Debate about oil resources should begin with the facts

Ireland is a high-cost, high-risk destination for the oil industry

Tue, Aug 6, 2013, 01:00

ExxonMobil’s announcement last week that it plans to abandon its search for oil and gas off the west coast looked like a blow to hopes for a fresh wave of petroleum exploration in Irish waters.

However, at least eight other, albeit lesser known, companies are stepping up activity in the same region, indicating that the industry is prepared to roll the dice here at least a few more times. Government estimates say that there may be 10 billion barrels of oil and natural gas lying beneath the seabed off our coast. The figure is often cited in the on-off debate about the supposedly generous licensing terms we offer oil companies, most recently by a movement, fronted by consumer champion Eddie Hobbs, Own Our Oil.

The Republic taxes oil and gas production profits at 25 per cent. On top of that, there is a resource rent with a ceiling of 15 per cent, so a very lucrative field would pay 40 per cent. The charges only apply after deducting costs, which run into billions. By the end of 2011, Shell and its partners had spent €2.5 billion on developing the Corrib field.

Much of the debate has so far been along the lines of “the Government is giving away our oil and gas to greedy corporate interests for a song”. But this is not an accurate reflection of the facts.

Advocates of a higher tax point to Norway, where oil and gas profits are taxed at 78 per cent. The problem with this argument is that 78 per cent of zero is zero. Vast quantities of oil and gas are not flowing ashore from wells dotted around our coast.

There has been just one significant find here since 1975. Our one existing field, Kinsale, is near the end of its life. Shell hopes to bring Corrib into production next year. Barryroe, a potentially commercial find by Irish firm Providence Resources, is a long way from producing anything.


Refunded expenses
The odds against striking commercial oil or gas in Irish waters are 32/1. In Norway they are 6/1 and in the UK 5/1. Since 2005, Norway has refunded 78 per cent of expenses incurred where exploration drilling fails to find anything and it allows companies to write off 130 per cent of their costs before it taxes profits.

These terms, combined with the high strike rate, ensure that Norway is a far more profitable destination than the Republic. A recent PricewaterhouseCoopers report, Making the Most of Our Natural Resources, showed that every €1 invested there returns €15, while in the Republic, a comparable ratio would be €1 to €5.

The report, which Providence commissioned, bases its calculations on a one in 33 strike rate and exploration costs of €60 million. That is on the low side. The bill for drilling in Ireland’s Atlantic margin is said by the industry to be €1 million a day. And the exercise could last for two, three or more months, so it would not be unreasonable to calculate those expenses at €120 million.

Ireland is a high-cost, high-risk destination for the oil industry. This deters companies from coming here. Only 6 per cent of the total area offered in the last licensing round, in 2011, was taken up. None of those that bid were household names. Overall, the industry’s big players are poorly represented here.

Just six of the top 50 – Shell, Statoil, Exxon, Eni, Petronas and Repsol – have interests in Irish licences, whereas about half of them are active in Norway and the UK.

Only 3 per cent of the State’s offshore area is under licence, according to the Irish Offshore Operators’ Association (IOOA), which also notes that just 130 exploration wells have been drilled there over the last 50 years, compared to 1,000 in Norway and 2,000 in the UK. This creates a vicious circle: the less you drill, the less likely you are to find something, the less attractive your territory becomes for exploration, and so on.

The IOOA’s chairman, Fergus Cahill, last week argued that more exploration could lead to more discoveries and an improved strike rate. Assuming this is so, and the Government’s estimates of what is lying beneath the seabed are true, then we need more exploration.

There are really two steps to this. The first is working out how to encourage that exploration. Unlike Norway, we can’t afford to underwrite exploration. However, the Government is jointly funding a €15 million survey with Italian oil giant Eni of the Republic’s undersea geology. Its results will be made available to the industry. They should mitigate some of the up-front costs by giving companies a focus for more detailed work.

The next step is deciding clearly what we want if there are large commercial quantities of oil out there.


Industry’s right to profit
Within that, we need to balance our right to a decent return from these resources with the industry’s right to profit from them, and work out how else we can maximise the wealth that they could potentially create.

So the Government needs to decide if it wants to charge tax, rent and/or royalties, at what rate, or participate directly.

When Norway’s first commercial field was discovered in 1969, its government drew up “10 commandments” to govern how its oil would be exploited. They required that the oil be landed there and an industry developed alongside it.

Such a rule would deliver obvious benefits here, but it would need infrastructure such as refineries and so on. The battle sparked by the Corrib field’s development, and the planning law failure highlighted by the judicial review of the foreshore licence granted to Providence for exploration off Dalkey, gives an idea of the challenges that this would involve.

These issues need to be weighed up in any debate. We should have that debate now, but it needs to start with the facts, not with emotive arguments about poor oppressed Ireland giving away her petroleum wealth for a song.


Barry O’Halloran is a journalist with
The Irish Times

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