they could not agree with the statement given by the Minister of Petroleum that he properly supervised the activities of the CPC, as prescribed in the Statute.

The Court said that the petitioner had made a Prima facia case on breach of public funds and public trust.

Leave to proceed with the two petitions was granted.

The SCruling followed the fundamental rights violation application filed by Wegapitiya, the Chairman of the Auto Gas Works Pvt Limited and the Venerable Thiniyawala Palitha Thera of Nalandaramaya, Nugegoda. They alleged mala-fide Hedging agreements between the CPC and some commercial banks. The Board approval was not granted for these agreements, the petitioners held.

The Supreme Court in yesterday’s order also suspended the Hedging agreements in question. The Monetary Board is to investigate and report to the Court on the impugned agreements.

The Court explained that according to the current Hedging agreements, when oil prices declined in the world market the liability on the corporation increased. When a barrel of oil is US $50, the loss increased is US $675 million. When a barrel is US $45, the loss incurred is US $700 million.

As regards, the reduction in the prices of petroleum products. The Treasury was directed to review possible tax revisions, and report to Court by December 15, 2008.

A copy of that order is to be sent to the Secretary to the President and the Secretary to the Treasury.

The petitioners had submitted to Court a notice of a press conference conducted by the Ceylon Petroleum Corporation Chairman.

The Court said that the notice of the conference had been on a paper bearing the logo of the Standard Chartered Bank. The petitioner had pointed out that the Chairman had said that all agreements with the banks will be honoured. A default would be a sovereign default. The Court condemned this statement by the Chairman.

The petition filed by the Venerable Thiniyawala Palitha Thera of Nalandaramaya, Nugegoda and two others, said that the Ceylon Petroleum Corporation opted for zero cost hedging with Commercial Bank. It means that the CPC was to gain had the price of oil increased beyond a particular point and the hedging provider bank to gain. The CPC is to pay the bank the difference between the capped price and the market price, if the price of oil were to dip to a particular figure. The first ever hedging deal was concluded by the CPC in February 2007, and under the said deal, oil price was capped at US dollars 130 a barrel, and the floor price was at US dollar 100, a barrel. According to the hedging agreement if the price rises above US dollar 130 for three months, the hedge agreement terminates, only allowing the CPC to buy, 100,000 barrels per month at a price of US $130, whereas the CPC was compelled to buy 200,000 barrels per month at a price of US $100 as the hedge agreement only terminates after a lapse of 12 months, if the price of oil were to dip below the US $100. The CPC is obliged to continue with the current hedge agreement till June 2009, which would end with the CPC paying as much as US $300 million, which amount would have been sufficient to built a harbour like Hambantota, causing huge loss to the CPC. According to the current hedging agreements, liability on the upside where the hedging providers, pay the CPC is limited. But the liability on the downside, where fuel prices fall and what the CPC pays the hedging provider is unlimited.

The CPC has made an ill considered, decision to enter into hedge deals, without properly evaluating and understanding the risks involved in hedging, and thereby wasting public funds.

The petitioners requested the Court to order the CPC to submit all the hedging agreements, for the perusal of the Court and to order the CPC to reduce the price of petroleum products to suit the price reductions in the world market.

Among the respondents are the Minister of Petroleum and Petroleum Development, A. H. M. Fowzie, the CPC, and its Chairman Asantha de Mel, the Secretary to the Treasury, Professor G. L. Peiris the Minister of Export and International Development, and the Attorney General.

Uditha Egalahewa, instructed by G. G. Amalpragasam supported the petition by the Venerable Thiniyawala palitha Thero of Nalandaramaya, Nugegoda and two other petitioners.

Viran Corea appeared for petitioner Wegapitiya.

The Deputy Solicitor General, Sanjay Rajaratnam appeared for the Attorney General and said that, the attorney General had not given his opinion on this issue in question.

He however added that cabinet is reviewing the issue.

The Bench comprised, the Chief Justice Sarath N. Silva, Justice K. Sripavan and Justice P. A. Ratnayake.

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