Untapped potential: factors keeping oil and gas big players from Irish shores

Reasons may include the poor strike rate of previous efforts, uncertainty over planning and concerns that the tax regime could be changed

Barryroe,  a Providence interest off the Cork coast, which could potentially be the next commercial field in the Republic’s waters. Photograph: Finbarr O’Rourke

Barryroe, a Providence interest off the Cork coast, which could potentially be the next commercial field in the Republic’s waters. Photograph: Finbarr O’Rourke

 

A single commercial oil or gas find in Irish waters could provide close to 800 jobs for 31 years and deliver €4.5 billion in corporate taxes to the exchequer, according to a report published yesterday. Ten such fields could deliver €45 billion to State coffers, sustain more than 11,000 jobs and another 13,500 while they are under development.

However, the same document, Making the Most of our Natural Resources – Oil and Gas Exploration in Ireland , argues that a number of concerns are deterring the industry’s big players from investing here. These include the poor strike rate of previous efforts to find commercial oil and gas, uncertainty over planning and suggestions the Government could change the tax regime.

Irish oil and gas explorer, Providence Resources, commissioned professional services firm Pricewaterhousecoopers (PWC) to carry out the research. Providence, whose shareholders include the O’Reilly family, has a series of interests around Ireland, including a majority stake in Barryroe off the Cork coast, which could potentially be the next commercial field in the Republic’s waters.

PWC says the probability of making a commercial find in Irish waters is one in 32. There have been four such discoveries, all natural gas, since 1971 – Kinsale, Ballycotton and Seven Heads, all in the Celtic Sea, and the Corrib field, off Mayo. PWC estimates that the industry has lost €3.2 billion here since 1971. Broadly speaking, it spent €5 billion and returns have amounted to €1.8 billion.

The report suggests that Ireland’s poor performance may be partly linked to the lack of drilling activity. Between 1993 and 2007, just 23 wells were drilled. PWC regards 1993 as significant, as in 1992 the government reduced corporation tax on oil and gas production profits to 25 per cent. Five years earlier, it abolished State royalties and allowed companies to write off exploration costs against profits. In 2007 it amended tax rules to allow for a maximum take of 40 per cent.


Attractive regime
The firm says this is an attractive regime, and is in line with those offered by other countries that are not leaders in oil and gas production, such as France and Morocco. However, the big international players have still displayed little interest in coming here, a situation which the PWC report describes as unique.

“Specifically, of the 43 licences currently in place, Irish companies have interests in 28 of them and top 50 global players have interests in eight,” it states. Just one significant international operator, Repsol, applied for an exploration licence option here in the last round in 2011, when only 6 per cent of the entire area offered was taken up.

Recent activity has given some grounds for optimism. In the 10 years since 2002, exploration companies drilled 17 wells in Irish waters and made five discoveries, both oil and gas, although none have been declared commercial. Exxon Mobil, the world’s biggest oil company, has just begun exploratory drilling in the Dunquin licence in the Porcupine Bank, around 250 miles from the southwest coast.

PWC argues that the bottom line is that other factors besides tax are keeping the big players away. The first is cost versus return. It shows that in Norway, the world’s sixth biggest producer, companies can expect a return of €3.3 billion on a total of investment of €224 million, after paying tax at 78 per cent on their profits, or 15 times what they have spent.

In Ireland, where the strike rate is one in 32 and the average cost is €60 million, companies can expect a return of €10.4 billion on a €1.9 billion investment, or five times their spending, even after paying tax at 40 per cent. Norway will return 78 per cent of exploration costs on every dry well and it supplies comprehensive geological data to explorers, cutting both their risk and costs.


Seismic data
PWC does not advocate that the State compensate exploration companies, but it does recommend that the Republic gather and provide seismic data, essentially an image of its offshore geology, with its licences. Recently, the Department of Communications, Energy and Natural Resources and Italian giant Eni began a joint two-dimensional seismic survey covering 18,000km of territorial waters, at a cost of €15 million. This will be completed by the end of 2013 and the information will be made available to investors.

International operators are also wary of planning and administration here. Exploration here could mean dealing with three Government departments and four or five other State agencies. This can lead to unexpected risks. In February, Providence surrendered a foreshore licence needed for exploratory drilling in the Kish Basin near Dalkey in Co Dublin after a court ruled that the EU Environmental Impact Assessment Directive had not been transposed correctly into Irish law. The long-drawn-out Corrib controversy meant that it had cost Shell €2.49 billion to develop the field by the end of last year, four times more than originally anticipated.

PWC recommends streamlining the regulations and planning, and argues that policy should be clear and communicated to both the public and industry. In a similar vein, it warns that suggestions that the Republic is about to change its oil and gas tax regime is also offputting for potential investors.