The subject of energy generation and its financial burden on our economy has spurred PKF to organise a conference to be hosted in conjunction with a leading international oil conference organiser .The conference will be held on 11 December in central London.
The agenda will bring together speakers from both senior government and opposition, corporate leaders in the oil and gas industries and financiers and global energy experts from around the globe to share their knowledge and experience on how Malta’s future energy and oil exploration possibilities can best be tackled. Can Malta become a potential oil and gas hub (joining Cyprus) and solve its recurring annual financial deficits while starting to repay its accumulated debts?
There is no easy answer, given that the subject is taboo – especially now, when a general election looms ominously on the horizon. But the man in the street can expect that whichever political party is elected to rule gives priority to seriously considering a proper investment strategy and planning future oil exploration .There is so much pessimism on the streets that there no hope of discovering the black gold that perhaps the issue has been neglected over the past 50 years, but now it seems that, due to geopolitical events, the situation has changed for the better and it may be our only chance to raise the bar.
Why not start planning how to exploit our riches (if any) under the seas? Certainly, more investment is needed to fully arm our Malta Resources Authority to start one-to one negotiations with oil giants such as Shell, BP, Exxon and Gazprom. This is a chicken and egg situation. When our economy is so fragile, one can be excused for being risk averse and refraining from allocating capital for such ventures. Both parties can be excused for omitting from their election manifesto their intention to ratify the huge capital investment to attract top oil and gas companies at a faster rate than has been the case in the past.
At this point one can understand the reluctance of the electorate to contemplate such a bold adventure. It is like reading the proposal form for an investment scheme and coming across, in small print, the disclaimer that “past performance is no guarantee of future performance”. This warning confuses the poor investor into thinking that trusting money to such a scheme may result in a loss. This may lead one to become more risk averse and to literally prefer the option of stuffing the cash under the proverbial mattress.
Allow me to digress on the subject of energy crisis and continue on the subject of national probity. One recalls the governor of the Central Bank warning us to repent of our profligacy as, in his opinion, we have really been living dangerously and the day of reckoning with our debt mountain is near. The Central Bank of Malta issued a warning indicating a deficit of 3.3 per cent for the first quarter, saying the Government may have to take additional cost-cutting measures to meet its targets.
Quoting a learned professor, he based his cautious comments on recent economic developments in the first quarter’s statistics that showed how that the government deficit had increased to €85.5 million (3.3 per cent of GDP) from €44.5 million (2.7 per cent) compared to the same quarter of 2011. To put it simply, the family paid out more than it earned and balanced its books by resorting to outside borrowing.
Continuing on the family allegory, we see how the earnings of the bread-winner increased by 5.1 per cent in the first quarter but – wonders of wonders – the family’s expenses increased by 11 per cent. The shortfall is justified, claims the finance minister, since part of the increase in expenditure reflected exceptional capital subventions to loss-making Air Malta, while purchases by the Government of goods and services, such as medicines and supplies for the hospital, also increased considerably.
True, it is a dilemma for the government to meet its pressing financial obligations while making sure that orders from Brussels to trim the deficit to below 3 per cent of GDP are followed. This is no mean task as the chronic pattern of annual deficits has been occurring regularly for two decades. 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 is projecting for the end of the year. It goes without saying that if the deficit is so high in the first two quarters, there has to be a gargantuan effort to address the shortfall to recover the loss by the end of the year.
Of course, given the fact that government accounting is on a cash basis, adjustments can occur, yet so far the deficit represents 229 per cent of the annual target set in the Budget. In fact, it is relevant to consider that the end-of-year deficit target is 2.2 per cent, but the figures so far indicate that achieving this is an impossible dream. Certainly unless an austerity drive is embarked upon (apart from the nominal savings of €40m) it is clear that more effort will be required to meet it.
At this stage, we come back to the subject of high energy cost which goes to show how precarious our position is to resolve the economic imbalance unless this can be achieved from extra tax revenues, once we discover oil in commercial quantities. Specifically, the subsidy to Enemalta was increased by €25m this year to ensure that prices would not rise, and a further increase in the subsidy might be necessary because of higher oil prices. The Opposition retort that the current state of affairs is due to mismanagement. They stress it is a sad reality that, as a consequence of many years of under-investment, Enemalta’s electricity generation efficiency rate currently stands at a very low 31.5 per cent (Marsa power station is 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 hard to believe in this day and age, when the country is buckling under the weight of so much debt. Some may say that inefficiencies exist in most other plants in Europe, so that the average is 50 per cent. To exacerbate matters, our distribution losses are high – reaching 25 per cent – which makes the revenue stream in Enemalta’s accounts look rather painful.
And when other companies in the private sector are obliged to file their accounts within nine months of their year-end, why is it that Enemalta (audited by KPMG) is three years in arrears? Is this a case of two weights, two measures, one may ask. The latest financial statements reflect the position in 2009, which were only recently tabled in Parliament and which show that the corporation lost €45 million on its hedging agreement. It is also saddled with extra personnel who can theoretically contribute about 25 per cent in additional costs in power generation.
The latest report by rating agency Standard and Poor’s (S&P) maintained Enemalta’s rating of B+ after having downgraded the corporation from BB last February, on the grounds that its outlook is still negative. The high debt burden of the utility company now exceeds €600m and is conveniently guaranteed by the government. It is not surprising that S&P have relied on this aspect, saying that there was a very strong likelihood that the Maltese government would provide timely and sufficient extraordinary support to the company in the event of financial distress.
S&P are quoted as saying that they considered Enemalta’s business risk profile to be ‘vulnerable’, reflecting its poor profitability, high cost and old generation portfolio based mainly on fuel oil, exposure to oil prices, and lack of timely cost-reflective adjustments in the prices it is allowed to charge consumers. They said the prices weighed significantly on their view of the company’s credit profile, especially in the current high oil price environment. S&P said its base-case scenario forecast that Enemalta would post losses of around €60 million this year, which is only partially subsidised to the tune of €25m from the government, which is struggling to address the much-needed financial restructuring of the company.
Certainly, the Delimara plant is now ageing quickly and will need to be replaced in the next 10 years (if not earlier), so the cheap alternative will be to convert the new €200 extension from burning heavy fuel oil to gas. But such a conversion would involve a massive investment exceeding €200m in pipelines and proper harbour infrastructure. Luckily, the supply of gas (unless this is found in our waters) can be secured if the deal with the Gulf State of Qatar goes ahead.
To conclude, Malta needs to restructure its energy needs and to start repaying its accumulated debts (unless an EU bailout is planned) so perhaps the oil and gas conference will be an ideal platform from which to start the ball rolling on how to chart our oil exploration in the near future. Interested parties wishing to attend can register with Audrey-Ann Cassingena by email to [email protected]
The writer is a partner with audit and business advisory firm PKF.
[email protected]