Updated Friday 9pm - Added Electrogas statement
Contract details previously concealed from the public indicate that taxpayers are losing tens of millions of euros from the new gas-fired power station deal, analysis of leaked documents shows.
A cache of 680,000 leaked files from the Electrogas consortium, which built and operates the new power station, sheds new light on the secretive energy deals signed by the government.
The files had been leaked to journalist Daphne Caruana Galizia, months before her assassination on October 16.
They were later shared with the Daphne Project.
One of the contracts found in the leak concerns a $1 billion deal that Electrogas entered with Azerbaijan’s state-owned company Socar, through which Malta will import all its gas needs from the company for 10 years.
The price at which Electrogas buys gas from Socar is fixed at €9.40 per unit for five years, until April 2022, the leaked contracts show.
The multiple energy contracts, signed in April 2015, bind Enemalta to buy €131.6 million worth of LNG from Electrogas yearly. Since the deals were inked, oil and gas prices have crashed.
This LNG provision by Electrogas is contracted out to Socar, who in turn buy it at lower marker prices from energy giants Shell.
Three energy experts who spoke to Daphne Project partners The Guardian said if Malta had dealt directly with Shell, it could have struck a better deal and saved money.
Socar started supplying LNG to the new plant last year, after its original March 2015 deadline kept being delayed.
Malta paying ‘nearly twice market rate’
In 2017, thanks to a fall in oil and gas prices, the set price meant Enemalta paid nearly twice the market rate for LNG, one of the experts said.
"That’s a huge margin. Malta should push to renegotiate that contract because they are losing money hand over fist,” the energy analyst said.
This came at a potential profit of $40 million (€32.7 million) for Socar, who declined to comment on the contract details, citing confidentiality.
In comments to The Guardian, energy expert Simon Pirani, who was given the leaked contracts to analyse, questioned Socar’s role in the LNG supply chain and the decision to fix gas prices for five years.
“If I were a Maltese taxpayer I would want to know why such a poor deal was signed and why a Socar subsidiary had been brought in as a seller of LNG. Socar is not supplying, and could not supply, these contracts from its own production,” Mr Pirani, a senior visiting research fellow at the Oxford Institute for Energy Studies, said.
Benchmarking exercises indicated Enemalta was paying a significantly higher rate than similar purchases negotiated in Greece, Italy and Turkey in 2015.
The leaked contracts were also given to two London-based energy analysts, who preferred to remain anonymous. Both questioned Socar’s role in the supply chain. One of them estimated that Socar was last year getting paid double the market price by Enemalta.
The analysts noted that all price risk was on Enemalta and the taxpayer, rather than Electrogas.
Electrogas’s own advisers questioned Socar’s involvement in the LNG contracting, the leaked files show.
“The arrangement is unusual,” UK consultancy Poten noted, “and typically one would expect the LNG supplier, in this case Shell, to contract directly with the project.”
After the five-year fixed price period, Enemalta will pay an index-linked price set at 14 per cent of Brent oil.
Deal spearheaded by Konrad Mizzi
The new power station project was spearheaded by former energy minister Konrad Mizzi. Despite being stripped of his energy portfolio in April 2016, leaked Electrogas e-mails show he was still one of the main contact points for the project, even after Joe Mizzi was appointed Energy Minister in June 2017.
This is not the first time Enemalta has lost money from a deal with Socar. A 2015 investigation by the Auditor General found the state-owned energy company lost €14 million from a Socar hedging agreement.
The Auditor General had flagged “ministerial direction” from Dr Mizzi to include Socar in Enemalta’s list of suppliers.
Contacted by members of the Daphne Project about its findings, a spokesman for Dr Mizzi disputed the conclusion that Enemalta had paid double the market price for LNG last year.
The value of the gas purchase agreement, including the initial five-year fixed price term, became apparent when one considered the volatility in the oil price, the spokesman said.
He said the project had been subjected to a thorough and rigorous state aid examination process by the European Commission.
A Commission spokeswoman said its role had been to check Electrogas was not being overpaid by Enemalta, rather than inspect the deal with Socar in isolation.
The Commission had concluded that the rate of return for Electrogas was in line with similar projects.
Government says consumer paying significantly lower tariffs
The government, in a reaction, said that contrary to the allegations being made, the Maltese consumer today is paying significantly lower energy tariffs than they did under the previous administration.
The large reduction in tariffs has been made possible by the Delimara Power and Gas Project and Enemalta’s corporate transformation. This, coupled with the reduction in emissions and other environmental benefits, had considerably improved the quality of life in Malta.
With regard to the transaction between Enemalta and Electrogas, the government said the starting point to any evaluation of the project, and the related contractual relationship, was the model and structure which was determined by Enemalta and which formed the basis of the competitive tendering process.
The project was based on a power purchase agreement and gas supply agreement, which meant that the contractor (Electrogas) was responsible for the provision of both the infrastructure and the supply of electricity/LNG.
"Having assessed a number of possible models and structures, for the changeover to natural gas as a cleaner source of fuel, Enemalta opted for a ‘final product’ procurement (as opposed to the procurement of infrastructure or LNG themselves). This decision was based on the information available to Enemalta at the time."
The article, it said, "is erroneously de-coupling these two elements which would change the nature of the competitive process and lead to the creation of completely different set of risk dynamics for the project as a whole. That would put Enemalta in a position of having to manage and administer LNG supplies for which it does not (either now, or at the time of the tender process) have the necessary capacity or technical capabilities to do itself."
It insisted that the contract was awarded following an open competitive process which analysed the final result on the basis of a long run average price offered by the bidders which took into account both the capacity payments and the commodity payments in arriving at the final result. The offer of Electrogas Malta Limited was 20% cheaper than that of the second-ranked bidder.
For the purposes of awarding the contracts it was not material whether this difference in price was due to any particular component of the project, be it the cost of fuel to be used or the cost of construction.
The government said Enemalta exceeded the previously estimated €143 million annual cost-savings emanating from the project. These savings include €80 million which was used to reduce electricity tariffs by 25% for all residential and commercial customers, and an additional €85 million, offsetting the 2012 losses of €48 million and leaving Enemalta with a profit of €37 million for 2017.
"The success of this turnaround has in fact been attested to by all the major credit rating agencies which have consistently improved Enemalta's credit rating for the past few years."
Regarding hedging, it said that Malta is not comparable to other larger countries which have the benefit of diversifying their energy generation capacity across a number of operators each of which would have its own hedging profile and policies. In the case of Malta, the LNG to be delivered to Electrogas would supply around 65% of Malta’s energy requirements such that fluctuations in the price of LNG would have a significant and direct impact on electricity tariffs charged to consumers.
This trend was observed in the oil market during the last years of the previous administration, which had adopted a policy of adjusting the electricity tariffs on a frequent basis and therefore creating significant uncertainty, not only amongst citizens, but also with the business community. For this reason, the government took the decision to stabilise energy prices for a period of five years.
This could have been achieved either by Enemalta entering directing into hedging agreements to fix the price for five years (essentially a 100% hedge) or alternatively to request a third party to do this on its behalf.
In order to achieve this objective, Enemalta would have had to provide significant resources of cash to undertake cash margining necessary to undertake the hedges directly two years prior to the fixed price coming into play.
Enemalta’s position at the time was such that it could not afford to make the required cash resources (or guarantees) available for such an endeavour. For this reason, it made more sense to get a third party to take care, and the risk, of the hedging process directly, the government said.
Everything was transparent - Electrogas
Electrogas said the company had been selected following an open, competitive process that had been completely transparent and highly scrutinised from start to finish.
That scrutiny included specific vetting and approval by the European Commission, the company said, which found that the rate of return was in line with that of similar projects.
Electrogas noted that it was not involved in the trading of LNG itself, describing its sole business as "the provision of safe and reliable gas-powered electricity to Enemalta plc."
In its statement, issued on Friday, the company said that it believed its IT systems had suffered a possible breach and had reported the matter to police.
PN: Where have the millions gone?
In its own reaction, the PN through deputy leader David Agius, shadow minister for energy, said that just in the first year of the government's energy deal with Azerbaijan, Malta had already lost €40 million. Where had this money gone?
These figures, Mr Agius said, had to be seen in the context of other reports which showed that $200,000 had been transferred to the secret company 17 Black by, he said, the company of the Maltese agent that supplied gas to the power station. According to German media, 17 Black was to transfer the funds to Panama companies belonging to Keith Schembri and Konrad Mizzi.
Mr Agius also recalled how in 2015 Enemalta lost €14 million in a hedging deal with Azrbaijan company Socar.
PD: Publish the full contract
Partit Demokratiku insisted that a full version of the contract should be published, and called for an independent review by overseas experts on the legitimacy and legality of this contract and whether it can be reviewed or even rescinded.
PD asked a few questions:
1. Why was a contract signed with Socar to supply LNG when it is not a known supplier or producer of it?
2. Why was the LNG not bought at a cheaper rate directly from Shell, which supplied the gas to Socar at a much lower rate?
3. If, as has turned out, the price we pay is almost double the current commercial rate, why has there not been a price correction as is normal practice? It can be done; Italy and Lithuania managed. Is there a clause in the contract allowing it?
4. Why was there never a public call for tenders to supply LNG to Malta?
5. Why was the contract fixed for, in the words of an international expert, ‘an unusually long time?’
6. Why did the then energy Minister Konrad Mizzi and Prime Minister Joseph Muscat omit to invite journalists and take along public servants when signing an agreement for ‘strategic cooperation in the field of energy’s with Baku?
7. We note Konrad Mizzi used ‘ministerial discretion’ to also sign fuel hedging agreements for petrol and diesel with Socar in 2014, also an unorthodox practice. Is there a pattern in all this?
8. We note that Nexia BT was involved in the deal, a company closely linked with an inner circle around the Prime Minister, a company the name of which crops up time and again in deals of dubious repute.
9. We note that Konrad Mizzi and Keith Schembri have now been definitely linked with 17 Black, a company that received a €200,000 from the local agent handling the tanker that supplies gas to the power station.
10. We note that 17 Black also received €1.4 million from an Azerbaijani company.
"The Maltese consumer is shouldering the burden of that extra cost. If people have been found to profit from signing deals that are disadvantageous to the nation, they should be forced from public office and prosecuted for, at the very least fraud; and if the profiteering is proven to be systematic and widespread, possibly treason," it said.