One of the world’s largest Banks, Deutsche Bank, has filed an arbitration claim against the government of Sri Lanka in a dispute related to oil derivatives entered into by Sri Lanka’s state-run petroleum utility.
Deutsche Bank has filed an arbitration claim against the government of Sri Lanka in relation to the hedging contracts, registered with the International Centre for Settlement of Investment Disputes (ICSID) on 24 March 2009. In its claim, Deutsche Bank argues that the government of Sri Lanka has violated the German-Sri Lanka bilateral investment treaty. Deutsche Bank has declined to comment on the case.
The state-run Ceylon Petroleum Corporation (CPC) entered into hedging contracts with a number of foreign and local banks in 2007 to protect against a surge in oil prices. While the contracts were originally profitable for CPC, they led to heavy losses when oil prices fell steeply in the fall of 2008.
Following heavy losses, the Supreme Court alleging corruption played a part in the contracts, leading the court to order CPC to temporarily suspend payments under the contracts. While that order was lifted in January 2009, The Sri Lankan Central Bank has also stepped in, ordering CPC to suspend the hedging transactions, on the grounds that they were “materially affected and substantially tainted.”
Another Bank involved in the hedging deal, Citibank, is also rumored to have turned to arbitration in order to enforce the hedging contracts. A Citibank official said he could not comment, because a case related to the contracts is pending in the Sri Lankan Supreme Court.
Deutsche Bank sold a contract worth 100,000 barrels to the CPC. Citibank had sold contracts worth 400,000 barrels, Standard Chartered 300,000, People's Bank 100,000 (including 50,000 bought from Commercial Bank), and Commercial Bank 20,000 direct (and 50,000 via People's Bank).
The original contracts were at half the volumes, but under the terms of the contract, volumes doubled when prices collapsed, incurring heavy losses to CPC.