Colm’s columns

Colm Rapple
Irish Mail on Sunday, 20th June 2010

On a conservative estimate there could be 10 billion barrels of oil, or the equivalent in natural gas,  under the seabed off the west coast of Ireland. That’s about enough to supply all of our needs for a hundred years. But junior minister Conor Lenihan is intent on giving it away. Oil companies already have rights to some of the most promising areas off the west coast. Oil and gas have been found and not only in the Corrib field off Mayo.  Now Mr Lenihan has invited applications from the oil companies for valuable options which would allow them first refusal on exploration licences over the remaining 250,000 square kilometres of our Atlantic shelf. That’s an area three times as large as the Irish land mass.

The companies can cherry pick the best prospects, undertake to do, or buy, some seismic studies, pay a fee of only €1,520 and gain an option to get a full exploration licences at any time within the following two years. Such a licence would allow them to exploit any find at the current generous fiscal terms.

Even the Government, in an official document, describes those terms as “amongst the most attractive in the world”. For many finds the State take will be no more that a 25% corporation tax charged on profits after allowance has been made for all exploration and development costs.  For very large finds the take can go up to 40% but even that’s low by international standards.

In North America the minimum Government stake according to a report prepared within Mr Lenihan’s department is 42% and it can rise above 60%.  South American governments get between 25% and 90%. The take in sub Saharan Africa ranges from 44% to 85%.

Our very favourable licensing terms have been defended in the past on the basis that we still need to prove the potential of Irish waters to yield sizeable oil and gas finds.  Once we’ve made that big strike, it has been argued, we can then up the anti for new licences.  It might be a valid argument if we hadn’t already licensed many of the most promising areas, most of them at the previous give-away terms under which the State can get no more than a 25% profit tax irrespective of the size of the find.

There is no case at all to be made for now letting the oil companies lay claim to the most promising of the remaining area of the Atlantic margin at the current terms.  There’ll be nothing left on which we can demand the type of return due to the Irish people for the exploitation of their natural resources.

There has long been a suspicion that oil has already been found in commercial quantities off the west coast and that it suits the oil companies to underestimate the prospects while they hoover up rights to more of our hydrocarbon resources. Mr Lenihan says that his decision was reached after consultation with the industry and is designed to boost the level of exploration activity.

Applications don’t close until May next so maybe he is also hoping for some good pre-election publicity. The announcement of an oil find wouldn’t go amiss and there are a few oil finds out there that have yet to be declared commercial. They might be so declared after these proposed new licences have been issued.

There is the Dunquin find west of Kerry. The licence was issued to Tony O’Reilly’s Providence Resources but it brought in ExxonMobile in return for a free ride. The Italian ENI group also has an interest. Davys stockbrokers have conservatively estimated that it could contain  9 tillion cubic feet of gas equivalent to 1.5 billion barrels of oil. That’s about the same size as the Corrib find.

The Dooish prospect off the Donegal coast was drilled by Shell in 2008. It has been keeping quiet about the prospects but gas flowed from earlier drillings in 2001 and 2003 with a “substantial gas condensate column” confirmed.

A prospect west of Clare known as Spanish Point was first drilled in 1981 and has yielded both oil and gas flows.

Those are just some of the known prospects that have already yielded finds.  But the State take from any of them will be small and long delayed. The licences were issued when the maximum tax was 25% and it’s only charged after all of the exploration and development costs have been written off.  It will be many years after oil or gas has started flowing before a cent of tax is paid.

The terms are decidedly lax in one other important way. There is no requirement to land any find in Ireland. Departmental officials did recommend that the State should be able to demand payment in kind of the extra tax introduced to licences issued after 2007.  But that proposal was overruled by the Minister or the Government. It never found it’s way into law.

Gas found off the west coast would almost certainly be landed in Ireland but oil could go anywhere. It could be piped from sub-sea facilities into tankers for shipment to refineries anywhere in the world.

It’s time to rewrite those old licensing terms perhaps by, at least, imposing a royalty levy on all oil and gas production. Until that’s done, no new licences should be issued.

Colm Rapple
Irish Mail on Sunday, April 11, 2010

As Tony O’Reilly’s Providence Resources raised the hope of finding oil in Dublin Bay this week, green Minister Éamon Ryan is preparing to give away another large slice of our natural resources. And I mean, “giving away”.  He has done it before, but his plans are even more scandalous this time. In the past the potential oil and gas reservoirs were in deep and inhospitable waters offshore. This time they are onshore. It’s true that the prospects are not thought to be great and any finds are likely to be small but exploration costs will be very low and the same very generous licensing terms that apply offshore will apply. The finders will effectively own whatever they discover and simply pay tax on their profits after writing off all their exploration and development costs.

Ireland’s first exploratory wells were drilled onshore back in 1959. Ambassador Irish Oil that was subsequently taken over by Marathon was granted rights to large areas both off and onshore. Wells were drilled in Cavan, Clare, Kilkenny, Cork, and Meath and some minor gas shows were reported in Cavan and across the border in Fermanagh where some drilling also took place.

Some of these areas were revisited in the 1980s and wells were also drilled in Leitrim. The last exploratory wells were drilled in Leitrim and Cavan in 2001.

Now Conor Lenihan, the junior minister in Éamon Ryan’s department has invited applications for licences that will give the holders the right to explore and exploit any hydrocarbons under about 8,000 square kilometres in what are know as the North West Carboniferous and the Clare Basins. Included are large areas of Counties Cavan, Donegal, Leitrim, Mayo, Monaghan, Roscommon, Sligo, Clare, Cork, Limerick and Kerry.

According to the Minister “this presents an exciting opportunity for the petroleum industry to invest in exploration onshore Ireland”.  That’s certainly true. But it would be far better if the opportunity was restricted to a State company like Bord Gais which undoubtedly has the expertise and the resources in co-operation with State agencies like the Geological Survey of Ireland to pinpoint and find any hydrocarbons that might be there.

It would require putting up some risk capital. But not a lot, and anything found wouldn’t have to be shared with the oil companies.

These new licences will be subject to the revised tax terms introduced in 2007 in response to the growing recognition that the old terms were far too generous. But in fact the old terms are likely to apply to any finds made. The new terms are not all that much onerous in any case. The only change was an additional sliding scale tax that will only hit really large and very profitable finds. Onshore finds are unlikely to fall into this category.

The terms will require the successful applicants to get their exploration work under way a lot quicker than it normally required with offshore licences. They’ll have an initial term of only two years. But with the low costs involved that should be no problem.

One of the arguments for maintaining the generous licensing terms made in the Indecon consultants’ report on which current policy is based, was that we are trying to promote a deepwater area in the Atlantic. It is pointed out that the Corrib gas field is at a depth of 300m and the Dooish gas condensate discovery is at a depth of 1,500m.

It was admitted in that report that oil companies the technology has improved significantly, and there are many examples of successfully exploited deepwater finds in the Gulf of Mexico, Brazil, and the Gulf of Guinea, among others but it was stressed that the costs are still relatively high.

That argument cannot be applied to onshore exploration. Even if the current terms were less generous than they are, it makes no sense to apply the same lax fiscal terms to such finds as apply to the offshore.  Indeed it makes no sense to apply them to the Providence Resources prospect on the Kish Bank off Dublin Bay.  The water is very shallow, sheltered and close to land.

It’s not the first time, of course, that hopes have been raised of an oil or gas find in Dublin Bay and it is still only a hope with no firm plans, as yet, to drill an exploratory well.  Four wells have already been drilled on the Kish, the first in 1977 by Amoco. Two years later, Shell thought it had identified a prospect. Than in 1986 it was the turn of Charterhouse while the latest well in 1997 was drilled by Enterprise Oil.

We know that there is coal under the Bay and that the geological structure is similar to that under Morecambe Bay, on the other side of the Irish Sea, where a gas find is being exploited. Maybe Providence will be lucky. The trouble is that, if it is, the rest of us will gain little from its luck.

Colm Rapple
Irish MAil on Sunday August 9, 2009

Can a gas find currently valued on the open market at no more than €1.5 billion, generate €1.7 billion in tax revenue for the State? According to junior minister Conor Lenihan, it can, and no doubt he is right. But this take on the Corrib Gas field off the Mayo coast is misleading in the extreme, all smoke and mirrors as Mr Lehihan’s mentor Bertie Ahern might have said.

The figures are not comparable. The value put on the field is what someone is willing to pay now for a stream of income that could extend over the next twenty years. Indeed on the basis of the tax revenue estimate the field is likely to generate profits in excess of €10 billion. It’s against that figure that the expected €1.7 billion tax revenue has to be considered.

Comparing the current value put on a company with a stream of tax revenue that won’t start flowing into the exchequer for perhaps ten years and won’t be fully collected for maybe twenty years is like comparing apples and oranges as the clever Mr Lenihan well knows.

Firm figures are hard to come by in the offshore hydrocarbon business. But it hard to get anything firmer than the price a company is willing to pay for a find or a stake in it. That’s what we now have for Corrib. This week the Canadian based Vermillion Energy Trust announced that it was paying up to $400 million (€280m) for the 18.5% stake in the Corrib field owned by Marathon Oil.

Vermillion is essentially buying a flow of income, having taken a view on the likely gas reserves and made some assumptions on the future trend in gas prices. In making such a valuation a discount rate is applied to future income and a 10% rate is not uncommon. That means that €100 which won’t accrue to the company until this time next year is valued at only €90 or €81 if it has to wait two years. Using a 10% discount rate, a €100 payable in ten years time is currently only worth €14.

That’s how companies put a current value on a future flow of income and that’s how Vermillion undoubtedly calculated the price it was willing to pay for the Corrib stake. On the basis of the €280 million it paid for an 18.5% stake, the Corrib field as a whole is worth €1.5 billion. But the actual profits that will be made will be multiples of that.

Putting a current value on a future flow of tax revenue is easy mathematically if we knew when that estimated €1.7 billion was going to flow into the exchequer. But we can guess. Shell and its partners won’t be paying any tax for many years. It can write off all of its exploration and developments costs and even the cost of eventually abandoning the find before declaring a taxable profit. So it could be ten years before they pay a cent in tax.

On the assumption that the tax would come in evenly over the following ten years, the current value of that estimated €1.7 billion tax revenue using a 10% discount rate is only €380 million.

That’s the figure that Conor Lenihan should have used this week if he really wanted to compare the potential tax revenue from Corrib with its current value as determined by the Marathon sale. And it’s a pittance. The Irish people, who actually own the gas, will get only 20% of the taxable profits made by the Shell consortium. Shell will be pocketing profits for many years before a cent in tax is paid.

The debate over where the gas refinery should be sited and where any onshore pipeline should be laid is really only a side show to this greater scandal. Instead of falling over themselves trying to made things easy for Shell, it’s time that the State agencies from the Minister down recognised just how good a deal Shell is getting and how much more it could be forced to contribute. It should at least be forced to be more environmentally and people friendly while a strong case can be made for a windfall profits tax. It’s an insult for Conor Lenihan to pretend that the Irish taxpayer isn’t being short-changed.

Colm Rapple
Irish Mail on Sunday, December 14, 2008

Oil giant Shell is keeping very tight lipped about the results of an exploratory well it drilled this year on the so-called Dooish prospect some 150 km north-west of Donegal. Earlier wells in this area yielded oil and gas finds which were described at the time as very encouraging. So encouraging, indeed, that Shell was willing to spent over €100 million on this latest well.

Mind you, the Irish taxpayer will be picking up the tab for a large chunk of that cost since Shell can write off the expense against its profits from the Corrib field.  Because of that tax concession we effectively pay a quarter of the exploration and development costs of getting oil or gas ashore. That, of itself, would justify the 25% tax we can hope to get on the profits from a find.

With larger finds the tax take can now go up to 40% but even that’s a pittance given that we own the oil and gas. We own the oil and gas, pay 25% of the exploration and development costs and yet, in the case of the Corrib find, for instance, will only get 25% of the profits.

But this latest drilling did cost Shell over €75 million so it was clearly optimistic about the prospects. But neither it, nor the Government, will reveal if that optimism was justified.

We are being denied information that would be very relevant in making a judgement about the appropriate of current Government policy on offshore exploration, in particular it’s approach to Shell’s development in Mayo and its decision to licence further key oil and gas prospects off the west coast on terms that are decidedly soft by international standards.

It suits both the Government and Shell to keep us in the dark. They have been playing down the possibility of other gas finds that could be routed through the Glengad landfall near Rossport in Mayo to the gas refinery being constructed at Bellinaboy.  But if there is more gas out there, that’s where it will end up.

And the prospects are good.

While Shell was drilling on the Dooish prospect this year, one of its partners in the Corrib project, StatoilHydro, was drilling on the Cashel prospect which is only about 50km north-west of Belmullet and a lot closer to the Corrib find that Dooish. It was the first drilling into a structure that was believed to be very promising although the industry speculation is that StatoilHydro was disappointed with its results.

But speculation is only that but we won’t really know until StatoilHydro makes a formal statement. Exactly why it is keeping quiet is anyone’s guess.

The Dooish prospect off Donegal is even more promising. An initial well in 2002 encountered a column of hydrocarbon condensate, oil and gas. Shell’s predecessor, Enterprise Oil, was reported to be very encouraged by the results and confirmed that view by returning to the well in 2003, drilling a fresh hole at an angle to the original one. It once again encountered hydrocarbon flows.

These wells are in particularly deep water, some 1700 metres, so it is not surprising that even a very promising find would be left for some years before being revisited. But Shell was obviously sufficiently encouraged by the results to return this year to drill again in an area west of the original find.

The well was spudded on May 19 and plugged on July 28, all without any fanfare, not even a one-line press release from either Shell or the Department.

If the news is in any way good, it calls into question Green Minister Éamon Ryan’s decision to go ahead with another licensing round covering an offshore area the size of the country.  We’ve known about his intentions for some time but it’s only in recent weeks that he formally requested applications for exclusive licences to a massive area off the west and north-west coast.

The companies will be able to cherry pick the choice areas and hold exclusive rights to them for sixteen years. To gain a licence they have to commit to an exploration programme but that may be satisfied by relatively cheap seismic studies and need not necessarily include a commitment to drill even a single well.

The licences will be subject to the slightly improved terms under which tax at up to 40% can be levied on very profitable fields. That’s a little better than a flat 25% but compares rather poorly with 50% in Britain, 78% in Norway and over 80% in some other areas.

Andrew Vinall, technical director at the British consultancy Hannon Westwood, recently described the new terms as in keeping with a regime that has always been “benign at least”. Even with the new terms, he added “if you do find oil and/or gas it is not going to be heavily taxed.”

We gave the Corrib gas away and now Éamon Ryan is intent on giving away the remaining choice areas of our offshore acreage at less than bargain basement prices. He risks giving away too much, too soon and too cheaply. Some of the areas on offer are very close to existing finds. If even one of those is declared commercial the terms for future licences could be greatly hardened.

Government studies suggest that there is oil and gas equivalent to 10 billion barrels of oil under the Irish Atlantic shelf. We’ve already given away our right to a significant proportion of it. Let’s not compound the error by issuing more licenses for next to nothing.

Colm Rapple
Irish Mail on Sunday, 13th July 2008
The Government has decided to give away rights to another large chunk of the continental shelf off the west coast. This time it’s an area larger than Leinster and Munster put together. The decision was taken this week to combine it with an even larger slice of our offshore area that is to be opened for licence applications later this year. The total area now on offer is greater than the land mass of all four provinces.
But despite spiralling energy prices there is no sign of the Government moving to harden the licence terms to ensure that we get a fairer share of the gas and oil that is undoubtedly under the sea bed. Yet this is the time to both demand more from new licensees and to introduce a windfall tax on the existing Corrib find off the Mayo coast.
Such a windfall tax may not have been a realistic option in the past. The risk to our international image was possibly too great. But the climate has changed with the spiralling increase in energy costs. Windfall profit taxes on energy companies are being openly advocated in Britain and the U.S. and not only by those who can all too conveniently be labelled left-wing radicals.
Our rights to the Corrib gas field were given away all too cheaply. Under the licensing terms then in force, and still applying to all licences issued up to last year, the oil companies get effective ownership of anything they find. All we get is the right to levy tax at 25% on the taxable profits and that’s after the company has written off all exploration, development and operating costs including an estimated cost of closing down the field when it is exploited.
The new terms introduced last year allow for the tax rate to be increased to 40% on highly profitable finds but these terms only apply to new licences and there’ll be no taxable profits generated in respect of these licences for at least ten years. In any case, it’s not enough.
Those terms need to be hardened further in respect of the licences under this latest round but more importantly the Government needs to take action to ensure that we get a fair return, not only from the Corrib find, but also from finds waiting to be exploited in those areas already under licence.
Two years ago the Department estimated that there was some 10 billion barrels of “oil equivalent” resources i.e. either crude oil or gas, under the sea bed off the west coast of Ireland. That estimate was based on a very detail assessment of the geology of the area, taking account of the difficulties and risks involved in exploiting the potential.
At our current rate of usage that would be enough to supply all of our energy needs for 90 years. At the time oil was selling for about $60 a barrel so the total estimated reserves were worth about $600 billion or €380 billion. Two years later with oil at $137 a barrel, these potential reserves are worth €870 billion or about €217,000 per head of population.
The value of the Corrib field has similarly soared. Shell and its partners, Statoil and Marathon are not worried about the delays in getting the gas ashore. The gas is going up in value by the day. In the US the wellhead price of natural gas is up three fold on where it was when Shell bought into the Corrib find back in 2002. Prices are up 37% since the beginning of the year.
A couple of months ago Bord Gais was predicting that household gas bills would have to increase by nearly 20% this winter. It may even be looking for more now and even if Corrib gas was flowing the outlook wouldn’t be any better. Shell will be selling the gas at the market price and Irish consumers won’t be getting any favours.
We’ll pay the same for our own gas as we would for the gas we are currently buying from the North Sea and further afield. That’s one good and sufficient reason why we should be demanding a larger share of the returns from the field. It is our gas and we won’t be taken for a banana republic for applying a windfall profits tax to what are clearly windfall profits. When Shell bought it’s share in the Corrib field back in 2002 the wellhead price of natural gas in the US was just short of $3 per thousand cubic feet. It’s now up to $9.
In euro terms the increase hasn’t been quite as sharp but euro prices have more than doubled. Shell and its partners are doing very well for themselves and showing a particularly mean streak in their approach to local environmental concerns. It’s time that they were put on notice that they’ll have to pay more than 25% of taxable profits for the right to exploit Irish gas.
And of course much stiffer terms should be applied to this year’s licensing round. It was announced back in April that licence applications would be sought later this year for some 71,900 square kilometres of the Rockall basin. That’s an area nearly as large as the whole 32 counties. This week Eamon Ryan’s Minister of State, Scan Power, to whom he seems to have ceded responsibility, announced that he intended to add a further 45,200 square kilometres to that. This new area stretches up towards Rockall north west of the Corrib find.
It would be a crime against the Irish people to licence the most prospective structures in this massive area on the basis of the current licensing terms.

Colm Rapple
Irish Mail on Sunday, 15th June 2008

There is little or nothing the Government can do to prevent the spiralling increase in oil prices but there is a lot it could be doing to help ease its social and economic impact. The quicker the better.

Brian Cowen and his colleagues have a very good idea what needs to be done. Government departments have been studying the matter for long enough with regard to the proposed carbon tax and the hike in oil prices is simply a carbon tax writ large. The truth is that the potential impact of a carbon tax pales into insignificance against the effect of the actual price increases imposed by market forces over recent months.

Debates on the carbon tax have centred around a rate of about €20 per tonne of CO2. Some have suggested far lower rates and very few have suggested anything higher. Yet €20 per tonne of CO2 is equivalent to less than 10c per litre of motor fuel – the type of increase we’ve been getting on a monthly if not a weekly basis in recent times.

There has been plenty of discussion on how to minimise the effects of a carbon tax on both socially and economically vulnerable sections of the community. We have had economic studies, a Green Paper, and published submissions from all and sundry dealing with the issues involved.

There’s general agreement that the Government would need to provide some form of direct help for those most affected by the price hikes resulting from the imposition of a carbon tax. The suggestions include social welfare increases, grants to enable and encourage a switch to cheaper methods of home heating, and offsetting subsidies for public transport and some vulnerable businesses.

But, if such initiatives are acceptable in the context of a carbon tax, why is the Government doing nothing at this time to help those hurting badly from the effects of higher fuel prices? The carbon tax is already with us in another form. The time for action is now.

•  Poorer families must be helped with fuel costs long before next December’s budget. The first priority must be, of course, to ensure that poorer households get some assistance with their fuel costs this winter. Fuel and light accounts for 4% of the average household budget. But poorer households spend 10% of their weekly income on fuel and light.
• These poorer households, which comprise one out of every ten, also spend a higher proportion of their income on food which has, like fuel, been rising sharply in price. They are facing a bleak winter if they are not helped.

There is no easy way of targeting the most vulnerable but an increase in mean’s tested social welfare benefit is likely to catch most of those in need. It’s not the ideal long-term solution but it may be the best that can be done in the short term and action is required long before the December budget.

• Those economic sectors most vulnerable to the effects of oil price increases need to be quickly identified and assisted in whatever way possible. It’s clearly not simply a matter of throwing money at the fishermen and/or hauliers. Oil prices are going to remain high, hopefully considerable lower than at present but still high by international standards. So obviously any subsidies decided upon should be aimed at promoting change and greater efficiency. But decisions are needed sooner rather than later.

Those are the immediate imperatives but a reassessment of a far wider range of government policies in the light of the higher oil prices is overdue. Such a reassessment should include at least the following:

• The case for a carbon tax needs to be revisited. Oil based products are dear enough to encourage a cut-back in their usage and a switch to less polluting alternatives. The trend could be accelerated by the introduction of suitable grants towards any capital costs required to make use of alternatives and some price control actions to ensure that the suppliers of alternative fuels don’t simply jack up their profit margins and prices.

• The greatly enhanced value of the Corrib gas field needs to be appreciated and a much harder line taken with Shell and its associates to ensure the best possible deal for this country. At current retail prices, the estimated 30 million cubic metres of gas in the field is worth about €14,000 million. It may not be possible to renegotiate the deal under which Shell’s predecessor, Enterprise Oil got that gas for nothing but Shell could be forced to spend a little of its ill-gotten gains on ensuring that its Erris development is as environmentally friendly as possible. It’s time for Government Departments, local authorities, and local grandees to stop doffing the cap to Shell. It’s not doing us any favours. The opposite is very much the case.

• New terms for the issue of offshore exploration licences were introduced earlier this year but they need to be quickly reassessed so do the terms at which onshore licences for mineral exploration are issued. Our natural resources are soaring in value and we’ve been giving them away at bargain prices.

Those are just some of the issues requiring urgent attention. There may be no easy answers but policies clearly need to be changed to suit the new realities.

Colm Rapple
Irish Mail on Sunday, October 14, 2007

The great oil and gas give away continues. This week Providence Resources unveiled a oil find off the Waterford Coast, estimated by some to be worth almost €4 billion. But just four weeks ago our new green Energy Minister, Éamon Ryan gave the company extra rights to an adjoining 150 square miles on which a number of prospective oil and gas pockets have been identified.

So the good news of the oil find must be tempered by a realisation that the main beneficiaries are going to the shareholders in Providence and its partners. Media magnate Tony O’Reilly senior is the larger single shareholder in the oil company of which his son, also Tony, is chief executive.

The find is not a new one but it has been better delineated and is coming closer to commercial exploitation. Analysts this week estimated that this particular reservoir could contain between 50 and 63 million barrels of recoverable oil. At $80 a barrel that could be worth up to €3,800 million before costs.

But the costs will be relatively modest. The find is not in particularly deep water and is only 30 miles off the Waterford coast or 80 miles west of Milford Haven. That latter point may or may not be significant since our licensing terms don’t require companies to land any finds in Ireland.

The oil is described as “sweet”, in other words it can be refined into the higher value products such as petrol, aviation fuel and heating oil. That could be done at Whitegate but equally well in Wales.

The Hook Head prospect was first drilled in the 1970s by Marathon Oil which found the Kinsale Head gas field. There have been other finds in the area since then although none of them were proved commercial. But given this reappraisal of the Hook Head field on the basis of fresh drilling by Providence, a number of these other finds, even if confirmed as small, could well prove commercial when fed into whatever infrastructure is put into place for the Hook Head find.

That will certainly be true of any other oil finds of which there are already a few. Close by are the Helvick and Dunmore prospects, both of which yielded oil flows in exploratory drilling. Back in 2000 the Helvick find was considered commercial for a time with potential reserves estimated at between 18 and 28 million barrels but it was subsequently decided that it was too small to be viable on its own.

That was before oil prices took off so even without the economics of scale that the Hook Head find will lend to its development, Helvick might well be currently commercial. A little to the south of Helvick there was a gas find on the Ardmore structure and to the south-west in the so-called Blackrock area drilling for oil proved inconclusive despite high hopes of a very large find.

All of these finds look a lot more encouraging in the light of the latest results from Hook Head. According to a report from Davy stockbrokers, the oil is of good quality, and the reservoir is of high porosity which means that the oil should flow well. Technical problems meant that actual flow tests were limited but Davy is confident that all is well.

It concludes that the find is of a scale sufficient to warrant development by itself and will also improve the viability of other finds in the area. It should also encourage more exploration in the area.

It seems that a number of targets have already been identified including some within that 150 square mile area beside the Hook Head Licences over which Providence was last month given an option. That option gives it first claim to an exploration licence over the area at a paltry cost of about €10,000 a year.

Granting that option just weeks before Providence announced the results of its test drilling doesn’t make sense. The Department had nothing to lose by waiting until the results were in or even longer. So why did Minister Ryan approve the deal? It wasn’t announced by the Department and there doesn’t seem to be any record of it on it’s very extensive web site.

It was left to Providence to reveal its good fortune which it did on September 13. While the Department gained nothing, it’s clear that Providence gained a lot. The Davy report says that “ regional mapping carried out by Providence over the area has indicated a number of significant leads and prospects at a similar level to those that are hydrocarbon bearing in the Hook Head structure”.

When Providence exercises its option and gets an exploration licence any find is likely to be subject to the new terms announced a few months ago. They are a bit more onerous than the old terms that will apply to production from any of the existing finds which are subject to the old 1992 terms.

But the State take won’t be all that much greater and no oil or gas will flow from this new acreage for at least a decade. In the meanwhile Providence will simply bank it.

The sensible thing would have been for the State to keep the acreage to either explore and exploit any finds itself or eventually issue at more advantageous terms than it feels able to currently apply to licences. The decision to give it to Providence and its partners is nothing short of scandalous.

Colm Rapple
Irish Daily Mail, August 2, 2007

Not one cent from the promised higher tax on offshore oil or gas finds will flow into the exchequer for at least ten years. That’s a fact although it is an admission that had to be forced out of Minister Éamon Ryan yesterday. He initially said that the tax might start to flow in five years but when pressed he was advised by one of his officials that ten years was nearer the mark. And the extra tax will only flow if there are massive oil or gas finds in the particularly inhospitable areas on the Porcupine Basin in the Atlantic some 200 km (125 miles) off the west coast.

Colm Rapple
Irish Mail on Sunday, July 1, 2007

Ghana has hopes of becoming the African tiger economy following the discovery of a substantial offshore oil field by Tullow Oil. It’s good news for the many Irish investors too. Tullow has been a popular punt over the years and the shares are up about 30% in value since word of the Ghanaian find began to leak out earlier this month.

Tullow and its oil exploration partners are going to do very well from the find but the Ghanaian people will also get a share of this new found wealth. It might not be as much as they deserve but it’s likely to be more than the Irish people would get from a similar find off the Irish coast.

There’s a message here for Éamon Ryan, our new Minister for Communications, the Marine and Natural Resources. It won’t have taken him by surprise but near the top of the in-tray left by his predecessor, Noel Dempsey, is a consultant’s report recommending changes to our offshore licensing terms. It was commissioned last year and was to have been published long before now in preparation for a fresh issue of licences for the Porcupine area off the west coast.

It’s hard to understand why Noel Dempsey didn’t make the decision and get Government approval before the election. It’s possible that there were strong conflicting views, the oil companies pressurising for a continuation of the current soft terms set against a growing recognition that the great oil and gas give-away has been going on for far too long.

Under our offshore licensing terms the State take from any find is confined to a tax of 25% on the profits from the sale of the oil or gas after deducting all the costs of exploration, development and even the estimated cost of eventually closing down the operation when the field has been depleted.

Although the oil and gas belongs to the State, i.e. the Irish people, it is simply given over to the private companies that found it. They are not even required to land it in Ireland if it doesn’t suit them and in the case of a small oil find it could make financial sense to simply pump the oil up to waiting super tankers for shipment to refineries in Britain or elsewhere.

The Ghanaians look for more. They are new to the offshore oil business and even relatively new to democratic rule. For most of the 50 years since it gained independence from Britain in 1957 it has been subject to various forms of despotic rule. The current democratic constitution dates back only to 1993. Some of its political problems were doubtless related to the fact that it is Africa’s second largest gold producer.

They’ve learnt how to tax the gold mines. There is a royalty of between 3 and 12% on the value of output, a profits tax of 35% and a tax of 25% on cash balances carried forward by the producing companies at the end of the year.

The State won’t be getting quiet that much from Tullow’s oil find but The State owned Ghanaian National Petroleum Corporation is entitled to a 10% ownership stake without having to fund any of the exploration or development work. On top of that Ghanaian law allows for a profit tax of up to 50% on income from oil and gas finds although the companies can negotiate a lower rate when applying for petroleum licences.

It’s not clear what rate Tullow and its partners will be paying but it is obvious that they were not deterred from exploring by the prospect of giving away an ownership stake in any find while also possibly paying tax at 50% on the profits.

So how much can Éamon Ryan extract from the oil companies? Although very supportive of the Rossport protestors on environmental grounds there is no record of him expressing strong opinions on the offshore licensing regime although his colleague and ex-leader, Trevor Sargent, is on record as blaming the Rossport dispute on “the giveaway deals for exploration licences”.

Certainly the Rossport debacle highlights the inadequacies in our offshore licensing regime but the issues involved are quite distinct. The Shell to Sea campaign is primarily concerned with safety and the environment but many supporters have come to recognise the need for new licensing terms that will ensure a fare return for the Irish people from the exploitation of our natural resources.

We are not going to get that from the Corrib gas find. The Shell licence is not going to be renegotiated but the fact that it will have to pay so little to the State in taxes simply underlines the fact that both national and local government should have been very demanding when it came to laying down conditions for the development of the find. They weren’t.

Shell and its partners could have been required to put their refinery offshore, to contribute more to the local infrastructure, to supply gas at a favourable price to local towns, factories or power plants. The possibilities are endless but instead of being demanding, the local and national mandarins seemed to have gone out of their way to favour the interests of Shell over those of the people who actually own the gas.

The job of sorting out the resultant mess now falls to Éamon Ryan as does the decision on future licensing terms. It’s not easy being in power but having stood shoulder to shoulder with the Shell to Sea protestors, the new Minister has a lot to live up to. He faces an interesting summer.

By Colm Rapple
Irish Mail on Sunday January 28, 2007

The decision of ConocoPhillips to sell Ireland’s only oil refinery for an asking price of €380 million highlights yet another example of governmental incompetence. The oil giant will be laughing all the way to the bank while the Irish taxpayer bears the cost.

It’s only five years since the refinery, together with the massive Whitty oil terminal in Bantry Bay, was sold by the Government for a mere €77 million. The dollar price of $100 million was worth a little more in euro terms then but that matters little since only a fraction of the agreed purchase price, perhaps as little as €30 million, ever found its way into the Exchequer.

Taxpayers didn’t get the benefit of even that small sum since the State had to assume responsibility for maintaining our strategic oil reserves. These stocks could previously be held at no cost in Bantry and Whitty but since we no longer own either facilities the Irish National Petroleum Corporation (INPC) is currently paying over €17 million a year in storage fees to private oil companies including ConocoPhillips.

Indeed it is likely that the bulk of our oil reserves is held in Bantry. While it is selling the refinery, ConocoPhillips is holding onto the terminal which has a capacity of 8.5 million barrels. With its deep water access and the Irish State as a guaranteed customer for storage facilities, it is clearly a very valuable asset.

So why did we sell both the terminal and the refinery so cheaply. We haven’t just lost money on the deal, we’ve also lost control over assets that are of prime importance to our national security. The importance of having at least one oil refinery in Ireland has been long recognised. It prompted the Government decision to originally buy Whitegate in 1982 when the then owners, a group of oil majors, threatened to close it down.

The State owned INPC took over the operation and in 1986 acquired the Whitty Island oil terminal when another oil major, Chevron, surrendered the lease. The terminal had been out of operation since the tragic explosion and fire that cost 51 lives and damaged the jetty in 1979.

INPC did a good job with both facilities. In 1997 it upgraded the refinery at a reported cost of €86 million while in 1998 the Bantry terminal was reopened. A requirement that oil companies buy at least some of their supplies from the State owned refinery provided an effective subsidy in some years but by the time it was sold in 2001 that requirement was no longer an issue and INPC was making a profit.

The Government decision to sell can be explained mainly by the ideological based belief that the less the Government owns and runs, the better. Even firm believers in that adage must accept that there are assets that are best kept in State control. The State’s only oil refinery and large scale oil storage facilities may well be examples.

But even if that isn’t accepted, it must make sense to get the best possible price for any assets sold. The sale of Whitegate and Whitty didn’t make sense. The Minister responsible Mary O’Rourke admitted in the Dáil at the time that the net proceeds from the sale were going to be substantially less than the $100 million “headline consideration” that was used in selling the deal to the public.

There was also a claim that the deal would help to bring down the price of fuel although internal Departmental documents later released revealed that there was no expectation of any significant impact on consumer prices.

Any potential opposition from management and staff were bought off with benefits and guarantees that helped to offset the move from State to private sector employment. Lump sum payments were made. Over €10 million of the purchase price was used to buy shares in Phillips Petroleum for the staff and jobs were guaranteed for 15 years.

As part of the deal the State had to give the new owners an €80 million guarantee to pick up the tab for any claims made in respect of environmental or other damage caused prior to the take over. And since they were only selling the assets of INPC, the State retained responsibility for the company’s debts which amounted to almost €90 million.

In reality the taxpayer got little or no benefit from the sale. In retrospect the guarantee that the refinery would stay open for 15 years was worthless. The State could itself have continued to run the refinery at a profit for that period but instead it gave away a very valuable asset for next to nothing.

Industry sources are quoting a current value for Whitegate alone of $500 million (€380m) and it’s easy to believe that the refinery is worth that. ConocoPhillips has continued to develop it with a reported investment of about €30 million. But it has also got some Government assistance. Last year a biodiesel project using soybean oil was grant aided. Rather strangely the Department of Energy didn’t require it to use rapeseed oil which could be produce in Ireland although it is said that the refining process would be the same.

Adding insult to injury the State owned Bord Gáis had to do a deal with ConocoPhillips to use part of the Whitegate site for a proposed generation station while the new Government development plan includes proposals for building additional strategic oil storage capacity. That 2001 decision to effectively give away the Whitegate refinery and the Bantry oil terminal continues to cost us money.

It might even make sense at this stage to buy them back.