Minister dictates what consultants’ findings should be: that things are fine the way they are
Last week Minister for Energy and Natural Resources Pat Rabbitte named the company chosen to carry out a “fitness-for-purpose” review of Ireland’s infamous licensing terms for oil and gas exploration. Unfortunately, the company he has tasked with carrying out this review is Wood Mackenzie, a company at the heart of the very industry that stands to gain from Ireland’s “attractive” licensing regime remaining as it is. Wood Mackenzie is an oil industry consultancy firm: what Mr Rabbitte is asking it to do is recommend whether or not he should reduce the share of revenue that some of its clients will receive from the sale of Irish oil and gas.
Wood Mackenzie’s parent company Hellman & Friedman also jointly owns an LNG (Liquefied Natural Gas) engineering company with oil major Total (see note below).
Interestingly, one piece of consultancy work carried out by Woodmac (as it is familiarly known in the industry) was a private study for Shell E&P Ireland in 2003 into Shell’s Corrib Gas project. That study projected that Shell and its partners could expect to pay just €340 million in tax to the Irish exchequer on their earnings from Corrib. That extraordinary revelation is dealt with in this article I wrote in 2011:
Ireland’s share of revenue from Irish gas fields could be as low as 7%, report shows
In fairness to Mr Rabbitte, he probably didn’t choose Woodmac himself. The choice will have been made by his officials in the Petroleum Affairs Division of the Dept of Energy and Natural Resources, who have consistently been sympathetic to the oil industry.
Economists such as Colm Rapple and Eddie Hobbs have highlighted the industry-captive mentality of these civil servants. As condemnation of Ireland’s management of its oil and gas has become more widespread, this review will give Rabbitte’s department something to point to to justify maintaining the status quo.
The perceived need for a review by industry insiders is heightened by the fact that a comprehensive review of Ireland’s licensing terms, conducted two years ago by a committee of democratically elected TDs from across the political spectrum, did not reach the conclusions that the oil industry and civil servants wanted. Reporting in May 2012, it said Ireland’s overall tax take should, in the case of future licences, be increased to a minimum of 40 per cent, with a sliding scale up to 80 per cent for very large discoveries.
By the way, this was no bunch of radicals. It was the Oireachtas Joint Committee on Communications, Natural Resources and Agriculture, comprising a majority of Government TDs.
We can fully expect that this latest review will conclude that Ireland’s current terms are just fine and should not be changed – or should merely be tweaked. Indeed, it is clear that Mr Rabbitte fully expects Woodmac to reach such a conclusion. In the press release announcing the choice of Wood Mackenzie to carry out the review, the Minister is quoted explaining how our licensing terms are already fit for purpose. He further elaborated on RTÉ’s Morning Ireland the following morning, repeating the familiar oil industry arguments at some length.
I have written previously about some of the changes that could be considered to Ireland’s licensing terms (for example, in my submission to the Oireachtas committee in 2011). Aside from the generally pro-corporate nature of Ireland’s management of its hydrocarbons, the single greatest problem with our fiscal regime is the fact that we use only corporation tax as a means of extracting revenue from these resources. While the terms of the latest review do appear to include consideration of whether to change this (“having regard to . . . the nature of the instruments used”), it is unlikely that Wood Mackenzie will recommend this.
As we have seen from the recent revelations about how little tax has been paid by computer giant Apple ($36m tax on $7.11 billion profits at Irish unit between 2004 and 2008) thanks to Ireland’s tax regime, a tax on profits is not a reliable method of extracting revenue from multinational corporations. As the aforementioned 2003 study by Wood Mackenzie showed, creative accounting will result in oil companies paying only a tiny fraction of their actual profits in tax.
Most countries use a combination of methods of extracting a share of the revenue generated from the sale of their oil or gas, including royalties, tax and production sharing. However, a tax-only system suits the oil industry, so that is what we are likely to be stuck with, unless this Minister (or some future minister) wakes up and realises that his officials are feeding him the oil industry line.
Notes:
1. In July 2012, Wood Mackenzie was bought by Hellman & Friedman:
Wood Mackenzie sold to Hellman & Friedman for £1.1bn
Hellman & Friedman also jointly owns LNG engineering company Gaztransport & Technigaz with oil major Total:
Hellman & Friedman Signs a Definitive Agreement to Acquire Saipem’s S.A. 30% Interest in Gaztransport & Technigaz S.A.S. (“GTT”)
Thanks to the Shell to Sea campaign for revealing this about the parent company of Wood Mackenzie.
Irish Oil and Gas 