Government considers hedging oil price
Moch. N. Kurniawan, The Jakarta Post, Jakarta
The government is considering protectionist measures for the country's oil sales price for next year at the price level of US$22 per barrel, which is set in the state budget, amid increasing worries that oil prices will continue to decline, a senior government official said Friday.
Staff expert for economic and financial affairs at the Ministry of Energy and Mineral Resources Kardaya Warnika said the hedging scheme was necessary to ensure that the government would receive Rp 66.1 trillion ($6.2 billion) in oil revenue next year as targeted in the budget. There is a worldwide fear that prices may drop drastically due to a threatened "price war" among oil producers.
"We still have to discuss this idea with the House of Representatives," he told The Jakarta Post.
A hedging scheme aims to protect buyers or sellers of commodities against the possible increase or decrease in market prices by setting a price that the buyer or seller is satisfied with, all of which is underwritten by a commercial financial institution. The financial group essentially agrees to buy at the set amount regardless of market prices -- and is paid protective costs by the government.
According to Kardaya, by effectively insuring the oil sales price, the government will be protected from the potential losses in case the price remains below $22 per barrel, but on the negative side, the government will not see a profit increase if the price goes above $22, that profit would go to the underwriter chosen to work with the government.
Kardaya admitted that if oil prices remained low, the country would find it difficult to sell at a price of $22 for any extended length of time. The protective costs payable by the government to the underwriter will soar, should the oil price remain low or dip further.
Kardaya said the government had no plans to initiate a hedge scheme for the remainder of 2001 due to optimism that it could reap the targeted Rp 100 trillion (about $10.52 billion) in oil and gas revenues this year, despite the current price slump.
He said if oil prices were to average $22 a barrel for the remainder of the year, the country would still meet the revenue target.
"Our oil revenue target assumes an average oil price of $24 for the entire year; thus far we've seen favorable prices of more than $25 during the first half of this year," Kardaya said.
Oil prices have been declining since the Sept. 11 attacks on the U.S., which has exacerbated the global economic slowdown.
To prop up the price the Organization of Petroleum Exporting Countries (OPEC) -- including Indonesia -- met this week to discuss plans to cut oil production, but the organization failed to get commitments from non-OPEC countries to participate in a proposed output cut.
OPEC agreed Wednesday to cut output by 1.5 million barrels per day starting Jan. 1 next year provided that non-OPEC producers, such us Norway, Russia and Mexico, are willing to cut output by 0.5 million barrels per day.
Brent crude prices slumped to $17.33 on Thursday following the refusal of non-OPEC countries to meet OPEC's request. On Friday, brent crude was being traded at $17.94 as of 6 p.m. Jakarta time.
Several analysts warn that oil prices could slump to $15 per barrel or more over the next two months in view of the dispute between OPEC and non-OPEC countries.
If this happens, Indonesia, with an output of 1.2 million barrels per day risks losing $9 million per day in potential revenue. This means Indonesia could risk losing $270 million in potential revenue this month or $540 million in the next two months.
This compares with the $520 million revenue expected by the government from the planned sale of 51 percent of state-owned cement firm Semen Gresik to Mexican firm Cemex SA de CV, and the total Rp 6.4 trillion ($600 million) in salary to be paid by the government for its officials this month and next month.