Paper for SEAI Seminar, Energy Security and Competitiveness,13th June
Fergus Cahill, Chairman, Irish Offshore Operators’ Association (IOOA)
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Firstly, I would like to thank the SEAI for asking IOOA to make a contribution to this important debate. For those who don’t know us, IOOA is the organisation which represents companies holding licences to explore for and produce oil and gas offshore Ireland

The theme of the seminar is energy security and competitiveness.

Energy security can be delivered in various ways, but I think that there would be a general consensus that the ultimate in national energy security is to have indigenous production of primary energy sources. Now, whereas there is at present a considerable focus, in this context, on accelerating the development of renewables, it is clear from this bar chart (1) that oil and gas will continue to supply about 80% of Ireland’s primary energy demand well into the middle of this century.

Thus, security of energy supply, in the current Irish context, for transport, for electricity generation, for space and process heating, and indeed as back-up for variable out-put renewables, rests primarily on continuous access to oil and gas.

However, we have no oil production and, at the moment, very limited gas production. About 5% of our gas demand is produced indigenously; the rest is imported.

It follows that we should be busting a gut, if you will pardon the expression, to develop our oil and gas resources, and this introduces the concept of competitiveness, not so much downstream, which is dealt with by other speakers, but upstream.

Are we competitive in seeking to develop our oil and gas resources?

How would you define such competitiveness?

Well, if we were a supermarket, competitiveness would mean the ability to attract and grow market share.

This map (2) shows the distribution of commercial oil and gas fields offshore Ireland, the UK and Norway. Looks a bit thin on our side, doesn’t it?

And how about this? In 2009, Ireland had a licensing round in the Rockall Area. It attracted precisely two applications for licenses. Regrettably, both were for the same blocks, so only one licence could be awarded. Not much market share there.

In fact in recent years our market share, far from growing, has fallen considerably. In 1995, our Association had seventeen members. Now we have eight . Only four of the original seventeen remain.

Now this is despite the fact that Irish fiscal terms for offshore production are acknowledged to be relatively favourable, and that the Department of Communications, Energy and Natural Resources (DCENR) estimates that there is potential for up to 10 billion barrels of oil equivalent in the Irish Offshore area.

So why is it that we have been so uncompetitive in attracting exploration investment, while countries like Norway who apparently have a seriously penal taxation regime, have companies queuing up for licences?

In answering this question, it is necessary to rebut a few of the urban myths that have grown up around the Irish offshore industry.

Urban myth 1: The oil companies are sitting on huge areas offshore Ireland where they know that there are vast resources and are waiting for the optimum time to declare and develop them.

Fact: Only three per cent of the Irish Offshore area is under licence at present. All of the licences awarded in the 1995 licensing round have been surrendered, as have 10 of the 11 licences awarded in 1997. In fact, licences are specifically structured to prevent companies sitting on acreage.

Urban Myth 2: In the ‘80’s, Ray Burke did a dodgy deal with the industry to remove royalties and lower taxes.

Fact: The UK, in 1982, was the first in NWE to remove royalties on new production. Norway followed suit in 1985. Ireland did likewise in 1987, followed by the Netherlands and Denmark. Royalties have now virtually disappeared in NWE for the very good reason that, as a levy on production rather than a tax on profits, royalties are disproportionally penal on high risk, low profitability projects. The process of altering the 1975 terms was initiated by Dick Spring, a Labour Minister and was continued by Ray Burke, Bobby Molloy and Bertie Ahern. We might also note that despite his commitment to renewable energy, Eamonn Ryan, when Minister for Energy, did not see fit to reintroduce royalties and broadly accepted the conclusions of the Indecon Report.

Urban Myth 3: Ireland’s oil and gas fiscal terms are the most generous in the world. Why can’t we be like Norway, who levy 78% of profits?

Fact: They can afford to, we can’t. The success rate of exploratory drilling in Norway is about one in five. In Ireland so far, it is about one in 25. More tellingly, if you drill a dry well in Norway, the Government will refund 78% of your costs, either by remission of tax, or if you are a new entrant having no taxable revenue, they write you a cheque! Thus, only one fifth of your money is at risk. Multiply the two fives and on a very rough basis, it is twenty-five times as attractive to drill offshore Norway as it is here.

Add the fact that discoveries offshore Norway tend to be very large, for instance the Troll field is fifty times larger than Corrib, and you can see what attracts exploration to Norway.

Norway has in fact correctly divined that what attracts companies is a low level of exploration risk, so Norway, we have seen, treats explorationists very generously.

The result is a high level of exploration drilling, leading to many discoveries, which enables Norway to impose heavy taxes on production.

For us, the correct comparison is with areas of low success, such as France, Spain and Portugal, and here Ireland is, fiscally speaking, broadly competitive.

Irish taxation on offshore production ranges between 25% and 40%. Portugal, Spain and France lie in a band between 28% and 35%, and do so for the same reasons as Ireland. Their success rates have been extremely low and their Governments have done what Governments do when they want to attract inward investment, they reduce taxes. Thus, our fiercely defended 12½% corporate tax rate.
However, in spite of our fiscal terms, the level of exploration has remained disastrously low, running at one or two wells a year, compared with perhaps 50 a year in the UK sector, and no less than 67 in Norway in 2009

What have been the reasons for this situation, which has persisted over the last three decades?

Firstly and obviously, there is a low success rate of exploratory drilling. In Ireland around 150 exploration wells have been drilled since 1975. In the succeeding 36 years, one significant commercial field, Corrib, has been discovered, with 3 smaller discoveries in the Celtic Sea. This contrasts with 1,200 exploration and appraisal wells in Norway and some 4,000 in the UK sector. In the UK sector, in 2009 alone, eight new fields came into production, with a further six approved for development. Success breeds success. There is an exponential relationship between the number of wells drilled and the success rate, and unless we can substantially increase the number of wells, it seems likely that the results will continue to be disappointing.

Then there is the related problem of the lack of supporting infrastructure in Ireland, which leads to high operating and capital costs. In the UK at the moment, two-thirds of all new developments are sub-sea tie-backs to existing infrastructure, which obviously reduces development costs. In Ireland, and particularly off the west coast, new projects have to bear the entire cost of development up front. Add to this the additional costs of harsh weather and deep water.

Finally, the problems encountered by the Corrib project have not gone unnoticed internationally.

So all very difficult, and what is to be done?

Well, the good news is that a lot has been done.

Considerable efforts have been made to market Ireland as an attractive exploration province. The DCENR’s officials have made a lot of progress in promoting investment offshore Ireland, by way of presentations and stands at international exhibitions and conferences, and advertisements and articles in industry journals. The recent Atlantic Margin Round opened a large area for licensing, and a new “option” licence has been introduced which runs for only two years and gives licensees the opportunity to make a preliminary assessment of their acreage. If they then wish to proceed, they convert to a normal exploration licence, with commitments to a defined work programme .

The result of these efforts and flexibility has been shown in the response to the Atlantic Margin Round, which closed on 31st May and has reportedly attracted 15 applications, which is a significant improvement on previous rounds.

Equally importantly, Minister Rabbitte, in his public utterances, has shown an admirable understanding of and commitment to the development of Ireland’s offshore oil and gas, which provides considerable encouragement to our members in their very expensive and high-risk exploration programmes.
On the industry side, Corrib may be on stream by 2013; Kinsale Energy are developing their gas storage capacity, vital for energy security; Providence Resources have announced an ambitious drilling programme; others of our members are pressing ahead with various exploratory surveys, and hopefully the new licence applications will lead to a marked acceleration of work offshore.

However, one thing remains to be done. The Corrib field was discovered in 1996 and will not commence production before 2013. That is 17 years to develop a relatively modest gas field, which in other jurisdictions would be done in perhaps four or five years. Without commenting on the specifics of the Corrib situation, and noting the difficulties which have been encountered by other large infrastructural projects, it is clear that Ireland needs a transparent, robust and legally binding 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. If the industry is to be persuaded to drill offshore Ireland, thereby putting very large sums of money at serious risk, there must be the assurance of a reasonably predictable field development process.

What would success in exploration mean?

Well certainly, security of supply.

But consider this. A DCENR study called Cost Effective Field Development Options has modelled a number of oil and gas fields which might be found offshore Ireland. The results are, to say the least, interesting. They predict that a “giant” oil field , with recoverable reserves of 750 MMbbl, would over its lifetime pay around €16 billion in taxes. While we would be lucky if such a field were to be discovered, it is worth bearing in mind that in the North Sea there are no less than 42 fields of “giant” status, that is, having recoverable reserves greater than 500 MMboe. Smaller gas fields, which appear more likely to be discovered, would also contribute substantial sums. Other benefits would include employment, the development of local economies, and should we have gas for export, downward pressure on the domestic gas price.

These considerations explain why the commitment of the Government to promoting exploration is so important, and is to be welcomed.

I won’t say that offshore discoveries would solve all our problems and, of course, in the event of discoveries, it would be some years before tax revenues would start to flow. But the proving up of substantial oil and gas reserves, backed by a realistic time frame for development, would provide long-term underpinning for a return of confidence, both at home and among international markets, would stimulate growth and would help significantly in getting us out of our current situation.

Just before we get too carried away, and to put our current 15 licence applications in context, it is instructive to recall that the last licensing round in the UK sector, in 2009, attracted 350 applications!

Clearly, we have some way to go before becoming truly competitive offshore, but now, at least, we appear to be on the way.