HPCL in no hurry to start hedging crude import risk

Vol 8, PW 13 (22 Sep 04) Midstream & Downstream

Hindustan Petroleum is clearly in no rush to begin hedging the risk of its crude imports.

HPCL feels it necessary not to rush into this activity, GA Shirwaikar, Executive Director (crude and supplies), wrote to the oil ministry on 14th September. Shirwaikar said HPCL has secured term contracts for 65% of its imported crude and that only a small quantity of high Gross Refining Margin (GRM) crude unavailable on term contracts would be purchased from the spot market.

Risk management is not desirable to hedge a large portion of the crude oil requirement in the paper market since refining margins and not crude prices are important to refining companies like HPCL, he adds. Locking of margins in these situations is likely to reduce profitability and therefore needs to be done with extreme caution.

Shirwaikar stresses that HPCLs refining margins remain high despite spiralling crude prices: during April to August this year, HPCL recorded an average refining margin of $5.09 per barrel against $4.44 per barrel last year. But HPCL has not excluded hedging completely.

Shirwaikar adds that HPCL plans to hire a consultant of international repute to develop a proper risk management function in the organisation to train concerned officers in the job. In 2003-04, HPCL imported 9m t/y of crude for its Mumbai and Vizag refineries.

Separately, HPCLs rival Bharat Petroleum is ready with its crude hedging and risk management policy and is only waiting for permission from the Reserve Bank of India to begin trading. We plan to start taking positions in the international market in October itself, BPCL tells PETROWATCH.

In 2003-04, BPCL imported 10.46m tonnes of crude for $2.18bn to be processed at its Mumbai and Kochi refineries. During the same year BPCL exported 97, 000 tonnes of different petroleum products worth $214m.

Consultant Accenture is BPCLs advisor for crude hedging.