Can Malta become an exchange hub for natural gas?

It is nostalgic (if not tragic) to recall how the exploration well drilled previous to Hagar Qim was the Lampuko and this was 12 years ago in 2002, resulting in only 11 wells drilled over a period of 50 years.

A recent initiative to be hosted by the EU in Malta with the participation of the Cyprus government is a two-day conference planned to take place at the InterContinental hotel on July 10 and 11. The title of the conference is “Security of gas supply: The role of gas developments in the Mediterranean region”.

Participants will be welcomed by Energy Minister Konrad Mizzi and his counterpart in Cyprus, George Lakkotrypis, with closing remarks by the EU Commissioner for Energy, Gunther Oettinger and Prime Minister Joseph Muscat.

Cyprus has recently discovered a large gas field in the Levant basin and as an EU country it has joined the growing list of gas producing countries. The conference has an agenda with interesting topics (among others) discussing the prospects, issues and implications arising from gas exploration and its potential delivery to the rest of Europe.

It also asks the question:-  can natural gas have the potential to change the energy landscape in the Eastern Mediterranean? Speakers will answer questions such as: 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?

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 it is expected that speakers will try to unravel its geopolitical effect. Reuters was quoted saying last August that turmoil in the 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 risks of production in Syria, Libya or Egypt. 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 there has been limited if any marketing outreach by the government, such that no drilling was licensed for the past decade even though seismic studies show hopes of an extension of Libya and Tunisia’s geology.

Cairn Energy, which has been licensed to conduct a seismic test in area 3 in the north close to the lucrative Vega oil fields, is reported to actively want to drill in offshore Spain next year. It sees geological similarities with Israeli waters, home to two of the largest offshore gas fields found in the past decade.

Cairn Energy will start a well in Morocco in September at a cost of around $80 million where a number of companies are targeting billions of barrels of oil, estimated but as yet unproven. According to Wood Mackenzie, the Moroccan government reduced its share of cash flow produced 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 once Malta succeeds to attract adequate investment in its vast largely untapped acreage then it can make use of modern technology.

This technology helped countries formerly overlooked like Cyprus and Israel to discover huge new gas fields. It is true that Genel, run by Tony Hayward (ex CEO at BP of Mexico’s fateful disaster) thinks that in Malta one faces more technical than political risks and has lately signed a farming out agreement with MOG on block 7 in area 4.

This concession was awarded in 2005 to Mediterranean Oil and Gas (MOG) and it appears that Genel paid handsomely for a 75% stake. MOG spudded a well aka Hagar Qim located 130 km south close to the Libyan oil rich Sirte basin on 24 May, 2014. The Hagar Qim well is the 11th well to be drilled offshore Malta. Can it be a coincidence that MOG announced on the same day i.e. 24 May, 2014 that it sold its entire shareholding to a cash rich company, Rockhopper, for a princely sum.

This means Rockhopper becomes entitled to the 25% share which MOG still owned in Hagar Qim.  More fun for MOG since the terms of sale state that if the Hagar Qim well proves promising Rockhopper offers to pay a bonus of additional one-off cash payment of between £11.9 million and £16.0 million in total (if potentially recoverable from the HQ Prospect equals or exceed 80 mmbbl).

One may be cynical and belittle the importance of such deals but it is interesting to note that since 2005 when MOG first secured the concession it took its time to run a 3d seismic test and on the strength of such data there has been a number of interesting deals. Both Genel and Rockhopper are well funded and can afford to risk capital on state of the art technology.

It is nostalgic (if not tragic) to recall how the exploration well drilled previous to Hagar Qim was the Lampuko and this was 12 years ago in 2002, resulting in only 11 wells drilled over a period of 50 years. This begs the question when countries such as Egypt, Morocco, Albania, Croatia, Greece, Spain are busy chasing investment in offshore acreage can one hope that Malta becomes proactive and stop 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 that private investment has exceeded €1 billion in exploration and production in 10 years.

PKF is doing its share to promote Malta’s acreage by speaking at a number of international events. The latest one was an oil and gas Summit on 18 and 19 June organised 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 among 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 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 with over half of its continental shelf claimed by neighboring countries, but recent attempts are ongoing to try to persuade such countries 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 and mushroomed a debt mountain to finance it.

An effort to turn Malta as a gas supply hub to EU users will generate extra revenue which will go some way to redeem our obligations. Certainly after trying and failing to hit it rich in gas discoveries nobody can blame the man in the street to display a high level of cynicism on the chances of a lucky strike at Hagar Qim.

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 the recent proposal to turn Malta into a European exchange for secure gas supplies will augur a brighter future.