Europe's oil producers hedge more, eye 'lower for longer' prices

Tue Sep 1, 2015 2:00am EDT
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By Karolin Schaps

LONDON, Sept 1 (Reuters) - Europe's small and medium-sized oil companies have forward-sold more crude than in previous years, ramping up their defences against a scenario in which prices stay weak for longer than expected.

Hedging future oil output against market volatility is a well-rehearsed practice among smaller producers but as prices remain historically low, they have shielded themselves more heavily than usual from a further downturn.

Second-quarter results figures showed that oil companies, including North Sea operators Ithaca and Premier Oil , have increased their hedging positions compared with the previous year.

Ithaca, a small player producing around 12,000 barrels per day, has gone as far as hedging out to mid-2017 and ramped up its 2017 forward sales by more than half over the past year.

Premier Oil had forward-sold 60 percent of its 2015 production at the half-year mark, compared with 53 percent the same time last year. A similar trend is visible among other producers.

"There are two reasons why companies have hedging programmes: one is to cover major capital projects that they have committed to and the second thing is to act as a buffer to allow them to reset the business in case of a change in oil prices," Aidan Heavey, chief executive of Tullow Oil, Africa's largest independent producer, told Reuters.

Tullow, Ithaca and Premier Oil have so far this year reaped the benefits of forward sales, with the latter selling some of its production in the first half at a hedged price of $106 a barrel, compared with an average Brent market price of around $59.

However, the recent accelerated slump in crude prices has meant companies are a little more reluctant to top up their hedging positions in fear of locking in production at the bottom of the market.   Continued...