RIL doubled its hedging in FY15 to shield against volatile crude

Mumbai: Mukesh Ambani’s Reliance Industries Ltd (RIL), which runs the world’s biggest single-location refinery at Jamnagar in Gujarat, more than doubled its product and feedstock hedging in the last fiscal year as a volatile crude exposed risks of huge inventory losses for crude oil refiners.

In 2014-15, RIL hedged a total of 308.71 million barrels annually or 0.85 million barrels per day (bpd) of its feedstock. This is against a total crude oil consumption of 1.32 million bpd that the company needs to run its refinery. This is more than double what RIL hedged in 2013-14, at 150.95 million barrels a year or 0.42 million bpd, according to the standalone numbers in the firm’s annual report released last Wednesday.

RIL uses the feedstock, largely crude oil, to run its 66 million tonne or 1.32 million bpd refinery at Jamnagar to produce refined items such as gasoline (petrol), gas oil (diesel), kerosene, aviation turbine fuel (ATF), fuel oil, etc. The company also consumes minor volumes of naphtha and natural gas to run its integrated refinery-cum-petrochemical complex.

The company also increased its hedging of petroleum products by almost three times in 2014-15, at 152.77 million barrels annually or 0.42 million bpd, as against 0.16 million bpd hedged in 2013-14, the annual report said.

The firm hedged a little extra on a consolidated basis to cushion itself from the volatility of crude oil prices in its upstream business, which contributes around 3% to its overall revenues and 5% to overall profits.

“Reliance’s (RIL) financial performance is subject to the fluctuating prices of crude oil and gas and downstream petroleum products. Prices of oil and gas products are affected by supply and demand, both globally and regionally… Since Reliance operates an integrated hydrocarbons business, some of these risks can be offset by gains in other parts of Reliance’s business. In addition, Reliance proactively hedges these exposures,” said the annual report.

The company used various instruments for hedging its risks such as forward swaps, futures, spreads and options.

“While the company has never explicitly given details of its hedging strategies, from what we understand, the company went long on feedstock and short on petroleum products. This is the strategy usually used by several oil and gas companies globally,” said an analyst with a domestic brokerage firm.

Going long essentially means the buyer is of the opinion that the price of the underlying instrument will go up and it will make profits when the price goes up. Going short on an instrument is the exact opposite.

He said while futures and options are exchange-traded instruments, forward swaps and spreads are usually over-the-counter instruments which are used to keep the price of a particular feedstock and its associated product within range.

He said while futures and options are exchange-traded instruments, forward swaps and spreads are usually over-the-counter instruments which are used to keep the price of a particular feedstock and its associated product within range.

Both analysts spoke on condition of anonymity.

RIL admitted to inventory loss in the third quarter during a conference call with analysts after its third-quarter results but did not share loss figures.

“Given that RIL is a crude oil consumer, hedging on crude oil would imply RIL would take long positions on crude. Notably, RIL has three times its net long position on feedstock from 41 million barrels to 135 million barrels, implying a $10 per barrel crude price increase since March 2015 to the present $64 per barrel. This would significantly add to hedging gains during Q1 of FY2016,” said Gagan Dixit, analyst with brokerage Quant Capital Ltd, in a report published on 22 May.

The second analyst cited above said a high level of hedging is prevalent among private oil and gas companies such as RIL, Essar Oil Ltd and Cairn India, while state-owned companies such as Indian Oil Corp. Ltd (IOC), Hindustan Petroleum Corp. Ltd (HPCL) and Bharat Petroleum Corp. Ltd (BPCL) do not have extensive hedging of products and feedstock.

In 2014-15, the price of benchmark Brent crude fell 48.86% from $107.76 per barrel to $55.11.

However, since 1 April till date, Brent crude has risen by 18.8% to $65.47 per barrel, benefiting firms which went long on the commodity.