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Rabbitte’s rush to give away offshore rights could cost us billions

Colm Rapple - Irish Mail on Sunday

It’s official. The terms at which we give away rights to potential offshore oil and gas reserves are far too generous. That was the unanimous conclusion of an Oireachtas committee that included 12 TDs and senators from Government parties and nine from the opposition. They want far tougher terms applied to all new licences. By implication, they fault minister Pat Rabbitte for rushing to issue offshore option rights last year covering the most favourable areas off the west coast.

Impatient: Energy Minister Pat Rabbitte was in a hurry
Impatient: Energy Minister Pat Rabbitte was in a hurry

The recipient oil companies can convert those options into exploration and production licences that will be subject to the current licensing terms – terms deemed wholly inadequate by the Oireachtas Committee, confirming the long-held view of many commentators.

It bases that view on the historical trend in energy prices, the potential for further rises given the political instability in many oil producing countries and advances in exploration and extraction technology. None of those have changed since last year.

Minister Rabbitte was asked to delay issuing the options until the Committee had concluded its deliberations. He refused, showing scant regard for democracy or the rights of elected representatives to influence government policy. He preferred to take a Stalinist approach, accepting the advice of his department officials rather than wait for a committee of TDs and senators to study the issues involved, examine submissions from interested groups and come up with recommendations.

Had he waited, he would now have the benefit of the Committee’s views and, if he accepted them, the terms applying to the options would greatly enhance the potential tax revenue derived from any find.  It would range from 60% more from the very smallest finds to twice as much from the largest finds.

Under the current regime the tax rate ranges from 25% to 40% depending on the profitability of the find. It’s made up of a basic 25% plus a Profit Resource Rent Tax (PRRT) of up to 15%. Under the Committee’s proposals the 25% basic tax would remain unchanged but the PRRT would be applied at rates of between 15% and 55% raising the total tax to between 40% and 80% depending on profitability.

The difference between the existing terms and those recommended is potentially massive given the very large sums involved.   On the basis of the Department’s own estimates there could be €540 billion worth of oil and gas under the seabed off the west coast. If even a tenth of that is under the areas covered by the exploration options, the potential tax revenue could run into tens of billions.

The proposed tax regime would yield twice as much as the existing one so that differences could run into tens of billions too. It’s a lot of money, potentially lost because Pat Rabbitte issued offshore licence options on the basis of the existing terms rather than on the terms now being recommended by the Oireachtas Committee.

Why the unholy rush?

The Committee chaired by Fine Gael TD Andrew Doyle wasn’t exactly top heavy with firebrands. In addition to the chairman there were seven other Fine Gael representatives including the vice-chairman. There were four members of the Minister’s own party, Labour, and four members of Fianna Fail. There were two members of Sinn Féin, and three independents.

There was never any fear of it reaching particularly radical conclusions. Yet Pat Rabbitte couldn’t wait for it to report. Its conclusions are based on very detailed research and open hearings with the whole gambit of stakeholders and experts. They included the Department, representative of the oil companies, SIPTU, The Energy Regulator, the Norwegian ambassador and a Norwegian energy minister.

Its conclusions must be taken seriously but because of Pat Rabbitte’s impetuousness, it’s unlikely to have any impact on policy for many years. There won’t be another round of offshore licences on offer for a few years at least.

Under the licence that applies to the Corrib find, for instance, profits are subject to tax at a maximum rate of 25%. That’s the most that Shell and its partners will have to pay. Applying extra taxes in this case wouldn’t make much difference. Taxable profits will only be declared after writing off all of the partners’ exploration costs in Irish waters, the development costs and the estimated costs of closing down the wells when the field is depleted.  That will be well into the future.

Collecting a royalty on production is about the only option that would produce speedy revenue for the Exchequer and that’s what we need at this time. Unfortunately royalties have fallen out of favour internationally and were not considered in any detail by the Committee. In any case it ruled out any retrospective change to the tax rules applying to existing licences.

That may, however, be an overcautious conclusion. It admits that many countries have introduced windfall taxes but the Committee never seems to have considered this in the context of getting a bigger take from Corrib and other existing finds. Pat Rabbitte may have let the horse bolt but it could be caught again.

Posted Date: 
27 May 2012