Leaked files reveal cost of agreement to taxpayers as opposition calls for more transparency

This article is more than 2 years old

This article is more than 2 years old

The European commission approved a monopoly energy deal with Azerbaijan under which Maltese taxpayers could be losing tens of million of euros a year, according to an analysis of leaked files.

A whistleblower gave a cache of data to the journalist Daphne Caruana Galizia, who was killed by a car bomb in October.

The leaked material has been shared with the Daphne Project, a collaboration of 18 media organisations from 15 countries, including the Guardian, Reuters and Süddeutsche Zeitung, led by France’s Forbidden Stories.

Q&A What is the Daphne Project? Show Hide A fearless anti-corruption journalist, Daphne Caruana Galizia’s reporting came to international attention with her exposes in the 2016 Panama Papers project. On 16 October the following year, the Maltese reporter was murdered by a bomb placed under the driver’s seat of her car. The Daphne Project was created to continue her investigations. It is a collaboration of 18 media organisations in 15 different countries, including the Guardian, Reuters, Le Monde and the New York Times. The project is the first to be led by Forbidden Stories, an international network of journalists who stand ready to take over when colleagues are silenced through imprisonment or murder. The project will publish a series of fresh revelations, setting out the dangers that alleged political corruption and poor controls on money laundering inside Malta pose to law and order in Europe.

Caruana Galizia died before being able to publish any findings from the leak. However, three energy experts in London have examined the files. They contain pricing information and contracts that Malta’s current government has so far refused to share with the public.

Some of the material concerns a deal with Azerbaijan’s state-owned oil and gas company Socar, worth more than €1bn, under which Malta agreed to import all the gas needed to supply its power stations for the next 10 years.

Over the past year, Malta has paid at least €131.6m ($153m at annualised exchange rates) for its gas – nearly twice the open market rate.

Maltese taxpayers were losing money “hand over fist”, according to one expert.

The deal was struck with Socar in 2015. Benchmarking indicated Malta was paying a significantly higher rate than similar purchases from the wider market negotiated at that time by Greece, Italy and Turkey. Estimates by the Guardian suggest Socar paid $40m less for the gas than the sum it charged Malta.

The gas is transported in liquid form, known as liquefied natural gas. Experts said there were questions to answer about why Socar, which had no relevant experience in producing or trading LNG when the deal was signed, was chosen as Malta’s partner.

There is no suggestion of wrongdoing by any of the parties involved. However, the lack of a public tender for the gas contract, and the absence of public information about its structure and costs, have hampered scrutiny and debate about whether the government secured the best deal for taxpayers, opposition politicians claim.

Malta’s Labour government says its energy market policy has been a success. By switching its power stations from fuel oil to cheaper, cleaner gas, it has slashed household electricity bills by a quarter.



The former Nationalist party leader Simon Busuttil said: “There was a total lack of transparency on this contract.

“It took the government two years to publish it and even then, the juicy parts were blacked out. There is now the inexplicable involvement of Socar, when the gas could have been purchased directly from Shell at a cheaper price.

“There is a fixed price for an unreasonably long time. And there is also a huge markup being made by Socar for no contribution at all, at the expense of Maltese taxpayers.”

The leaked material concerns a company called Electrogas, which is one third owned by Socar.

Facebook Twitter Pinterest The most recent liquified natural gas delivery from Shell appears to have come via Maran Gas Apollonia. Photograph: Darrin Zammit Lupi/Reuters

Electrogas has played a key role in Malta’s transition from using fuel oil to LNG. Liquefied gas can arrive by sea, which is crucial to the island nation because it has no gas pipelines connected to mainland Europe.

In 2013, Malta held an open competition for a company to build facilities at Delimara on the southern tip of the main island. The company would import LNG, store it, convert the liquid back into gas and pump it into turbines operated by the state-owned utility Enemalta.

The winning bidder was also required to build turbines of its own, to supply Enemalta with electricity. The Electrogas consortium was selected, in a public process in which 18 bidders expressed an interest.



Leaked tender documents show Enemalta requested a fixed price for the first five years. Because the price of the gas was included in the cost of the bid, there was no separate public tender for the LNG supply contract.



In 2015, Electrogas signed contracts to buy all the gas Malta needed from Socar. Regular deliveries began in April 2017, once its facilities at Delimara were built.



Azerbaijan is a major oil and gas producer, but it does not produce LNG. The Daphne Project has established that Socar is not supplying the gas from its own reserves. It is in fact buying the gas from Shell and selling it on to Electrogas at a profit. Socar does not handle the gas, organise its transportation or add value in any physical process.



The most recent delivery from Shell, on 22 March, appears to have come from fields off Trinidad and Tobago, via a tanker called Maran Gas Apollonia.

Until now, Malta’s taxpayers were in the dark about the exact figures, because the government has only published the relevant contracts in redacted form. The Daphne Project has seen the originals.

Facebook Twitter Pinterest Parliament House in Valletta, Malta. The government has refused to publish pricing information on the gas deal. Photograph: Alamy

Since April 2017, when regular LNG shipments to Malta began, Socar has apparently benefited from the discrepancy between the fixed and market rates. Oil and gas prices tumbled between 2014 and 2016, and are only just beginning to recover. The cost of LNG is still well below the fixed price Malta is committed to paying.



Simon Pirani, a senior visiting research fellow at the Oxford Institute for Energy Studies, said: “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.”

Two other specialists, who asked to remain anonymous, reviewed the contracts and said a five-year commitment on the agreed terms was unheard of.

“Socar are getting paid double by the Maltese utility,” said one. “That’s a huge margin. Malta should push to renegotiate that contract, because they are losing money hand over fist.”

Konrad Mizzi, the Maltese tourism minister, steered the project through in his previous role as minister for energy. In a six-page letter to the Guardian, he said his government’s initiatives had secured hundreds of millions in investment from corporations and banks. The switch from oil to gas had lowered electricity prices and improved air quality.

He said Malta’s energy sector had been “in desperate need of a complete overhaul”, with Enemalta in debt despite charging some of the highest prices per customer in Europe.

The state provider’s financial woes were one of the main reasons for outsourcing the whole gas supply chain, he said.



Facebook Twitter Pinterest Konrad Mizzi, the tourism minister, argued the fixed price was worth paying in the interests of security of supply. Photograph: Darrin Zammit Lupi/Reuters

The decision had been shaped by advice from international law firms and specialist consultants, he said, and received financial backing from a consortium of leading banks.

Mizzi argued the cost of the five-year fixed term was worth paying because “security of supply and price stability were paramount”.

Socar said Electrogas, in which it holds a 33% stake, had been chosen as Enemalta’s partner after a fair and open tender process, and that it had submitted a “competitive and attractive” bid.

The European commission, which says it was made aware of the pricing details, raised no objections and approved the deal in January 2017.

A spokesperson for the commission’s directorate general for competition, which approved the deal, said its role had been to check Electrogas was not being overpaid by Enemalta, rather than inspect the deal with Socar in isolation. It had concluded that the rate of return for Electrogas was “in line” with similar projects.

However, among the leaked material is a report by a UK consultancy hired by Electrogas to analyse the costs, in order to convince banks to invest. In the report, the consultancy questioned Socar’s involvement.

“The arrangement is unusual,” an adviser noted, “and typically one would expect the LNG supplier, in this case Shell, to contract directly with the project.”

The energy deal explained

In a convoluted chain, the gas Malta needs is sold by Shell to Socar, which then sells it to Electrogas, which sells it on to the majority state-owned grid operator, Enemalta.



Facebook Twitter Pinterest Estimates suggest Socar paid Shell $40m less for the gas than the amount it charged Malta. Photograph: Anna Gowthorpe/PA

For the first five years of the 10-year contract with Socar, Malta has committed to a fixed price of €9.40 ($11.50) per mmbtu, a unit of gas.



Since deliveries began in April 2017, the average price per unit on the UK NPB, a widely used indicator for Europe’s wholesale liquified gas market, has been $6.20 – nearly half the Maltese fixed rate.

This does not include transportation costs, whereas the €9.40 does. But Socar is still paying much less for the gas than the price at which it sells to Malta.



Malta buys a minimum of 14m mmbtu per year under the deal with Socar. Using average exchange rates for the past year, Malta paid an estimated $153m to Socar for gas.

For the final five years, Malta will pay a market linked price, pegged to the Brent oil index. Each unit of gas will cost 14% of the price of a barrel of oil. Socar’s deal with Shell is also linked to oil, for the entire 10-year term. The exact terms are unknown, but the price cannot be more than 14%, otherwise Socar would make a loss in the final five years. This means Socar paid Shell no more than $113m over the first 12 months of the agreement.



This represents a potential $40m profit for the Azerbaijani energy company. Socar declined to comment on pricing, saying it was restricted by confidentiality clauses.



Malta could not have foreseen the sustained oil and gas price crash that has made its deal with Socar look like poor value.



However, it has the option to redraw or cancel the agreement. Other countries have done this: Lithuania secured a price cut from its supplier, Statoil, and the Italian energy company Edison went to court to reduce the cost of its deal with Algeria.