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Iraq mulls oil-hedging bigger than Mexico's deal

Baghdad considering hedging as much as 25% of its production. OPEC member is in the early phases of studying the project

Petroleumworld 05 24

Iraq is mulling an oil hedging program to lock in prices for future crude sales, potentially topping a similar deal run by Mexico that is considered the largest energy trade in Wall Street.

The Middle Eastern nation is in the very early stages of exploring a hedge for as much as a quarter of either its crude production or exports, Falah Al-Amri, the head of Iraq's state oil-marketing company, known as SOMO, said in an interview in London.

"We will not rush. This is a long process," Al-Amri said. "We must make sure we do not lose money. You know the Iraqi parliament, it would not accept that."

If Iraq goes ahead, that would require contracts giving price protection to about 400 million barrels a year of crude, according to Bloomberg calculations. That would be significantly larger than the Mexican oil hedge, run by the country's finance ministry, which uses options contracts to cover about 250 million barrels a year. Petroleos Mexicanos, the state-owned oil producer also known as Pemex, this year also hedged its output, an additional 100 million barrels.

Although oil hedging is common in the private sector, for example by U.S. shale producers to lock-in revenues and airlines to guarantee a maximum price for their jet-fuel, they are rare among oil-producing countries. On top of Mexico, only a handful other nations have publicly disclosed hedging programs, including Ecuador and Ghana.

Political Risk

Oil-producing countries face a number of obstacles to hedge. Mexico has spent on average $1 billion a year buying options contracts that give it the right, but not the obligation, to sell at a predetermined price. The size of the transaction could roil the market, sending prices lower. Any losses could carry a heavy political price.

Oil traders and bankers who monitor the Mexican oil hedge have said in the past the program contributed to push oil prices lower at least in 2008 and 2014.

Al-Amri didn't say what kind of hedging instrument Iraq could use or give a timeline for the start of the program, saying Iraq was in a learning process.

"We are sending people for training with international companies and they will learn about hedging and how we can do it," he said. "We will study and make a proposal to the government."

The hedging program would be a departure from usual business practices in the Middle East, where producers sell crude largely under long-term contracts with refiners. Iraq is already testing out new ways of selling oil, for example auctioning crude cargoes on the short-term market.

"Transforming SOMO is unstoppable. It will do more than just market Iraqi crude," Al-Amri said.

Story by Julian Lee and Javier Blas from Bloomberg.

bloomberg.com 05 23 2017

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