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Jamaica hedges oil bill in US$20m deal with Citibank

Published:Wednesday | June 10, 2015 | 6:57 PM
Governor of the Bank of Jamaica, Brian Wynter.

Jamaica has purchased hedging contracts from coun-terparty Citibank NA, covering six million barrels of oil imports over a period of 15 months dating from June 2015.

The Bank of Jamaica (BOJ) confirmed on Wednesday that the deal, inked during the first week of June, includes a number of contracts with differing volumes for each period and priced at the weighted average premium rate of US$3.34 per barrel.

The strike price varies across the contracts, but averages US$66.74 per barrel.

"A hedge or insurance was purchased from a counterparty last week. It is a number of contracts covering the next 15 months and six million barrels in total," said BOJ Governor Brian Wynter.

"The number of barrels varies each month - less at the start and more at the end when the risk of higher prices is expected to be greatest," Wynter said.

The transaction is the Jamaican Government's first oil hedging arrangement, resulting from a policy decision to manage the country's exposure to a predicted spike in oil prices from lows of about US$40 per barrel reached earlier this year. The fall in world prices since last year have boosted Jamaica's balance of payments position due to a lowering of the oil import bill - crude imports total nine million barrels per year - even as it threw tax revenue collections off-target due to lower SCT receipts from state refinery Petrojam.

Expectations are that crude prices may climb back to US$75-US$80 per barrel on the world market this year. They are already back above US$60.

The total premium paid for the hedge approximates US$20 million ($2.32 billion), Governor Wynter said. He is not ruling out other contracts, saying those transactions would be pursued if the need arises.

"The amount budgeted allows for this," he said, while noting that decisions would be made by a technical committee formed to monitor the hedging arrangements.

Jamaica has created both

a technical and an oversight committee to manage the hedges. The members of the oversight committee are Financial Secretary Devon Rowe as chairman; Governor Wynter; managing director of the Development Bank of Jamaica, Milverton Reynolds; managing director of the Petroleum Corpo-ration of Jamaica; Winston Watson; and Dr Vincent Lawrence.

The technical committee is chaired by Michael Hewettt of Petrojam and otherwise includes representatives of the BOJ, Ministry of Finance, and DBJ, whose specific identities were not disclosed.

The hedging contracts are being financed from a new special consumption tax (SCT) of $7 per litre on petrol - about US 6 cents per litre - implemented by the Government in March of this year. In total, it will raise about $6.4 billion to pay for insurance against the upward movement in oil prices.

Wynter said the weighted average strike price for all the hedging contracts is US$66.74 per barrel based on West Texas Intermediate pricing.

"If the price of oil exceeds the strike price, Citibank will pay to the GOJ the difference between the strike price - the market price - times the number of barrels for the period. If the price is less than the strike price, no payment is made by the counterparty," he said.

The central banker said the premium rate of US$3.34 per barrel - totalling US$20 million spent to insure the six million barrels, or just about a third of the expected intake from the new tax - was "lower than first projected".

"It's a process, not a one-shot thing. We can do more," he added.

BOJ later noted that the premium was lower than the originally budgeted rate of US$3.93 per barrel.

Jamaica consumes 17 million barrels of petroleum products, nine million of which are crude oil imports, while the rest is finished products.

The hedging arrangements are focused on the crude imports, which Jamaica sources almost exclusively from Venezuela at market prices.

Wynter did not say why the Citibank contracts did not cover the other three million barrels.

"Whether we do more will depend on the recommendation of the technical committee," he said.

The central bank said later that it was the technical committee that opted to insure two-thirds of import volumes now, but is planning to secure contracts for all nine million barrels eventually, but did not address whether it had a different counterparty in mind for the other three million barrels.

Otherwise, the central banker said Minister of Finance Dr Peter Phillips would address the issue of what the excess funds from the SCT might be used for. In March, Phillips had said that the collections would flow into a dedicated sub-account at the BOJ, which will be administered by the Development Bank of Jamaica in conjunction with the Ministry of Finance.

Wynter also declined to say where Jamaica expects the world price of oil to end up at yearend and into 2016.