Govt weighs 'options' to lock lower fuel prices.

Islamabad -- To take maximum benefit from the lowering international oil prices, the petroleum division has recommended the government to hedge the prices of 15 million barrels of oil for up to two years.

In a summary moved to the Economic Coordination Committee (ECC) the Petroleum Division has recommended various options for hedging the prices of Petroleum Products.

According a summary available with The Nation, the Ministry of Energy (Petroleum Division) recommended Call Options for 15 million barrels of oil for one year, divided in 12 monthly accounts, with a strike price of $8 above current Brent as long as the fee is within acceptable range. Similarly it was also proposed that a Call Options for 15 million barrels of Oil for two years, divided in equal 12 monthly amounts, for a strike price of $15 above current Brent as long as the fee is within acceptable range. As per the summary PSO was approved as the call option holder and Ministry of Finance was to give a guarantee of performance by PSO.

Fuel price hedging through call option, which is a contractual tool being used to reduce exposure to volatile and potentially rising fuel costs, is being used by Pakistan for the first time.

The energy ministry proposed that a committee be notified, led by Secretary Finance and comprising of Secretary Petroleum, Secretary Law, Secretary Planning and MD PSO, to finalize the Call options with the selected banks.

OGRA be given policy direction to include the monthly price of the options in the cost of LNG (or any other oil products chosen) in announcing the monthly prices.

It was further noted that the international market for oil and petroleum products has been in a major turmoil for the last few months. Starting from a price was led by Saudi Arabia and Russia (two largest oil producers, who perhaps have a common goal of forcing out American Shale oil producers) to the collapse in demand due to Covid-19 related lockdown around the globe, the market has seen price lows that nobody expected. With the recent agreement on production cuts, the Brent price seems to have stabilized somewhat.

The Ministry of Energy(Petroleum Division) has been working with the Ministry of Finance for the last one month to evaluate the possibilities of hedging some portion of the exposure to Pakistan for import of Petroleum products that are directly or indirectly linked to crude prices. This include crude oil, Motor Gasoline, HSD as well as LNG. In this process, several...