Options to tackle fuel costs

The extreme options in solving the problem of the rising cost of oil are increasing the 17 per cent water and electricity surcharge to 102.5 per cent or raising fuel prices by 20c per litre and keeping the surcharge at 17 per cent.

A number of options were presented for the consideration of the Malta Council for Economic and Social Development by Investments Minister Austin Gatt on Tuesday. The MCESD is meeting again on Monday to make known its preferred choice.

Dr Gatt told a press conference yesterday that another option the government was proposing was to shoulder 30 per cent of the burden but to do so, it would have to raise taxes or finance this through more loans.

Economists were against this option and the constituted bodies were telling the government that taxes should be lowered and not raised, the minister added.

Dr Gatt said that MCESD members would also be considering the impact the proposed measures would have on the retail price index and on inflation.

Putting the burden on water and electricity bills would have a smaller impact than if this were put on motor fuels, Dr Gatt said.

He said that the 13,000 households whose water and electricity bills were nil because they could not afford to pay would continue not to pay.

In spite of the 17 per cent surcharge, Enemalta still had to absorb Lm8.4 million in additional costs, which it will be shouldering again next year. This was, however, the most the corporation could afford to do.

If Enemalta were to take on more than it could carry, Standard and Poor's would lower its ratings and this would lead to higher interest on loans, Dr Gatt explained.

The minister said oil prices were based on the international cost of oil and the exchange rate between the lira and the dollar. Since April, when the lira strengthened against the dollar, the cost of oil became even more expensive for Enemalta.

In spite of this, the minister said, Malta's household electricity rates and the rates for small and medium businesses were the third lowest among the EU countries and the fifth to sixth lowest for large businesses. This was mainly due to the nature of the utility bills. While industry subsidised households in Malta, volume discounts were given abroad.

KPMG has been commissioned to look at other financing models and a report was expected to be submitted towards the middle of next year.

Dr Gatt pointed out that the government would not have any problems buying oil from Libya once again if this was offered at better prices than the island was getting now.

However, in 2003 Malta bought its high sulphur fuel oil (which is no longer used here) from Libya for $3.5 per metric tonne over the average Platts rate and it had to pay for it immediately. It was now getting its low sulphur fuel oil at $2.5 per metric tonne below the average Platts rate. Moreover, it was also getting a 60-day credit.

The Foreign Minister is having talks with Libya to see if an agreement on better prices can be reached, he said.

Alternative sources of energy, although necessary, were more costly, even if cleaner. Their use was being studied by the Malta Resources Authority.

Studies on the development of a gas pipeline connecting Malta to the European grid were already in hand but in practice such projects would only provide security of supply and would not lead to lower costs.

A foreign company was studying the feasibility of setting up a liquefied natural gas plant here. LNG was cheaper than other fossil fuels but land and sophisticated machinery were required for its use and Malta's demand might not justify this.

Another option under consideration was to start using high sulphur fuel oil again. This cost 13 per cent less than low sulphur fuel oil.

Although the EU allowed the use of high sulphur fuel oil in particular circumstances, to return to this sort of fuel the country would have to install what were known as De Nox plants - which would clean the air immediately, investing Lm55 million and having an operational expense of Lm6 million.

On hedging - whereby oil is bought in advance at a fixed price - Dr Gatt said that although he did not have anything against such a system, this was a risk-taking exercise and it was a risk which would have to be taken with the people's money.

Enemalta, he said, had a fuel procurement committee which made decisions on whether or not to resort to hedging.

The minister said Malta was still in time to use hedging next year but to do so it would have to pay $359.30 per metric tonne instead of the spot price which now stood at $313.25.

Dr Gatt said that while Enemalta's cost of fuel amounted to Lm18.7 million in 1998/1999, this went up to Lm54.5 million last year (Lm47.7 million were budgeted) and was expected to rise to Lm84 million in 2005/2006.

He said Enemalta had renegotiated its loans, which amounted to €300 million, saving Lm1.8 million in interests.