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BP joins Shell in helping Mexico execute oil hedge - sources

Published 07/11/2017, 12:13
© Reuters. FILE PHOTO: General view of a new BP petrol station on the outskirts of Mexico City, Mexico
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By Dmitry Zhdannikov

LONDON (Reuters) - BP (L:BP) helped Mexico execute its 2018 oil hedge, the biggest in the industry, becoming the second major after Shell to participate in the highly coveted programme and challenging the traditional role of banks in the operation.

Three industry sources said BP has become a participant of the 2018 programme on which Mexico spent some $1.26 billion (£959.5 million) to hedge its 2018 oil exports against oil price falls as part of government's efforts to stabilise its budget.

BP declined to comment.

BP joins rival Royal Dutch Shell (L:RDSa), which made a first foray last year to become the first major to challenge years of dominance of big Wall Street banks in the programme.

Shell declined to comment.

Banks such as Goldman Sachs (N:GS), Citi (N:C) and JPMorgan (N:JPM) have dominated Mexico's programme for years but their role has diminished with tighter regulations on bank commodity trading, including a near total ban on proprietary trading.

Commodities-related revenue across Wall Street banks broadly tumbled in the first half of 2017 to its lowest level since at least 2006, consultancy Coalition said in a report.

This was due mainly to a drop in client activity and a slump in trading performance in the energy sector.

Mexico did not disclose the volumes of oil hedged nor detail of the average price per barrel of put options that the government has purchased.

In September, the finance ministry proposed a 2018 budget that based expected oil export revenue on an estimate of $46 per barrel. In October, members of Congress increased that estimate to $48.5 per barrel as global oil prices rose.

On Tuesday, Brent oil prices stood at $64 per barrel [O/R]

For more than a decade, Mexico's government has paid for a hedge every year in a bid to guarantee its revenues from oil exports by state company Pemex. The programme is seen as the world's top sovereign derivatives trade.

Last year, the government bought put options at an average price of $38 per barrel to cover 250 million barrels of crude at a cost of $1.03 billion and underpin the 2017 budget, which was based on an average price of $42 per barrel.

This year, Mexico is on track to not see any income from its oil hedge as prices for Mexican crude trade well above $50 per barrel. In 2016, Mexico saw a $2.65 billion payout from its oil hedge.

Mexico used to receive about one-third of federal revenues from oil sales, but it now funds less than one-fifth of the budget with oil sales after the collapse of crude prices in late 2014 and a decline in production.

© Reuters. FILE PHOTO: General view of a new BP petrol station on the outskirts of Mexico City, Mexico

(The story was refiled to correct a typographical error in paragraph 1)

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