Issue link: https://maltatoday.uberflip.com/i/1019972
13 maltatoday | WEDNESDAY • 29 AUGUST 2018 OPINION BUSINESS George M. Mangion gmm@pkfmalta.com The writer is a partner in PKF an audit and business advisory firm THE recent withdrawal from Iran by the French oil giant Total was caused by a reinstate- ment of US sanctions which cover foreign firms doing business with Tehran. In an ominous fashion, President Donald Trump tweeted earlier this month: "Anyone doing business with Iran will not be doing business with the United States". This unilateral move has been met with much chagrin from the side of the EU partners who collectively signed the nuclear deal with Iran. In 2015, the agreement had lifted heavy sanctions in return for a commitment from the Islamic Republic to abandon its nuclear enrichment programme. President Donald Trump re-imposed Iran sanctions in a number of stages – the first one covering metals and cars. In June, the State Department called on buyers to stop import- ing Iranian oil or risk facing US sanctions. Analysts contend that as full sanctions against Iran take effect, perhaps in combination with production problems else- where, maintaining global oil supply might be challenging. It creates pressure to maintain an adequate spare capacity cush- ion. This certainly powers the oil price upwards possibly next November when the next round of sanctions come into effect. Readers may counter-argue that any shortage of Iran oil can be substituted by extra production from US fracking industry – lately this has seen great poten- tial. Yet, this may not work out to achieve an equilibrium, so in the short term it could place more than two million barrels per day at risk. US administration officials have said they might look at requests to stabilise the market on a case-by-case basis to avoid oil shocks, while also maintaining that the target is to cut Iranian oil imports to zero. At the same time, global de- mand for oil goes on unabated such that the IEA raised its 2019 forecast for oil demand growth around the world by 110,000 barrels a day to 1.5 million bar- rels. Some predict oil price next year will reach $100 a barrel, particularly if US friction with Iran escalates. How, does this economic prognosis affect us, being the smallest EU member? Facts show that we still rely 100% on imported fossil fuel for our en- ergy. Attempts to wean off the dependency and switch to green energy are welcome yet we still can only count on about 6% of energy from the sun. But it is not all doom and gloom – consider how much progress we achieved since Independ- ence. Since 1964, we have tried and succeeded to diversify our economy – to break the mould of a fortress island dependent on the British services. Nostalgically, we managed over the years to diversify the pillars of production to include iGam- ing, financial services, manu- facturing and mass tourism. Even so we must not forget how fragile these are, and subject to market and political oversight from Brussels. Perhaps now that we have started to register a modest sur- plus it is a good time to diversify our vision by investing longer term. Our geographical location and maritime tradition yearn for new investment on logistics, transportation, LNG storage and hydrocarbon extraction. While discussing the subject of diversification particularly in the energy sector, PKF is keen to share its dream that one day the island will reap oil discoveries as was the case with close neighbouring countries. A delegate from PKF has been invited to attend a three-day conference next October in Cyprus which focuses on such E & P issues. The European Mediterra- nean Oil & Gas Summit will discuss the geo-strategic, commercial, technology and regulatory issues that will shape the management and future development and commerciali- sation of oil and gas assets and infrastructure in the European Mediterranean region. The agenda includes ground-break- ing solutions to maximising return on investment on hydro- carbon transportation, storage, processing and extraction. More than thirty international speakers will discuss latest developments while secondary topics include talent sourcing and managing health and safety issues. In attendance are a number of producing countries including Turkey, Croatia, Greece, Italy, Albania, Israel, Sweden, USA, Egypt, Cyprus, Norway and North Africa. In this context, PKF will be presenting a paper discussing the potential for the island to become a future oil and gas ser- vicing hub. History tells us how our past attempts in explora- tion were not complimentary. It was 1954, when the first on- shore concession was awarded to a company called D'Arcy Exploration (BP) to drill a well in Naxxar. Since that fateful attempt all other drilling at- tempts were unsuccessful. Over a 60-year stretch we only test drilled 13 wells which experts consider as too little but is never too late to try regaining parts of our Continental shelf boundary claimed by others. Yet, it is encouraging to know that the island's main source rock for the oil is expected to be rich in the organic Streppenosa oil shale unit which is desig- nated world class in its prolific oil generating capabilities. No wonder the nearby offshore Sicily Vega oil field, with an es- timated resource of one billion barrels of oil in place, is only 20km away from the northern border of the latest zone in Malta's exploration efforts. Needless to say, experts predict that the proximity of similar concessions and similarity in geology to the producing basins of Tunisia and Sicily lend support to the theory that oil strikes for Malta cannot be ex- cluded. The "intra-basin" ridge trend offers a new and highly prospective oil strike in our wa- ters provided we reach bilateral agreement on contested areas. The good news is that a Na- tional Oil Company has been incorporated to help promote upstream business so can we hope that behind closed doors the authorities are devising plans to kickstart the drive to attract foreign investment. Another harbinger is the pre- diction mentioned earlier that oil price will rave on an upward trajectory. The subject is a taboo. Prag- matists argue exploration is a pipe dream fit for visionaries hoping to attract countries such as China as part of its One Belt- One Road investment policy. Operators now use modern technology and Artificial Intel- ligence – this may surprise us with good tidings. It is fair to say that our politi- cians know that any success in extraction sector may take dec- ades to be monetised into cash. It is a long gamble to appease voters. It is a slow return when contrasted to dividends earned from mass tourism, iGaming and financial services. This may be true; yet all incum- bent sectors took a decade or more to reach optimisation. Sadly, in any democracy, think- ing short term when forging macro-economic policies reso- nates a populist ring but left un- checked, this policy can harm the enlightened self-interest of current generations. Some predict oil price next year will reach $100 a barrel, particularly if US friction with Iran escalates George Mangion Budgets: beware the pitfalls of short termism