Following the announcement in March 2012 by Providence Resources of a commercially viable oil discovery at the Barryroe field off Co Cork, The Journal.ie (an Irish online newspaper) ran this well-researched article (published 25th March 2012) about the significance of the discovery in the context of the Irish State’s management of its oil and gas resources. I was interviewed for the article.
How much is the Barryroe oil find actually worth to us?
A striking aspect of this article is that the vast majority of comments under the article are supportive of the view that Ireland’s licensing terms are too generous to oil companies. This is indicative of how the critique of the State’s management of its oil and gas has gained wider acceptance. A year or more ago, similar articles tended to attract comments that were misinformed and largely hostile to campaigners’ argument.
I want to leave some comments for you to consider. I have been involved in finance for the exploration sector for over 20 years. I don’t regard exploration companies as immoral but amoral. These companies are headed up by people many of whom are decent (not all as in any walk of life). Shell is one of the better companies in my experience.
I have read through some of your comments and those of Rapple and others. I don’t live in Ireland so I could only watch events of the past decade from afar. Am home now so time for some thoughts.
1. Shell has great engineering skills but terrible PR handling. The decision to make martyrs of the original ‘Rossport 5’ was a huge own-goal. I have been involved in other Shell projects elsewhere where similar mistakes were made.
2. Shell failed to purchase local and national political support at an early stage. Political support is cheap to purchase in Ireland. A discreet method is to throw 5K at each of 100 election candidates, thus putting the contributions below the SIPO declaration radar, yet making a substantial contribution to a party. Now you own the party hierarchy for just a half mil. Usually local support is obtained by paying off the tribal elders and allowing community peer pressure to do the rest. None of these actions are illegal. A few million at the start to buy locals new houses, send kids to college, new GAA facilities – all the minibribes they’re doing now would surely have avoided all the cost and delay. Poor strategic planning.
3. Statoil’s reputation seems to have come off unscathed with Fintan O’Toole even suggesting that Ireland should start a joint venture with Norway rather than allow big bad oil to rob us. Did he not know that Statoil is mostly owned by Norway or that Statoil was a major JV partner in Corrib?
4. Regarding the zero royalty rates. I would see this as OK so long as there is some upper bound on what can be extracted. Last time I checked, France and Spain also had zero royalty and I believe Norway started this way to attract drilling. The idea is to lure companies to perform some exploration and drilling and build some infrastructure, then levy higher tax rates on later licences, should anything be found. Corrib and Kinslae are very small finds.
5. For any criticism to be valid, you need to provide an alternative policy. You have suggested (I think) free state equity in projects or else introducing a royalty or more stringent taxation.
6. Regarding equity. Equity is usually worth less than a fixed share of profits for a resource extraction project (unless the company’s shareholders are embezzling the capital). Consider an equity holding in the Corrib Field. The shareholders may be liable for additional capital requests as needed either by dilution of shareholding or debt. Ultimately, what do the shareholders gain for their time and money invested? Profits. The state will obtain a profit share without risk capital.
7. Regarding higher taxes/ royalties.I think you understand that additional taxes for future projects in Ireland would likely result in no further exploration. The oil/gas would be left in the ground. In a way this is good: after all, oil and gas are finite and history suggests that prices will rise and that extraction techniques will improve. On the other hand, there is the hope that the initial low tax discoveries will be the catalyst for a huge taxable find. Is there democratic public support for a policy of ‘leave it in the ground’? There is not.
8. I think you also understand that existing contracts cannot be retrospectively altered within Irish or EU or EFTA law.
9. Regarding Ray Burke etc. Laying the blame at RB’s door is unconvincing even if it is an attractive narrative for the public. Many governments have come and gone since Ray Burke in the 1980s and none have chosen to alter the licensing regime (apart from Eamonn Ryan who brought in the 15% surtax). The licensing terms in operation are not out of step with other territories that have had such poor exploration history as Ireland. Your graph omits these countries.
10. Regarding the idea that corporate profits are elusive and untaxable. My job is to maximise financial efficiency for energy companies. It is naive to think that profits can simply be magicked away. Gas and oil extraction is near impossible to hide and the wholesale price is well known. In other industries where the goods are less tangible and the pricing more opaque, there is more opportunity for creative accounting. The Corrib partners can legitimately complain that their profits have been reduced by the years of delay but it is also their own fault for failing to obtain political buy-in at an early stage and concentrating their efforts instead on the engineering problems. The regime of accelerated capital allowances is not unusual or restricted to resource extraction (eg you can get ACA for renewables and energy efficiency and even some real estate projects). ACA is not particularly costly, it just means the company gets its tax reliefs earlier. I doubt Shell/Statoil care much. Also I am assuming that you understand the concept of taxing profit rather than turnover. The state does not tax a plumber for the cost of his tools.
11. Regarding the ultimate gain to the state from the project. You seem a little confused about the price of gas. Gas price for Corrib will be set by the UK NBP spot price. This is the alternative to buying gas from Corrib. spot price right now is around 68c/therm or €6.8bn for a 1tcf field. Of course the price of gas has varied wildly in the past. The estimates for the ultimate quantity of gas to be extracted are vague, the lifespan of the well is unknown. A lot depends on future shale gas discovery, LNG, price of oil, and so on. There is a lot of risk and uncertainty. if you put the costs at 2.8bn and assume that gas price remains constant for 20yrs then you have a 1bn profit for the state and 3bn for the investors, spread over that time. It’s not a lot of money given that gross state expenditure will probably exceed €2tn over that time. The big dream is that a really big find is made that contributes €1bn/year. Norway gets over €10bn/year from its oil and €18bn from its gas. Norway exports the equivalent of three entire Corrib fields each year. So you can see we are discussing relative crumbs compared to other countries. Even if Ireland seized the Corrib gas operation by force it might bring in €200mn a year or 0.3% of gross annual public expenditure.
12. There are other benefits to the project. Most towns in Mayo now have gas and this part of the country will have this energy infrastructure when the Corrib gas runs out. Gas is a cleaner more plentiful fuel than oil and a benefit to have. There will be some local employment and economic activity. Gas is transported by pipe so you don’t get the heavy traffic during operation that you get with an oil refinery.
13. Regarding oil extraction direct to ship (FPSO) This is an expensive option compared to pipeline. You are onto something here because using an FPSO means that there is no pipeline hardware adding energy security for Ireland. The state should mandate a pipeline to shore as a planning condition. But in all honesty I think it’s a remote possibility that any company would consider FPSO in Ireland.
14. I expect you know that Providence’s claims are not credible. Their market cap is less than 0.5% of the value of the oil they claim to have found. The stock market does not believe them. Anyone who thinks otherwise is welcome to buy their shares. There have been no commercial oil finds to date in Irish waters but many media and stock market announcements.
15. Ireland may have a pot of gold but it has not been found and few are looking. Only one exploration licence granted in 2009. Arguing about the tax rates is probably a waste of time. Remember the state still spends up to 70bn per year and much of this is misdirected. I would be more interested in where this cash is being misallocated rather than chasing an illusory new revenue source.