Update 3 | Mizzi told Enemalta to add SOCAR to suppliers’ list, PN claims ‘scandal’

Energy minister Konrad Mizzi directed members of Enemalta’s petroleum procurement committee back in April 2014 to hedge on unleaded petrol and diesel from Azerbaijani state oil company SOCAR, a new report by the Auditor General has found.

The NAO report has flagged the way by which a decision to hedge unleaded petrol and diesel in the second half of 2014 was taken.

Documentation reviewed by the NAO failed to provide a comprehensive account of the Advisory and Finance Committee’s (AFC) sourcing of final approval and the subsequent placement of order with SOCAR Trading SA. Minutes of the Petroleum Procurement Committee meeting dated 3 April 2014 indicated that the deal with SOCAR had been concluded following “ministerial direction”.

SOCAR is a partner in the ElectroGas consortium selected to construct Malta's LNG power plant and provide natural gas for the plant.

The Opposition will not fail to notice that in 2013, investments minister Austin Gatt was taken to task in an NAO audit, which spoke of oil hedging strategy being influenced by ministerial interventions and the purchase of oil between 2008 and 2010 having bypassed “the most fundamental principles of good practice”.

In their reaction, the PN said that Mizzi had a lot to answer for, dubbing the choice of SOCAR as a “scandal that stinks”, and that the minister should explain why he had personally intervened in the procurment of oil and whether this had been done with the Prime Minister’s blessing. The PN added that the government lost €14 million following the minister’s intervention - specifically referring to hegding losses registered towards the end of 2014.

According to energy minister Konrad Mizzi, the direction provided was intended at reducing consumer prices. But the NAO said that the documentation detailing final approval issued by the AFC and the subsequent placement of orders with SOCAR Trading SA was incomplete.

“This rendered it impossible for the Office to determine the extent of ministerial direction exercised and responsibilities assumed by the AFC. 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.”

Government reaction

In a reaction, the government said it made contact with its Azeri counterparts after Enemalta had informed the energy ministry in March 2014 that it would have to raise fuel prices by 2c due to changes in the market.

“The energy minister, in agreement with the Enemalta chairman at the time, gave the direction to Enemalta to keep looking on the market and find a better spread of suppliers to provide hedges and avoid this price increase. The directive was one intended at stability and price reduction if possible.”

The government said its intervention stopped at political contact with Azerbaijan, and that no interference took place in the transaction carried out by Enemalta.

The subsequent fuel hedge with SOCAR resulted in a 2c reduction on petrol, and a stable price on diesel, the government said.

Konrad Mizzi justifies decision to widen supplier pool

In comments to MaltaToday, energy minister Konrad Mizzi said that no oil had been purchased but that this was a paper transaction intended at fixing the price.

“At the time then chairman Charles Mangion told me that we were facing a price increase at a pump. I told him to go out on the market and reach our targets, and to widen the supplier pool. Having got to know SOCAR through ElectroGas deal, we included them in the supplier pool. A few weeks later, Mangion informed me that they had clinch a price decrease on fuel.”

Mizzi justified his decision to direct Enemalta to search for more suppliers on the market. “If I could, I’d do it again. It was the right thing to do. I welcome the NAO report and its recommendations, and I have asked both Enemalta and Enemed to formulate a hedging policy.”

Mizzi also said the reason for heavy losses on fuel hedging were down to the crash in the price of oil in the last three months of 2014.

“We had profits on hedges during the first three quarters, but we obviously made a loss when there was the drastic reduction in the price of oil in the fourth quarter. That was addressed in January when again, I gave direction to go on the market to mitigate the price decrease, and we hedged when the price of oil was at $48.”

Losses on fuel hedging

In 2014, Enemalta registered a loss of €8.6 million on hedging undertaken on crude oil and a loss of €5.5 million with respect to unleaded petrol and diesel hedging. Central to the loss registered by EMC with respect to hedging on crude oil, unleaded petrol and diesel were the significant market movements recorded during Q4 2014, which were not and could not have been anticipated when such agreements were entered into.

On the other hand, the Corporation registered a gain of €5.5 million in terms of foreign exchange hedge undertaken for fuel oil and gasoil and an additional €2.5 million gain from exchange hedges entered into with respect to unleaded petrol and diesel requirements.

The audit was requested back in January by the Opposition to investigate Enemalta’s hedging activity during 2014.

The NAO said that hedging policy-related shortcomings identified in a 2013 report had largely persisted: Enemalta still does not have a formally documented hedging policy against which the Corporation may subsequently set its strategic orientation.

One notable manifested change was Enemalta’s decision to extend hedging operations to include unleaded petrol and diesel. The NAO noted the significant improvement registered in terms of the Advisory and Finance Committee’s (AFC) governance. Documentation and correspondence exchanged by members of the AFC indicated that the committee was continuously monitoring oil and foreign exchange markets.