Petrojam weighs oil hedging strategy … cautiously
State-owned refinery company Petrojam Limited is actively considering a suggestion that it adopt a hedging strategy for its crude purchases, but is cautious about making the wrong bets on prices.
Petrojam imports about nine million barrels of crude per year, mostly under concessionary terms from Venezuela. It also imports refined products as needed, a bill that the Economic and Social Survey Jamaica last estimated at US$853 million for 2013.
Trade data for the period January to September indicate a near US$200-million fall in the value of crude oil imports by Petrojam. The refinery's imports were valued at US$503.4 million for the first nine months of 2014, down from US$691.8 million in the comparative period of 2013, according to data provided to the Financial Gleaner by the Statistical Institute of Jamaica.
Savings expected to erode
Those savings are expected to erode when world oil prices change direction. Crude is now trading below US$50, but analysts believe prices may return to a US$60-US$80 range by yearend.
Petrojam says it pays Gulf-referenced market price for PetroCaribe oil.
The man tasked with resetting Jamaica's energy strategy, Dr Vincent Lawrence, believes oil may return to US$75 to US$80 per barrel by yearend. Earlier this month, he proposed that local oil importers consider hedging their purchases ahead of the shift.
Petrojam, in response to Financial Gleaner queries, indicated that it was weighing the idea, but was not inclined to rush.
"While hedging is a strategy that is being actively explored by the organisation, it is not an activity in which we are currently engaged," the company said via its marketing department.
"Crude prices are in general, difficult to predict and, based on the volatility of the energy market, we would not be able to estimate where these prices will be."
Hedging is aimed at accomplishing a stable price, says head of treasury and trading at Scotia Investments Jamaica, Gregory Samuels. He says hedging is essentially an insurance policy against price volatility.
"There are several strategies," he said. "If you are a consumer of oil, you can buy a call option on oil, where you pay a premium upfront and you buy at a particular price; you can also do a swap, where you pay a fixed rate no matter what the price of oil is; then there are combinations of different strategies ... ."
Winston Watson, the group general manager of Petroleum Corporation of Jamaica, Petrojam's parent, said at a public forum that the company had to weigh carefully the price at which to hedge.
"In a falling market, you are going to have to find which price you are going to hedge at. If the market is going down, and we hedge at US$50, in a falling market someone is going to come and say why did you hedge at US$50 when it's selling for US$40. You have to carefully analyse the market to see where is the strike point for you to then make your call," he told the forum.
Watson said Petrojam's hedging strategy review would be completed in three to four weeks.
Samuels said large manufacturing companies have done one-off synthetic hedges which allows them - by determining the number of barrels used in producing electricity - to hedge oil usage.
"If Company X consumes 1,000 BTUs of energy, based on the number of barrels it takes to produce that amount, what you would do is hedge that amount. Once oil price goes up, the bill could be hedged by about 80 per cent. That's a strategy that companies can employ," the trader said.
Jamaica's bauxite interests import their own oil, but the largest of the operators which controls about 60 per cent of the sector's assets, said it would not disclose information on its purchasing strategy.
UC Rusal Jamaica said through its Windalco-Ewarton information office that it was bound by confidentiality agreements with its suppliers.
Other local oil importers
PCJ Chairman Christopher Cargill says Petrojam brings in, on average, about 70 per cent of imported oil; and that other direct importers are bauxite/alumina companies Jamalco and UC Rusal, and petroleum marketing company Rubis Energy Jamaica, which imports directly to Rockfort in Kingston.
Cargill said that of the lot of local oil importers, Jamalco is the only one known to engage in hedging. Jamalco spokesman Leo Lambert said new owner, Noble Group, would not comment for this story.
Like Petrojam, Caribbean Cement Company is weighing a hedging strategy. It would be a first for the cement maker, which leans heavily on coal to manage its energy bill.
"Whatever we purchase in regard to diesel of Bunker C comes from local suppliers. We use coal for our kiln fuel, which typically comes from the US eastern seaboard. Our coal fuel costs approximate to US$10 million per annum," said General Manager Anthony Haynes.
Haynes said coal prices are fairly steady, but are also trending downwards.
"With falling oil prices and therefore falling electricity prices this does change the potential benefits. Our varying power options remain under review," he said.
Samuels says "the jury is out as to where oil prices will end up" and that hedging will allow manufacturers and other businesses the certainty to plan based on fixed prices locked into contracts.
Not a bet
Even if oil prices drop to US$28, and the contract is locked at, say, US$47, the trader said, the company is still ahead, given that prices are coming from US$100 per barrel just last year.
"It's not a matter of a bet; it's more about operating in an environment you are comfortable with and providing some level of certainty so that manufacturers can plan," he said.
"Part of the problem is the volatility. You do not know what your cost of production will be, so you don't know how to price your product. If you know over a particular period that the price will be 'this', then you can make a plan. Having a US$50 certainty in price is still better than not knowing that price will be because of the fluctuation and volatility."
Samuels also believes that Petrojam should hedge its oil purchases, saying the savings would pass through to electricity consumers at the level of the household, and the cost of production at the level of the firm.
"This is an opportunity for them to lock in prices at this lower level, because it is just a matter of time before oil prices start going back up ... what it means is that as soon as oil prices start going back up we will benefit from having locked in a lower price," he said