Territorial disputes hanging over parts of Maltese oil licensing areas may be deterring actual investment, but there is still no shortage of interest from oil companies.

Sources close to the government said that a substantial number of reputable oil companies have shown interest in Malta’s offshore acreage over the past 12-15 months and have even made visits to view data from previous explorations.

“The government is very prudent about who gets access to these data, as they give significant information about the potential of Malta’s offshore acreage and have great commercial value.

“It is worth a fortune to countries which claim the territory ...” the sources said.

Neighbouring states have registered claims over part of Malta’s 76,000 sq. km acreage: Italy to the northwest and northeast, Tunisia to the west and Libya to the south. Therefore, apart from Area Three and Area Four (see map), there are other areas that are affected by overlapping interests.

Court action has been suspended since a 1985 ruling by the International Court of Justice. Now, according to Infrastructure Minister Joe Mizzi, the government is opting for a pragmatic “joint activity” approach without prejudice to sovereign rights, and in this scen-ario each state would suspend its continental shelf claims for an agreed number of years to enable joint exploration to proceed.

This would not come a moment too soon: Malta has a number of blocks which are currently open for licensing. Tony Trevisan, founder and significant shareholder of Mediterranean Oil and Gas, currently drilling the Ħaġar Qim exploratory well, made it clear that territorial disputes deter investors.

“Exploration and drilling is a very expensive business and it makes no sense to make discoveries or fund research on behalf of other nations, particularly bigger and more influential ones.

“And let’s face it. All of the nations surrounding Malta’s waters are much bigger and more influential countries,” Mr Trevisan told the Business Observer.

The government does not spend a cent on the seismic studies or exploratory drilling – on the contrary, it receives hundreds of thousands of euros from the licensees. Investors can make significant gains if oil is found in viable amounts – but if not, they lose everything .

“It clearly makes no economic sense for any government to spend tens of millions of euros in acquiring seismic and other technical studies, given the very real and significant sovereign risks attaching to most of Malta’s licensed areas,” Mr Trevisan said, noting that Heritage Oil – a substantial exploration and production company – has sat on important and promising acreage to the south of Malta for seven or more years without any drilling.

“The government had extended the original agreement and is still receiving revenue from the company, but the sacrosanct contractual requirement to drill one or two wells has been neatly sidestepped without forfeiture of the licences, and frankly, for good reason as Heritage – not unlike any other commercial enterprise – will not spend the vast sums of money required to drill offshore without security of tenure over their licences. And currently they don’t have that.

“Parts of the acreage licensed to Heritage have been reported as having technically compelling evid-ence of a geology which is synonymous with other certain discoveries in northern Africa. Heritage is an aggressive multi-billion-pound explorer and the only impediment to drilling is Libya’s (and more recently Italy’s) territorial claims and uncertainty over the sea shelf.

“Overall I think Malta’s resources department has managed the situation very well by negotiating licences over the relatively smaller, non-contentious areas – certainly the most pragmatic and realistic way in the circumstances,” he said.

Mr Trevisan also warned that success in any area could exacerbate the territorial disputes.

“Anyone who believes Tunisia, Libya and Italy are likely to step back from their growing territorial claims over previously recognised Maltese waters is living on a different planet ... Exploration success in non-contentious areas would likely further inflame those claims.”

He said multi-billion companies like the operator of Area Four, Genel, employ an “army of geologists and geophysicists” with considerable experience in exploratory drilling, production and development. Companies would not drill if the prospects of success were much less than one in five.

“Exploration and more particularly offshore drilling is a calculated risk by the companies who undertake it. It may be compared to a lottery with some inside information. In this case Genel are punting some $30 million dollars based on a technical hypothesis which may or may not be correct, and running the chance of either writing off that cost and walking away with nothing, or potentially making billions of dollars. We can all scale those numbers back and can relate to the trade-off between risk and reward.”

Overall I think Malta’s resources department has managed the situation very well- Tony Trevisan

The sources also believe that there must be sufficient reason to support the interest.

“There is enough evidence to justify the investment made so far by Heritage, Cairn (Capricorn) and Genel/MOG (Phoenician). Judging by the interest shown, there are many investors out there biding their time until the results of Ħaġar Qim are known in the coming weeks (see box),” the sources said.

“If they are positive, we should expect to see interest stirring for the rest of the area available. And people often overlook that even if Ħaġar Qim itself is not a discovery, additional exploratory wells might still be drilled by Genel/MOG”, if the data gained from this drilling supported the geological model the operator was following, the sources said.

In fact, the second well is very often considered to be more viable than the original one.

MOG’s directors are currently recommending approval of a £29.3 million take-over bid by Rockhopper, which actually includes a contingent payment to shareholders based on a 100-million-barrel discovery at Ħaġar Qim – but not from any subsequent wells. Rockhopper has asked for the consent of the take-over from the Maltese government – but it will also require approval by the takeovers panel of the London Stock Exchange, MOG shareholders at a general meeting to be called and the British Court in the coming months.

Oil? When will we know?

Exploratory drilling started in May and will last between 45-55 days, so by the end of August we could be talking about the next phase, a Genel spokesman said.

There are around 120 people on the Paul Romano rig, including some 50 Maltese. The rig is drilling in waters that are 450m deep, considered to be deep but not excessively so.

“The deeper it gets, the harder it is for a rig to anchor,” the spokesman explained.

The objective of the well is around 2,500m below seabed.

Tony Hayward, the CEO of Genel, the majority shareholder in the consortium holding the licence to explore Area 4, is predicting a one-in-five chance of finding oil, but the odds could be twice that.

While it may be wildly pre-mature to predict whether oil or gas would be found in commercial quantities, a few reality checks based on industry case studies may help to understand the timeline.

If a discovery were made, an appraisal programme would take place over three years to determine whether the discovery can be considered as a Commercial Petroleum Field. If this is the case, then it would take several other years until the field starts to be developed in accord-ance with a development plan.

There are examples where this was done faster – like the Jubilee field in Ghana which was in production after just four years. But some projects – such as some in Angola – took 10 years. The average tends to be around seven years.

Of course, this all depends on whether the finds make commercial sense – but the relatively low costs of drilling in the Mediterranean compared to places like the North Sea mean that if the price of oil were to fall from the $100 level to even below $80, it could still be profitable, sources familiar with the industry said. Having said that, drilling in Malta would cost substantially more than in the Adriatic, for example, due to the water depth.

And what if oil were found? Due to the distance of the field from Malta, the sources said that the most likely solution would be a floating production, storage and offloading (FPSO) unit. This is a floating vessel which takes the hydrocarbons, processes them, and stores the oil until it can be offloaded onto a tanker or, less frequently, transported through a pipeline.

The next question on people’s minds would be what Malta stands to gain from any eventual production. The details of Malta’s Production Sharing Agreement (PSA) were never revealed, but sources indicated that they are more or less in line with industry standards. Mr Hayward had described the terms as “very competitive” during a recent interview.

“The PSA covers a number of things such as who pays for the exploration and what the tax on petroleum found would be. And then it is up to the government to determine what level of impact they want the production to have on the country. For example, Trinidad and Tobago, which derives some 40 per cent of its GDP from oil and gas, managed to retain a strong tourism interest. It is possible to leave things offshore and have a minimal impact on tourism, fishing, the environment and so on,” the sources said.

Malta could still provide logistical support – such as warehousing and storage for drilling equipment, materials and fluids – and supply boats would be used to transport this to the production rig (the Paul Romano is only for exploration). Crew changes could also be done through Malta via helicopter.

The sources had an optimistic note on which to end. Even if the Ħaġar Qim well is not successful, there could still be oil or gas just a short distance away.

“So more exploratory wells might be drilled! We should never give up!” the sources said.