In order to effectively mitigate price risk of crude oil, petroleum products & freights, Bharat Petroleum adopts a comprehensive Risk Management Policies & Processes.
Refinery margins are being hedged in order to protect operating costs of BPCL’s refineries from adverse price movement of crude oils and petroleum products in the international markets. Freight costs on import of crude oil are being hedged in order to protect BPCL from adverse price movement of international shipping freight rates.
Refinery margins are hedged by entering into derivatives contracts viz. Swaps, with BPCL’s registered counterparties through Over-the-Counter transactions, at fixed prices for future months. Hedging transactions undertaken are as follows:
- Sell positions for swaps of products crack spreads of Naphtha, 92 Ron Gasoline, GasOil, Jet/Kero and Fuel Oil i.e. difference between the respective product price and Dubai benchmark crude oil price
- Buy and Sell positions for swaps of inter product spreads i.e. price difference between two poducts viz. Reforming Margin (Gasoline – Naphtha), Regrade (Jet/Kero – Gasoil) and Coking Margin (Gasoil – FO), and
- Buy positions for Swaps of Dated Brent and Dubai Crude Oil price differential.
Freight costs, comprise of charter hire and bunker fuel costs. Freight is hedged by buy transactions of derivative instrument called Freight Forward Agreement (FFA). However, liquidity of FFA is very low and not actively traded farther months ahead. Bunker fuel cost is hedged by derivatives instruments viz. Fuel Oil (FO) swaps (buy transactions) and FO Zero Cost Collar (ZCC) options (both buy and sell transactions in each instrument).
These derivatives transactions are also done with BPCL’s registered counterparties through Over-the-Counter transactions, at fixed rates for future months.