Goldman Sachs (NYSE:GS) Threatening to Sue Chinese Power Company ‘Shenzhen Nanshan Power’ for $80 Million in Contract Defaults

After a little over a year, Goldman Sachs (NYSE:GS) and Chinese Power Company ‘Shenzhen Nanshan Power’ haven’t been able to come to an agreement over to oil hedging contracts which Shenzhen defaulted on; a battle centering around losses related to derivatives.

The commodity arm of Goldman Sachs, J Aron & Company, has said if Shenzhen doesn’t pay up, they’ll have to resort to suing them for $80 million for breaking the contracts between the two in October 2008.

Shenzhen Nanshan Power, is a Chinese state-owned enterprise producing thermal power. A spokesman for Shenzhen stated the company won’t pay what J Aron is demanding, although they continue in negotiations. In other words, after almost 15 months there’s no headway, so it’s bound to go to court to resolve it, as what more can be added to the negotiations than has already been talked about?

J Aron has pressed the issue by saying they will take whatever steps they need to to secure the money they’re asking for, and that could be to sue them without any further talks or communication.

According to Chinese regulators, executives at Shenzhen didn’t have the authority to enter into these contracts with J Aron, and so in October 2008 forced the company to terminate the contracts, which initiated the negotiations and ongoing battle between the two.

Le Wei, vice-chairman of China’s State-Owned Assets Supervision and Administration Commission (SASAC), said recently that the contracts offered from J Aron were marketed “fraudulently” and with “evil intentions.” Le Wei added that the derivatives contracts sold Shenzhen were “intentionally complex and highly leveraged.”

As far as the specifics of the contract, Shenzhen leaders entered into deals which would reward them if oil were to remain above the price of $62 a barrel between March and December 2008.

What seems to have happened in this particular deal, is the Chinese took on what seemed to be a sure bet, as the price of oil in the early part of 2008 stood as high as $110 a barrel, reaching a high of $147.27 a barrel in July 2008.

But the price plunged in a relatively short time, plunging as low as $33 a barrel in December 2008. Almost 70 Chinese companies ran up losses close to $1.6 billion in oil hedging contracts with a number of foreign banks.

SASAC continue to backup Shenzhen in refusing to pay the money they allegedly owe to Goldman Sachs’ commodity unit.