Nanshan Power, Goldman in Talks on Hedging Dispute

By Winnie Zhu

Dec. 19 (Bloomberg) -- Shenzhen Nanshan Power Co., a Chinese power producer based in the southern city, and Goldman Sachs Group Inc. are in talks to resolve a dispute over oil- hedging contracts that caused losses for the utility.

The parties may take legal action if the talks fail, Nanshan Power said in a statement to the Shenzhen Stock Exchange late yesterday. The Chinese producer is refusing to pay for losses on contracts signed in March based on oil prices ranging from $62 to $66.50 a barrel.

Benchmark crude oil in New York has fallen to $36.44 a barrel from a record $147.27 in July. Nanshan Power and other fuel consumers such as Air China Ltd. have lost money in hedging contracts as the global credit crunch led to volatility in commodity prices.

Nanshan Power is ``in active negotiation'' with Goldman Sachs and will disclose progress on the issue, the Chinese company said without elaborating. ``The contracts have been terminated,'' said the electricity generator based in the Shenzhen city of Guangdong province.

Connie Ling, Goldman Sachs' Hong Kong-based spokeswoman, declined to comment when reached by phone. The New York-based investment bank earlier this month cut its forecast oil prices in the first quarter by half to $30 a barrel.

State Violations

Nanshan Power in October halted trading of its shares after state regulators said the contracts bought from Goldman Sachs' Singapore unit didn't pass `` proper decision-making channels, failed disclosure rules and violated state laws.''

In one contract, Nanshan Power may gain as much as $300,000 a month if oil prices were to rise above $63.50 a barrel between March 3 and Dec. 31, the company said on Oct. 22. The company will incur a loss if oil falls below $62, it said.

Oil has slumped 75 percent from July's record amid a global recession. The oil contract for January delivery traded at $36.44 a barrel at 2:58 p.m. in Singapore on the New York Mercantile Exchange.

Nanshan Power shares climbed 0.5 percent to 3.94 yuan at 2 p.m. local time compared with a 0.2 percent gain in the benchmark CSI 300 Index.

To contact the reporter on this story: Winnie Zhu in Shanghai at Wzhu4@bloomberg.net.