Colm’s columns

Colm Rapple
Irish Daily Mail  February, 2006

The international oil giant ExxonMobile has committed itself to spend upwards of €100 million on exploring an oil and natural gas prospect off the Kerry coast. It’s known as the Dunquin prospect in the Porcupine Basin. Initial seismic studies indicate that the targeted area could contain over 25 trillion cubic feet of recoverable natural gas and over 4 million barrels of oil. That would be enough to supply our energy needs for many decades. But we’ve already given it away.

ExxonMobile and its partners, Tony O’Reilly’s Providence Resources and a small Scottish based company, Sosina Exploration, will effectively own whatever they find. That was part of the deal agreed with the Irish Government. If we want any of that oil or gas we’ll have to pay for it at the full market price. The licensing agreement doesn’t even require that finds be landed in Ireland. Any oil could simply be piped up to waiting tankers and shipped anywhere in the world.

We are entitled to tax the declared profits of the exploiting companies but only after they have been allowed to write off all of their exploration and development costs. They will even be allowed to write off the estimated costs of eventually abandoning the find when it’s exhausted. It could be many years, maybe even decades, before any tax revenue accrues to the Irish Exchequer.

These give-away licensing terms have remained unchanged since they were introduced in 1992 and are badly in need of an overhaul. They were overgenerous to start with and are now nothing short of scandalous given the sharp increase in energy prices and the growing concerns over security of supply.

Yet Energy Minister, Noel Dempsey, is currently preparing to licence off a further area of potentially rich oil and gas prospects off the west coast on exactly the same terms. The oil companies have been invited to cherry pick from an area of about 18,000 sq km stretching from west of Clare in the south to due north of the Foyle estuary in the north. It’s an area equivalent to about a quarter of the Irish landmass.

Applications close on March 15th and Noel Dempsey is expected to issue licences shortly afterwards with more of our potential natural resources being banked by the oil companies. A rethink is urgently needed.

The full extent of the scandal was highlighted by the ExxonMobile decision to buy itself back into Irish offshore exploration. Exxon had Irish offshore interests in the 1970s and 1980s but hasn’t applied for licences in recent years. Had it been interested it undoubtedly would have been granted the licence that was instead issued in November 2004 to Tony O’Reilly’s Providence Resources and Sosina Exploration.

The US oil giant would have had to get preference in view of its size, resources and expertise. But it didn’t apply for a licence at the time and is now paying a high price for coming in late. The fact that it is willing to pay that higher price confirms how ridiculous the Government’s licensing policy is.

Providence and Sosina were able to demand a continuing 20% stake in the licence although ExxonMobile will be paying all of the exploration costs. Had Noel Dempsey not issued the licence fourteen months ago he presumably could have demanded a 20% stake for the Irish people in anything that ExxonMobile finds. Instead that 20% will be going to Providence and Sosina.

If the expectations are justified the biggest single beneficiary will be Tony O’Reilly who personally owns a 45% stake in Providence Resources. That gives him a 7.2% stake in the total venture. His son Tony O’Reilly jnr. is chief executive of the exploration company.

Those with long memories may feel a sense of déjà vu remembering O’Reilly’s first venture into offshore exploration through Providence’s predecessor Atlantic Resources. It’s exploration wasn’t successful but fortunes were made and lost as the share price bounced up and down fuelled by speculation, rumour and greed. The fact that news of the ExxonMobile deal was selectively leaked during the weekend prior to the official announcement on February 13 prompts fears of a repeat performance when ExxonMobile starts drilling.

But hopefully the stock exchange, journalists and particularly investors will have learnt from the mistakes of the past. But that’s a story of possible scandals in the future. The very real current scandal is that the Government is intent on continuing to give away our offshore oil and gas prospects on terms that the ExxonMobile deal proves to be over generous.

The alarms bells should be ringing in the Department of Communications, Marine and Natural Resources. Applications for the current round were invited on the understanding that the old 1992 licensing terms would apply but there is no reason why any of the applications should be accepted.

The oil companies already have rights to too much of our offshore area. It’s hardly possible to alter the terms applying to those licences already issued but in the changed energy environment it would be stupid to give out anymore. It’s time to strengthen up the terms to ensure that the Irish people get a greater share of their own natural resources.

The State can demand an ownership stake in the company exploiting the find. That way it shares in the profits. But given the high set-up costs it can be many years before any profits are declared. A better option is to take royalties. These are set as a fixed percentage of the value of the oil or gas produced irrespective of whether they are produced at a profit or not. A final source of revenue is tax on the profits of the enterprise.

All of those methods of collecting revenue for the State were included in the licensing terms introduced in 1975 by Labour Party minister Justin Keating. There was a right to take up to a 50% ownership stake in any successful find and royalties equal to between 8 and 16% of the value of any production irrespective of the profitability of the developing company. That’s a far cry from the give away terms of to-day but there was no shortage of takers. In 1976 licences were issued to 11 groups and in each of the two following years three licences were issued.

As the oil crises of the 1970s faded from memory, interest began to wane and the licensing terms were gradually eased. By 1987 the State’s right to an ownership stake in any find had been abolished. So too had the right to royalties but there was still provision for an extra levy on the profits from larger finds. That provision was also removed. Most of the concessions were introduced by the then minister Ray Burke and confirmed in licensing terms issued in 1992 by PD minister Bobbie Molloy.

Despite mounting criticism over many years successive Ministers have defended those terms presumably relying on advice from the Department’s Petroleum Affairs Division. Under pressure from SIPTU in 2002 the then Minister of State John Browne agreed to have a review carried out but it was a half-hearted affair. Department officials didn’t go to a lot of bother in deciding terms of reference. They requested a proposal from David Fox who had been a part-time consultant engineer with the Department since October 2000. He sent back a short memo indicating that he could do a comparison based on the way oil companies looked at different prospects. It would take him only 10 or 12 days he wrote.

Mr Fox is an international consultant who on his personal website boasts of his ability and success in negotiating better terms for oil companies so it is not surprising that his report took a very narrow focus. He estimated State tax takes under different scenarios and had to conclude that exploration companies do stand to make far higher returns from Irish finds than from similar discoveries in any of 13 comparable areas abroad. But he concluded that we dropped to 7th in the rankings, however, when account is taken of our past poor success rate.

This is the report that Noel Dempsey and his team still rely on to justify their continued defence of the indefensible. It is flawed not through any fault of its author but by the narrow terms of reference.

It didn’t take account of how long it takes for the Irish exchequer to get any revenue from a find. It has been estimated that the Corrib gas field will be half exhausted before Shell pays any tax.

The report viewed the comparative success rate in the various countries on the basis of past experience rather than future potential. But spiralling oil prices are opening up whole new areas for commercial exploitation and seismic surveys undertaken by the Geological Survey indicate that our hydrocarbon reserves may be more extensive than previously thought.

The fact that there is no requirement to land oil or gas finds in Ireland was not even considered. Security of supply may not have been an issue in 1992 but it certainly is now.

The report was never intended to be a serious reassessment of our offshore licensing terms. It’s clear from the way it was produced that the aim was to produce a simple review aimed at keeping a Minister of State and SIPTU officials off the backs of the Departmental mandarins who always believed that they knew best. Even if it had been a comprehensive report at the time it would now be outdated by the fact that oil prices have almost trebled in value since.

It would be totally irresponsible for Noel Dempsey to issue any more offshore licences until the licensing terms have been subjected to a rigorous reassessment.

The Minister must also take account of the very generous terms applying to the Corrib gas field. The value of the find has soared since Shell first declared it commercial. The gas originally belonged to the Irish people but now we will be forced to buy it back from Shell at the same price that we pay for imported gas. Given that the imported gas includes higher transport costs Shell will actually be getting more for the Corrib Gas than a North Sea producer does. And adding insult to injury we are even paying, through the State owned Bord Gais, for the pipeline that will link the proposed gas refinery at Bellanaboy in Co Mayo to the national grid in Galway.

The availability of Corrib gas won’t bring down the price and the gas will be flowing for years before Shell pays a cent in tax. It may be too late to change the licensing terms but the least that Noel Dempsey can do at this stage is to ensure that Shell exploits the Corrib field in a safer and more environmentally friendly way. It can well afford to do so and still make a very sizeable profit on the venture.

Colm Rapple
Irish Mail on Sunday February 20, 2006

Independent Newspapers’ boss Tony O’Reilly has secured himself a free ride in an exploration venture off the west coast which will personally net him a 7% stake in oil and gas finds that could be worth over €20 billion according to some analysts.

The drilling has yet to start but seismic exploration has already pinpointed two large oil and gas prospects under the seabed some 200 miles south west of Kerry. O’Reilly’s company Providence Resources estimates that they could contain over 25 trillion cubic feet of recoverable natural gas and over 4 million barrels of oil. That’s very big, even by international standards.

Providence has got someone else to foot all of the exploration costs including exploration wells costing up to €40 million each.

The deal highlights the ridiculously generous terms at which the Government is giving away rights to our potential oil and natural gas reserves. A little over a year ago it gave Providence Resources and a private Scottish based company, Sosina Exploration, an exclusive licence to explore and exploit the so called Dunquin area off the South West coast. Now those two companies have sold an 80% share in the licence to ExxonMobil. Under the deal Exxon will bear all the exploration costs while Providence and Sosina simply sit back and look forward to a 20% share in any find.

Providence is retaining 16% and Sosina 4%. Tony O’Reilly personally owns 45% of Providence giving him a 7.2% stake in the total venture. His son Tony O’Reilly jnr. is chief executive of the exploration company.

It’s a very good deal for the O’Reilly clan and the other shareholders in Providence. The shares which are quoted on the Irish Stock Exchange were as low as 2c last year but jumped to 8c on news of the ExxonMobil deal before settling back down to 6c. Many of those who follow Tony O’Reilly’s search for oil don’t wait for a find to make their money. They make it by shrewd trading in the shares. If you can buy at 2c and sell within the year at 8c, you are not doing too badly.

But some of those who followed O’Reilly’s oil fortunes in the past got badly burned. His initial oil exploration vehicle Atlantic Resources enjoyed a roller coaster ride on the stock exchange fuelled by speculation, leaks and rumours, many of which proved false. It eventually plummeted from favour leaving many with a sour taste and has since been subsumed into Providence.

It’s disturbing that Monday’s important announcement which was obviously going to have a marked impact on the share price, was leaked over the weekend. There is no suggestion that there was any insider dealings in the shares but shareholders have every right to be worried when they see important price sensitive information being made available to a few even during the weekend when the exchanges are closed. At the very least they must be concerned that those to whom the information is leaked may be inclined to repay the favour with biased comment at some future date.

A lot of money can be made and lost in trading exploration shares. On Monday after the Providence announcement over 57 million shares worth €3.8 million changed hands in Dublin. There were a total of 458 deals recorded during the day.

Of far greater concern, however, than the prospect of another bout of speculative exploration fever, is the clear evidence that the Government is giving away our offshore resources on the cheap. ExxonMobile has leaving Providence and Sosina with what is known in the business as a “carried interest” in the licence. It will be bearing all the costs in return for an 80% stake.

Had it been of the same mind fourteen months ago when the licence was first issued, it presumably would have been willing to do a similar deal with the State. Instead of giving the licence to Providence and Sosina who have no direct experience of drilling offshore Ireland, energy minister Noel Demspey could have dealt directly with the giant ExxonMobile keeping the 20% stake for the Irish people.

It may well be that ExxonMobile would not have been interested at the time. Maybe the current deal reflects the changing environment for energy pricing. But either way the deal is a fact and proves conclusively that the current terms applied to offshore licences are far too generous. It’s time the Government looked for more.

But it’s failing to act. Mr Dempsey is getting ready to issue new licences to another large tract of the offshore area ranging from due west of Clare to north of Derry. When he sought applications he promised that the licencing terms first introduced in 1992 would apply. But no application has yet been accepted and given the sharp rise in energy prices he should renage on that promise.

Under the current terms, the oil companies effectively own any oil or gas they find. The State gives up its ownership rights and the oil companies simply pay tax on their profits at the rate of 25%. But before they are deemed to have made any taxable profit they can write off all exploration and developments costs and the estimated costs of eventually shutting down the wells at some stage in the future. It has been estimated that many finds would be at least half depleted before the State would get a cent in tax revenue. And there is no requirement on the oil companies to land any resources found in Ireland. Oil could be piped up into tankers and shipped straight to Britain or even the US.

Noel Dempsey can look for more and get it. The Providence deal proves that.