1. Ireland’s Offshore Oil and Gas Potential

The Department of Communications, Energy and Natural Resources (DCENR) report, “Cost Effective Field Development Study for Atlantic Margin Basins” indicates that a substantial gas/condensate field located in the South Porcupine area, would, over its lifetime, pay $6.7 billion (€5 billion) in taxes.

Such discoveries would improve the markets’ view of Ireland’s economic prospects, leading to a reduction in the cost of borrowing, while tax revenues would flow as projects reached production. Additional benefits would include significant job creation, the establishment of spin-off industries as has resulted from the Kinsale Head development, and a reduction in our reliance on imported fuels, which would increase competitiveness and improve security of supply.

2. Current Challenges

The DCENR estimates “potential, yet to find” reserves of up to 10 billion barrels of oil equivalent in the Irish offshore. There is, however, a crucial difference between “potential” and “proven”.

If we are to move from “potential” to “proven”, the level of exploration activity needs to be significantly increased. Unless the number of exploration wells can be increased, Ireland’s offshore oil and gas potential will not be realised. Exploration activity is currently extremely low.

• Only 3% of the offshore area is under license.
• Only 5% of the DCENR estimate of “potential, yet-to-find” of 10 billion barrels of oil equivalent has been proven so far.
• Exploratory drilling is running at only one or two wells per year, at an average cost of €50 million per well.
• Ireland’s most recent offshore licensing round in 2009 attracted two bids – a recent UK licensing round attracted 350 bids.

There are numbers of reasons for this low level of exploration activity:

• The poor success rate of exploratory drilling to date.
• The harsh operating conditions, and the absence of onshore and offshore infrastructure, leading to high capital and operating costs.
• A perception amongst international operators that support for the Irish offshore industry is low, which influences decision-making in respect of investing in Ireland.
• The delays in bringing the Corrib gas field into production have also negatively influenced potential investors.

The key challenge is to increase the level of exploration activity and, in so doing, realise the potential of our oil and gas resources.

3. Realising the Potential

To increase exploration activity, the following measures should be implemented:

a) Put in place a regulatory and administrative regime which facilitates a predictable field development process

The primary requirement is for a transparent, robust and legally binding administrative and regulatory regime for field development, so that all stakeholders have a clear understanding of the issues involved and how they are to be addressed. This should include consultative mechanisms, defined timelines for permitting, and unambiguous definition of the technical standards to be applied to the various aspects of field development.

In the case of a major discovery, with licensing and permitting across many administrative lines, a mechanism should be established to coordinate and optimise the inputs of the various State agencies. Such a mechanism was put into effect during the successful and uncontroversial development of the Kinsale Head Gas Field in the 1970’s. More importantly, if the industry is to be persuaded to drill offshore Ireland, thereby putting large sums of money at serious risk, there must be the assurance of a reasonably predictable field development process.

This approach will avoid the mistakes which were made by all parties in the early stages of the Corrib project and which have caused difficulties which remain unresolved.

Responsibility for an effective field development regime rests with the Government, in consultation with all stakeholders.
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b) Promote offshore Ireland to the international oil and gas industry

International competition for exploration dollars is fierce, and Governments go to considerable lengths to attract the industry. For instance, the Norwegian Government reimburses some 78% of the cost of an unsuccessful well. At the other end of the world, New Zealand has announced a significant strengthening of promotion of its offshore resources. In between, there are numbers of “hot-spots” such as West Africa, North Africa and offshore Brazil, where the chances of success are good and the overall ambience is welcoming.

The DCENR has engaged constructively with the industry to try to increase the level of exploration. However, their resources are limited when compared with other nations, and are divided between the functions of regulation and promotion.

The DCENR should be appropriately resourced to enable a significant additional focus on promotion and the disparate functions of regulation and promotion should be separated.

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c) Assure potential applicants for licenses that their presence and investments in offshore Ireland will be welcome.

Investment in offshore exploration and development should be as welcome as any other foreign direct investment. It requires no financial support or State aid, and once established, the jobs and the tax revenues remain in the State for the long term.

Irish oil and gas fiscal terms were reviewed three years ago by international consultants, Indecon, in a study commissioned by the Minister for Communications, Energy and Natural Resources. Indecon concluded that the tax level of 25% was broadly appropriate to the level of risk in offshore Ireland. They recommended that in the future 35% be levied on the most profitable fields. The Minister increased this tax level to 40%.

There has been a considerable amount of comment on the Irish fiscal terms, much of it poorly informed, particularly as regards the absence of royalties. The UK abolished royalties on new production in 1982, followed by Norway in 1986. Ireland followed suit in 1987 to remain in some way competitive, followed closely by the Netherlands and Denmark. Royalties have effectively vanished offshore North-west Europe for the reason that, as a levy on production rather than profits, royalties can seriously damage the economics of high-risk, high-cost projects.

Proactive steps should be taken by relevant Government departments and state agencies to increase understanding of the industry and to assure potential applicants for licences that their presence and their investments are welcome.

For more detailed information on the issues raised in this briefing paper please review the Irish Offshore Operators’ Association report on ‘Ireland’s Offshore Potential’ (www.iooa.ie).

About IOOA

Founded in 1995, the Irish Offshore Operators’ Association (IOOA) is the representative organisation for the Irish offshore oil and gas industry. Its members are companies licensed by the Government to explore for and produce oil and gas in Irish waters and include ExxonMobil, Eni, Lansdowne, Providence Resources, PSE Kinsale Energy, Serica Energy, Shell E&P Ireland and Statoil.

Contact Details
Mr. Fergus Cahill
Chairman IOOA
Tel: +353 1 825 5444
Mob: +353 86 829 6064
e-mail: fergusbcahill@eircom.net