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First find the oil, and then raise the taxes

Sunday Independent

[Shell to Sea] Please be advised that the Tony O Reilly who is a significant shareholder in the Sunday Independent, also owns oil & gas exploration company Providence Resources. The point argued in this article is dealt with page 10 of "Liquid Assets"

Ireland’s ‘take’ can be increased later, once more oil and gas is found. Oil company executive John Craven told the Irish Independent (April 15, 2012): “The Irish Government need to create an environment where people are happy to come in and drill and to park the tax issue until people are on production, when there is something to tax.”

Licences already offered by the Government can be changed, but only with considerable political will and some risk. In reality, future Irish governments will be extemely reluctant to do so. Unless the terms are changed now, all or most of the areas likely to contain oil and gas will have been licensed exclusively to companies for decades to come. The companies will have exclusive control over how much oil is produced and when and to whom it will be sold. Moreover, data on which finds are significant can be withheld by the company. The Petroleum Affairs Division has acquiesced in the withholding of this information, thus denying to the public information relevant to the debate about Government policy on offshore exploration. See article by economist Colm Rapple:


THE success of Providence Resources in finally finding oil in commercial quantities in Irish waters has inevitably renewed the long-running debate on our system of oil and gas royalties.

While the Irish terms are certainly generous by international standards, it might be a good idea to actually find the oil and start pumping it ashore first before we start changing the rules.

The latest contribution to the debate on the issue was from Dublin Shell to Sea, which on Monday published Liquid Assets, a 44-page document arguing that Irish oil and gas royalties were too low and should be raised.

At present, Ireland levies a 25 per cent tax rate on oil and gas profits and an additional profit resource rent tax of up to 15 per cent. In theory, this means that the total tax rate could be up to 40 per cent.

However, critics of the system argue that the terms are so loosely drawn that very few, if any, companies will pay anything like 25 per cent, let alone 40 per cent. However, even applying these headline rates, it is clear that companies producing oil and gas in Irish waters will be taxed at far lower rates than in almost any other countries.

So should Ireland be increasing the tax rates on oil and gas profits? To paraphrase St Augustine, yes but not yet. Exploring offshore for oil and gas is a seriously expensive business with an exploration well costing $100m (€76m) or more. Somehow I can't imagine our creditors being ecstatic at the prospect of the Government literally pouring money down speculative holes.

Far better to let our low tax rates and high energy prices encourage as many companies as possible to explore in Irish waters. If this exploration leads to large oil and gas discoveries, we can then change the rules later.

Posted Date: 
16 September 2012