Lectura 4:00 min
Oil hedging
Its easy to be a Monday morning quarterback, hurling critiques after the fact. But the point is that, now that prices of the Mexican oil export mix are approaching 90 dollars per barrel, maintaining an upward trend of many months, criticism grows regarding the governments decision to spend 812 million dollars to hedge oil revenues.
Finance Secretary Ernesto Cordero, who is now widely regarded as a strong presidential candidate for 2012, proudly announced last month that Mexico entered into a hedging transaction to limit the impact on government revenues if oil prices should fall sharply this year.
As things appear today, oil prices are headed north, with most experts predicting 100-dollar oil by spring, for the simple reason that demand will continue to outstrip supply in the foreseeable future.
Corderos decision marked the third consecutive year that the government has carried out such a hedging operation, essentially meant to protect the value of the revenues it receives from the oil monopoly firm, Pemex.
In announcing the hedging deal as part of the customary year-end review, Cordero acknowledged that the government has paid 812 million dollars for a put option that would enable Pemex to sell 222 million barrels of oil at an average price of 63 dollars per barrel in 2011. Cordero said the latest arrangement turned out to be the cheapest hedge so far, costing the government far less than the 2009 outlay of 1.1 billion dollars.
Up until now, everything seems fine and in order. After all, the business of second-guessing government actions has never been a profitable venture. The issue, however, is the governments lack of transparency, a malady that permeates the entire Executive Branch.
Specifically, the government refuses to reveal not only the names of the parties involved in this years deal, but also how much it pays in commissions, the amount of the deductible in case oil prices plummet even though that seems a remote possibility today, and other fine points.
Its difficult to keep secrets in the financial sector, and thus it has been unofficially confirmed that Hacienda for 2011 went with the same folks who were involved in last years hedging operation, JPMorgan Chase, headed in Mexico by Eduardo Cepeda, and Barclays.
No matter how you slice it, says a report by The Oil Daily, a unit of the prestigious Energy Intelligence Group, it would be disastrous for Mexico not to have an oil price insurance policy, since Pemex gross revenues constitute a major chunk of the federal budget.
The nation relies heavily on oil revenues, which can be volatile, to finance about 40 per cent of the federal budget. To mitigate that volatility, the government has used hedges as an insurance policy in case oil revenues drop during the fiscal year.
Pemex is currently producing around 940 million barrels per year, roughly half of which is exported. The real problem with oil output is that production has been declining for several years, and Pemexs operating inefficiency, plus the fact that it is milked dry by the government, make it difficult to allocate more resources to new explorations.
To be fair, the hedging strategy saved Mexico billions of dollars in 2009, when oil prices plunged. In July 2008, Hacienda, then headed by Agustín Carstens who is now at the central bank helm, paid 1.5 billion dollars for a put option allowing Pemex to sell 330 million barrels of its 2009 oil output at 70 dollars per barrel. At the time, oil prices exceeded 100 dollars, but they fell to less than half that level later that year.
Although this years hedge provides a price floor of 63 dollars, the 2011 budget factors in an average oil price of 65.40 dollars per barrel. Should the government exercise the option at the slightly lower price, Hacienda says it can make up the difference using Mexicos oil-income stabilization fund, which is not exactly bountiful.
Also, it must be acknowledged that the hedged price for this year is substantially lower than what Pemex has been getting for its oil exports. Through October, export prices averaged 70.65 dollars per barrel. In October, the most recent month for which the firm has reported data, the average price was 74.30, and the November estimate is higher.
The conclusion is that despite the cost, and the fact that Pemex is in dire need of capital to boost production, its better to be safe than sorry. If only transparency were the rule.
