Government ‘prudent’ in oil price hedging

Finance Minister Tonio Fenech told Parliament yesterday the government was exercising prudence in hedging oil supplies and waiting for better prices to buy.

Speaking during the debate on the estimates of Enemalta Corpor-ation for 2011, Mr Fenech said if the government had hedged when the price was at $104 a barrel, it would have made a loss of €35 million as the spot price was $103. The corpor-ation’s estimates were based on the price of oil as at April 20, when it had been $120.80.

In this uncertain scenario, Enemalta was carrying out a daily analysis of the international market, in order to determine the ideal time to hedge. Last year, Enemalta had hedged at $81 per barrel. During this year, when things were more difficult, 63 per cent had been hedged at $79 a barrel, which was better than last year although the dollar costs were slightly higher. There were times last April when the price had been $126, but the average was $111 a barrel.

Therefore, said Mr Fenech, Enemalta was waiting for better international prices to hedge. On a positive note, oil prices had decreased during the past week; in fact yesterday’s price was $103 a barrel.

This was why he felt the opposition would be cheap in its promise to reduce utility bills when faced with such volatile fuel prices which were affecting all countries.

Earlier, the minister said the generation of energy was an important sector for the economy. Foreign investors needed a guarantee that the island could produce energy for their businesses. Although it was a controversial debate, one had to focus on how Enemalta would remain sustainable and one had to discuss how expenses were to be distributed.

In the last 20 years the demand for energy had doubled. From 230 megawatts in 1997 it had increased to over 400 megawatts last August. This demand would continue to rise in line with the expected economic growth. Thus, Enemalta had to have the required infrastructure, be it traditional or alternative, to cater for this expected growth in demand.

Such expenses inevitably had to be covered by families and industry alike. Enemalta also had to make good for the €3,000 given to each family making use of the solar panelling scheme.

Mr Fenech said that at the end of 2010, the corporation had been due to collect €145 million while at present this stood at €127 million. The average payment period had decreased from 168 to 143 days.

Referring to the Leader of the Opposition’s statement that once Labour was elected to office the party would strive to cut utility bills, Mr Fenech said such a promise could not be made. Such a prediction was unreasonable due to the volatility of fuel prices. He asked how the opposition was planning to reduce €15 million from an expenditure of €350 million a year. Such a sum did not even amount to five per cent of the total expenditure. What effect would such a minute reduction have on bills? In fact, 70 per cent of the €350 million were used to buy fuel.

Nevertheless, if Enemalta were to transfer to an alternative source, utility bills would be higher and not lower. This was because alternative energy was very expensive. While Enemalta now produced one unit of electricity at 16c, with alternative energy a unit would cost 27c.

Due to this situation, for the time being Malta would remain dependent on oil. Once an alternative was found, the country would make the change.

Mr Fenech said a gas terminal was not environmentally feasible on such a small island as Malta. However, discussions were ongoing on a European level which, if approved, would mean that Malta together with Cyprus and the Baltic states would receive financing from the EU in order to develop a link for both electricity and gas between Malta and mainland EU member states. In such a case Malta would have an opportunity to make the switch.

The government was investing in Enemalta for the corporation to become more efficient. The smart meters project would eliminate electricity theft because it would increase the corporation’s technical efficiency. Other operative decisions had been undertaken, including the setting up of Arms Ltd.

Through the Marsa power station closure, people would be benefiting more than 25c of electricity with every €1 paid. This was why the government was investing €165 million in the Delimara power plant which would reduce pollution and be more efficient. The interconnector project would further reduce expenditure. The best option was to establish a gas pipeline to Sicily, and this was under active consideration.

Mr Fenech said Enemalta had a debt of €450 million. Talks were being held with banks to spread this debt over 25 years.

Also taking part in the debate were Nationalist MPs Ċensu Galea. Philip Mifsud and Franco Debono.