Oil hedging: ECC may decide on call options tomorrow

The Economic Coordination Committee (ECC) of the Cabinet may be presented with a proposal of oil hedging on Wednesday and decide to empower the committee led by Secretary Finance to finalize one of the two proposed call options.

Other members of the committee include secretary petroleum, secretary law and secretary planning as well as Managing Director Pakistan State Oil (PSO) to be tasked to finalize the call options with the selected bank. A similar proposal was also discussed during 2009 but was not considered viable and was shelved, sources in Ministry of Finance said.

Call option one is for 15 million barrels of oil for one year for a strike price of $8 above crude oil price whereas in the second call option the same quantity of oil for a period of two years at a strike price of $15.

The ministry proposed that as currently Brent is in the range of $20-25/bb and the price of call options vary every day with a change in the price of Brent, therefore it is essential that the approval granted by the ECC is for a range of call option prices in order for the finance ministry to lock it when an acceptable offer is put on the table by the relevant bank; a fixed price approval will become irrelevant the next day as the market price changes. .

Ministry of Energy has proposed two call options for oil hedging with the first one suggesting $8 above the current Brent as long as fee is within acceptable range for 15 million barrels of oil for one years in twelve equal monthly installments whereas under second call option hedging to be at $15 above current Brent.

Sources said that earlier, Prime Minister was informed by Petroleum Division over placing order for oil import when oil price fell to $30 per barrel in March 2020 but it dropped the idea of oil hedging on fears of a further crash in prices. Shankar Talreja, senior research analyst Topline Securities told Business Recorder that hedging is a complicated and risky practice that allows oil producers to lock in a future price, protecting against falling oil prices.

He said that oil producing countries like Saudi Arabia use a hedging strategy to keep selling crude oil at a high price.

Sources in Petroleum Division said that no oil hedging took place after 2008 though proposals came under consideration occasionally but no decision was taken on this.

On June 17, 2010, Public Accounts Committee of National Assembly clamped a ban on Pakistan International Airline (PIA) for fuel hedging in future, which it observed inflicted huge financial loss to the entity. Chaudhry Nisar chaired the committee which was informed that PIA operated the Haj flights by hedging fuel, which inflicted Rs 120 billion loss to public exchequer in 2008. Citibank (Pvt) Ltd and Standard Chartered Bank (Pvt) Ltd made hedging arrangements for 425,000 barrels at $120 per barrel. The reason; Ministry of Religious Affairs persuaded PIA management to fix Haj fares in 2008 and wanted the exact amount of Haj fares prior to announcement of Haj Policy.

Pakistan's crude oil import is 68 million barrels per annum. The import of high-speed diesel (HSD) is 19 million barrels and of petrol is 45 million barrels. The liquefied natural gas (LNG) stands at 6 million tonnes. This makes the total volume of imports of around 175 million barrels per annum.