The Auditor General’s discovery that fuel hedging agreements with Azerbaijani state oil company SOCAR were concluded following “ministerial direction” has led to a strong condemnation by the opposition, which is insisting that Energy Minister Konrad Mizzi has a lot to answer for.
But Dr Mizzi defended his involvement in comments made to The Malta Independent, stressing that he simply suggested SOCAR as a possible supplier and did not, in any way, force Enemalta to reach an agreement with the company.
The National Audit Office has published an analysis of Enemalta Corporation’s hedging activity during 2014 at the request of the opposition and highlighted a number of reservations, although it did note that governance at Enemalta’s Advisory and Finance Committee (AFC) – which handles hedging agreements – has significantly improved.
This was seized upon by the government in its reaction, but the Nationalist Party and opposition leader Simon Busuttil focused mainly on the SOCAR deal.
“Yet another damning NAO report. Konrad Mizzi gives millions worth of contracts to Azerbaijan's SOCAR by ‘ministerial direction.’ This stinks,” Dr Busuttil wrote on Twitter.
His party noted that this was the second report in as many weeks – the other concerned the Café Premier “bailout” – in which the NAO condemned the government’s use of public funds. It said that Dr Mizzi and Prime Minister Joseph Muscat had a lot to answer for.
Hedging policy undone by drop in oil prices
The NAO had flagged various shortcomings in Enemalta’s hedging practices in a report published in 2013, and to its dismay, these shortcomings have largely persisted, including the lack of a formally documented hedging policy against which Enemalta may set its strategic orientation.
Enemalta’s hedging was actually profitable for much of 2014, but the corporation was blindsided by a dramatic fall in international oil prices in the latter parts of the year. The corporation actually made a €3.1 million profit on crude oil hedging in the first nine months of the year, but significant losses between October and December led to an overall loss of €8.6 million.
As for unleaded petrol and diesel, a non-hedging policy had been reversed under the present government in 2013, in a bid to introduce a degree of price stability. While hedging led to a €1.6 million profit in the first eight months of the year, losses in the subsequent four months translated into an overall loss of €5.5 million during 2014. These losses were largely borne by Enemed, formed out of what had been Enemalta’s petroleum division before it was sold off to the government to settle tax arrears.
On the other hand, Enemalta fared much better when it came to currency hedging, which aims to address risks related to the fact that it trades and procures oil using US dollars whilst generating income in euros. It ended up gaining €5.5 million through hedging related to fuel oil and gasoil and a further €2.5 million on hedging with respect to unleaded petrol and diesel.
Asked to comment, Dr Mizzi insisted that Enemalta was actually following a clear policy on hedging, albeit one that remains unwritten. He said that this was now set to be addressed.
As for the significant losses registered through hedging, the minister insisted that the steep drop in international oil prices at the end of the year had been unexpected.
But the minister insisted that when this is taken into account, “the loss is very reasonable.” He also said that hedging deals entered into this year are helping to reverse this loss.
The SOCAR deals
On 1 April, 2014, Enemalta agreed on a deal with SOCAR Trading SA which hedged diesel at a price of $910 per metric tonne. The two companies reached another deal the very next day, hedging petrol at a price of $920 per metric tonne.
These deals made it possible for the corporation to reduce the price of petrol by €0.02 per litre the following month, whilst keeping the price of diesel stable: prices that remained put until the end of the year in line with the hedging agreements. This move had been hyped up as a “major announcement” by the government, weeks before the European Parliament election took place.
But the NAO expressed reservations on the way the decision to hedge petrol and diesel requirements for the second half of 2014 was taken.
The documentation it saw failed to provide a comprehensive account of AFC’s sourcing of final approval and the subsequent placement of an order with SOCAR, while minutes of a Petroleum Procurement Committee meeting dated 3 April 2014 indicated that the deal was concluded following “ministerial direction.”
The NAO asked for various clarifications from the ministry and from Enemalta, but ultimately concluded that the documentation concerning the SOCAR deals was incomplete.
“Given the magnitude of the agreement reached with SOCAR Trading SA, this Office considers the lack of documentation as detracting from the process’ accountability and a shortcoming in terms of governance,” it maintained.
But while Dr Mizzi said that “a lesson was learnt” concerning documentation, he defended the way the deal was done. He explained that Enemalta was set to fail its hedging target, and that then-chairman Charles Mangion had informed him that this would lead to a €0.02/litre increase in the price of both diesel and petrol.
“I insisted that we have to do everything possible to reverse this trend… I did not want prices to go up,” Dr Mizzi maintained.
With this in mind, he explained, he advised Enemalta to keep trying to meet its hedging targets, but also suggested that it should widen its base of potential suppliers, suggesting SOCAR as an option. Dr Mizzi’s familiarity with SOCAR stems through its involvement in the ElectroGas consortium, which is set to build a new gas-fired power station at Delimara.
But the minister insisted that his “ministerial direction” ended there, stating that some weeks later, Enemalta informed him that they had met their hedging targets, paving the way for lower petrol prices.
“With the benefit of hindsight I would do this again,” the minister maintained.
Ultimately, the fact that fuel prices stayed put during the last few months of 2014 even as they fell in the rest of Europe had been the cause of political controversy. But the outcome of hedging policies was beyond the scope of the NAO’s analysis.