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1) Background:
1.1 Inventory
Bharat Petroleum Corporation Limited (BPCL) operates large supply chain
spanning the length and breadth of the nation. To service such a huge supply
chain, BPCL carries large inventories of crude oil. However, since inventories are
valued at cost or net releasable value, whichever is lower, the volatile oil prices
during any accounting period can have a major impact on corporate profitability
through adventitious gains/losses. As per Business Plan 15-16, Mumbai Refinery
& Kochi Refinery moving average inventory target decided as14 & 23 days
respectively.
1.2 Oil Price Volatility
During recent years, international oil market has witnessed fluctuations in the
crude oil prices. A graph below shows the fluctuation in monthly crude oil prices.
Such fluctuations in oil prices can have a major impact on the inventory value,
which in turn can have a disproportionate affect on the profitability. Hence,
corporate profitability is susceptible to the vagaries of international oil prices.
Year
Quarters
Imported Crude
Closing stock
(Million MT)
(Physical + In
transit)
201112
Q1
Q2
Q3
Q4
0.989
0.936
1.040
0.690
3942.1
3834.0
4701.3
3316.9
3942.1
3834.0
4701.3
3316.9
201213
Q1
Q2
Q3
Q4
1.402
1.227
1.099
0.591
5978.6
5805.4
5152.2
2766.6
5876.8
5805.4
5152.2
2626.1
201314
Q1
Q2
Q3
Q4
1.049
1.156
1.143
0.591
4825.0
6405.6
6170.2
3089.9
4825.0
6201.9
6010.9
2989.9
201415
Q1
Q2
Q3
Q4
1.321
1.322
0.888
1.135
6866.1
6315.3
2788.2
3092.9
6807.4
5955.9
2625.7
3092.9
Crude
Original
value (Rs
Crores)
Crude
Revised value
(Rs Crores)
Net
difference
(Rs Crores)
101.9
140.4
203.7
159.3
99.9
58.7
359.4
162.5
The pictorial below shows the quantity (bar graph with reference to right Y axis)
and crude value (line graph with reference to left Y axis). It would be seen that
quantity variation is within a narrow band whereas value of inventory has varied
significantly.
After taking into account the changes in quantity of inventory, the magnitude of
change (on absolute basis) for crude oil price have been in the order of Rs.1000
crores over the last 16 quarters. Thus there is a need for hedging crude oil
inventory.
Due to oil price volatility in the market and the inventory valuation policy based
on accounting standards applicable in the country, situations could occur where
the inventory value is lower than the cost. Therefore, use of swap and options will
be necessary to cover risks.
5.2 Market:
In line with existing practice of hedging of imports/exports/refining margins, OTC
Singapore market shall be used.
5.3 Tenure:
The tenure of the hedge contract will be limited to a maximum of one year
forward viz. 12 months as per RBI guidelines
5.4 Volume to be hedged:
A maximum of upto 50% of the inventories based on the volumes in the quarter
preceding the previous quarter can be hedged as per RBI guidelines.
5.5 Tools - Price linkage and publication to be used:
5.5.1 Inventory - Crude oil: Price linkage to Dubai and Brent in the OTC market.