Last night’s Frontline and the tax take from Corrib

By William Hederman. On RTÉ’s Frontline last night, I raised the question of the very low projected tax take from the Corrib Gas project. This issue is sometimes misunderstood. An example comes in this comment sent to me today by one of the other contributors to the programme, Tony Allwright. You can read my response below. (Incidentally, there were numerous pro-industry myths aired on the programme, which I hope to address in a further post very soon.)

From Tony Allwright:
Just a small point. You criticised the fact that Shell in Corrib will pay tax only on its profits not revenue. First, Shell’s Corporation Tax will be 25% compared with 12½% for every other business in Ireland. Secondly, Corporation Tax is statutorily structured to be levied on profit not revenue. So your complaint made no sense.

My response:

Tony, my point certainly does make sense and is crucial to the debate about Ireland’s licensing terms. Your comment betrays a poor grasp of the issue. Either you don’t understand the basic problem – or else you are pretending not to understand it.

To compare the 25% tax rate to the 12.5% rate for other corporations is either highly disingenuous or ludicrously simplistic. Oil companies will pay this 25% tax on profits they make from selling oil or gas from Irish fields, having been handed full ownership and control of those resources by the State: the State extracts no royalties and takes no share. If the company chooses to supply the Irish market, these profits are made by selling this Irish oil or gas to Irish consumers at the full international market rate.

The 12.5% general corporation tax rate in Ireland may be objectionably low, but at least the companies to which it applies have not had ownership and control of valuable Irish resources transferred to them in full. Your comparison is a fatuous one.

This tax rate for oil and gas extraction is the only revenue the State will earn from Irish resources. In this context, a 25% tax rate is exceptionally low.

But the really important point is this: because our licensing terms were drawn up under the watch of Fianna Fáil ministers Ray Burke and Bertie Ahern two decades ago (following intensive lobbying by the oil industry), they are structured in a way that allows the companies extraordinarily generous tax write-offs: a 100% tax write-off up front of all exploration and developments costs extending back to 25 years before the field goes into production, including the costs of all the other unsuccessful wells the company has drilled in Irish waters; the cost of dismantling the project; and costs incurred in other countries (what hope is there that the Irish tax authorities will be able to keep tabs on which costs really are connected to the Irish oil or gas project?). At the end of the day, the declared profits will bear very little relation to the true profits.

This is something respected economist Colm Rapple has warned about for years. He explains it better than I can – see his website.

Corrib will be the first example of a field extracted under the Burke-Ahern terms. So, what people in Ireland need to know when assessing the appropriateness of our licensing regime is this: after a company has sold gas or oil it was gifted by the State, what proportion of that revenue will return to the Irish exchequer?

If it’s a very small proportion, then most sensible people would conclude that either the resource should be left in the ground or else a new method of extracting revenue from the company should be implemented. So, just how small is that return?

The former head of the Corrib Gas project, Brian O’Cathain (who also spoke on last night’s Frontline), inadvertently revealed (in December 2010) that in the case of the Corrib field, the return would have been just €340 million, even if the gas had started flowing in 2005 (i.e. that low return is not an effect of the long delays to the project). €340 million is a pittance. It is an insult to Ireland.

This figure was contained in a consultants’ study for Shell in 2003. O’Cathain would not reveal what the projected gross revenue figure was in the study. To reveal this would expose just how minuscule the State’s take is as a proportion of the revenue the company earns by selling Ireland’s gas. Obviously, the declared profits in this projection must have been €1.36 billion – the €340 million tax take is 25% of that.

Just five years later, in 2008, the Government gave €9.5 billion as the projected total revenue figure for Corrib, with a projected tax take of €1.7 billion. That is a state take of 18% of revenue (obviously the Government would want to give an optimistic figure for tax take). Even if the applicable gas price had doubled in the five years from 2003 to 2008 (Bord Gais told me that it may have almost doubled), then the 2003 study for Shell projects Corrib paying just 7% of revenue back to the State.

The above is all detailed in this article on my website.

And remember, this pitiful tax take is the only thing Ireland is guaranteed to get in return for this giveaway. Ireland gets no security of supply. In the case of Corrib, we got some short term jobs. In future projects, such as the Dalkey Prospect, Ireland might get no jobs, no infrastructure and no supply to the Irish market: more on that here.

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16 Responses to Last night’s Frontline and the tax take from Corrib

  1. Nigel says:

    Well done on the Frontline William, you got some great points across very well, and i hope most people could see that the argument for the providence project was very weak and where trying to muddy the water with weak arguments for the Tax take for the project, you can always tell when they will not give a total figure for the Corrib e.g. then you you know they have something to hide.

    I have also done a video from the meeting in the Royal marine last week ,feel free to use and put up on you site if you like http://vimeo.com/36336782
    Regards,
    Nigel

  2. Dear oh dear! Corrib is a business conducted like any other in accordance with rules laid down by the democratic government of the day. Two foreign companies, evil Shell and the sainted Statoil, are making their huge investment on that basis.

    If you don’t like the rules, then by all means agitate for them to be changed. But it serves no purpose to criticise Shell and Corrib for acting within Irish law.

    The Shell-to-Sea protests have – alone – trebled the cost of Corrib from €800m to €2½ bn and the time from four years (first gas 2007) to twelve (2015). No technical or financial or industrial relations problems have contributed to this otherwise remarkable feat of engineering under the leadership of a fine UCD engineer from Mayo.

    Obviously these such an overrun will hit the planned profits of the investors hard – which many objectors will be happy about – but it has also has made this country a pariah state as far as future oil and gas investment is concerned. (Would YOU accept a 200-300% local political risk premium on you investment? You can be sure that, ultimately, Tamboran and Providence will not.)

    There will be no further investment, taxes or Irish jobs for a generation, until Corrib has been forgotten about. Just what’s needed to pay off €120bn in debts.

    Moreover, a simple calculation shows that the cost of this enormous overrun, in NPV terms, has reduced the TAX take by some 75%. Yes, Shell-to-Sea have robbed Irish taxpayers of three-quarters of their Corrib revenue. And all over a 9 km pipeline route!

    As for security of supply, where exactly do you think Bord Gais, who have contracted for 100% of Corrib’s gas, are going to export it to? And how? And, indeed, why?

  3. Dear oh dear indeed Tony. You really don’t get it.

    It strikes me that you are coming from a blinkered pro-business approach, where any kind of “investment” by corporations must be facilitated and even begged for, even if the net benefit to Ireland of that “investment” is close to zero.

    First of all, you say….

    > If you don’t like the rules, then by all means agitate
    > for them to be changed. But it serves no purpose to
    > criticise Shell and Corrib for acting within Irish law.

    Nowhere in my post above do I criticise Shell for acting within Irish law. The problem IS the law. I find it hard to believe you hadn’t noticed that I and others ARE agitating for the rules to be changed. That’s what the whole “Great Oil and Gas Giveaway” is about. Note that campaigners don’t call it the “Great Oil and Gas Robbery”. It’s a Giveaway, because the State is giving it away. Naturally corporations will take advantage of a tax regime that allows their accountants such creative licence with “costs” and “profits” that they end up paying Ireland a pittance for her resources.

    Corrib is just an example of how little tax Ireland can expect from an offshore gas field under our terms. And since you refer to the delays with Corrib, it’s worth pointing out again that the tiny tax take projected in the 2003 Wood Mackenzie study was based on an assumption that the gas would start flowing from Corrib in 2005, i.e. a non-delayed Corrib.

    Turning to the problems with Corrib itself, those delays are, again, the result of successive Fianna Fáil governments, for allowing its Galway tent guests from Enterprise Energy to use northwest Mayo as a testing ground for a new, experimental configuration for bringing gas ashore: a gas refinery (or “processing plant” if you must) in the catchment area of a lake providing drinking water to 10,000 people; that refinery fed by a pipeline in a shifting bog, carrying raw, odourless gas at extremely high pressure; a pipeline just 1.4 metres below fields and roads.

    In 2006, Terje Nustad, then president of the SAFE trade union, representing 8,700 Norwegian oil workers, visited Rossport. He was a board member of Statoil. I met him in Dublin and told him what Shell had been telling the Irish public: that Corrib was not unique, that similar high-pressure, raw gas production pipelines had been laid close to residential dwellings at two projects in Norway: Snovit and Ormen Lange. Nustad was appalled at this misinformation. He told me nobody lived close to those projects in Norway and that the pipelines were buried deep underground.

    If the legacy of the protests in Mayo are that big oil doesn’t want to build any more gas refineries and raw gas production pipelines in residential communities in Ireland, then those protestors have done the people of Ireland a great service.

    > … Just what’s needed to pay off €120bn in debts.

    Tony, those debts were created by the same blinkered, pro-business, light-regulation, Galway-tent approach that gave us the Corrib fiasco.

    > As for security of supply, where exactly do you think
    > Bord Gais, who have contracted for 100% of Corrib’s gas,
    > are going to export it to? And how? And, indeed, why?

    Firstly, the important point relates to future gas projects, if we allow further extraction under our disastrous licensing terms. As you present yourself as someone who knows about this area, I presume you will know that the Government’s policy is for Ireland to become “a net exporter of gas”. This is the central message every year at the Government-hosted ‘Atlantic Ireland’ conference in Dublin. In other words, companies are at liberty to export.

    Future gas projects can be exported, either directly from the field (as explained in detail in this article https://irishoilandgas.wordpress.com/2011/07/03/oil-companies-plan-to-export-directly-from-irish-oil-fields/ ) or via one of the “interconnecter” pipelines between Ireland and Scotland. One of the interconnecters would be modified to allow it to pump gas in the other direction – this has been confirmed to me by oil industry sources and by the Dept of Energy and Natural Resources.

    What this means is that we in Ireland will have to bid against buyers in other countries for our own gas.

    Bord Gais has indeed contracted for Corrib Gas. This means that Bord Gais will have to pay the international market rate for the gas. So if the price of gas internationally were to double in the next 20 years, then the price Irish consumers pay for the gas from Corrib would double. Minister Pat Rabbitte clearly didn’t know this when he said on RTÉ’s Morning Ireland last June: “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.” (Morning Ireland, June 1st, 2011: https://irishoilandgas.wordpress.com/2011/06/01/rabbitte's-gas-price-gaffe-on-morning-ireland/ )

    In the following month, July 2011, the Commission for Energy Regulation warned that if and when Corrib comes ashore, it is “very likely” to result in an increase in the price Irish consumers pay for gas. (This was reported in the Sunday Business Post: http://www.sbpost.ie/news/ireland/corrib-gas-could-push-up-prices-57391.html )

  4. Pro-business pro-Irish-people Tony here.

    Where did you get the idea that Irish consumers would receive gas at less than world market prices? Security of supply is not about price. It is about ensuring you can get access to gas in spite of disruption to, for example, the existing supply route that begins in Siberia and ends in Ireland.

    You seem remarkably relaxed about the monumental €120 bn debt legacy that is being thrust upon the credit cards of Ireland’s children, babies and the yet unconceived. Today’s generations, since they bear collective responsibility for it, have a massive responsibility to seek revenue from any source they can in order to minimise the looting of the futures of those kids.

    Rather than rejoicing in Ireland’s new pariah status (“those [Mayo] protestors have done the people of Ireland a great service”), would it not be more equitable to find ways that the projects can proceed in an acceptable fashion rather than simply calling for their abolition?

  5. derek doherty says:

    What exactly is an acceptable fashion when it amounts to a sovereign government Rotten to the core relinquishing the right of its citizens to a fair deal on its natural rescources? Only in Ireland were corruption and brown envelope politics has prevailed, would such a travesty be allowed. Shame on those responsible.

  6. And shame on Derek Doherty for his insouciance over the continued looting of Irish children’s futures and his unwillingness to countenance reducing this should the production of hydrocarbons in any shape or form be involved.

  7. Ed says:

    Tony, that is certainly one of the most comprehensive failures to respond that I have seen in a very long time. I am tempted to simply cut and paste William’s last post, since you have ignored every single substantive point that he made.

  8. Ronan says:

    Tony, just to clarify one or two points. In relation to security of supply, we are the closest country to the well and you would be right to think that we should therefore be the 1st country to receive the gas. But the state does not own the gas (part of the terms of the license), so we have no right to the gas other than what Shell sell to Bord Gais. Shell have not released full details of their contract with Bord Gais, but Statoil did confirm that they will be exporting some of the gas abroad. If there is an energy crisis on the continent, if say Russia has another fight with Ukraine and that could well happen, Shell will sell the gas to the highest bidder as is their obligation to their shareholders. I imagine the UK, Norway, Netherlands etc. would well outbid us. Sure we would receive the gas due to Bord Gais, whatever that percentage is, but if we at least owned 50% of the well, we would have some clout in the decisions. Whatever about the lack of royalties and low corpoartion tax, I believe the worst thing about this Corrib issue and future licenses/discoveries is that the state do not own any of the gas.

    Little is known about the actual reasons why the protestors were protesting, which suited Shell and Statoil perfectly. I’m not going into those reasons here, i’d be here all night otherwise, but efforts were made by various individuals within the community to find a way through this mess which would have dealt with the concerns of both the developer and the community. A group such as Pobail Cill Comain looked for such a compromise, but the developers weren’t interested in engaging despite what they said publicly. At the end of the day if the gas companies properly planned and developed the project from the start and not on the cheap, also if the state agencies did their job, the gas would have flowed along time ago. No one would have heard of Ballinaboy and the surrounding communities would have had no problem with it. Despite what you have seen on TV or read in the papers, the local communities wanted the gas to come ashore, but only on condition that its done as safely as possible.

  9. Gary Quigley says:

    To Mr Allwright,
    How dare you refer to any citizen that protests government action, especially dubious oil license agreements as a pariah. It is our right, indeed our duty to scrutinise government actions. We are their employers after all.
    How is it possible for you to even consider standing behind the decisions of a both incompetent and corrupt bunch of bluffers that represent the Irish Citizen via the farce that is commonly known as the Irish State?
    Mr Ryan is a second hand bicycle salesman, nothing more. Mr Rabbitte a career politician with no business experience, nothing more. Even our Finance minister is nothing but a secondary school teacher, nothing more. Anyone who runs a business will tell you that “Cash is King, theory is for fools”.
    None of these people deserve any respect or indeed the positions they have been privileged enough to occupy. Do you think for one minute that even the local Centra would hire any of them without relevant experience?
    But worst of all, are the faceless hordes of Mandarins hiding behind them, never changing, only growing in numbers each year, most related, each and every one in it for themselves.
    These are the people that represent us, the Irish Citizen in negotiations with Shell et al. No wonder we are fleeced. Their delusional defense of “their” deals only underlines the fact that they are so incompetent that they consider their level of incompetence normal.
    We need a complete purge.
    These people do not care about anyone or anything beyond their pay check and pension entitlements. They should not be considered as equals, as citizens, they are the pariah. It is entrenched incompetence, with no solution other than starting over based on merit not bluffing ability.
    It is truly sickening that a situation has been slowly engineered in this country so that the majority of its citizens are too busy just trying to survive to notice, or indeed care about any of this treachery.

  10. Ray Burke the man who betrayed his country and walked off with a multi million euro pension. He should have faced a firing squad for what he did to this country.

    • Gary Quigley says:

      Yes, and he will probably be a “consultant” for some oil company.
      Just look at Bertie, chairman of the International Forestry Fund, what state assets are they talking about selling?
      The point I would make is that corruption does not have to occur while in office, these traitors (public officials) and their beneficiaries (immediate family) should be watched for the rest of their lives. Seriously, that is not as Orwellian as it sounds. Their over generous self awarded pensions more than compensate them.

  11. Gary,

    I did not “refer to any citizen that protests government action, especially dubious oil license agreements as a pariah”.

    I spoke of Ireland the country. Thanks solely to the actions of Corrib protesters and the almost supine response of elected politicians, Ireland has become a pariah state in the eyes of would-be oil and gas investors. Frankly, would YOU put your OWN money into an investment, where the record of such investments meant you had to build in perhaps 200% as a political premium? The protests -alone – have trebled the cost of Corrib (from €0.8bn to €2.5bn) and the delivery time (from 4 years to 12, ie completion now expected 2015). In turn, this means that 75% of the economic tax revenue from Corrib, due to the Irish people, has been destroyed (as have 75% of Shell’s and Statoil’s profits).

    No wonder Statoil, for one, now rate Ireland the world’s third riskiest place to invest, after Somalia and Iraq.

    Certainly sounds like pariah status to me.

    BTW, I agree with much of what you say about Irish politicians and mandarins! We need a new political party.

    • Gary Quigley says:

      Tony,

      I misunderstood your post, apologies for any offense, none was intended. I simply took your comments as being from yet another apologist who has issue with anyone voicing an opinion that does not line up with that of officialdom. I wasn’t aware of the Statoil position, that is very troubling, agreed.

      I am sure part of the Statoil reasoning has largely due to with the (and I can just picture them in my mind) unprofessional parochial cretins they have to deal with who represent the citizens of this country through our thoroughly broken and corrupt state.

      Although nepotism is not supposed to be an issue anymore, we have all dealt with somebody senior in officialdom and wondered “how?”. Just look at Pat Rabbitte, a career politician who never held a real job. How is he supposed to understand the commercial realities of his actions? Yet he is the person who would be dealing with Statoil, is he really representing our interests by bluffing? Would you hire him?

      The fact of the matter is that while we would (I think) both agree that there was some definite profiteering on behalf of elements of the protesters, the heart of the protest is correct. It was and still is an appalling deal for the Irish state that was conceived by elements of the state that are woefully under qualified for the position of trust and power they occupy.

      I am beginning to agree with your question about investing in this country, I have invested considerable time & capital (not in oil though) and am wondering now if it has all been a waste of time. It seems that there is the same “wink and nod” mentality everywhere a business has to deal with the state.

      100% agreed on the new party, but would that suffice? We would also need a complete rethink on how this country operates (or doesn’t). Yet again the pre-election promises are turning into post election nightmares. Everything is too cosy, banks, courts, gardai, siptu, civil service. It’s funny how nobody uses the term civil service anymore isn’t it?

      Trying to bracket nurses and firemen in the same category as the mandarins. Safety in numbers I suppose. Meanwhile Bertie gets a large spread in a Sunday newspaper to state his case. Unbelievable!! In the states he would be locked away already, in China?

      How is Sean Gallagher doing?

      You can only sit back and laugh.

  12. Ken Healy says:

    Dear All,

    With regard to state ownership of oil and gas fields in Irish territory

    The main question the Norwegian team dealing with the oil companies and oil explorers asked each and every time a decision was to be made about their oil resources was, “How will this benefit the Norwegian people?”. This simple question showed how they were putting the interests of Norway’s people and society first.

    When issuing their second round of exploration licences the Norwegians decided that the state was going to take an ownership stake in all oil and gas fields found in their territory.

    My simple question is:
    Why cannot the Irish Government do the same for her people?

    There is enough money in oil and gas for both the people of Ireland and the exploration companies to make obscene amounts of money!

    We have had enough instances where our government have failed us totally, it is time to put Ireland first.

  13. Pingback: More Oil Off Irish Coast | alternative economics

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