Oil firms will shun us if we have Norwegian-style taxes

 

THE CLAIM by Fintan O’Toole (Let’s make Norway joint owner of our oil and gas, Opinion and Analysis, August 16th) that Ireland “is on the brink of signing away almost all of the resources we have left on terms that are by far the worst in the developed world” is factually incorrect on both counts, writes PAT RABBITTE

Far from resulting in all of the Irish offshore being licensed for exploration, the total area covered by the 15 applications received is approximately 6 per cent of the area on offer. The terms on offer quoted by O’Toole – “a tax on profits between 25 and 40 per cent” – compare favourably with all similar countries but not with Norway.

The explanation for this exception is the very enviable geology of Norway’s offshore.

For example, the tax rate in Portugal is 27.5 per cent, 30 per cent in Spain and in France the rate is 34.4 per cent. The reason why a higher rate applies in Norway is straightforward: the strike rate in Norwegian waters is incomparably better.

O’Toole is correct in one assertion, namely, that I “was once a critic of the regime”. In the 1970s, like many others, I thought Ireland had Norway-like prospects. Unfortunately it has turned out otherwise. For example, 156 exploration and appraisal wells have been drilled in Ireland compared with over 1,200 in Norway and 4,000 in the UK.

The statistics are more stark when it comes to producing fields.

The UK has had in excess of 380 oil and gas fields, while Ireland has only three with a fourth in development. The Troll field offshore Norway is in the region of 50 times the size of the Corrib gas field.

Is it any wonder that the tax take in Norway is higher? If Ireland over the last 40 years had enjoyed Norwegian-style finds then I too would be recommending similar tax rates. Norway’s enviable success is almost exclusively attributable to its fortunate geographic location and the geology of its offshore.

Unfortunate as it may be, replicating the Norwegian regulatory approach will not in any way change the geology of the Irish offshore.

Fintan O’Toole accepts that “the scale of the investment and expertise required means that the giant oil corporations will have to be involved”. But he can’t logically then argue for Norwegian-style tax rates. The oil companies simply wouldn’t come to Ireland and, as he concedes, we do not have the capacity financial or otherwise to do the job ourselves.

If the basic rate of tax of 25 per cent introduced almost 20 years ago was too low, why then have fewer than 20 exploration wells been drilled in the Irish offshore in the last decade? The answer is that the international industry has by and large chosen to invest its exploration budget elsewhere on the basis of its perceived risk/reward balance.

In relation to the appropriateness of Ireland’s licensing terms it is important to recall that Ireland’s oil and gas tax terms were revised as recently as 2007, following a review that was informed by independent economic experts. There have been calls for the Oireachtas to review these tax terms and I would of course be happy to engage with any such process. I believe, however, that the evidence in terms of the international industry’s investment decisions provides a clear indication as to the appropriateness of Ireland’s tax approach.

Without dwelling on the relative merits of tax, versus royalties, versus a State shareholding, as a means for the State to extract value from Ireland’s natural resources, it is important to recall that each of these is simply an instrument to ensure a return to the State from successful exploration. The most common instrument in use internationally is a tax on profits and this is the model used in Ireland. Needless to say without successful exploration the choice of instrument is irrelevant.

Finally to return to the opening sentence of the O’Toole piece. The reality is that the recent licensing round, while positive in terms of demonstrating a modest upswing in interest, will not put Ireland on a footing with countries like Norway and the UK in terms of the level of exploration activity. Far from resulting in all of the Irish offshore being licensed for exploration, the reality is that the vast majority of Ireland’s offshore will continue to be both unlicensed and underexplored.

This represents a real challenge for Ireland. Ireland is not Norway. Ireland’s policy approach to the taxation of profits from oil and gas production must be informed by clear and rational analysis and must be grounded in reality.


Pat Rabbitte is Minister for Communications, Energy and Natural Resources