A well-oiled PR machine

As Malta was getting all excited for the memorandum of understanding on the purchase of oil from Libya, our southern neighbours were hurriedly queuing up at petrol stations to fill their cars while enduring power shortages on a daily basis.

Unlike us, Libyans were not queuing up to fill in their cars out of fear of a price hike, but because of a severe shortage of fuel and the exasperating power failures which are not down to a tripped boiler switch, but are the result of the strikes and blockades in the country's oil fields and terminal.

Libya has the tenth largest proven oil reserves in the world and the 17th highest petroleum production; and the government headed by Ali Zeidan is pinning its hopes on reaching 1.7 million barrels per day.

However, reports emerging from Libya show that production is down to 60,000 barrels per day and the government's Energy Committee has admitted that armed strikes at Libya's oil fields and export terminals have brought crude oil production in the country to a virtual standstill.

With losses so far reaching an estimated €2.3 billion, government officials have acknowledged that if the strikes and blockades led by armed militias are not over soon, the government will not be able to pay salaries by the end of the year.

But a jubilant Maltese government left no room for legitimate doubts and questions on the MoU. "Once their production reaches a decent level, our agreement takes off," Energy Minister Konrad Mizzi said, describing it as an "open agreement."

An MoU is not a done deal, but rather a gentlemen's agreement between two countries, with no legal commitment and the vagueness of which raises more questions than it answers.

While reaching some sort of agreement with Libya is undoubtedly positive, the exuberant announcement of the gentlemen's agreement came across as a carefully planned PR exercise aimed at galvanising the government's image.

On the other hand, I suspect that the Libyan government is looking beyond the immediate implications of the agreement, with an eye on setting foot in the oil-thirsty European market and beating off competition from neighbouring countries.

So what will Libya gain out of the memorandum? So far, I am yet to be convinced by the official replies mentioning health, transport and educational services as a trade-off for the oil products Libya will be providing at advantageous rates.

Malta's proximity to both Europe and Libya could come in handy for Libya's plans to supply its oil and gas to mainland Europe. Energy Minister Konrad Mizzi confirmed this by mentioning the possibility of setting up pipelines linking Libya, Malta and southern Europe in the long-term.

'Killjoy,' I hear? Well let's look at the minute details, however cloudy they are. Resting on the government's declarations so far, the MoU covers a wide variety of products and services. The provision of refined oil at advantageous prices could go a long way in reducing Enemalta's energy costs and address its massive debts.

However, with doubts lingering on the Libyan government's capability to quell the revolting militias and restore production to 1.7 million barrels per day by Christmas, I seriously doubt whether it will be in a position to sell oil to Malta by 2014.

Mizzi said that such a deal would allow Enemalta to reduce energy tariffs in 2014, before the conversion to gas in 2015. But the government's plans to reduce energy tariffs by 25% by March are covered by an advanced payment which all bidders for the power purchase agreement signed to.

So does the government know that the deal with Libya for the provision of oil for the Delimara power plant will never materialise, or will it reduce energy tariffs even further once the preferred bidder for the new power plant deposits the advanced payment and the Libya-Malta agreement kicks in?

Possibly, oil exploration is the most significant of possible agreements, yet being a gentlemen's agreement this could turn out to be pie in the sky. The two countries have agreed "in principle" to carry out joint explorations in areas disputed by both Libya and Malta.

Since the MoU is not a binding legal contract, details on who will finance the studies, who will bankroll the drilling and how any eventful oil reserves would be split are inexistent. Therefore, the two countries might agree in principle on joint exploration, however this could blow up once they start trashing out the agreement's minute details.

We have been there before with similar agreements with Tunisia falling through when it came time to thrash out the minute details; and I wouldn't be surprised if history repeats itself once again with so much at stake and with both countries attempting to maximise their profits.

Mizzi also explained that the government will strike a deal with Libya over the purchase of Liquid Petroleum Gas, used mainly in our households and establishments, at advantageous rates and credit terms.

Following the liberalisation of the gas market, the state utility, Enemalta, is no longer involved in the market dominated by two privately owned companies, Liquigas and Easygas.

The minister said that the agreement with Libya would be proposed to the two companies, meaning that they would have the last word on whether to take up the proposal or not.

The MoU also covers the purchase of diesel, petrol and jet fuel at favourable prices and credit terms, in what looks like the most successful aspect of the agreement, since the demand for such fuels will continue to increase unabated for years to come.

Hopefully the MoU will lead to solid and long-lasting agreements with Libya. However with the sole exception of car and jet fuels, I suspect that this gentlemen's agreement is a wishy-washy declaration of intent which will benefit the government's ratings rather than the economy.