Pertamina gets offer to hedge oil price at $22

Berni K. Moestafa, The Jakarta Post, Jakarta

State oil and gas company Pertamina said it had received offers from Bank of America and Credit Suisse to hedge its crude oil selling price at US$22 a barrel to safeguard oil revenues for next year's state budget against a protracted slump in oil prices.

Pertamina president Baihaki Hakim on Tuesday described the two financial institutions as respected hedging agencies in the market.

Asked whether Pertamina had approached them, he said "they've made the offer."

He confirmed that the two institutions had agreed to hedge Indonesia's crude at $22 a barrel, but added that the question was at what premium.

As yet, talks with them had centered around the hedging mechanisms, which would later determine the fee Pertamina would have to pay, he said.

"The fee could range between 10 U.S. cents and $1 a barrel," Baihaki explained.

The government is mulling over hedging the selling price of its crude oil as prices remain weak reflecting the grim outlook on the global economic front.

Crude oil prices have slumped to below $20 a barrel, buckling under low demand as the world's economies slide into recession.

Analysts are predicting that oil prices will remain low until into the first semester of next year.

Baihaki said he preferred hedging Indonesia's crude for that six-month period.

The 2002 budget assumes an average oil price of $22 a barrel.

Based on an exchange rate of Rp 9,000 to the U.S. dollar and oil output of 1.3 million barrels per day (bpd), Indonesia is eying Rp 60 trillion (some $5.75 billion) in oil revenues for next year.

Currently, Pertamina produces only 1.2 million bpd. But a weaker than expected rupiah could help mitigate the shortfall in output or in price.

Baihaki added that Pertamina would only hedge the government's 85 percent share of the country's total oil output.

"We must proceed carefully with the plan, since Indonesia has never entered the hedging market," Baihaki continued.

He cautioned that Indonesia's crude oil was unknown to players in the hedging market, meaning they faced a greater risk with Indonesian crude oil.

The only Indonesian crude oil known to the market was the Sumatra light or Minas, he explained.

"I think the market is hesitant, as they've never done an evaluation and don't know the appropriate price," he said.

Baihaki said an alternative to hedging would be to revise the oil price assumption in the state budget altogether.

"But everyone thinks it's too premature to revise oil prices downwards. It's better to just wait," he added.

Separately, local oil and gas company PT Medco Energi Internasional's president John S. Karamoy said hedging became common when oil prices were falling.

"The higher the price one seeks to hedge against, the more expensive it will be," he told The Jakarta Post.

According to John, hedging the oil price at $22 a barrel when prices were as low as $20 was likely to be expensive.

Meanwhile, Baihaki said Pertamina would sign six new oil and gas contracts by the end of this year, giving a boost to the country's diminishing oil production.

In addition, the company might also extend two oil and gas contracts, he said.

He said the four contracts would cover fields in East Kalimantan, one in Natuna and another one in the Java Sea.

He did not mention the combined value of the contracts nor the names of the oil and gas companies involved.