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Finally, a first tiny step on the way to owning our oil

Eddie Hobbs - Sunday Independent
A new report recommends that Ireland must examine production sharing, writes Eddie Hobbs
'THE impact of what happened today will halve exploration activity for the next five years and I can tell you as Gospel, because we spent the last six years in the farm-out market." David Horgan, CEO Petrel Resources, Wednesday, on TV3's Tonight with Ivan Yates.

Grand so, I told the Petrel Resources CEO, take your licence and stuff it. Probably a bit harsh, but I've a low threshold for gamesmanship from industry lobbies. Leaving TV3, I joked with Horgan about looking forward to seeing his company's notice to quit Irish waters in the newspapers but I doubted I'd see any.

He'd previously told an industry conference in the Burlington Hotel "we have long known Ireland's offshore Porcupine Basin is a hydrocarbon province, our recent work identified a number of high potential prospects, at least one we believe has a billion-barrel potential".

Millions of us believe in God, even though there's no hard evidence, but, based on a common reaction to this debate, many of us refuse to believe in the probability of offshore oil and gas despite evidence of it all around us, off Norway and Britain and across the Atlantic off Newfoundland. Since 1987, we've tolerated giving that potential away in the hope of raising some corporation tax in the future when we'll buy back our own oil and gas at international prices from our 'partners'. Gas is about to come ashore from Corrib, billions of it, but we won't get a sausage because we've relied on trying to extract tax revenues off the bottom line.

That changed last week in an important first baby step; the Wood Mackenzie report has come in and Pat Rabbitte, Minister for Communications Energy & Natural Resources, announced that he is adopting its findings. So what's in the report and what does it mean for Ireland's higher risk frontier location, 90 per cent of which remains unexplored?

The U-turn on government policy is the recognition that attempting to recover economic rents due to the Irish people purely by chasing elusive profits, below the line, needs changing. A royalty-type charge of 5 per cent, an advance payment of the new Petroleum Production Tax (PPT), is now being introduced because, as the report makes clear, "if it becomes apparent that the Government will receive no revenue until costs are recovered, this could lead to political pressure on Government to change the terms for the field. A guaranteed flow of revenue for the Government from each field will reduce the risk of potential instability". Kicking up a fuss works.

In further implicit criticism of the existing regime, the report author, Wood Mackenzie, substitutes the field surcharge tax known as Profit Resource Rent Tax (PRRT), introduced in 2007 by Green minister Eamon Ryan, with PPT because "PRRT only becomes payable once the producer's after-tax profits reach a certain multiple of its capital expenditure so will usually only become payable later in a field's life". Precisely – think 20 years plus.

The effect of the changes is to raise the State maximum take-out to a ceiling of 55 per cent of profits, up from 40 per cent but still well below international pricing, so are the changes to be made retrospective? The answer is an emphatic no for fear of creating instability among exploration companies, a risk that the British government was quite happy to take when it recently tightened its pricing.

But the nominal rate of tax, capped at 55 per cent and comprising corporation tax of 25 per cent and PPT, remains largely a meaningless exercise given the breathtaking scope for profit shifting and the continuance of undisturbed rights to 100 per cent capital allowances on all expenditure going back 25 years. Until these are tackled, the new 5 per cent above-line charge remains the only hope for the Irish people to recover any early cash.

But the most significant development in the report is the U-turn from a strong head wind of apathy and resistance by both the department and industry to a light tail wind towards a new destination; Wood Mackenzie has accepted that Ireland must seriously examine moving towards Production Sharing Contracts (PSCs) in tandem with the establishment of a National Oil Company, (NOC) which is precisely what Own Our Oil has advocated in discussions with the consultants and in the recent book.

Production-sharing largely eliminates the risk of retroactive tax changes that can destabilise private risk-taking and, crucially, positions the Irish people to immediately benefit at a significant level as soon as oil and gas is beached. A national oil exploration company, mimicking what the Norwegians did with Statoil, affords the opportunity for public private partnerships that includes expertise and know-how transfers over time; industry comes with the private capital, the State with the undersea resources.

Wood Mackenzie, which was appointed to examine if Ireland's pricing was 'fit for purpose', had a few months to deliver its findings before the June licensing round and had neither the scope nor the time to properly flesh out how these game-changers would work in practice, but makes it quite clear for the next Minister for Communications, Energy and Natural Resources: "We recommend that the current concession system is retained but that the pros and cons of moving to a PSC system are considered in tandem with the discussions around the possible establishment of a NOC."

The main takeaway from last Wednesday's conference is that this implements an incremental step towards a new destination to be scoped out with further work. That being the case, the question we are left with is why the current licensing round is not simply abandoned until we finally get it right – why continue to give away resources for a handful of coloured beans? Next minister up, please.

Posted Date: 
22 June 2014