The splendid news that last year Cyprus discovered huge deposits of natural gas in the Levant basin has kindled hopes in other Mediterranean islands of being able to tap this valuable resource. As far as Cyprus is concerned, it appears to be on track to further expand its exploration efforts in the months ahead, offering a possible solution to an economy weighed down by its own debt and the country’s weak banks, saddled with a close connection with Greece’s own stagnated economy.
According to Reuters, the Levant basin offers Cyprus access to an estimated 5.1 trillion cubic feet of natural gas, which would enable Cyprus to meet its domestic needs with local natural gas by 2017 and earn export revenue by 2019. It offers some much-needed confidence to its creditors and potential energy investors. The island has already received 15 bids from companies and/or consortiums for nine offshore blocks off the south of the island in an area where a significant natural gas discovery was reported late last year.
According to the minister responsible for commerce, industry and tourism, the discovery of these vast reserves of natural gas is a watershed for the island’s troubled finances. But, of course, the promotion of the available acreage was carried out in a professional manner so that it attracted the attention of Italy’s ENI, France’s Total, Malaysia’s Petronas and Russia’s Novatek. Of course, the money invested by the Cyprus oil agency to attract new business in this sector has been manifestly rewarding since, according to the estimate by the US Geological Survey, over 100 trillion cubic feet of reserves are up for grabs. This is a huge treasure chest almost equal to the world’s total annual consumption of natural gas.
Nostalgically, some readers will remember with humiliation how, in the 1970s, drilling in the Medina Bank attracted the wrath of the Libyan dictator who sent gunboats to scare off the investor drilling for oil. Similarly in Cyprus, following the discovery of gas, it is facing disputes with its neighbours. Back to Malta, the subject of energy generation and its financial burden on our economy has spurred PKF to organise a conference in conjunction with a leading international oil conference organiser that will be held in April in central London. The agenda will bring together senior government and opposition speakers, oil and gas corporate leaders and financiers and global energy experts from around the world to share their knowledge and experience regarding how Malta’s future energy and oil exploration possibilities can best be tackled.
As is to be expected, an oil and gas conference planned by PKF will be an ideal platform to start the ball rolling as to how to chart our oil exploration roadmap and attract serious investors in the near future. There is massive acreage on offer. Interested parties wishing to attend the conference can register by email to Audrey-Ann Cassingena at [email protected].
Can Malta join Cyprus and become a potential oil and gas hub, thus solving its perennial financial deficits while starting to repay its accumulated debts? The answer is not easy, given that the subject is taboo especially now when a general election looms ominously on the horizon. However, reliable sources say that the Malta Resources authority (MRA) is in the final stages of negotiations to grant a foreign company an oil exploration licence in a promising area to the south of the island. Following international roadshows privately conducted by the MRA last year, several companies expressed an interest in acquiring a licence and everyone expected that some information about this initiative would be disclosed in the budget speech – but there was none. Nevertheless, the man in the street expects whichever party is elected next year to make a priority of seriously considering a proper investment strategy and sticking to a definite oil exploration plan to diplomatically resolve long-outstanding claims by neighbouring countries – some of which have struck oil close to our boundaries.
The good news is that geopolitics in the North African territory have sanitised since the Libyan uprising and the peaceful resolution of the Jasmine revolution in Tunisia. Many ask if it can now be written in our destiny to strike while the iron is hot. It may be our only chance to raise the bar, even though no additional funds were allocated in the budget speech last week. Regrettably, it is a chicken and egg situation. When our economy is so fragile, with a projected growth of a mere 1.6 per cent, the finance minister can be excused for being risk-averse and refraining from allocating capital to such ventures.
At this point, one can also understand the reluctance of the electorate – when faced with a high national debt – to contemplate such a bold adventure. True, it is a dilemma for the government to meet its pressing financial obligations while making sure that marching orders from Brussels to trim the deficit to below three per cent of GDP are followed. This is no mean task, as the pattern of annual deficits has been occurring regularly for two decades, during which we have never succeeded in balancing our budgets.
The National Statistics Office reported that in the first seven months of the year the deficit stood at €333 million, more than double the shortfall the government has projected for the end of the year. Of course, given the fact that government books are posted on a cash basis, a windfall can conveniently occur in the last quarter. In fact it is relevant to consider that the end-of-year deficit target is 2.7 per cent, but from the results so far it looks as if the finance minister needs a magic wand this time to reach year-end targets. To compound the issue, our 100 per cent dependence on imported oil and Enemalta’s massive €850million debt (all guaranteed by government) lead us to pay a subsidy to Enemalta of €25m this year to ensure that prices will not rise but observers reply that a further increase in the subsidy might be necessary next year due to the chance of higher oil prices. The Opposition party stresses it is a sad reality that, as a consequence of many years of under-investment, Enemalta’s electricity generation efficiency rate currently stands at the very low rate of 31.5 per cent (the Marsa power station is only 23 per cent efficient).
To put it in simple terms, for every €1 of oil that is burnt, the value of electricity generated rarely exceeds €0.31 which is a fact of life that is hard to believe in these days, when the country is buckling under the weight of so much debt. Again, the latest report by rating agency Standard and Poor’s (S & P) classified Enemalta’s rating at B+. After having downgraded the corporation from BB last February – it maintains that the outlook is still negative. Naturally, as the accumulated debt burden of the utility provider now exceeds €850million, it is expected that S&P relied on comfort letters issued by government to provide timely and sufficient extraordinary support to the company in the event of financial distress. In their words they said: “We consider Enemalta’s business risk profile to be ‘vulnerable’, reflecting its poor profitability, high costs and old generation portfolio based mainly on fuel oil, exposure to oil prices and the lack of timely cost-reflective adjustments in the prices it is allowed to charge consumers. S&P said its base-case scenario forecasts that Enemalta will post losses of around €60million this year which is partially subsidised to the tune of €25m from government.
Only this week, a Special Purpose Vehicle has been approved in Parliament to spread the amortisation of its huge debt over 25 years. Certainly, the Delimara plant is now ageing quickly and will need to be replaced in the next five years (if not earlier), so the logical alternative will be converting the controversial BWSC extension from burning heavy fuel oils (with its health hazard) to gas. But there is a hole in the bucket, since to convert to gas we need a massive investment in excess of €200million, mainly for the installation of adequate pipelines and a proper harbour infrastructure. Luckily, the supply of gas (unless this is found in our waters) can be secured at favourable rates if the deal proposed last year with the Gulf State of Qatar is agreed.
To conclude, the island needs to overcome the Jeremiahs who doubt our oil heritage, and buttress its future energy policy which, if successful, can earn us extra revenue to effectively repay accumulated debt now comprehensively reaching 90 per cent of GDP. The alternative of doing nothing means premeditating an EU bailout.
The writer is a partner in PKF an audit and business advisory firm
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