A report from PwC commissioned by Providence Resources points the way towards maximising the benefits to the Irish economy of the developing offshore oil and gas industry.
The report was commissioned to provide an independent, expert review of the operating environment for offshore exploration in Ireland, and to offer a critical analysis of how the State can derive economic benefits from an oil or gas find.
It looks at the emerging nature of the industry in Ireland; compares the industry here with those of the UK and Norway; examines what needs to be put in place to assist in its development; and analyses its potential in terms of employment and economic value.
One of the key findings is that even a single producing field on the anticipated scale of the 2012 Barryroe discovery could be worth upwards of €4.5 billion in corporate tax and Profit Resource Rent Tax (PRRT) alone over its full project life – equivalent to the entire corporate tax take in Ireland in 2011.
The economic impact of 10 such discoveries would be enormous with the critical mass generated leading to, potentially, an average of 13,500 jobs a year during the 10-year development phase and 11,500 jobs a year during the 25-year production phase.
Unfortunately, such discoveries have been the exception rather than the rule. Over the years, Ireland has had only four commercial discoveries from 129 exploration wells drilled around our coast.
This gives a probability of discovery of one in eight and a probability of a commercial discovery of just one in 32. The UK enjoys a probability of commercial discovery of one in six while Norway’s is one in seven.
Poor demand
This is the key determinant of exploration activity and it is no surprise that Irish exploration licences are in relatively poor demand. To put this in context, the UK issued 167 licences in its 2012 licensing round while Norway issued 51 during the same year.
Our most recent round was in 2011 when we issued only 13 “licence options”. These options are a form of licence-light involving less onerous work programmes, which was introduced here to try to attract more exploration activity.
“The oil and gas exploration sector is a truly global industry and Ireland doesn’t really feature,” notes PwC consulting partner Ann O’Connell. “When we compare ourselves to Norway and the UK we have very few of the top 50 players operating here.
“The main reason behind this is our very low success rate in terms of commercial discoveries, but there are other factors at play and we have looked at each of these in the report,” she says.
These are the regulatory and planning regime; operating costs; the fiscal regime; fiscal certainty; and risk mitigation. It rates each of these on a traffic light system with red needing urgent attention, yellow requiring improvement and green being up to standard.
Our commercial discovery success rate gets a red, but it is accepted that we cannot change Ireland’s geology to improve this. On the other hand, factors such as the regulatory regime and risk mitigation can certainly be influenced to enhance our attractiveness to exploration companies.
The regulatory regime gets a yellow but has been improving in recent years. “The industry is broadly happy with the licensing regime, but there is some confusion surrounding areas like planning and foreshore licences,” says O’Connell.
“The Strategic Infrastructure Act 2006 has helped but more could be done. We are not suggesting a single entity to look after all aspects of licensing and planning but a high-level cross-departmental group to resolve logjams and other issues would be a help, as it would reduce the current levels of complexity and confusion.”
High cost
Operating costs here are high in relative terms, but there is little which can be done about this. “It is costing over $200 million to drill a single well in Dunquin,” PwC tax partner Ronan MacNioclais points out.
“This high cost is due to a number of factors including the deep waters and high waves involved. However, the costs would come down if we were to develop a critical mass of industry activity here and that is why it is so important to make whatever changes we can now.”
Despite corporation tax on oil and gas production profits being double the standard rate at 25 per cent in Ireland and that there is a further PRRT which could push that as high as 40 per cent, our tax regime is seen as quite favourable relative to high production jurisdictions such as Norway, the Netherlands, and the UK. Indeed, the UK levies a rate of 62 per cent while Norway’s is 78 per cent.
Given the very high probabilities of commercial discovery in those countries the tax rate is not seen as a particular disincentive. Ireland ranks with the less advanced countries such as France (36.1 per cent), Portugal (31.5 per cent), and Morocco (30 per cent).
Fiscal certainty, however, is regarded as needing some attention. “In the UK there were retrospective changes to the tax regime over the years,” MacNioclais notes. “Companies considering coming here must be assured that there will be fiscal certainty.”
Incentives
The question of risk mitigation might be a little more thorny. In Norway, the state will repay a firm 78 per cent of the cost of a failed exploration project.
This is to give companies an incentive to take a risk, but it is clearly quite affordable for the government there which benefits so hugely from the tax take from commercial discoveries.
This is probably not something which Ireland could contemplate at the moment, but the supply of data gathered by the State to operators could assist in risk mitigation.
“There is a seismic survey due to be carried out in the North Atlantic this year and it is expected that data from this will be made available to the industry in the next licensing round and that will be helpful,” notes O’Connell.
The report recommends the development of a Government-led long-term vision and strategy, addressing the evolution of the onshore and offshore industry to give an indication that Ireland is “open for business”.
“This would be a very powerful signal and would help put Ireland in an optimum position to unlock the economic potential of the oil and gas industry,” says O’Connell.
