Slippery oil: Regulatory confusion impedes hedging plans
Confusion over SBP’s role, fear of administrative action major hindrance.
Experts of the banking industry say government must not ignore benefits of hedging oil as the economy takes a battering whenever the price rallies. PHOTO: REUTERS
KARACHI:
Pakistan is unlikely to hedge even a small part of its $14 billion oil import bill any time soon because of confusion over state regulation and fear of prosecution if the bet goes wrong, industry people assert.
At least four top executives of as many refineries and oil marketing companies told The Express Tribune that the State Bank of Pakistan (SBP) does not allow the industry to hedge purchase of oil.
But Petroleum Minister Shahid Khaqan Abbasi insists there is no such restriction. “Private companies can hedge if they want to. Any bank can do that for them,” he said.
Oil has dropped to a five-year low of around $50 a barrel and governments of net importing countries are encouraging companies to hedge.
Byco International Incorporated Chairman Amir Abbasscisy, Attock Refinery CEO Adil Khattak and Pakistan Refinery Limited’s Managing Director Aftab Hussain all say that hedging has been prohibited by the central bank.
“We wanted to do it when the price was going up but were told that it was not possible,” said Khattak. “If the government really wants deregulation then there shouldn’t be any such restriction.”
The SBP did not comment despite its spokesman Khubaib Usmani being sent questions a week ago and after repeated reminders. In the end, he excused, saying the relevant department hasn’t replied.
However, experts of the banking industry say the government must not ignore benefits of hedging oil as the economy takes a battering whenever price rallies.
Former SBP governor Saleem Raza said he is unaware of regulations barring oil importers from hedging. “But if that’s true then (energy) firms must make a case to the government because I don’t see any reason why it shouldn’t be done.”
In his opinion, the central bank might be concerned about its foreign exchange reserves. “Maybe it wants companies to buy dollars from open markets rather than depending on SBP reserves.”
At least one-state run company, Pakistan International Airlines (PIA), has started insuring against a rise in jet fuel price.
Citibank’s Pakistan operations, ex-head Zubyr Soomro says the advantages of hedging at the right time can be huge. “Imagine the possibilities … power producers, which rely on imported furnace oil, can lock a lower price.”
As far as the reserve situation is concerned, officials shouldn’t worry because the companies pay in foreign exchange just once, he said.
What if the bet goes wrong?
In Pakistan’s case, any real benefit of insuring against future price hike can come only if PSO, the largest importer of petroleum products, is onboard. But a senior official said risk is too high.
“No one is going to stick his neck out for this. It’s almost impossible to predict oil prices even in the near future. And when the price drops below hedged value, there will be a loss. Someone would be made to pay for that,” he said.
State-run Pakistan Refinery’s Aftab Hussain also says that fear of facing corruption charges is the biggest deterrent for government organisations.
“What if we hedge now (at $50 per barrel) and the price drops to $20. Who is going to take the hit? There is margin of price moving a few dollars away from the target price but that is not enough.”
Petroleum Minister Abbasi also feels that hedging comes with a risk. “I don’t know of any government which is in the business of hedging oil. Obviously when a hedge doesn’t work out then you take a beating.”
About chances of PSO doing it, he said the government can’t take risks with public money.
Is it the right time?
Abbasi, who is also a businessman, says that it is unwise to hedge when price is falling. “You must also remember that in the end the casino always wins.”
Byco’s Amir Abbasscisy says that this is the time for companies to clear their oil stocks as quickly as possible. “Hedging is done when things are going smoothly. But there is a lot of uncertainty right now.”
He referred to Riyadh’s insistence that it could survive at the price of even $20 a barrel as just another example of how uncertain the near future appears. “So I don’t think this is really a good time to hedge.”
Published in The Express Tribune, January 8th, 2015.
Pakistan is unlikely to hedge even a small part of its $14 billion oil import bill any time soon because of confusion over state regulation and fear of prosecution if the bet goes wrong, industry people assert.
At least four top executives of as many refineries and oil marketing companies told The Express Tribune that the State Bank of Pakistan (SBP) does not allow the industry to hedge purchase of oil.
But Petroleum Minister Shahid Khaqan Abbasi insists there is no such restriction. “Private companies can hedge if they want to. Any bank can do that for them,” he said.
Oil has dropped to a five-year low of around $50 a barrel and governments of net importing countries are encouraging companies to hedge.
Byco International Incorporated Chairman Amir Abbasscisy, Attock Refinery CEO Adil Khattak and Pakistan Refinery Limited’s Managing Director Aftab Hussain all say that hedging has been prohibited by the central bank.
“We wanted to do it when the price was going up but were told that it was not possible,” said Khattak. “If the government really wants deregulation then there shouldn’t be any such restriction.”
The SBP did not comment despite its spokesman Khubaib Usmani being sent questions a week ago and after repeated reminders. In the end, he excused, saying the relevant department hasn’t replied.
However, experts of the banking industry say the government must not ignore benefits of hedging oil as the economy takes a battering whenever price rallies.
Former SBP governor Saleem Raza said he is unaware of regulations barring oil importers from hedging. “But if that’s true then (energy) firms must make a case to the government because I don’t see any reason why it shouldn’t be done.”
In his opinion, the central bank might be concerned about its foreign exchange reserves. “Maybe it wants companies to buy dollars from open markets rather than depending on SBP reserves.”
At least one-state run company, Pakistan International Airlines (PIA), has started insuring against a rise in jet fuel price.
Citibank’s Pakistan operations, ex-head Zubyr Soomro says the advantages of hedging at the right time can be huge. “Imagine the possibilities … power producers, which rely on imported furnace oil, can lock a lower price.”
As far as the reserve situation is concerned, officials shouldn’t worry because the companies pay in foreign exchange just once, he said.
What if the bet goes wrong?
In Pakistan’s case, any real benefit of insuring against future price hike can come only if PSO, the largest importer of petroleum products, is onboard. But a senior official said risk is too high.
“No one is going to stick his neck out for this. It’s almost impossible to predict oil prices even in the near future. And when the price drops below hedged value, there will be a loss. Someone would be made to pay for that,” he said.
State-run Pakistan Refinery’s Aftab Hussain also says that fear of facing corruption charges is the biggest deterrent for government organisations.
“What if we hedge now (at $50 per barrel) and the price drops to $20. Who is going to take the hit? There is margin of price moving a few dollars away from the target price but that is not enough.”
Petroleum Minister Abbasi also feels that hedging comes with a risk. “I don’t know of any government which is in the business of hedging oil. Obviously when a hedge doesn’t work out then you take a beating.”
About chances of PSO doing it, he said the government can’t take risks with public money.
Is it the right time?
Abbasi, who is also a businessman, says that it is unwise to hedge when price is falling. “You must also remember that in the end the casino always wins.”
Byco’s Amir Abbasscisy says that this is the time for companies to clear their oil stocks as quickly as possible. “Hedging is done when things are going smoothly. But there is a lot of uncertainty right now.”
He referred to Riyadh’s insistence that it could survive at the price of even $20 a barrel as just another example of how uncertain the near future appears. “So I don’t think this is really a good time to hedge.”
Published in The Express Tribune, January 8th, 2015.