New oil exploration licences will increase State income

New fiscal terms for oil and gas exploration and production in Irish waters will increase the maximum "State take" from 40 per cent to 55 per cent and will include an annual royalty, Minister for Energy Pat Rabbitte has announced.

The terms will apply to licenses issued from 2015, including those secured under a new licensing round due to be announced by Government today (wed june 19).

Corporation tax at 25 per cent applying to petroleum production will remain the same, Mr Rabbitte told the Ocean Wealth conference in Dublin Castle this morning.

The principal change - combining corporation tax with petroleum profits tax to a maximum of 55 per cent depending on the size of the field - was recommended by international consultants Wood MacKenzie.

Wood MacKenzie was appointed last year by Mr Rabbitte to undertake a review after a 2012 Joint Oireachtas committee report recommended that the State should get a minimum 40 per cent and maximum 80 per cent take from proceeds of any oil and gas finds off the coast.

Mr Rabbitte said he agreed with the consultancy recommendation that there should be no retroactive change to the fiscal terms applying to existing exploration authorisations.

“There are three elements to this,”Mr Rabbitte said of the changes. “The first is that if you have a producing field then in year one, straight off, five per cent goes to the Exchequer.”

“Thereafter, it’s a combination of corporation tax at 25 per cent and a profits tax that, depending on the size of the field, can grow to a maximum of 55 per cent,”he said.

Wood MacKenzie had identified scope for strengthening the current fiscal system, to provide for an increase in the overall State take; ensure an earlier share of revenue for the State; and address “inconsistencies” it had identified in the current system, Mr Rabbitte noted.

Its principal recommendations were that Ireland should maintain a concession system, with industry rather than the State bearing the risk associated with investing in exploration.

It also said that a form of production profit tax should continue to apply but should be revised for future licenses.

The consultants said that the tax should be charged on a field-by-field basis with the rate varying according to the profitability of the field and charged on each field’s net profits;

They recommended that the revised tax should include a minimum payment at five per cent which would “ function like a royalty” and ensure an annual yield to the State from the first year of production.

The consultants also recommended that the revised tax rates should be higher than the profit resource rent tax currently in place - introduced by former energy minister Eamon Ryan in 2007.

This would ensure a higher State share from the most profitable fields, resulting in a maximum rate of 55 per cent applying in the case of new licences, compared with a maximum rate of 40 per cent under the current fiscal regime.

Wood MacKenzie had compared Ireland’s case with nine other comparable hydrocarbon producing nations including Newfoundland and Labrador, New Zealand, Spain and South Africa, and had also included Norway and Britain as the systems in these two states were part of the current debate over oil and gas licensing, Mr Rabbitte said.

“By acting now and setting out Government policy on this issue, it is my intention to communicate a clear message in relation to the stability of Ireland’s fiscal regime for the oil and gas exploration sector,”Mr Rabbitte said, emphasising no change for existing licences.

Mr Rabbitte noted “significant interest” by the industry, in spite of poor returns. “I think this is a very well judged regime,”he said, and the proposals were designed “not to deter in investment”.

Wood MacKenzie did not recommend setting up a national oil company, and Mr Rabbitte concurred with this.

“It is a cardinal principle that governments stick by contracts,”Mr Rabbitte said, of the decision not to impose a changed regime on existing licenses. “We can’t get a reputation as a country that abrogates contractual terms just because the circumstances have changed.”

“The only negative comment you can make about the last contract period is that we didn’t make a find, “he said. “To listen to some of the commentary, you’d think we were finding gushers every second day of the week. The fact of the matter is that in 40 years, we have only have four gas finds and no oil find,”he said.

Mr Rabbitte stressed the vital role of ocean energy in providing for future needs, and said that it was “inevitable” that an agreement to export renewable energy to Britain would be secured – though the recent agreement had not been realised.

Also at the Ocean Wealth conference, Minister for Marine Simon Coveney forecast a potential €0.25 billion expenditure by the EU and State in the seafood sector, as a result of the doubling of EU aid to Ireland under the new Common Fisheries Policy (CFP).

“Seafood exports are up 30 per cent, there is a “world first” plan for a biomarine plant in Killybegs, and the value of Irish catches landed has been over 0.25 billion euro annually,”he said, stressing that there were “many positives” to the seafood sector.

Mr Coveney said the Government was committed to ensuring ocean wealth was an integral part of the economy, with five ministers at the conference - opened by Taoiseach Enda Kenny - and eight government departments involved in an inter-departmental marine co-ordination group established in 2009.

Ireland would be one of the first countries in Europe to develop a marine spatial strategy, over the next five years, led by Minister of State Jan O’Sullivan, he said.

The Government’s Ocean Wealth report published in 2012, which aims to double the value of the marine sector to 2.4 per cent of GDP by 2030, would “not sit on a shelf”,Mr Coveney pledged.

Speaking afterwards, Mr Coveney said that he was “very happy” in his portfolio holding agriculture and marine. “I am not looking for a new opportunity in Cabinet and I hope I’ll stay, but this is a matter for the Taoiseach,”he said, when asked about the impending reshuffle.