Jamaica Hedges 8 Million Barrels of Crude in Deal with Citibank

The Government has contracted Citibank to provide coverage for eight million barrels of crude imports over an 18-month period, under its hedge programme.

Hedging is an investment position used to reduce substantial losses that could be incurred based on actual or perceived fluctuating developments.

The arrangement with Citibank covers the period from June 2015 to December 2016, and for which the bank has been paid approximately J$3.3 billion (US$27.9 million) in premiums by the Government to execute trades in June and July.

This was disclosed by Finance and Planning Minister, Dr. the Hon. Peter Phillips, during Tuesday’s (September 29) sitting of the House of Representatives, in response to questions posed by Opposition Spokesman on Finance, Audley Shaw.

Dr. Phillips said Citibank was chosen from three of the four entities making submissions in response to the Government’s request for proposals for the provision of quotations on the cost of purchasing call options (financial contracts) for 12 and 24-month periods, beginning June 1, 2015.

The other entities approached, he told the House, included: British Petroleum; Noble Corporation; and the Bank of Nova Scotia.

The Minister said the proposals were evaluated on the basis of “consensus forecasts” from various market analysts regarding possible movement in global oil prices.

These assessments, he indicated, “pointed to sharp increases in crude oil prices, particularly towards the latter half of 2015,” adding that Citibank provided the “most competitive quote.”

Dr. Phillips said the $3.3 billion premium payment to Citibank, which should have been made from the proposed Energy Stabilisation and Energy Efficiency Enhancement Fund (ESEEEF), was advanced from a Finance Ministry budget contingency provision, “which was approved for this purpose.”

This, as the legislative framework to facilitate the ESEEEF’s establishment and govern its operations is currently being undertaken following Cabinet’s approval in August.

The funds to be channelled into the ESEEEF will be derived from revenue generated from the $7 special consumption tax (SCT) on fuel, which came into effect in April.

The ESEEEF aims to provide the resources needed to better position the Administration to undertake projects over the medium to long term that will reduce Jamaica’s dependence on oil imports and undertake the hedge programme.

These, as part of measures to cushion the country against the impact of possible global oil price shocks.

Revenue generated from the SCT, between April and July, totalled $2.45 billion, of which Dr. Phillips said $1.75 billion has been set aside for the ESEEEF.

The remaining $700 million, he told the House, will go into the Consolidated Fund.

Dr. Phillips advised, however, that in light of the legislative amendments being undertaken to facilitate the ESEEEF’s creation, all SCT revenue generated will, in the interim, be deposited in a sub-account of the Consolidated Fund.