Colm’s columns

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.

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.

Colm Rapple
Irish Mail on Sunday January 7, 2007

Energy Minister, Noel Dempsey is about to do a u-turn by demanding a greater share for the Irish people from future oil and gas finds off our coast. But the changes won’t apply to licences already granted.

Up to a few months ago Mr Dempsey was stoutly defending the existing terms and conditions under which our natural resources are effectively given away free to the oil companies that find them. He claimed that such incentives were essential to encourage the companies to explore Irish waters and he ridiculed those who said otherwise.

But a number of independent reports have recently proved him wrong. His critics, including this columnist, have been proved right. Unfortunately being able to say “I told you so” is no consolation for the scandalous fact that the new terms will not apply to existing licences including those issued in recent years when oil and gas prices were soaring on international markets greatly increasing the value of potential oil and gas reserves.

The fact that new terms are being introduced highlights the fact that Shell and its partners have secured such a good deal on its Corrib find that they could well afford to fully address all of the concerns raised over its proposed Mayo development. The oil companies, with the aid of the Government, have been trying to develop the very lucrative find on the cheap.

The Government may not be able to change the terms of a deal already done but, having given away the gas for free, it should at least be ensuring that it’s development doesn’t impose any additional costs on the Irish people or their environment.

One report that the Government has had since before June, 2006 estimates that there are at least 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 is 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 a price of $60 a barrel it would be worth $600 billion or €455 billion. It’s hard to comprehend such large figures but that’s about ten times as much as the Government expects to raise in tax this year. Put another way it’s equivalent to about €114,000 per head of population.

According to the report that’s a conservative estimate of the potential.

Under the current licensing term those resources would be given away to the companies that find them. We’d have to buy them back at full market price, just as we will have to buy back the natural gas from the Corrib field off the Mayo coast.

It’s no wonder that the Government has been reassessing those licensing terms. Initially the Petroleum Affairs Division within Mr Dempsey’s department hoped to do the reassessment itself but it was forced to get an independent assessment of its views.

The terms of reference were limited, however. Instead of being asked to start from scratch, the economic consultants Indecon were asked to assess the Department’s own views and provide “advice” on alternatives. A final report was promised for last September but there has been much toing and froing between the consultants, Mr Dempsey’s department and the Department of Finance.

The consultants have presented various drafts but a final report has still to be agreed.

Indecon has a long and distinguished record of independent economic consultancy. Its managing director Alan Gray who at one stage was economic adviser in what was then the Department of Industry and Energy and who also worked in the Central Bank was last week appointed a director of the Central Bank and Financial Services Authority.

While final proposals have still to be presented to Government, it is obvious that the final recommendations will include a hardening of the current licensing terms. That was made clear in the Green Paper on energy published by the Government in October.

It criticised the pessimistic view of Ireland’s offshore oil and gas potential promoted in no small measure by Mr Dempsey himself. We did suffer from some disadvantages as regards water depth, wealth etc and there has only been four discoveries from 121 exploration wells, the Green Paper admitted.

But it points out that two of only nine exploration wells drilled off the west coast over the past ten years yielded substantial finds, the Corrib field in 1996 and the Dooish field in the Rockall Basin during 2002. This more optimistic outlook was confirmed in the major study mentioned above which has been available to the exploration companies since June at a price of €25,000.

Mr Dempsey didn’t mention its optimistic projections when he launched a report from the Irish Offshore Operators’ Association last June which urged him to maintain the current give-away licensing terms.

The Green Paper, however, did take the optimistic outlook on board and stated categorically that “given the significant increases in global oil prices and the greater certainty surrounding the hydrocarbon potential of Ireland’s Atlantic waters since (the terms were last reassessed) the Government believes there is a case for changing the current regime”.

That revelation wasn’t as newsworthy at the time as many others features of the Green Paper and went unreported. A departmental spokesman this week said that the comment should be viewed as one for discussion. But while the Green Paper does encourage discussion on many topics, the Government view on this one is stated very emphatically.

So the licensing terms are to be hardened up but having being dragged obviously reluctantly to this conclusion it is to be hoped that Mr Dempsey and his departmental officials will not try to palm us off with half measures