Ghana has hedged the sale of its jubilee oil at $107 per barrel from May to December 2011, a decision the Finance and Economic Minister, Dr. Kwabena Duffuor says will stabilize the budget revenue.
However, the country will gain when crude oil stays above that price and lose when it trades below $107. “It is primarily an insurance program to ensure that we have a predictable minimum price for our exports. This will help our budget not to be destabilized if crude prices fall, the Finance Minister emphasized.
He also added that the country will continue to hedge 50 percent of crude oil imports, about a million barrels till the end of the year as part of the Petroleum Price Risk Programme.
This is expected to insulate consumers from hikes in crude oil prices on the world market. Brent crude hovered around $119.20 yesterday on the world market. Due to the volatility in oil prices, the price at which Ghana hedged the imports would differ monthly.
However, the price of fuel products might go up depending on the current market price. Dr. Duffuor said Ghana was aware of the hedging challenges that hit certain global firms including Orange County, Barings and more recently Societe Generale.
Therefore, these problems highlight the need for government to develop oversight and internal control system that has many elements including establish overall risk management policies for government, approve and implement monitoring systems, report regularly to cabinet about on-going risk management activities among others, he added.
But some economists and market watchers have expressed concern about the derivative, especially when multinational companies like AngloGold posted losses when they hedged some years ago.
However, the Finance Minister noted that if the economy in 2008 was insured against the price risk of crude oil which reached a record $145 per barrel, the economy would have been able to withstand the external shocks much better. The external shocks brought about high fiscal deficit and imports bill.
He emphasized that the oil hedging policy has played an instrumental role in the macro-economic stability of the country. “In economic management there must be a strategy. With the 50 percent we have hedged, we have been restored as a country. If we had not gone in for hedging the whole macro situation would not have been stabilized,” he said.
Citi Bank, Standard Chartered Bank and some other financial institutions were selected as transactional advisers to the hedging deal and it is believed that the country spent some GH¢66 million by way of premium payment alone for the period.
Hedging is the process in which when there is an anticipation of a rise in the price of a commodity in a future, the buyer places a contract to buy the commodity at a fixed price from the seller. Government hedged one million barrels of crude oil at $82.50 per barrel for a period of six months in November last year.
At that time, the price of crude on the global market was hovering around $75 but after four months it surged past $115. Ghana discovered oil in commercial quantities in July 2007. Presently, the country produces about 70,000 barrels a day from the jubilee oilfield which is expected to increase next month.
It has so far bagged about $250 million from the sale of its share of the oil through the Ghana National Petroleum Corporation (GNPC).