A 10-year fixed-term agreement on gas is possible but there is a risk the global price could actually go down over the next decade, according to international industry experts.

Prices go up and then they go down... the question is – can you spot the cycle?

A fixed-term power purchase agreement is central to Labour’s proposed energy plan because it gives the private investor the party plans to attract fixed parameters and guaranteed profits.

The proposal came under fierce attack from the Government, which argued that such an agreement of the sort was practically impossible or was likely to be hugely expensive given that the price is expected to increase.

Professor Jonathan Stern, from Oxford University’s Institute of Energy Studies, however, has confirmed that agreements of this length are not unusual.

On the contrary, he argued that a 10-year period was relatively short for a new market entrant such as Malta.

“Previously you would have needed a 15-to-25-year power purchase agreement back-to-back with an LNG sale and purchase contract,” Prof. Stern said, adding there were “plenty” of examples of such contracts all over the world.

Prof. Stern is a senior research fellow and chairman of the Natural Gas Research Programme at Oxford and has authored and edited several papers, including a book in 2012, The Pricing of Internationally Traded Gas, which charts likely future developments of the industry.

The Sunday Times carried its own research of such agreements but while examples are easy to come by, they are usually covered by confidentiality clauses that reveal very few details. Moreover, consultancy firms were reluctant to comment on the matter.

Finance Ministry: there may be inherent risks in hedging

However, Prof. Stern also confirmed the possibility of locking prices through a hedging agreement. Whether this is wise or not depends on the economic outcome one is trying to achieve, he added.

“If it helps you, I teach my students that gas – like all other commodities – moves in priced cycles linked with supply/demand cycles. So prices go up and then they go down... The question is – can you spot the cycle?”

But beyond the question of whether commodity price cycles can be predicted with precision, Prof. Stern, and another expert in the field, Derek Lennon, agree that developments in industry are likely to see the price of gas stabilise and even drop over the coming decade.

The development of an extraction technique called fracking, which is used to extract petroleum and natural gas from shale – a fine-grained rock – means the reserves of this commodity have grown considerably over recent years.

When this point was put to the Finance Ministry, which is responsible for Enemalta, a spokesman stood by its stated position and referred The Sunday Times to a December 2012 paper by Andrew Walker, vice-president for the British oil and gas multinational BG Group.

In it, Mr Walker said: “By 2025, there will be a 175m tonne gap between demand and supply – that’s the challenge we see for the industry.”

“Projects,” he added, “look easy until you try to deliver them.”

However, Mr Lennon, who has built major plants in 26 countries, said fracking would change the dynamics of the industry.

“This (development) has dramatically affected the price of gas in the US which is now $3.4/MMBTU (recent prices in EU have been around $11/MMBTU)... the US will become an exporter of Liquefied Natural Gas and Norwegian oil and gas multinational Statoil has already begun a terminal. There are large shale deposits in the UK and Poland so there is a lot of gas available for the next 100 years.”

Prof. Stern too predicted that prices would go down towards the end of this decade, but also argued that the industry could be expected to go through two price cycles in which demand or supply are dominant, therefore prices would go up and then down.

The Finance Ministry also said there could be inherent risks in a hedging agreement where Malta would be buying energy at a higher price than the industry average in future.

Labour’s frontman for the energy proposal, Konrad Mizzi, said the idea of price fixing was not intended as a money-saving measure but rather to give the system stability.

“Under our plan, we would be going from the current 18c per unit to 9.6c, which will boost the industry, and the hedging will give the same industry the peace of mind to be able to plan by having a portion of our energy mix on a fixed price,” he said.

He pointed out that under Labour’s plan, only 40 per cent of the country’s energy mix (from the new 200MW gas-fired plant it is proposing) would be placed on such a long-term hedging agreement.

“We’re saying that the rest of our energy will come from the BWSC plant, which will be converted to gas, the interconnector and the Phase Two Delimara plant, which will be run on oil and kept as spare capacity,” Dr Mizzi said.

But the Finance Ministry stressed that a long-term hedging agreement would necessarily be expensive, to account for the price changes that could happen in this time frame.

Dr Mizzi argued that Labour’s Dutch consultants DMV Kema had made a comfortable provision for these hedging costs. However, he argued that the party could not release specific figures for this because it would be giving away its eventual bargaining position.