Budget done and dusted, yet weak on energy

An ebullient minister of finance has given a detailed explanation of 2016 budget proposals which, as expected created no earthquakes and was generally a “steady as she goes” exercise which was welcomed by many. Yes, we are slowly going down on annual deficits, which is highly commendable, but regrettably we still face a long way to repay the inherited debts. However, nothing was said on alternative structures to earn that magic windfall that will ensure a solid recovery towards a surplus. 

It is an understatement to say a golden opportunity was missed to set a new strategy on oil exploration and related new prospects for a revamped maritime industry, something that neighboring countries are busy investing and certainly not wasting time waiting for the next upturn in the oil price.

PKF, within its resources, has taken the challenge to promote Malta and attended a three day international conference last week to discuss how neighboring countries in the Mediterranean are planning to finance new joint ventures to improve the energy problems concerning oil and gas industry.

This is the first time that such an event is taking place in Malta and the organisers are proud to have invited speakers from Adriatic, Balkan, Eastern Europe and North African with vast offshore exploration experience. Speakers include the director general in our Continental Shelf department, the Head of Ministry of Turkish Energy and Natural resources, PKF, MedServ, representatives from respective ministries from Croatia, Egypt, Cyprus, Italy, Azerbaijan, Algeria, Bulgaria, Middle East and Africa. 

Naturally, the most interesting topic is that discussing the future of offshore and onshore operations when the industry is currently facing a glut of oil with record low prices. Another topic which will feature strongly is how to achieve best practices for the development and operation of LNG distribution and related storage facilities in the Mediterranean.

Readers may ask what is the relevance of such a specialist conference to Malta when we have no current exploration activity planned for the foreseeable future and no reference to such industry in the budget speech. Cynics may reply that with so much oil discoveries in both central and eastern Med there is no point for Malta to labour too much to search for hydrocarbons as there is plenty of supply. Egypt has recently discovered a large gas field in the offshore waters (apart from oil producing wells in Sinai desert) and  joined the growing list of gas producing countries. 

The conference had an agenda with topics (among others) discussing the prospects, issues and implications arising from gas exploration and its potential delivery to the rest of Europe as an alternative or to complement supplies from Russia. It also asks the question: can natural gas have the potential to change the energy landscape in the Eastern Mediterranean? 

Speakers gave answers to questions: can Eastern Mediterranean gas contribute to Europe’s energy security? How are gas exports likely to change the region’s geopolitics? What are the future prospects for upstream developments? Can the natural gas industry develop further with potential to change the energy landscape in the Eastern Mediterranean particularly in view of a huge gas field in Egypt? 

It goes without saying that EU countries prefer to have a stable supply of gas and because of this can Eastern Mediterranean gas contribute to energy security. Due to the economic benefits of abundant gas discoveries in the Levant basin and huge untapped gas resources in Algeria is expected that a diversion in supply to Europe may be a logical solution. Reuter was quoted last year to say that turmoil in Middle East has given a fresh spur to energy companies looking for big finds further afield to more stable and inviting hosts such as Morocco, Malta and Spain. 

Undoubtedly Malta is closely situated to known reserves which if successfully marketed can offer tempting terms for explorers without the security risks of production in Syria, Libya or Lebanon. In the race for oil supremacy the flavour of the month is Morocco as it succeeded to attract investors with the promise of a link to the energy-rich formations of west Africa, while in Malta since Independence, there has been limited if any marketing outreach by the government such that no drilling was licensed for this year, even though seismic studies show hopes of an extension of Libya and Tunisia’s geology. 

Quoting Wood Mackenzie, the Moroccan government reduced its share of cash flow produced taxes from any oil or gas field to about 30 percent which is much lower than what was typical for Algeria, Libya and the rest of the North African and Middle East region. Officially Malta does not make public the rate of tax it charges on production sharing agreements but one hopes that higher transparency in its policy can lead to attract new investment. Cairn Energy started a 3D seismic study in the most promising area north of Malta facing existing oil producing wells in the Sicilian Ragusa basin. 

It is encouraging to read that if and when Malta succeeds to attract adequate investment in its vast largely untapped acreage then bidders can make use of latest technology. This technology helped countries formerly overlooked like Cyprus, Egypt, and Israel to discover huge new gas fields. The Hagar Qim well is the 11th well to be drilled offshore Malta in past 50 years compared to Croatia which drilled over 800 during same period – Croatia was successful.

This begs the question when countries like Egypt, Morocco, Albania, Croatia, Greece, Spain are busy chasing investment in offshore acreage can one hope that the budget speech will reaffirm a change in policy particularly that Malta becomes proactive and stops using a laid back policy of “do not seek them let them come to us”. 

It is no surprise that Italy has been successful in its discoveries as quoting Assomineraria (Italy’s oil and gas producer association) – it estimates private investment has exceeded 1 billion euros in exploration and production in 10 years. PKF continues doing share to promote Malta acreage by speaking at a number of international events including  an oil and gas Summit  last year organized by the Resourceful Events Pty Limited which took place at the Marriott Hotel in London.

The two day event hosted a number of keynote speakers such as Neil Gregson, Fund Manager, JP Morgan Asset Management – UK, Peter Kiernan, lead analyst, energy, economist intelligence unit – UK; Jonathan Waghorn, co-portfolio manager, Guinness global energy fund – UK and amongst many others, Freddie Lee, director, Barclays Natural resource investments – UK. The chairman for the first day was Stewart Dalby, editor and director, Oilbarrel. 

This event tackled current issues in the conventional oil and gas world such as for example: Understanding the oil and gas sector through the eyes of the expert investor; what is guiding their investments and how do they view the industry’s near term prospects? What are the most significant factors influencing investor appetite for this industry? 

Another hot topic is the assessment of political and project risk: What do investors perceive as the biggest risks for current small and mid-cap oil and gas companies? Speakers examined a number of driving factors behind supply and demand – such as to what extent could the US Shale energy revolution impact global supply and demand dynamics in the near to medium term? It is no secret that Malta holds the unenviable record of having the longest disputed maritime boundary in the Mediterranean – over half of its continental shelf claimed by neighboring countries but recent attempts in Italy are ongoing to try to persuade it to accept joint drilling on contested areas. 

To conclude, there are no prizes for guessing that the gradual transformation from a fortress economy based on revenue earned as a British naval base to a functional EU inspired economy has been a demanding task. 

An effort to turn Malta as a gas supply hub will – if successful – generate extra revenue which will go a long way to improve our standard of living and start repaying debt. Our exploration activity has so far left us with a bitter taste when we reflect on our vast acreage delineating the Continental Shelf… but the future beckons and one hopes that the long delayed formation of a national oil company will become a reality.