It was more than 50 years ago that the government of the day embarked on a drive to market Malta’s offshore acreage among oil companies with a view to encouraging them to prospect for oil and gas.
To be exact, it was 1954 when an unsuccessful onshore concession was awarded to a company called D’Arcy Exploration (BP) to drill a well in Naxxar. All attempts since then have failed, some with dry wells, others with some oil and gas prospects, but no commercial success followed.
The bone of contention is the promising areas in the south banks numbered 4,5,6 and 7 that are located close to Libyan waters. These have been in dispute for over 40 years since the Gaddafi regime never conceded to Malta’s claim of ownership and so far refused even joint exploration. In particular, Area 4 comprises four contiguous licence blocks in the southern part of the Maltese offshore adjacent to acreage in Libya.
Mediterranean Oil and Gas (MOG), as the licence holders, intend to explore for and produce oil and gas in the Area 4,5,6 and 7.
MOG had previously commissioned a specialist operator to shoot seismic survey and succeeded in interpreting an extensive long-offset 3D view over the central graben of Area 4. The prospects look promising such that it is now apparent that this part of offshore site is geologically analogous to the Libyan Sirte Basin, containing analogues to proven producing fields in Libya in addition to those offshore Tunisia.
Specifically, the experts have identified a portfolio of prospects in the Lower Eocene/Paleocene sequence. The new scientific survey has, for the first time, allowed imaging of the Cretaceous and Jurassic sequences, enabling several large leads to be defined at this stratigraphic level.
Last week, MOG announced that its wholly owned subsidiary, Phoenicia Energy Company Limited, has entered into a conditional farm-out agreement with Genel Energy plc for oil exploration in Area 4 Offshore site. Under the agreement, Genel will acquire 75 per cent of MOG’s interest, which covers blocks 4,5,6 and 7, for $10 million in cash consideration.
It will also get 100 per cent ‘carry on’ the first exploration well, which is planned to be drilled to a minimum depth of 2,500 metres, and a 100 per cent carry on the second exploration well up to a maximum of $30 million gross expenditure.
Genel Energy has effectively teamed up with MOG by signing an Area of Mutual Interest agreement for a minimum term of three years which covers cooperation in assessing and acquiring exploration and production assets in the offshore areas not only in Malta but also in Libya and Tunisia.
The venture concerning the Maltese concession is expected to be carried out by the end of October, but is conditional on the receipt of approval from the Minister responsible for Resources and Rural Affairs, together with a one-year minimum extension of the first phase exploration period of the Area 4 licence. This is sweet music to the ears of shareholders of both Genel Energy and MOG and the markets have sensed a good bet. Shares have recently rallied such that MOG’s share price rose 14.13 per cent to 13.12p, while Genel’s share price climbed 1.22 per cent to 703p.
This is good news for the island’s future prospects as an oil producing country. A confident Dr John Hurst (COO for Genel) said: “We are delighted to have reached agreement to farm in to the Area 4 Block Offshore Malta, a licence with considerable exploration potential being geologically similar to known producing areas nearby in Libya and offshore Tunisia. It is consistent with our strategy of building a portfolio of high impact exploration assets within the Middle East and Africa.”
Perhaps now that the Libyan dictator is gone, prospects might be brighter for us. Again, these are promising ventures but one cannot forget the sad incident in the late seventies when the Gaddafi regime used its naval gun ships to blockade us, effectively stopping us from commencing any drilling. Officially, in 2008, Libya issued a formal letter, warning Heritage Oil Company Ltd (the current licensee) to desist from any activity in an area that the Jamahiriya considered part of its territory. With not a drop of oil or a cubic metre of gas, the island finds small comfort in the fact that it is located in a Mediterranean basin surrounded by rich oil deposits reaped by Italy, Tunisia, Libya and Greek concessions.
Perhaps one can console oneself that scientifically proven assessments suggest prospects at Area 4 to yield gross recoverable un-risked prospective oil resources of 200 million barrels of oil with a fair chance of success. With hindsight, the Mintoff government elected in 1971 was friendly with both neighbouring North African countries Tunisia and Libya. Various bilateral agreements were signed with these countries to promote trade and generate work for the Maltese Islands. Gaddafi was personally invited to Malta in the mid seventies and was given the highest award the island could confer, but still there was no progress on joint exploration on disputed areas.
Although, to be fair, one cannot forget the gesture by Libya that for a limited period it compensated us with a supply of oil at a discounted price. It was certainly a diplomatic disaster for the Mintoff regime when Libya sent gunboats to the exploration areas to stop drilling, although it later agreed to refer the matter to the International Court.
After winning the 1987 election, the Nationalists, led by Fenech Adami continued to court Gaddafi but failed to resolve the issue. However, it progressed in other bilateral areas and this proved successful for many Maltese companies, which were awarded contracts by the oil rich regime.
Again this was small consolation for the Exchequer, which in 1987 vowed to take the island on a course of modernisation that was then considered as an essential roadmap to rebuild an ageing infrastructure. The list of reconstruction by the Nationalist Party is endless but one recalls that a new power station at Delimara was built, followed by intensive training of the decrepit public service (a management systems unit run by expats was set up) and a new digital telecoms system, which replaced the ageing analogue relic. Privatisation was started in earnest, which saw the family silver converted into cash.
All these reforms were part of an ambitious roadmap that cost millions to upgrade the infrastructure and liberalise commerce, which was mostly nationalised − all this with a conscious aim to prepare the island as an EU candidate.
But with no oil revenues, the Fenech Adami administration had no alternative but to trust the people and borrow funds by issuing unsecured local bonds. Each year, revenues were exceeded by public expenditure resulting in a structural deficit, which over the past 25 years now reached around €5 billion or 75 per cent of GDP.
With hindsight, we can stop and ponder what would have been our destiny if neighbouring countries had agreed to our right to drill and enjoy the windfall from a successful prospecting for oil and gas. Sadly, both the Gaddafi and Ben Ali regimes were not accommodating but with recent changes starting in the Jasmine revolution and recently with the new Constitution in both countries, one hopes that a new era of oil prospecting will no longer be a pipe dream, something our politicians tempt us with on the eve of each election.
Is there a reality check in view? It appears so − both local political parties are quietly contemplating that the issue will be a major platform in the coming election. Each party is expected to start spinning a web of feel-good factor, that they are better equipped to pursue the exploration issue after past failures and reap our merited bonanza stored deep under the sea. It is never too late for us to seriously start contemplating the creation of a sinking fund to repay the local bonds the government issues to finance its annual shortfall. It is true that this year the economy is in recession, but officially it is doing reasonably well compared with other eurozone members such as Greece, Portugal, Cyprus and Ireland all being candidates for a bailout. Here one must hope that our political leaders will lead us to the promised land of milk and honey when we can rightfully claim the black gold that has been eluding us for the past 50 years.
Viva il Madonna Taz Zejt…
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The writer is a partner in PKF an audit and business advisory firm