Govt considering buying oil in advance to benefit from global prices

--MoE submits summary to ECC to allow import of 15 million barrels oil

ISLAMABAD: The federal government is considering taking benefit of the decline in global oil prices by purchasing the oil in advance and in this regard the Ministry of Energy (MoE) has sought an approval of the cabinet’s Economic Coordination Committee (ECC).

According to sources, owing to a decline in oil prices in the international market in the wake of the coronavirus lockowns, MoE wants to purchase oil in advance for one or two years.

They said the ministries of Energy and Finance have worked jointly during the last one month to evaluate the possibilities of hedging some portion of the exposure to Pakistan for import of petroleum products that are directly or indirectly linked to crude prices. And, in this process several discussions were held with the Standard Chartered Bank, the Citibank, and a consortium of the Habib Bank with the JP Morgan to understand the options available and the pricing mechanism, sources added.

“The next meeting of ECC is likely to consider the summary of MoE,” sources said, adding the ministry has asked to sign an agreement for purchase of diesel, petrol, crude oil etc in advance due to massive cut in oil prices following virus lockdowns.

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As per sources, the advice from all three institutions was that since Pakistan is considering oil price hedging for the first time, it should start with covering 15 per cent to 20pc exposure. And, once this programme is operational, it can consider increasing the coverage and making it an ongoing programme. Similarly, it was clearly advised by all that since the prices are changing hour to hour, the cost of a hedging programme goes up in a volatile market. Therefore, the collective view was (a) not to try to time the bottom of the market, and (b) wait for some level of price stability.

Sources further said total imports of crude oil are 68 million barrels per annum with HSD 19 million barrels, PMG 45 million barrels and the term contracts of LNG is six million tonnes.

Documents available with Pakistan Today disclosed that MoE (Petroleum Division) has prepared a summary for ECC titled ‘Hedging Prices for Petroleum Products being imported’ and forwarded the summary for consideration.

The ministry, in it summary, has asked ECC to approve import of 15 million barrel of oil for one for a strike price of $8 above current Brent or allow import of 15 million barrel of oil for two years for a strike price of $15 above current Brent as long as fee is within acceptable range.

“The Ministry of Finance will give a guarantee of performance by the Pakistan State Oil (PSO), while the Oil and Gas Regulatory Authority (OGRA) be given policy direction to include the monthly price of the option in the cost of Liquefied Natural Gas (LNG) in announcing the monthly prices,” said the document.

As per document, it has been suggested to notify a committee led by the Secretary Finance and comprising the Secretary Petroleum, the Secretary Law and the Secretary Planning side by side the PSO’s managing director to finalise the call options with the selected banks. Final approval will require ECC node to be obtained on short notice.

“MoE has seen and authorised the submission of the summary to ECC,” reads the document.

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Ahmad Ahmadani
The author is an investigative journalist. He can be reached at [email protected]
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