ECC likely to hedge prices of 15% imported POL products

ISLAMABAD: The Economic Coordination Committee (ECC) is likely to approve a summary of Petroleum Division seeking the permission of initiating process about hedging the prices of 15% of the country’s petroleum oil and lubricants (POL) products imports under the financial instrument of call option today.

According to The News, the ECC will take up 11-point agenda today which also includes summaries from various ministries. The meeting will take up the summary titled “Hedging prices for petroleum products being imported”.

Among the agenda items, important issues including (i) Impacts of reduction in demand due to lockdown and economic slowdown as a result of COVID-19-Committee for finalisation of ToRs for payments to IPPs; (ii) Reimbursement of operational cost of single point mooring installed by Byco refinery will also be discussed.

An official said that in case the ECC accords approval to the hedging of prices, the country will get a reasonable benefit as the basket price of petroleum products in the country would remain stable and cheaper as well as under the proposed summary, the prices of 15% petroleum products of total annual imports of 68 million barrels oil for up to two years will be hedged to get the benefit of the low prices of POL products in the international market because of COVID-19 pandemic.

The government will use the financial instrument of a call option for 15 million barrels of oil for one or two years divided into 12 equal monthly amounts for a strike price of $8-15 above current Brent as long as the fee is within an acceptable range.

A call option provides the buyer with an option to hedge against potentially rising prices and under the instrument a price cap is bought for a defined volume and a defined period of time.

The call option has a price that depends upon the length and level at which the call is set up.

The News in its May 11 edition published a story ‘Govt poised to hedge prices of 15-20% imported POL products’. The Finance Ministry, State Bank of Pakistan (SBP) and Standard Charted Bank, Citibank and a consortium of Habib Bank with JPMorgan are on board for the purpose of hedging the POL prices.

Under the proposed summary, the government wants to use the hedging instrument of a call option for 15 million barrels of oil for 1-2 years divided into 12 equal monthly amounts for a strike price of $8-15 above current Brent as long as the fee is within an acceptable range.

The Pakistan State Oil (PSO) has been recommended in the summary to be approved as the counterparty and the Ministry of Finance will extend a guarantee of performance to PSO. The Petroleum Division has recommended to the ECC two scenarios for call option of hedging prices of 15 million barrels of oil either for one year or two.

Under scenario one, there will be a call option for 15 million barrels of oil for one year divided into 12 equal monthly amounts for a strike price of $8 above current Brent as long as the fee is within an acceptable range.

And under scenario two, there will be a call option for 15 million barrels of oil for two years, divided into equal 12 monthly amounts for a strike price of $15 above current Brent.

The Petroleum Division in the summary for ECC has also asked for notifying a committee led by secretary finance and comprising of secretary petroleum, secretary law and secretary planning plus the managing director of PSO to finalise the call options with the selected banks.

It also recommended the ECC to give Ogra the government policy direction to include the monthly price of the option in the cost of LNG (or any other oil product chosen) in announcing the monthly prices.

Originally published in The News