CIÉ has warned that a significant increase in its fuel costs in 2005 is likely because of rocketing world oil prices.

The company is currently forming a new panel to provide it with fuel hedging contracts. It is expected to be formed next month or in October.

The company is already completely hedged for 2004, but only has a small amount of its requirement hedged for 2005.

A spokesman said: "There will be a significant increase in the price paid for oil in 2005 compared to 2004.

"The actual impact for 2005 is still unclear however as it is cushioned by the fact that we have already covered off a portion of our 2005 requirements and by the relative strength of the euro against the dollar."

The company expects to spend about $20 million (€16 million) on fuel in 2004. Approximately 50 per cent of this is used by Irish Rail and the balance is shared by Dublin Bus and Bus Éireann.

A spokesman explained how the company approached the issue: "We purchase approximately 84,000 tonnes of ultra low sulphur diesel per annum for Irish Rail and the two bus companies. We manage oil price risk to, as far as possible, achieve a stable and acceptable cost over time using commodity hedging instruments."

A few months ago the company began updating its panel of approved agencies offering fuel hedging services. Companies approved on the panel are then asked to bid for specific hedges as they arise over the three-year life of the panel.

The issue of fuel costs has become a major concern for Irish companies in the last few months as oil prices have hit record highs.

Aer Lingus recently decided to hedge its entire 2004 fuel requirements. Ryanair is also waiting for prices to fall so it can fully hedge itself for 2004.

Chief executive Mr Michael O'Leary acknowledged recently the company was only hedged until the end of October at the level of $26 (€21.56) per barrel. But he said when prices came down towards $30 a barrel, the airline would seek to hedge.