Time to take the tough decisions on oil and gas
WE’VE just been through a year when the unthinkable became normal. The problem is that all the unthinkables have been bad: the nationalisation of the banks and their debts, the arrival of the IMF and so on. Is it not time to consider another unthinkable that would be of potentially transformative significance – taking back control of our offshore resources.
Wishful thinking is the last thing we need, but it is not far-fetched to suggest that oil and gas finds could play a huge role in Ireland’s long-term economic and fiscal future.
At a conference in Dublin in November, Noel Murphy from the petroleum affairs division of the Department of Communications, Energy and Natural Resources said: “The Atlantic basins of Ireland are an underexplored frontier petroleum province with proven working hydrocarbon systems. Source rock modelling, prospect evaluation and analogue basin review show a . . . potential of at least 10 billion barrels of oil equivalent. The structural styles allow for the presence of giant undrilled structures. Therefore it is not unreasonable to say that Ireland is at the beginning of the pipeline providing natural gas to mainland Europe rather than at the end of the gas pipeline importing gas from our European neighbours.”
The likelihood is that oil prices will reach $100 a barrel again this year. That would put the potential value of Ireland’s offshore energy resources at a 1,000 billion dollars. This is the only figure one can cite in relation to Ireland that makes the bank debts look small.
The problem, of course, is that these potential resources are being given away. The Government itself describes the “fiscal terms” given to oil and gas exploration companies as “amongst the most attractive in the world”. In most cases, the State is entitled to just 25 per cent corporation tax, with no royalties – after the deduction of all exploration and production costs. For licences issued after 2007, there may be an additional 5 to 15 per cent tax. Even if this applies, it is (after all the deductions) extremely low.
In the USA and Canada, the government stake is between 42 and 60 per cent. South American governments take between 25 and 90 per cent. Even in sub-Saharan Africa, where governments tend to be weak, their stake ranges from 44 to 85 per cent.
The financial effect can be seen with the contentious Corrib gas field. Corrib has a trillion cubic feet of gas. Its monetary value will of course depend on global gas prices over the next decade but on any sober estimate, Corrib will generate vast profits for the Shell-led consortium that controls it.
The cost of developing the field will probably have reached €2 billion to €2.5 billion before the gas begins to flow. Production costs will probably account for another €1 billion, making for a total outlay of €3 to €3.5 billion. Yet the lowest estimate I can find for the value of the gas is €9.5 billion. Industry estimates value it at about €13 billion.
That leaves a profit of somewhere between €6 billion and €10 billion – on a resource that belongs to the Irish people.
In 2008 Minister for Energy Eamon Ryan claimed that the total corporation tax revenue accruing to the State from Corrib will be €1.7 billion over a period of 15 to 20 years. Given the known ability of multinational corporations to minimise their taxes, this figure has to be regarded as a highly optimistic. Even if it is accurate, though, that still leaves a profit of between €4.3 billion and €8.3 billion for Shell and its partners.
These terms were granted by two of the most discredited figures in Irish politics – Ray Burke and Bertie Ahern. Burke abolished State royalties and rights to part-ownership in 1987 but left the corporation tax rate at 50 per cent.
Ahern, astonishingly, halved the tax rate in 1992.
We are not stuck with these appalling terms. Indeed, one of the principal defences of the current regime has long been that if and when there were significant finds, the terms could be reviewed. In May 2006, for example, the then minister Noel Dempsey told the Dáil: “One can only assume that commercial finds would increase the attractiveness of Ireland to those looking to prospect. On that basis, these licensing terms are, and always have been open to review. If, at some point in the future a reform of the Irish fiscal system is necessary to redress the balance and to obtain a greater share of petroleum rent for the State then that will be done. If it is possible to extract a royalty payment without killing off interest in exploring Irish waters, then that will be done.”
In the desperate situation we’re in, Ireland simply can’t afford to squander any of its resources, let alone those of such potentially enormous significance. Even with their existing licences, no one can bring oil or gas ashore without the active support of the State. It is time for the State to think the unthinkable and ensure that most of the profit goes to those who actually own the resources.