Updated - Oil hedging with Azeri company on 'ministerial direction' - NAO flags the issue, Busuttil says it 'stinks,' government explains
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Updated - Oil hedging with Azeri company on 'ministerial direction' - NAO flags the issue, Busuttil says it 'stinks,' government explains

€14m hedging loss partly offset by €8m gain

The National Audit Office has expressed reservations over how Enemalta hedged oil consignments worth millions of euro from the state-owned Socar company of Azerbaijan following 'ministerial direction'.

Opposition leader Simon Busuttil immediately commented in a tweet that the affair 'stinks'. The government said the deal meant the price of petrol was reduced by 2c when it had been expected to rise. It denied actual ministerial intervention in the transaction.

The audit office said it 'has reservations' regarding the manner by which the decision to hedge unleaded petrol and diesel requirements for the second half of last year was taken.

"Documentation reviewed by this Office, which solely focused on the setting of targets, failed to provide a comprehensive account of the AFC’s (Advisory and Finance Committee) sourcing of final approval and the subsequent placement of order with Socar Trading SA.

"Minutes of the Petroleum Procurement Committee meeting dated 3 April 2014 indicated that the deal with Socar had been concluded following “ministerial direction”.

"Explanations and documentation put forward by the Minister for Energy and Health, as well as by the then Chair EMC (Enemalta), provided an element of context, particularly in terms of the stated Government policy of price stability. Furthermore, the Minister stated that the direction provided to EMC was limited
to, and in line with, Government’s efforts at reducing consumer prices. In addition, the Minister claimed that EMC was advised to maintain its targets and widen its supplier base. This was corroborated by the then Enemalta chairman.

"Notwithstanding the review of emails exchanged by the AFC and clarifications put forward by the Minister and the then Chair EMC, the National Audit Office is of the opinion that documentation detailing final approval issued by the Committee and the subsequent placement of orders with Socar Trading SA was incomplete. This rendered it impossible for the Office to determine the extent of ministerial direction exercised and responsibilities assumed by the AFC.

"Given the magnitude of the agreement reached with Socar Trading SA, this Office considers the lack of documentation as detracting from the process’ accountability and a shortcoming in terms of governance." 

In its report, the audit office said it had resulted that Enemalta made a loss of 
$9,855,463 from hedging during 2014. This loss was attributable to developments that took place in the last quarter of 2014, which starkly contrasted against previous gains recorded in Q1, Q2 and Q3 2014.

€14m LOSS ON FUEL HEDGING PARTLY OFFSET BY €8m GAIN

In determining Euro equivalence of gains and losses registered through the hedging of crude oil, the NAO utilised the European Central Bank EUR/USD exchange rate for 2014. Applying this method of conversion, the total loss registered by EMC with respect to crude oil hedging undertaken in 2014 amounted to €8,623,434 on crude oil.

A loss of €5.5 million was made on procurement of petrol and diesel.

The Audit Office said that central to the loss registered by Enemalta with respect to hedging on crude oil, unleaded petrol and diesel were the significant market movements recorded during the last quarter of 2014, "which were not and could not have been anticipated when such agreements were entered into."

On the other hand, the Corporation registered a gain of €5.5 million in terms of FX hedge undertaken for fuel oil and gasoil and an additional €2.5 million gain from FX hedges entered into with respect to unleaded petrol and diesel requirements."

IMPROVEMENT IN GOVERNANCE

In its report, the Audit Office said it had noted significant improvement in terms of the Advisory and Finance Committee’s (AFC) governance. Documentation and correspondence exchanged by members of the AFC indicated that the Committee was continuously monitoring oil and FX markets. All members of the AFC were included in such correspondence and decisions taken were appropriately authorised by the Committee Chair.

Even during periods of AFC inactivity (such as the period between 12 March 2014 and 19 September 2014), the Committee members maintained a constant watch over developments. The NAO reviewed all decisions taken by the
Committee and the Office established that the absolute majority of decisions were reflected in hedging deals concluded by Enemalta.

GOVERNMENT EXPLAINS

The government said the report showed how governance in the way oil was procured had improved substantially in the past two years. Most of the hedging decisions were based on the recommendations of the ‘Risk Management Committee’ .

The government said it recognised the auditor's comments about incomplete documentations in one transaction. It said that in March Enemalta informed the government that that owing to closed hedging transactions, its targets would not be achieved and fuel prices had to rise by 2c. 

The Energy Minister in agreement with the chairman of Enemalta directed the corporation to stay on the market and widen the spectrum of companies it could deal with.

"The directive was one of stability and lower prices, where possible". After contacts between the government and the Azeri government, Socar Trading was introduced as an option. Government involvement 'stopped here and there was no involvement in the transactions made by Enemalta, the government said. 

Enemalta subsequently informed the government it had reached hedging agreements with Socar and instead of raising prices, it reduced them by 2c for petrol and diesel was unchanged. 

PN: GOVERNMENT HAS A LOT TO ANSWER

In a statement, the PN said this was the second Audit Office statement in a few days which had condemned the way the government used taxpayers' money.

In the first scandal, the government had given €4.2 million to a failed company and now the government had lost €14 million through an agreement 'reached with interference by the minister.' 

The people deserved to know why Energy Minister Konrad Mizzi had personally involved himself in oil procurement and whether this was with the prime minister's blessing.  

LABOUR REACTION

The Labour Party noted that the Auditor's report had noted progress in the way hedging was made. 

It was clear that the decisions which were taken reflected the government's policy of stability and price reductions.

"The only thing which still stinks of corruption is the oil procurement scandal under the former administration, of which Simon Busuttil was part as deputy leader," the PL said.   

It said that instead of welcoming the fact that fuel prices in Malta were falling while they were rising abroad,Dr Busuttil was making insinuations "which exist in his mind only". 

See full report on pdf below

Attached files

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