Indian State Refiners Reluctant to Hedge Oil Purchases

India's risk-averse state refiners are reluctant to follow central bank advice to hedge part of the country's $165 billion annual oil import bill, fearing administrative action if they suffer losses, refinery sources said.

Officials in Prime Minister Narendra Modi's government on Monday discussed the idea, which is part of a push by Reserve Bank of India (BANKINDIA.NS) Governor Raghuram Rajan to make Asia's No.3 economy less vulnerable to external shocks.

India is the world's fourth-largest oil consumer and imports 3.8 million barrels per day of crude. Any spike in oil prices can drive up the current-account deficit and inflation - both chronic ills that have long hobbled India's development.

The idea of buying insurance against a possible oil price rally comes onto the agenda as oil prices touch four-year lows. But India's dominant state refiners are reluctant to hedge due to the political fallout that any wrong-way bets could trigger.

"The RBI has suggested that we should hedge our crude purchases ... I doubt state refiners will be doing it. It is very risky for them," said one source with direct knowledge of the meeting.

Further discussions could follow Monday's get-together between oil secretary Saurabh Chandra, officials from the finance ministry and Modi's cabinet secretary, the country's most senior bureaucrat, this source said.

Officials at the oil ministry, finance ministry and RBI could not be reached for comment because of a public holiday in India.

State-owned Indian Oil Corp, Bharat Petroleum Corp , Hindustan Petroleum Corp and Mangalore Refinery and Petrochemicals Ltd together control about 60 percent of India's 4.3 million bpd in refining capacity.

Privately owned competitors Reliance Industries and Essar Oil (ESSAROIL.BO) both use hedging tools to lock in costs, as and when the opportunity arises on the international market.

India wants state refiners to capitalise on falling oil prices, which at $82 a barrel for Brent crude are at their lowest since October 2010, to lock in their supply costs. Some already hedge their refining margins.

Only last month, Modi deregulated diesel prices that the prior government had subjected to state controls to blunt the impact of a previous oil rally on Indian drivers and truckers.

The policy will reduce costly fuel subsidies but also expose India's state-owned refiners to greater market risks on the refined products they sell in addition to the cost of the crude they process.


Risky Bet
A parliamentary panel last year had raised questions over state refiners' reluctance to hedge imports.

"It is a risky affair. So, at times it can work in your favour, but many times it can work against you. If it goes against you, then you are answerable to all kinds of queries," R.K. Singh, the then-chairman of Bharat Petroleum, said at the time.

Sources at refining companies said they can hedge oil purchases to the extent of their physical transactions, but unlike private refiners, they lack the flexibility and appetite to absorb losses if their bets go wrong.

"My finances will be immediately affected if we make losses in hedging ... I am already depending on government subsidies for my operations," an executive at IOC said.

Indian state refiners on average buy 80 percent of their oil import needs through term contracts and the balance through spot purchases.

Traders and private companies can absorb some of the losses and they adequately reward their staff if they make a profit, said a source at one of the state refiners.

"But for us we have two sides of the transaction -- a minus and a plus. Plus is your duty and minus is a penalty," he said.

(Reporting by Nidhi Verma; Editing by Douglas Busvine and Dale Hudson)