Last month (December 2011) I was invited to make a written submission to the Joint Oireachtas Committee on Communications, Natural Resources and Agriculture, which is reviewing Ireland’s licensing terms for oil and gas exploration. My submission is below.
Joint Committee on Communications, Natural Resources and Agriculture
Offshore Exploration: Discussion
Submission by journalist William Hederman
Supported by Dr Andy Storey, School of Politics & International Relations, University College Dublin
December 12th, 2011
I am a freelance journalist. I am also a campaigner in a voluntary capacity. In the past year, I have carried out extensive research into issues around Ireland’s management of its hydrocarbon resources. I was motivated to do this by the fact that debate on the topic has been so poorly informed. My research has resulted in several significant – and alarming – revelations. Chief among these is the existence of an industry report which shows that, because of the extraordinary tax write-offs available under Ireland’s licensing terms, the State ‘take’ from gas fields in Irish waters is likely to be closer to 5% than to the 25% – or 40% – that is widely perceived to be the case.
Myths and misinformation
I shall begin with another common misconception: the idea that increased exploration in Irish waters will create a thriving oil industry here. Addressing this committee on November 29th last, Mr Sean Hannick of the Council for the West defended Ireland’s controversial licensing terms by asking you to “imagine the transformation that could take place in this country if we could develop the oil and gas industry to create even 100,000 jobs.” He called for the development of “an Irish oil and gas industry that would create Irish jobs and generate a tax return this country so badly needs.”
Mr Hannick’s words are typical of the recent discourse in Ireland around this issue. Critics of the State’s management of its natural resources argue that the State’s share of revenue is among the lowest in the world and represents a virtual “giveaway”. Successive Irish governments and the oil industry lobby – who speak with one voice on this issue – counter that Ireland must offer these “attractive” licensing terms to encourage companies to explore in our waters, in the hope that this will result in further discoveries of gas and oil.
The implicit logic is that if more oil and gas is found, it would result in jobs and infrastructure. It would also create a domestic supply of oil and gas in an increasingly uncertain global market, reducing Ireland’s dependence on imported fossil fuels. Unfortunately, when one examines this logic a little more closely, it falls apart. With some research, I was able to establish that none of these supposed benefits is guaranteed.
Oil companies plan to export Ireland’s resources directly from the field
Companies that discover oil or gas in Irish territory are not obliged to supply these resources to the Irish market. Not only that, our licensing terms are so weighted in the industry’s favour, they do not require the companies to bring a single drop of our oil or gas ashore in Ireland.
I did what policy-makers and journalists appear not to have done: I lifted the phone and asked oil companies what they intended to do with our oil and gas. For example, I asked the technical director of Providence Resources, John O’Sullivan, what would happen to oil from its Dalkey Prospect. He explained that modern technology allows for the oil to be put into “tanker-ready form” at the rig and it would probably be shipped to Milford Haven in England or to Rotterdam.
If companies export our oil directly from the field, this will mean that increased exploration will result in very few or no onshore jobs, no new infrastructure onshore and will not improve Ireland’s “security of supply”. And as the Committee is well aware, jobs on the rigs themselves tend not to be given to people in Ireland. Workers are flown to rigs in Irish waters from other jurisdictions, meaning that the economic spin-offs of exploration and production in Irish waters will benefit countries other than Ireland.
Mr O’Sullivan explained that the Whitegate refinery in Cork (Ireland’s only oil refinery) “may not be able to take the oil”. Of course, we cannot blame the oil companies for exporting some of Ireland’s oil directly from the field if the facilities to refine that oil are not available in Ireland. However, the important point is that it is disingenuous of the industry to argue that more oil discoveries will result in jobs, infrastructure and a domestic supply – and it is naive of the Government and other commentators to embrace this misleading argument.
I suggest that the Committee needs to ask the following question: if our licensing terms allow oil companies to export directly and if doing so will maximise their profits, is there any reason to believe that oil companies will ever choose to bring oil from under Irish waters ashore in Ireland – even if more oil refineries were built here? Is it good enough for the Irish Government merely to hope that some of the oil will be brought ashore here?
Ireland’s gas reserves
Turning to gas, I spoke to Prof John FitzGerald of the ESRI, an expert on energy policy. He warned that because of what he called the “regulatory failures” with Corrib, companies might in future consider piping gas from Irish waters directly to Britain. (This is a warning he subsequently issued on page 41 of the ESRI’s ‘Review of Irish Energy Policy’ in April 2011.)
I asked several industry sources about this possibility. They offered conflicting opinions about whether or not gas from fields off Ireland’s west coast could be piped around Ireland to Britain. However, all were agreed that a find off Ireland’s east coast could easily be piped to Wales. Furthermore, a consultant who advises the Government, and who would speak only on condition of anonymity, alerted me to an intriguing new technology. He warned that Floating Liquefied Natural Gas (Floating LNG) was “coming down the tracks pretty fast”.
Floating LNG allows gas to be processed and liquefied at sea, shrunk by 600 times and transferred to tankers for export. The technology is being pioneered by Shell at its Prelude gas field off northern Australia. Described in Shell PR material as “a game-changer for the energy industry”, Floating LNG will mean that gas does not need to be piped ashore.[i]
In an Irish context, Floating LNG will mean that gas from fields off the west coast could be exported directly. This could be an attractive option for oil companies keen to avoid “another Rossport”. Again, this would mean future discoveries of gas would not result in any improvement in Ireland’s “security of supply”. It would also mean that any jobs or investment would be offshore or in other countries.
The ministerial signature
I put these concerns about direct export of gas to the Department of Energy and Natural Resources. In response, a Department spokesperson said: “Any future oil/gas production project in the Irish offshore would require the approval of the Minister for Energy and Natural Resources for the Plan of Development for the project. The methodology proposed for producing the oil/gas would be central to the Minister’s consideration of a proposed Plan of Development.” In other words, if the company was proposing to pipe the gas away from Ireland, the Minister could choose not to approve the project.
The Committee needs to ask: How solid is this safeguard? Considering the poor record of Irish ministers in facing down powerful oil corporations, is the Committee reassured by the knowledge that the withholding of a ministerial signature is all that stands between a multinational and the maximisation of profits that direct export of gas might bring?
What is Ireland’s ‘take’ likely to be?
If oil companies do export oil and gas directly from the field, then exactly what guaranteed benefits for Ireland remain? The answer is a pitifully small share of the revenue generated from the sale of the gas or oil on the international market. As the Committee knows, the corporation tax rate of 25% will apply to most fields, despite the introduction of a PRRT of between 5% and 15% in 2007: the PRRT will only apply to highly profitable fields. As you will also know, the tax is paid on profits and before declaring those profits, the companies can avail of extraordinarily generous tax write-offs.
The question is: how much tax will the companies end up paying, as a percentage of the total revenue generated by the sale of our resources? Very little attention has been paid to this question, but it is crucial in assessing whether or not Ireland’s fiscal terms are appropriate. Of course, the answer is hard to determine, as no oil or gas has yet been produced under the 1992 or 2007 terms. However, in researching this question, I made a shocking discovery.
Let’s start by looking at the Government’s prediction. In 2008, Michael Ring TD put a Dáil question about the value of Corrib to then minister Eamon Ryan. In a written reply on 24th September 2008, the minister said the 800-900 billion cubic feet of gas estimated to be in the field was worth €9.5 billion and that the tax revenue from the field “would be in the order of €1.7 billion”.[ii] That represents a State ‘take’ of just under 18%.
Private study for Shell
However, I contend that the civil servants at the Department of Communications, Energy and Natural Resources (DCENR) who wrote that parliamentary answer would be inclined to make the most optimistic prediction possible about tax take, considering the controversy around Ireland’s management of its resources. On the other hand, a projection for Corrib made by Shell or by consultants on its behalf would likely be much closer to the truth, especially if it was confidential. A private review by industry experts would factor in all the costs, write-offs, loopholes and tricks of which Shell’s accountants could avail.
As it happens, just such a confidential study of the Corrib project was carried out for Shell by globally respected energy consultants Wood Mackenzie in February 2003. The study is not publicly available, but figures from the study were emailed to me by the man who was in charge of the Corrib project until 2002. Brian O’Cathain was MD of Enterprise Energy Ireland before the company was bought by Shell in April 2002.
O’Cathain made reference to the study during a public debate at the IFI cinema in Dublin on December 4th, 2010, which I attended[iii]. I emailed O’Cathain a few days later, asking him for a copy of the study. He refused, but he emailed me the following information:
“Woodmac of Feb 2003 show Corrib coming on stream in 2005 at 270 million standard cubic feet per day (“mmscf/d”) (annual average for part year) rising to 310 mmscf/d in 2006. Tax is first paid in 2008, and is about €40mm per annum for the 1st five years, declining with production thereafter. Over the full field life it pays €340 million in tax.”[iv]
The elusive ‘Woodmac’ study
That tax figure of €340 million is roughly one-fifth the size of the Government estimate made five years later. Of course, the price of gas increased during those five years between 2003 and 2008, so the value of the field – or gross revenue – in Wood Mackenzie’s projections would have been lower than €9.5 billion. But how much lower?
I asked O’Cathain several times what the 2003 study’s estimate was for gross revenue from Corrib. He refused to tell me. In other words, he would not reveal how much Wood Mackenzie had predicted in 2003 that Shell would sell the gas to Bord Gais for. One needs this figure in order to determine the State ‘take’ as a percentage of total revenue.[v] Despite contacting numerous sources, it was not possible to obtain a copy of the study. Wood Mackenzie, based in Edinburgh, confirmed the existence of this 2003 report, but would not provide any figures from it.
I recommend that the Committee attempt to obtain a copy of this 2003 report. Both Shell E&P Ireland and Wood Mackenzie itself would have copies. It would provide the Committee – and the people of Ireland – with a realistic assessment of the tax take from Irish gas fields, as opposed to a Departmental assessment. The report might also raise questions about the reliability of information from the Petroleum Affairs Division of the DCENR.
A rough estimate
Without access to the Wood Mackenzie report, I attempted to estimate what its €340 million figure was as a percentage of total revenue. I assumed that Wood Mackenzie was using the same figure for the quantity of gas in the field as the DCENR used to answer Deputy Ring’s Dáil question five years later: 800-900 billion cubic feet. If the price of gas for this 2003 study had been the same as that used by the DCENR in 2008, then Wood Mackenzie’s prediction for State ‘take’ would have been just 3.6% of the field’s value (i.e. €340 million as a percentage of €9.5 billion).
However, the price of gas increased significantly between 2003 and 2008. According to Bord Gais, the price of gas almost doubled between 2003 and 2008, which suggests that the Wood Mackenzie study would have put Corrib’s value at around €5 billion. On this basis, the figures indicate that, had Corrib Gas come on stream on schedule in 2005, roughly 7% of the revenue from the sale of the gas would have returned to the exchequer in tax.
Let’s put this in simple terms. When Corrib comes ashore, Bord Gais will buy the gas extracted from that Irish gas field for the same price as it buys gas from the North Sea (or it might pay more for it – see below). Gas from future discoveries in Irish waters may be exported directly from the field. In either case, when the oil company sells that Irish gas to Irish consumers via Bord Gais, the State can expect to receive 7% or less of that revenue over the field’s lifetime. (NB: this very low projection for tax take from Corrib is not a symptom of the delays to the project. This was a projection issued at the start of 2003, based on an assumption that the gas would start flowing in 2005.)
Security of supply
It is ironic that the Government and oil industry cite security of supply as a reason to encourage exploration. More exploration under our current licensing terms would lead to Ireland’s security of supply being weakened rather than strengthened, if the reserves are exported. If these resources really are so difficult to get at that Ireland has to give them away with negligible returns, then why not leave them in the ground? In decades to come, they will be more valuable and the technology to extract them will have improved. These resources could be hedged as a reserve against future supply shortages.
Incidentally, another myth that has enjoyed remarkable currency is the notion that Ireland’s natural gas is sourced from eastern Europe. The “security of supply” bogeyman is greatly overplayed by the oil industry lobby and by Government. It is widely believed that Ireland is “at the end of long pipeline from Russia” and is thus vulnerable to geopolitical factors in politically volatile regions.
Again, I lifted the phone and asked Bord Gais where Ireland sources its imported gas. The answer is that our gas comes from Norwegian and British fields in the North Sea. This is spelled out clearly on the Bord Gais website: “Ireland’s imported natural gas supplies are sourced from the North Sea. The possibility of gas supplies to Ireland from these sources being restricted is very remote.” (www.bordgais.ie/corporate)
Admittedly, if the supply from Russia was interrupted, the demand for North Sea gas would suddenly increase and Ireland would have to compete with other western European countries to access North Sea gas. This could mean huge price rises and even the possibility of interruptions to supply. However, as long as our current licensing terms are maintained, further discoveries of gas in Irish waters will not remove these risks or alleviate Ireland’s vulnerability. Firstly, if companies are exporting our gas directly from the field, we will not have a domestic supply. Secondly, even if we are lucky enough that gas from Irish gas fields flows ashore in Ireland, the operator can choose to export it via interconnector pipelines to Britain. This would mean that, if the emergency situation outlined above arose and Ireland was forced to bid against other European states for North Sea gas, then Ireland would also be bidding against those countries for gas from Irish fields.
Irish consumers and the price of gas
A further indictment of Ireland’s licensing terms is the fact that further discoveries of gas in Irish territory will not result lower gas prices for Irish consumers. Indeed, the Commission for Energy Regulation warned in a July 2011 report that when gas from Corrib comes ashore, it was “very likely” to lead to an increase in the price of gas for Irish consumers.[vi]
This is another aspect of the debate that is dogged by misinformation. Even the Minister with responsibility for the Corrib Gas project, Pat Rabbitte, is evidently unaware that Corrib will not bring down gas prices. Speaking on RTÉ’s Morning Ireland on June 1st, 2011, he said: “Gas prices have rocketed again in recent months and that has serious implications… It’s an argument as well for us getting the Corrib field onshore.”[vii]
Both of these myths – the idea that our security of supply is under threat (and that the Government’s current approach will address that) and the belief that Corrib will bring down gas prices – have been used by Shell E&P Ireland and successive Governments to try to win support for pushing ahead with the disastrous Corrib Gas project and to turn public opinion against those who have objected to the inland refinery and high pressure pipeline. This has resulted in a false dichotomy, in which the health and safety and environmental concerns of people living close to Shell’s proposed inland refinery in north Mayo have been set against the “national interest”. These myths are also used to justify licensing terms which give the State a paltry share of revenue.
What motivates civil servants to maintain our licensing terms?
An obvious question raises itself: if the terms are so bad for Ireland, why do the senior officials in the Petroleum Affairs Division of the DCENR continue to brief ministers that these terms should be maintained? The most plausible explanation is that these senior civil servants are too close to the oil industry and as a result are too heavily influenced by, and are too sympathetic to the views of, these oil executives. The officials and industry representatives work closely together, for example through the Petroleum Infrastructure Programme (PIP), which is a joint Government-industry initiative. I suggest that this has resulted in a form of group-think and a situation in which the interests of exploration companies have become conflated with the interests of the Irish State.
This phenomenon makes the work of this Committee especially important, as the Committee is less susceptible to influence by the oil industry lobby.
I would argue that the Government’s approach to Ireland’s oil and gas resources should take the following as a starting point: Why should we extract these resources at all? A number of arguments can be advanced for leaving them in the ground, including environmental concerns and also the argument that these resources will be more valuable and easier to extract in future decades. So, if Ireland is going to allow companies to extract her valuable resources, the Government needs to be able to point to significant benefits to Ireland in order to justify that extraction. “Foreign direct investment” by oil companies in and of itself is not necessarily a benefit, especially if companies are going to export directly from the field, not create any jobs in Ireland and then pay only a paltry proportion of the value of the resources back to the Irish exchequer in tax.
Ireland should change its licensing terms so that the State takes a greater share of revenue. If such a change deters companies from exploring here, then so be it. It would be preferable to hold on to our resources rather than give them away for next to nothing. As a letter in the Irish Times last August put it: if the best deal available is a terrible deal, “the most pragmatic approach is to leave it where it lies until a better deal is on offer.”
Find more detailed information at my website:
[i] Extensive information about Floating LNG technology can be found by searching online for: “Shell Prelude FLNG”.
[ii] Parliamentary Question No 152, by Michael Ring TD to Minister for Communications, Energy and Natural Resources, Eamon Ryan. For WRITTEN answer on Wednesday, 24th September, 2008: http://debates.oireachtas.ie/dail/2008/09/24/00887.asp
[iii] O’Cathain was a member of the panel at the debate. He cited the Wood Mackenzie report to back up a rather unusual argument he was making: that protesters had deprived the exchequer of tax revenue. Had the project gone ahead on time, he argued, it would now be contributing tax. According to O’Cathain, Corrib is now unlikely ever to pay any tax, because the delays meant rising costs and thus lower profits:
“The problem with Corrib is that, because of the very long delay… the original budget for the project was $650 million, I think it was. Now Shell and their partners have spent over $2 billion. What that means is that … the project will never go into profit. The impact of that is that Corrib will never pay tax.”
I have an audio recording of the debate, which I would be happy to make available. An audio clip of the above excerpt is available online:
[iv] “Woodmac” is a common abbreviation for Wood Mackenzie.
[v] O’Cathain did not give a reason for refusing to tell me the figure for gross revenue. I assume it was because, having revealed the projected tax figure of €340 million as part of his argument about protesters delaying the project, he did not want to reveal how big the gross revenue figure was, as that would have exposed just how little tax Corrib would have paid as a proportion of that gross revenue.
[vi] Reported in the ‘Sunday Business Post’, July 10th, 2011
[vii] An audio file of Minister Rabbitte’s interview on Morning Ireland is available at the following RTE news article:
Pingback: Ask Leinster House - News from Irish Poilitics
This is one of the most readable submission on the subject (and it needs to be readable for the audience it is addressed to, as TDs are notable for not being very competent and that is polite)
The Commissioner for Energy Regulation CER has finalized the new management for virtual trading via the gas interconnectors entry point at Moffat; virtual trading was always a fact as far back as 2002 and always part of Corrib gas sale. Shell and the previous management company Enterprise Energy Ireland gave evidence at the 2002 ABP hearing regarding sale of gas to Irish market. In short Corrib gas can be exported by virtual trading. Once gas enters the EU gas network, managed in Ireland by Bord Gais and financed by capacity fees from gas shippers, is available for trading on the open market. Vermillion (18,5 shareholder of Corrib gas made a submission promoting a engineering export gas pipeline. CER was set up as the state agency for security of energy supply to the Irish market, as they confirmed to me, however they are restricted by EU Directives to adhere to open and fair trading, i.e. they are legally obliged to regulated free access to the EU gas network in the case of gas. The current issue is how virtual trading can avoid paying the capacity fees for the interconnectors as virtual trading does not use capacity in the physical sense and therefore gives an unfair advantage to virtual gas traders. If you are interested in documented evidence from 2002 you are welcome. For over 10 years I can’t understand why the issue is so hard to understand, for the public maybe, but for decision makers? One statement gave me quite a shock in 2002: Dr. Robinson, principle officer in DCENR said in 2002: ‘Ireland is in no position to dictate to the oil industry’. I can safely say that in 2012 the same religious belief still exists but it is now in the cover-up mode. The Norwegian Geological Society forecast in the ’60s that there was no oil and gas in Norwegian waters and Norway would never be a oil and gas nation, well, contrary to Irish decision makers (more principle officers in the department than any minister) Norwegians decided to be prepared otherwise. Regards, Monica
Pingback: Frontline programme covering natural resources issue this evening | Irish Oil and Gas
Its time to Nationalise the Industry.There are enough Irish people
Involved in Oil and Gas exploration and production all over the world
And enough money in the coffers to do it.Of course the Majors might
Not like it.Take a leaf out of the Norway book.
Pingback: Ask Leinster House - News from Irish Poilitics
INDECON report 2007 available on DCENR website, PAD
Pingback: Rabbitte asks oil industry whether licensing terms are too generous to oil industry | Irish Oil and Gas