ECC approves oil price hedging plan

Updated 04 Jun 2020

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Committee formed to select strike price for 15m barrels. — AFP/File
Committee formed to select strike price for 15m barrels. — AFP/File

ISLAMABAD: The Economic Coordina­tion Committee (ECC) of the Cabinet on Wednesday allowed hedging the prices of about nine per cent of oil imports (about 15 million barrels) and constituted an inter-ministerial committee for the selection of an appropriate strike price.

The ECC meeting presided over by Finance Adviser Dr Abdul Hafeez Shaikh also approved payment of Rs23 billion from public kitty for onward payment to independent power producers, Rs8.8bn for “strengthening of western border security” and Rs4.41bn to National Accountability Bureau (NAB) to pay arbitration penalties to a British firm.

The ECC constituted a committee led by Special Assistant to Prime Minister for Petroleum Nadeem Babar to explore various call options for hedging prices for the petroleum products imported by Pakistan.

Committee formed to select strike price for 15m barrels

The committee will have representation from State Bank of Pakistan, Pakistan State Oil, Finance Division, Petroleum Division, Law Division and Planning Division to explore call option for 15m barrels of oil for one or two years divided in 12 equal monthly amounts for different stock price above current Brent as long as fee was within acceptable range.

Under the terms of reference (TOR) which can be readjusted by the Committee in the light of future developments, PSO will act as the counterparty while the Ministry of Finance shall give a guarantee of performance by the PSO. The Oil & Gas Regulatory Authority (Ogra) would also be given the 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.

The Ministry of Petroleum has sought approval for a call option for 15m barrels of oil for one year, divided in 12 equal monthly amounts, for a strike price of $8 above current Brent.

It has sought to have another call option for 15m barrels of oil for two years, divided in 12 equal monthly amounts, for a strike price of $15 above current Brent.

Pakistan’s total imports are about 175m barrels per annum of oil equivalent. This includes total crude imports of 68m barrels per year, 45m barrels of petrol, 19m barrels of high speed diesel and 6m tonnes of term contracts of LNG.

The ECC also discussed the reported shortage of petrol in some cities and asked the Ministry of Energy, Competition Commission of Pakistan and the Ogra to ensure the requisite stocks were maintained by the OMCs and the supply to the fuel stations across the country was regular and intact throughout the month. Chairman ECC while taking a stern view of the reported petrol shortage directed all the relevant ministries, departments and agencies to immediately inform him if situation worsens any further.

The ECC also took up a proposal by the ministry for payment of unrecovered fixed costs of Rs43.7bn to the IPPs and asked the Finance Division to release Rs23bn while the issue of remaining payments would be resolved by all the stakeholders within one week and would be taken up in the next ECC meeting.

Published in Dawn, June 4th, 2020