Mexican Federal Government Oil Revenues Hedging Program

Transcription

1 Mexican Federal Government Oil Revenues Hedging Program MINISTRY OF FINANCE AND PUBLIC CREDIT G-20 Commodities Seminar May 6, 2012

2 Oil and Public Finances The Mexican Government has followed an strategy to increase non-oil revenues, which currently are at their historical maximum. However, oil-related revenues continue to represent an important share of total revenues Non-Oil Tax Revenues (% of GDP) Oil Revenues (% of Total Revenue) Source: SHCP *Approved Source: SHCP 2

3 Oil and Public Finances This has been completed with measures to increase the efficiency and production capacity of the oil sector. Production has stabilized and diversified. Investment in PEMEX has amounted to 2.0% of GDP per year since Exploration and Production Contracts between PEMEX and the private sector, approved as part of the 2008 Energy reform, allow PEMEX to attract new investment and technology Oil Production (Thousand Barrels/Day) Cantarell Others - The auction of the first contracts concluded successfully in August A second auction of contracts to be allocated in June 2012 is in progress

4 2. Oil Income Stabilization Fund In order to ensure oil revenues against a potential reduction in average prices below the level established in the Federal Revenues Law, the Ministry of Finance conducts a crude oil prices hedging program. Oil Income Stabilization Fund (FEIP) was created in 2001 instructed by the Expenditure Budget in According Fiscal Responsibility Law, the objective of the FEIP is to lessen the effects of changes in the crude oil Mexican mix in Federal Government revenues and public finances. The Fund must compensate losses derived from estimates differentials approved in the Federal Revenues Law, to support the Expenditure Budget.

5 3. FEIP s Technical Committee In order to accomplish FEIP s objective, a technical committee was created by Law. In case of a decrease of the income from oil exports, the Committee authorizes the amount withdrawn from the FEIP to compensate for the loss. The Committee approves the oil hedging strategy and its costs. The Committee instructs Mexico s Central Bank (Banxico), to execute the hedging strategy in behalf of Mexican Federal Government.

6 4. Oil Hedging Program Each year the Mexican Central Bank and the Federal Government make an analysis of different market factors to establish the oil volume and strike prices which will be discussed and approved by the Committee. Several different strategies have been implemented through the years, nowadays the hedging strategy considers Mexican Oil Mix. In the last years, the hedging strategy consists in buying Asian put options on the average price of the Mexican Export Oil Mix. This means that Mexican Government acquires the right (but not the obligation) to sell oil at an average price of certain USD per barrel.

7 4. Oil Hedging Program Put options function as insurance against a drop in oil prices. This instrument pays a premium at the time of purchase and could provide payments for the Federal Government when the average price of the Mexican Export Oil Mix during the year is below the level provided by the Federal Revenues Law. Mexican Central Bank is in charge of selecting the most convenient counterparties in the market and of buying the derivative contracts that satisfy the best market conditions.

8 5. Reference Price The budget is created using a reference price that is considered to be the average price for the next year. The reference price used in the income budget is calculated with a formula based on the average price of Mexican crude oil, the model contains two main components: 1 2 Historical oil prices Future contracts WTI price and future contracts are the main reference in the calculation of the price.

9 Jan-yy Jul-yy Dec-yy May-yy Oct-yy Mar-yy Aug-yy Jan-yy Jan-yy Jul-yy Dec-yy ay-yy Oct-yy ar-yy Aug-yy Jan-yy 6. Determining the Hedged Volume The risk exposure of the Federal Government due to changes in oil prices is obtained by an analysis of sensitivity of oil income to changes in the price of a barrel of crude oil. Hedged Volume is calculated netting crude oil exports versus diesel and gasoline imports; given the exposure on both markets. Crude Oil and Gasoline Production (Thousand Barrels/Day) 4, ,500 Crude Oil and Gasoline Exports (Thousand Barrels/Day) 600 3, , , , , , , ,000 Crude Oil Gasoline 2, Crude Oil Gasoline 100-9

10 Jul-yy Dec-yy May-yy Oct-yy Mar-yy Aug-yy Jan-yy Jul-yy Dec-yy May-yy Oct-yy Mar-yy Aug-yy Jan-yy USD/bbl 6M Volatility 7. Successful strategy 2009 Given the decrease in oil prices observed during 2009, the Federal government received 5,085 million dollars from the exercise of the option. This amount compensated the reduction in oil revenues Mexican Mix 6M Vol. WTI 6M Vol. WTI Mexican Mix This oil hedge transaction received the 2009 Most Innovative or Creative Use of Derivatives Award given by the global derivatives magazine Futures and Options World.