The report is now being studied by the Department of Economic Affairs (DEA). Should North Block wave the green flag, a small amendment in the laws for forward trading in commodities could spell `Open Sesame' for crude and petroleum products. The Reserve Bank of India's (RBI) approval will be required too, since hundreds of crores of foreign exchange will be involved in oil price hedging operations. The committee on risk management techniques for crude purchases was set up by the Union petroleum ministry sometime in November 1998.

The report, submitted to the Union petroleum ministry a couple of months ago, however, does not limit its ambit to crude purchases alone. It calls for a phased introduction of trading in futures in both crude and petroleum products.

The panel recommends access to the oil futures market for petroleum refineries to begin with and subsequently, crude oil producers and oil consumers. It suggests opening up the forward trading market for crude purchasers or petroleum refineries, allowing a free play over forward market instruments, like caps, collars, options or swaps.

Crude oil producers in the country, like the Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) could be ushered into the magic world of forward trading in the ensuing two years. In the third year oil consumers, like petrochemical companies could be allowed to hedge prices of their raw material supplies. The process could lead to fixed prices for the customers of petroleum companies. Industry sources say forward buying crude oil and forward selling products was quite usual in the global market.

Transnationals like BP-Amoco and Mobil (though not Exxon) are known to hedge prices of both their crude supplies and petroleum products. The system enables petroleum companies to predict and ensure refinery margins for the year ahead. Petroleum majors neck deep in the game tie-up crude oil purchases in the futures market at a particular price. They then forward sell their petroleum products at a price that could ensure a remunerative refinery margin. Oil fed industries like power and petrochemicals can also ensure raw material supplies at assured prices through the forwards market.

Industry seems excited about the whole new arena of market instruments before them. The new players in the refining and marketing business, like Reliance Petroleum Limited (RPL) and Mangalore Refinery and Petrochemicals Limited (MRPL) are known to favour futures trading. Both RPL and MRPL will be buying crude through transnationals comfortable in the futures market.

Reliance Petroleum has tied up its crude supplies through Shell Trading and Transport Company and MRPL has a pact with Chevron. The industry excitement has not rubbed off on Government though. There are apprehensions in the corridors of power about the risks involved, especially since the risks involve foreign exchange.

In 1998-99 canalising agency Indian Oil Corporation (IOC) arranged imports of 39.80 million tonne of crude oil, 18.87 million tonne of fuel products and 12,000 tonne of lubricants. The country's oil bill was $6.5 billion or Rs 24,000 crore. This year the oil bill should touch $13 billion or nearly Rs 60,000 crore. The forward and futures market involves premia for the instruments, like call options and other ways of hedging price fluctuations. Apart from the risk of the foreign exchange losses to the country, the `risk management techniques' entail risks for the balance sheets of the companies involved.

Think tanks in Government are yet to decide whether forward trading should be allowed in principle. Once that is sorted out, the Government will have to decide whether it was suitable for companies in which it had majority shareholdings like Indian Oil Corporation (IOC) for instance.

Crude prices sprang up from $16 a barrel in May 1999 to $30 a barrel this month, with petroleum product prices in tow. The more than 100 per cent increase in oil prices buttresses the argument for resorting to price hedging instruments, especially since India's crude imports could only grow in the coming years. A line of thought much in vogue is that some element of `self-hedging' could be undertaken by oil companies through purchases in the spot market.