RBI permits hedging by oil firms

MUMBAI: The Reserve Bank of India (RBI) has allowed Indian oil companies to protect themselves from the volatile international oil market by finally allowing risk management of refining margins.
The apex bank has permitted IndianOil, Bharat Petroleum, Reliance Petroleum and MRPL (Mangalore Refineries) to hedge their margins, to ensure an even cash-flow. The companies will be permitted to manage their risk to the extent of their exposure to imported crude.
Oil companies hailed the decision.``The decision has been awaited by the oil companies for a long time and it will allow for assured cash-flows'''', an oil company source said.
"Companies will now be able to lock-in their crude oil prices as well as their end-product prices, so they clearly know what their margins will be,'''' the source explained. The refineries'' operations can be planned on this basis. A refinery can then be run either at a higher capacity when margins are high or it can take a cut if margins are poor, he said.
Sources in IndianOil said they plan to start hedging refining margins for themselves as well as Chennai Petroleum as soon as possible. The company''s crude import bill was $6 billion last year as it uses imported crude for most of its seven refineries.
The other big refiner Reliance Petroleum today imports 100 per cent of its 27 million tonne crude requirement. RPL has already been hedging its imports but will now be able to hedge margins, sources said.
MRPL sources said "they would commence hedging as soon as the system was in place."
The company currently imports all its crude requirement and is advised by Chevron-Texaco on its international oil trade deals. BPCL uses indigenous (Bombay High) crude for most (70 per cent) of its Mumbai refinery needs, but it plans to hedge its remaining exposure as well as that of Kochi Petroleum, it is learnt.
The oil companies approached the Reserve Bank of India in September ''00 for permission to hedge its refining margins. The finance ministry cleared the proposal and had been pending with the RBI.
IOC has already shortlisted about 20 counter-parties, mostly large banks, oil companies and traders, through whom the trades will be executed. The list includes players such as Goldman Sachs, Morgan Stanley and Citibank.