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Dáil Committe Debate of 27th Sept 2011 on Offshore Exploration Licences

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[Shell to Sea] This is the Dáil committee hearing that Shell to Sea members were barred from entering despite being invited to attend by Éamon Ó Cuív: http://www.shelltosea.com/content/shell-sea-barred-d%C3%A1il-oil-and-gas-hearing

Offshore Exploration Licences: Discussion with Department of Communications, Energy and Natural Resources 

Chairman: I welcome everybody. Before we start, I thank the Vice Chairman for filling in during the early part of the meeting. As members know, I have just returned from a meeting of the chairmen of EU agriculture parliamentary committees in Warsaw, and there will be a report in due course.

 

It was agreed to have a discussion with officials from the Department of Communications, Energy and Natural Resources. I welcome the witnesses: Mr. Michael Manley, assistant secretary; Mr. Ciarán Ó hÓbáin, principal officer; Mr. Jim Whelan, assistant principal; and Mr. Noel Murphy, petroleum specialist. Members may recall that following the Minister’s address in the Dáil, the officials indicated that they were willing to come in and discuss further the issue of offshore exploration.

 

I remind everybody to turn off their phones. We have had occasional interference and it does not do anybody any favours to have them on as they cannot take the calls anyway. I ask the people in the Gallery to turn off their phones also.

 

Witnesses are protected by absolute privilege in respect of the evidence they are to give to the committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

 

Mr. Michael Manley: I am happy to be here this afternoon to take the committee through the provisions and terms of offshore licensing. I am joined by Mr. Ciarán Ó hÓbáin, principal officer in the petroleum affairs division, Mr. Noel Murphy, senior petroleum specialist, and Mr. Jim Whelan, also from the petroleum affairs division. We will make a brief presentation to the committee for its information, outlining the background and context of petroleum terms and the evolution of those terms over the last number of years. Then we will work through the current position in terms of applications and licensing. I ask the secretary to commence the presentation. Do we have hard copies?

 

Chairman: Yes; hard copies are here.

 

Mr. Noel Murphy: Our policy objective is to maximise the benefits from exploration and production of indigenous oil and gas resources. The Department regulates and licenses all petroleum activity. It has a small team of professionals, including myself, whose job is to approve all offshore operations, and we strictly supervise those operations when they are ongoing. We require companies to give us all data and we receive all of it. I will come back to that later.

 

The list of definitions is long, so I will go through them quickly, but members are welcome to ask me about any of them afterwards. The words “petroleum” and “hydrocarbons” are interchangeable - the difference does not mean anything - but the term “petroleum” does include oil and gas. The meaning of “exploration” versus “appraisal” is pretty much self-evident. An “exploration play” is sometimes spoken about. This is a regional concept that a company may have which has a certain association of reservoirs, source rocks and so on. It is very broad. There may be some positive evidence that a play is an interesting one and should be explored. We then get on to seismic data, and there we can get some glimmer of a structure, which may be a lead. The lead would then have to be matured into a prospect and ultimately a drillable prospect. With regard to “dry hole” versus “show”, dry hole is self evident, while one can have oil or gas shows in extremely small amounts. They can be in the source rocks, where they are not produced, or in a reservoir, where they may be of no significance or they may indicate a moveable hydrocarbon phase. In the latter case, one has made a discovery. We look at petrophysical data in the first instance to see if shows can warrant testing or qualify as a discovery.

 

With regard to in-place hydrocarbons and reserves, there are always more hydrocarbons in a reservoir than one can ever retrieve. The reserves are what one can get out of the ground and are thus by definition recoverable, so we do not need to say “recoverable reserves”. If the word “reserves” is there, that is what it means. With regard to “potential” versus “proven”, this is self evident. It is self-evident that potential is potential. The colourful map now before members shows Ireland in the context of the Atlantic Ocean and the other main exploration areas. The designated area around Ireland currently comprises approximately 720,000 sq. km. The rather thick red line on the following image reveals the round we carried out this year on an area comprising approximately 250 sq. km. The warmer colours represent shallow waters and the contour then dives into deep water blues and greens. The Porcupine Seabight is located at the southern end of the licensing round area and the Rockall Trough shoots through to the west.

 

The geological imagery reveals these basins, as well as others in the Celtic Sea and off the north-west coast which are not mirrored at the seabed. I am adding complexity to show the soft unconsolidated sediments of the seabed at a depth of between 2,000 m and 4,000 m of water. Our interest starts at that point and it continues down for several kilometres.

 

The following black and white map shows the locations of the basins. The Slyne Basin, the Erris Basin and the Porcupine Basin are lined up in a row to the west of Ireland. Further west is the Rockall Basin and the North Celtic Sea Basin lies to the south.

 

In order to have a petroleum accumulation, a number of conditions need to be met. The parameters include reservoir, source, seal, trap and timing. The reservoir rock needs to be porous enough to retain hydrocarbons. The source rocks need to be initially composed of organic fine-grained sediments. If they are buried for long enough at a sufficiently large temperature, they will start to cook and thereby generate oil and gas. If the source rock is present in the correct concentration, it will expel hydrocarbons and these will migrate in search of a structure or a trap. Something is needed to seal or cap the hydrocarbon accumulation. Common types of rock which meet this purpose include shales and vaporites, such as common salt. Traps are large blocks segmented by faults. Prospectivity is generally constrained to these basins, which are formed when the earth’s crust is pulled apart and subsides. As it subsides, sediments begin to fill it and, in time, will convert to rocks. We must always bear in mind, however, that an evaluation is only as good as the data it uses. Talent and software can, of course, improve the modelling but the calculations must always go back to the existing data.

 

In regard to exploration wells, there is a small cluster in the northern part of the Porcupine Basin and several more in smaller basins on the western margin. However, gigantic areas have no well controls and, as a result, we do not know what is there. All we have to go on are the seismic lines, which themselves are widely spaced. The lack of data in deeper water areas is a significant issue for us. Even where the blue and red lines on the map appear close together, there are large spaces between them when viewed at a proper scale. Solid blue filled areas which are 3-D represent higher density data but longer lines rather than 3-D are needed when investigating a region for exploration opportunities. Issues also arise in regard to data quality. A line might not record at a depth that is sufficiently deep or it may be poor quality due to geological issues such as volcanics and chalks.

 

The following slide represents my attempt to show reservoir prediction at a particular geological horizon. Well control is so bad that we are investigating whether we can learn something from the Canadian margin. This exercise is indicating some exciting prospects for the future. One must be very precise at the local scale because a couple of kilometres can mean one is inside or outside a reservoir. In relying on key maps to evaluate the broad region, the only way we can fill the gaps between the widely spaced seismic lines is by applying other geophysical methods, including magnetics and, especially, gravity. That is not a very precise approach, however, and while a map may appear reasonable at the broader scale, it is not well constrained over large parts of the region.

 

Similar problems arise in regard to source rocks, which are essential. We have some control in this regard and we look to the data produced by Canada and the UK to postulate where they might exist. After one predicts that they may exist, one must run models to show how much oil or gas they may expel and when this may occur. When the oil or gas is expelled, it will follow certain migration routes and the structures may be in a very unfortunate location. The structures are frequently missed or in shadow.

 

The next slide outlines the factors that are necessary for an area to have petroleum potential, as defined by certain parameters and geological time from 300 million years ago to the present. In regard to trap formation, blebs of black form at the 150 million year point. The blebs at the very right hand side are coming from the green source rock depositions one line up. We think these source rocks were relatively recent in expelling their hydrocarbons. Significantly, we believe this happened subsequent to trap formation, which is a positive sign. If oil moves before traps form, all is lost.

 

The indicative estimates for the as yet unfound reserve potential in the area to the west and in the Jeanne D’Arc Basin in the eastern Canada area appear great. However, while we appear to have a good number, the estimates are based on existing data. While I do not fault the work in any way, it is all one can do. We have to look at prospects and leads and ask whether we have the same density in an area for which we do not have any seismic. Maybe we do or maybe we do not. We work our way through and come out with a figure. That figure is pitched at the oil industry. If there are any oil industry colleagues listening, we are not trying to pull one over on them. We cannot do that. We are looking to the oil industry’s technical people, who will understand the basis for the figures. The objective of this number is to tell them that maybe it is time they looked at Ireland.

 

This particular graph in the presentation shows all the wells that were drilled since 1970. There is nothing down yet for 2011, but we hope to have a well from Providence Resources in the Celtic Sea in the next couple of months. We are typically doing one well per year and that is extremely low. We need tens if not hundreds of wells to have any crack. I would be happy if we had about five wells per year. We would then have a reasonable chance of making some discoveries or improving on potential. The slide shows the kind of risk factors and probability factors involved. I will not belabour them, but would point out that our technical success rate is about one in nine. That is not particularly great, but I would not downgrade it completely. The cost of a well is also included, at €30 million to €120 million. It is over €100 million if we go into the deeper water basins to the west.

 

The next page deals with seismic issues. We have line kilometres on the left and square kilometres on the right. The grey lollipop sticks represent three dimensional seismic works, which are more modern and valuable, but tend to be over small areas. We have seen four small surveys this year, which is encouraging.

 

If a discovery is made, we have to go through several steps to see how much there may be in it. It invariably means that we start drilling appraisal wells and develop model engineering studies and so on. The final issue is to decide if the project is commercial. Can it be brought to the market? Starting from today, we are talking years before we can get a discovery to market.

 

The next slide contains a map of fields and key discoveries. I can show other wells that have had little blips of oil or gas, but these wells have had a reservoir in them that could technically be produced if they were big enough. The white and red marks indicate the actual commercial fields, while the other marks only represent discoveries at this stage. Nearly all of them are being examined by companies, although not the companies that found them unfortunately. They have moved on as they did not find the opportunity, which only came after a few generations.

 

The next page shows some basic statistics for the six significant discoveries west of Ireland. The second line down shows the Corrib discovery, at 64 million cubic feet of gas per day. The Connemara and Porcupine discoveries represent 5,589 barrels of oil per day. The Corrib rate is a good rate. In the case of an oil well, we would typically be looking for anything from 3,000 to 6,000 barrels, so this is a good figure. We then get down to very small numbers for Spanish Point and Burren, but these will be examined again. Perhaps further drilling, if it could be justified, would give better results.

 

The next page contains a lot of text on the discoveries and I do not have time to go through it. The basic message is that many discoveries have been made, but very few of them have been found to be commercially interesting, let alone viable. The companies that have discovered them have left Ireland. Somebody else might decide that there is an opportunity if they shot some more seismic or had a new idea and decided to go back in. Even at that stage, they can fail as well. We have had Statoil in Connemara and Chevron in Spanish Point, who came in long after the original company had left, but they still did not succeed. I do not want to paint too negative a picture. I always try to promote the technical value of what we have got.

 

The next page shows production on a blue map. Members will be familiar with the location of the pipes. At the lower right part of the picture, there is a small map which shows our daily gas production in billions of cubic feet per annum. There is a gaping jaw between the black lines and the red demand curve, and that is what we want to fill. About 95% of our gas is being pulled in through the interconnectors from the UK. It would be nice if we could find a bit more here.

 

In regard to data and information, we require everything and we get everything. It might not be generally well known, but we maintain a national data archive which is a treasure. It is an absolutely fantastic asset, not only for the Government or from a research point of view, but for the explorers themselves. The content of that database is far bigger than any oil company would have, including the major companies. From time to time, major oil companies and seismic contractors come in looking for old data of theirs that they can no longer find. This database is second to none on an international basis. We guard it and maintain it very carefully.

 

We keep close contacts with the industry under our regulation duties and because we try to promote ideas. However, we also have a need for day-to-day communications on the drilling of wells and the like. We get all the data on the wells on a daily basis. We can have real-time access. If we have nothing better to do, we can watch the bit on the bottom drilling away. We cannot see the bit, but we can see the drill rates. When we get into a big and expensive exploration well off the west coast, we might tell the companies that we need to install a live link, and all of the data just streams in. During the logging and testing operations, all data will be transferred to us and we do our own independent petrophysical analysis and test evaluation. Inspections are frequent and basically we are on call all the time during the drilling season.

 

The next slide deals with licences and shows the current licences in blue, petroleum leases in red and options in yellow. There is then a histogram showing the licences and options, going way back to the 1970s. There is a kind of cyclical nature to this, although I try to think that we put something into it that bucks the trend. We are not doing too badly with licences at the moment, but they are beginning to fall away again. They go through a natural life span from one phase to the next. If the opportunity or the results are not there, then the group of companies will just walk away and relinquish the licences, as they are required to do if they are not doing work. We are a little bit on the downward trend at the moment.

 

The next slide shows white bars containing the total number of applications offered in licensing rounds as far back as 1994. These are all our frontier exploration rounds west of Ireland. The grey bars represent the number of authorisations awarded under each. The years 1994, 1995 and 1997 were particularly good rounds for us, but unfortunately what followed is a bit of a mixed bag. It is a bit on the low side.

 

We then have the current round, the Atlantic margin licensing round 2011, which closed on 31 May. We can see its outline in the basins on the map. We received applications for approximately 15,000 square kilometres, which constitutes 6% of the area on offer and 2% of the entire designated area I showed earlier. One can argue that not all of this area is prospective but I would not go further than doubling these figures. They are still relatively modest.

 

We have too few wells. The plate is not being tested. While I could argue it is not being tested fast enough, with only one well and in some cases no wells being tested each year, the available potential is not being explored. We still have large data gaps and this is one of the key issues we need to address. In terms of the latest round, I am a little disappointed at the lack of applications we have received for deeper water areas. This, I believe, can be purely ascribed to the lack of data and needs to be addressed.

 

Petroleum research is crucial in laying the technical platforms for planning and promoting the sector. I referred to Canada and we have active research ongoing with the Canadians to examine how we could correlate the geology across the Atlantic. This is exciting and keeps geologists such as me going. While there are encouraging signs, a considerable increase in drilling levels over many years will be required to establish whether any or all of Ireland’s potential can be proven.

 

The final slide shows the number of exploration companies departing Ireland in any year. This group is depicted in yellow below the horizontal line, while companies entering the country are shown in blue above the line. We are just about managing to avoid a net loss. As the slide shows, the net gain was one new entrant in 2011. Exploration is hard work and the diagram reveals we have some way to go in attracting the industry to Ireland.

 

Mr. Michael Manley: While I am aware that we have taken up considerable time, I ask the Chairman to allow us five more minutes to discuss the fiscal times. This will give members a full picture. Mr. Ó hÓbáin will discuss this aspect of the issue.

 

Mr. Ciarán Ó hÓbáin: It is important to set the geological, geophysical and exploration history background against which the licensing terms are set. I will briefly set out the history of our fiscal terms before focusing in some detail on the 2007 review, the analysis which underpinned it and the recommendations arising therefrom. I will then briefly discuss the question of international comparisons and some of the topical policy issues and options that are discussed from time to time.

 

The slide sets out the history of the fiscal terms from 1975 to 2007. Members will see that the 1975 terms included a high rate of tax, at 50%, royalties, production bonuses and a right to State participation. A significant change was made in 1987 when royalties were abolished. In doing so, we followed the lead of the United Kingdom and Norway. In the same year, State participation was ended and the write-off of capital development costs was allowed against tax. A further change was introduced in 1992 when the corporation tax rate was reduced to 25%. This was a significant development when one considers that it occurred against a backdrop of a general rate of corporation tax of 50%, in other words, the new rate for exploration companies was below the prevailing rate for companies. In 2007, the additional profit resource rent tax of between 5% and 15% was introduced following the review of the same year. This is an additional tax on top of the 25% corporation tax rate. The write-off on exploration and development costs was maintained.

 

Members have seen the diagram showing the number of exploration licences. It helps us understand the background to the changes and terms. The first peak occurred in the mid-1980s when the 1987 changes were introduced. The 1987 and 1992 changes were introduced because declines in the number of licences had been anticipated on the basis of the nature of exploration licences where the lead in and lead out are done over a number of years. The number of licences peaked in the 1980s and drilling was either successful or unsuccessful. One then moves on to 1992 when the number of exploration licences was at its lowest ever level. This figure increased after 1992 and throughout the 1990s but started to decline again by the end of the decade.

 

On the background to the 2006-07 review, a critical reason for the review was that the terms for exploration licences had not been reviewed for 15 years. There had also been a reasonable amount of public debate on the issue, some of which was influenced by the Corrib gas project. On the plus side, high oil prices resulted in a modest increase in the level of exploration activity and drilling. For these reasons, a decision was taken to consider whether to increase the tax rate. There was also a concern that Ireland was increasingly dependent on imported gas and gas was becoming increasingly important as a fuel, particularly in electricity generation. Our principal source of gas, the United Kingdom, was heading towards becoming a net importer.

 

The review was undertaken primarily by Indecon Economic Consultants. Their key findings, which were twofold, are outlined in the following two slides. They were that the Irish tax terms are relatively attractive for companies which make a discovery and the key issue for industry is prospectivity. Balancing these two factors, Indecon concluded that the attractiveness of Ireland as a location for exploration diminishes compared with the analysis of the country’s post-tax position. If a company makes a discovery it does well but the chances of discovery are not high and, as such, it is a relatively high risk investment.

 

The principal conclusion of Indecon was that while there was a potential for the Government to capture a higher share from more profitable fields, this potential should not be overestimated. The next slide sets out the company’s recommendations. Its key recommendation was to take a steady-as-one-goes approach to exploration for fields of a modest size. It did not propose any change in the basic 25% tax rate but recommended the introduction of a new profit resource rent tax of between 5% and 10% on more profitable fields. This tax would be incremental in its application. The Government went beyond the recommendation and introduced an additional 5% element bringing the maximum profit resource rent tax to 15% or the maximum profit tax to 40%.

 

A key element of Indecon’s report was how it approached the issue of retrospectivity. It recommended that the new tax terms should be applied to new licences and recommended against making the new profit resource rent tax retrospective. It signalled that in the event of new discoveries being made, opportunities would arise to increase the tax rate again. However, it recommended that this adjustment should not be retrospective. The 2007 terms are not retrospective. The analysis underpinning this was twofold. One element was its potential impact on exploration investment in the sector, while the other was that, on a broader analysis, retrospective terms could have a negative impact on confidence and could also impact on other industries in respect of the predictability of Irish tax policy.

 

On the issue of comparative analysis, Irish tax terms are frequently discussed by commentators in the context of countries such as Norway and the United Kingdom. We all have a reasonable understanding of the position in these countries. The Department’s view is that Norway and the UK are the wrong comparators as one is not comparing like with like. One is comparing a major oil producing province with a country which is a modest producer of gas.

 

Mr. Murphy touched on the need for exploration drilling. The figures show that Ireland has 126 exploration wells while the United Kingdom has almost 2,500 such wells. Ireland has had four commercial discoveries, whereas the United Kingdom has almost 400 producing fields. We are, therefore, talking about a different scale. The next slide shows countries that have an exploration history more similar to Ireland’s and their tax rates are broadly in the range of the Irish rates of 25%-40%.

 

Turning to some of the other options and issues involved, while the 10 billion barrels estimate is often thrown out as if it is something we could bank tomorrow by multiplying it by the price of oil, that is not the case. It is a case of “yet to find”. We do not know if the oil is there and, if it is, we do not know where it is.

 

It is sometimes suggested we should leave the resources in the ground until the level of exploration interest increases and that companies would come here even if there were a higher tax rate. Again, when we do not know if the resources are actually there and if they are there, we do not know know where they are, and when we consider the timescale involved in the exploration, development and production phases, that would not seem to be a strong policy approach to take because we would be putting off something we do not know would ever be achieved.

 

On the question of leaving resources in the ground and focusing on renewables, again, from an Irish perspective, this would not make sense. If we know we will be burning some fossil fuels for a long time to come, it makes more sense, if we can, to utilise our indigenous resources and gain revenue from this, rather than importing oil or gas.

 

The question of where gas will be landed is often discussed and a number of points arise. The first concerns physics. The pressure will fall in a pipeline the further gas has to travel; therefore, it is in the interests of the company and the State that gas is landed onshore in close proximity to where a discovery is made offshore. The second point is a practical one in terms of regulation, namely, for any discovery the Minister has to approve the plan of development, which is a tool for the State in influencing how a project is advanced. The final point is also a practical one in that the interconnectors between Ireland and the United Kingdom flow in one direction; therefore, there is no technical means of piping gas from the island.

 

Another issue that is often discussed concerns the impact of discoveries on prices for the Irish consumer. The way legislation is framed, Ireland and the United Kingdom are, in effect, a single wholesale market and gas is sold at the market price. Doing otherwise, leaving aside potential competition issues, would have an impact on the balance between one’s tax terms and any potential subsidy and it would require reconfiguration.

 

Moving to the conclusions made, the first and last points are the most relevant in that, first, Ireland’s petroleum potential is relatively unproved and, second, the perception of prospectivity is the key factor. Therefore, until such time as we can better demonstrate our petroleum potential, it will be difficult for Ireland to attract significant additional mobile international exploration investment.

 

With regard to the tax terms, with the benefit of hindsight, the 1975 terms were set too high and based on an early, over-optimistic assessment of Ireland being the next North Sea which, again with the benefit of hindsight, we can see was not the case, unfortunately. The 1992 terms are sometimes discussed as being radical in nature, but, again, looking back two decades later, one can see the 25% rate is still in place for the more modest discoveries, yet the level of exploration activity in Ireland is still relatively low.

 

The final slide outlines that getting the risk-reward balance right is critical, although the Department would not suggest for one moment that this is an exact science. The industry will give an indication of how well one is doing because industry investment is mobile and can travel. The key risk is that exploration rights will be given away at too low a price. One way of addressing this would be to set the tax rates significantly higher, which would remove that risk. The danger then is that it would also have a very negative impact on the level of exploration investment. A better option, I suggest, is to try to minimise the risk by fixing the terms at an optimum level that takes account of a range of public policy objectives, although, as I said, it is not an exact science.

 

The 2007 review concluded that Ireland’s tax terms reflected a reasonable risk-reward analysis. A key concluding point is that we have not had any new commercial discoveries in the four years since.

 

Mr. Michael Manley: I thank committee members for their forbearance during what has been a long presentation. We wanted to cover the geology, the history and the evolution of the issues involved and, in particular, to bring members up to date on the fiscal terms as they apply. The key message is that there is a positive correlation between the capacity to produce oil and how much tax one can take in. We are in the end-of-life phase of the Kinsale project and at least two years away from the start of the Corrib project. Therefore, we are not a major producer of hydrocarbons and it will be some years before that question has to be dealt with.

 

I hope my colleagues have made a presentation which has covered the evolution of the issues involved. We are very happy to take questions.

 

Chairman: Thank you, Mr. Manley.

 

Senator Paschal Mooney: Is the discussion to deal exclusively with offshore exploration issues?

 

Chairman: Yes. It was the intention to have a discussion on hydrocarbons.

 

Deputy Éamon Ó Cuív: There are so many questions that we will never get through all of them today. The delegates have provided a lot of geological information. I understand a seabed survey is also being carried out by the Marine Institute. How much more preliminary work could be done before the Department could issue licences, if the State was minded to do so, in order that we would have much more geological data and so on? More would be known, at a modest cost, in order that when the Department was a position to give out licences, there would be a better chance of success and, therefore, a better chance of a return.

 

The Department’s website shows there are many wells under appraisal. The delegates might clarify exactly how many wells are under appraisal and, where something has been found, tell us what is known about these finds. For example, could somebody be sitting on a fortune waiting for the price to go up? I thought we would receive a detailed explanation today of all the wells that, according to the Department’s website, are “under appraisal” or in limbo.

 

The Minister has mentioned a number of times in answer to Dáil parliamentary questions that taxes could be changed retrospectively. Is he or the Government minded to do this? Has the Department recommended that the 2007 regime be applied, for example, to the Corrib project? The Minister keeps mentioning this possibility and I am sure he would not do so if he did not mean it as a probability. Perhaps the delegates might clarify this point.

 

There are two big questions everyone asks about exploration. First, if the State issues licences for large areas of the seabed, somebody someday discovers a very big field and the State then states it will not change taxes retrospectively and that everything is fixed, the company concerned will suddenly find itself in a situation similar to the one in Norway and all the arguments the delegates have been making that this is not Norway will suddenly be reversed because a field will have been found in an enormous area of the sea. Incidentally, I understand that when they found the big field in Norway, they were on the last drill of the last well when the drill-bit broke. However, the Minister insisted they go down the full distance -they were just short of it - and they found the big field. What would happen in such a scenario? Would there be no comeback?

 

Another issue concerns the report produced by Indecon. The Indecon consultants put forward a scenario in which they used a fixed price for oil or, in other words, they based it on certain oil prices. The delegates might indicate to members what was that oil price and what is the price of crude oil per barrel today. In other words, they might provide the relative price on which they based the 2007 terms and the price of oil today. Arising from this, they might inform members whether the Department believes Indecon’s analysis is still valid in view of the price of oil. I will be interested to hear such comparisons.

 

I have two questions for the historical record. While taking into account Mr. Ó hÓbáin’s comment about the 1975 terms being too onerous and good, does the Department in general believe all subsequent terms were the right ones? The delegates should state whether any Minister at any time acted against the advice of the Department by setting the terms either too high or too low. Did any Minister refuse to take the Department’s advice or were all the terms set at different times based on the advice of the Department at that juncture? I ask this because often there is much play made of this issue and members should get the Department’s perspective on it.

 

A question also arises as to whether the State should have developed its own Irish petroleum corporation. I seek the delegates’ views on whether it should be working actively with the oil companies as partners. Moreover, how does the Department know it is getting accurate information? How does it know the large multinational companies are telling it everything they know and that such information is accurate and correct?

 

The next issue pertains to the tax take. Our tax is based on profitability and Mr. Ó hÓbáin stated one can write off all one’s investment costs against it. First, how will the Department ascertain the profitability of the company to be in a position to assess the tax? I remind delegates of the existence of transfer pricing. How does the Department intend to measure a company’s profitability to ensure the State receives the correct tax take? Second, what specifically can be written off against tax? Mr. Ó hÓbáin referred to exploration costs, but do such costs relate to a particular licence or to all of the historical exploration costs of that company in Irish waters or is it even more extensive than this? In other words, what are the exploration and development costs that can be written off? Does it relate to the actual find or is it wider than this? Does it relate to a licence or to all of a company’s drilling activities in Irish waters? I presume it does not relate to anything outside Irish waters.

 

There has been much talk about peak oil and some of the evidence with which members have been presented appears to operate on the basis that oil prices will remain stable. Many believe that while there are very few inevitabilities in life, one certainty is that oil prices will rise continuously and that they could rise sharply depending on geopolitical issues. They are extremely unlikely to fall in the long term, as the world uses more and more oil. In the event of someone having a big strike and oil prices rising, what will be the State’s hedge against the prospect of having a very low tax take from the totality of revenue?

 

I revert to the scenario in which someone has a big oil strike. In the context of the current licensing round and its predecessors, has an entire section of the available area already been given out on the present terms, even if the position suddenly became more like that in Norway and less like that in Ireland? I presume technological improvements mean that while deep water exploration remains a challenge, it no longer is the challenge it was 20 years ago and that as technology changes, the challenge is rapidly diminishing. It is strange to think that mobile phones now have more computing power than a building full of computers 40 years ago; presumably, the same happens in this industry.

 

Am I to understand there is no requirement to land oil or gas and that it is not part of the licensing regime that one must land oil or gas on the island of Ireland? If we had a surplus of gas, can the delegates explain the reason it would not be possible to reverse the flow of gas in the pipe to have it going outwards rather than inwards? Is there a major technical problem in having the gas flowing from west to east rather than from east to west? Mr. Ó hÓbáin appeared to indicate there was and I was somewhat intrigued by that suggestion.

 

One often hears complaints to the effect that the oil industry in Ireland has very few Irish people working in it on rigs and so on. We have not developed an indigenous oil industry in respect of either exploration or workers with skills in that industry. Does the Department have a policy in this regard? Has it had discussions with an institute of technology or FÁS to facilitate enabling our own people to work on rigs with drilling equipment and so on to achieve the maximum potential benefit for them from exploration?

 

Deputy Martin Ferris: I thank the delegates for their presentation. They mentioned that the radical 1992 terms which involved a lower tax rate than general corporation tax did not result in a stampede in the take-up of licences. This certainly undermines the argument that to explore and deliver on the resources that might be found in our waters, interest will only be generated by a very low tax rate. I note the 1992 rate did not result in this happening.

 

As for the data being gathered, Mr. Murphy has made reference to the Department having a great deal of top-class data. I assume all these data came from the company. It was mentioned in the presentation that the Department occasionally sent someone on board rigs to check, but in most instances, its data are furnished by the company. Does Mr. Murphy wish to respond to this?

 

Chairman: Deputy Ferris should continue.

 

Deputy Martin Ferris: We can come back to that issue. The data are collected in what is called the shaker room. The information is gleaned from what is returned when one pumps the mud down the hole and the evidence from the formation comes back up. This is how the data are collected. This evidence is sent to what is called the geology room, where an assessment is made and a report issued. I worked on an oil rig when there was a find on the Porcupine Bank. There was a three-day burn-off, during which time it was top secret and no one was allowed near it. No Government representative was on board. While the late George Colley came out afterwards, no one had any idea as to what was there. What some of us were told by people who were prepared to share this information was that this intelligence went straight to the company and nowhere else. Is there a definitive way of being certain the data being supplied to the Department by the company are 100% accurate?

 

As for oil companies exploring in Irish waters for oil or gas, they intend to export directly from the field to refineries or the United Kingdom, as they call it. Consequently, as there will be no refineries and the gas will go straight into the UK pipeline, what benefit will this have for employment? If one is lucky enough to get a job on an oil rig one has to leave Ireland and return. The idea behind that is to de-unionise the rigs. It is impossible.

 

I was on the offshore committee for a number of years and we could not get anybody on the rigs. One had to go to Portugal, Norway or the North Sea and if one was lucky enough to get a job on a unionised rig, one would have to hope it would return to Ireland. If one compares that to the 1970s and 1980s, hundreds of people were employed in Galway, Cork and Fenit on oil rigs. There is no benefit.

 

Deputy Ó Cuív mentioned exploration costs . All exploration costs are written off. Part of the argument made by the Minister in the House a number of weeks ago was that we cannot afford exploration. If there is a successful find and exploration costs are written off we are paying for them. That is the reality. It makes no logical sense to say that we cannot afford it but are paying for it.

 

Another argument being made about security of supply is that oil companies are drilling in Irish waters and if they strike oil or gas it is taken out of the country. How does that create security of supply? It is bought back at market value, therefore there is no security of supply.

 

The 1975 terms referred to carried interest, which was overturned in 1987 by Ray Burke. Carried interest allowed the Government to take a share in what was discovered. Is there any provision for that today or has it gone by the wayside?

 

On prices, a July 2011 report from the Commission on Energy Regulation warned that when gas from the Corrib comes ashore it is very likely to lead to an increase in the price of gas for Irish consumers. Does that suggest that there is something fundamentally wrong with our licensing system? The gas comes from our field but we will pay more for it. It does not add up.

 

Is it hoped to drill this year or next year?

 

Mr. Noel Murphy: This year.

 

Deputy Martin Ferris: I understand Providence has an Irish interest and a commercial interest for very wealthy people. What licences have been issued for drilling this year, next year and the following three years? A lot of effort has been made to develop alternative energy.

 

The maps in the presentation show formations. A lot of gas and oil is a continuation of veins from Greenland or the North Sea. There were some small discoveries, including one reasonable discovery, in the Porcupine Basin in the late 1970s and early 1980s but they had to be capped because of the depth of the water and the lack of available technology. Is the technology available to exploit resources in deep water today?

 

My major concern is that the type of tax regime which offers so-called incentives is of no benefit to the Irish people. If discoveries are made, which I am confident they will if effort is put into them, it will mean nothing to the taxpayers in this country.

 

Deputy Thomas Pringle: I thank the delegates for the presentation. Many of my points have been raised by Deputies Ó Cuív and Ferris. I will be as brief as I can.

 

The data on the prospecting that has been taking place was outlined in the presentation. One of the main threads is that there are large data gaps and a lack of information on offshore prospects. Like other Deputies I would like to know how much of the information the delegates have in their archives has been provided by exploration companies and how much has been carried out by the Department. The presentation highlights the need for the nation to carry out seismic studies to try to narrow down potential areas and perhaps get a better return for the investigations that take place.

 

How satisfied are the delegates that the information provided by companies is what they actually find during their explorations? What systems are in place to audit the information on successful finds and compare it with information received during the exploration process? How has information sharing worked in the past and how does it work now?

 

On the 156 exploration wells that have been drilled, 42 are in the west of Ireland. What has the success rate been? From the presentation I understand approximately five or six have been successful, which would make the success ratio a lot higher in the west of Ireland and imply that it is more attractive to explore there.

 

Figures are quoted in the presentation on the tax take from exploration finds in France, Portugal and Spain. A document from the Oireachtas Library service was circulated to the committee and was interesting reading. It contained a table from the House of Commons Scottish affairs committee in 2007 which compared 65 different countries and their tax take. There is no mention of France, Portugal and Spain in the list. It identifies Ireland as having the lowest government take, with the next country being Papua New Guinea at 34%. Where do the figures on France, Portugal and Spain in the delegates’ presentation come from?

 

It has been widely reported that exploration companies can potentially offset any exploration costs carried out anywhere in the world against successful finds off the Irish coast. Is that possible? If so, what steps have been taken to make sure it does not happen?

 

Has consideration been given in any of the reviews that have taken place to production sharing contracts? It is the preferred method in many countries. It would be a fairer system and of greater benefit to the Irish nation because we would retain ownership of any finds and oil companies would act as contractors and share in the profits. It would leave us with a lot more control over any resources found.

 

When the Corrib field comes on line gas will be sold to Bord Gáis at the market rate. How does that benefit the Irish people and State, given that we have, in effect, given control to the company?

 

Chairman: We will have to suspend the meeting for a vote in the Dáil.

 

Sitting suspended at 4.50 p.m. and resumed at 5.10 p.m.

 

Chairman: We are back in session. We have questions from Deputies Ó Cuív, Ferris and Pringle. I propose to go to the Government questions and then back to the Opposition. We will take these questions first.

 

Mr. Michael Manley: There are several common themes to the questions. I will try to take them together as best I can, and then colleagues will go into more detail if anybody wants clarification on anything. There are several questions on data quality, data reliability, the sources of the data and so on, and I will defer to Mr. Noel Murphy on those, as he is the senior petroleum specialist.

 

A specific question was asked on wells under appraisal. This issue is covered in the presentation. While we did not go through the document in detail, we would be pleased to do so. As all the wells are under licence, the licences will all expire at some point. One of the typical comments one will see on the Department’s website is that a well is “under appraisal” until we reach the end stage. Again, I would be happy to go through each of them.

 

A question was asked about the retrospective application of tax changes. I do not believe the word “retrospective” is meant literally. It is a question of whether a change would apply to what was produced at a given point in time as opposed to new finds.

 

Deputy Éamon Ó Cuív: We are not being given answers to the questions. Is retrospective application likely or under consideration?

 

Chairman: The Deputy may ask a quick supplementary question. There are a large number of questions to be answered.

 

Deputy Éamon Ó Cuív: I am aware of that but unfortunately we are being given only-----

 

Chairman: Perhaps Mr. Manley will clarify the position.

 

Mr. Michael Manley: I will not attempt to read the Minister’s mind as tax terms are a matter for the Government to decide. I can state clearly, however, that the Indecon report specifically recommended against retrospection at that point in time and recommended against the introduction of retrospection at a future point in time.

 

Deputy Éamon Ó Cuív: Is that the Department’s advice to the Minister at this point in time?

 

Chairman: The straightforward answer is that it is the advice of the consultants who were asked to examine the issue at the time.

 

Deputy Éamon Ó Cuív: While a consultant can advise, a Department is not required to take its advice.

 

Chairman: The Deputy asked another question on this issue which will be answered shortly.

 

Mr. Michael Manley: On Ministers declining the advice of the Department, while I cannot go back to 1975 and everything that has occurred since, I expect every Minister interrogated and questioned any advice offered. I am not aware of any Minister having declined or rejected the advice of the Department. I reiterate, however, that I am not aware of every development that has taken place since 1975.

 

On the question as to whether the State should participate in exploration, a question arises as to the not insubstantial cost to the State of being involved in exploration. Alternatively, if the cost was being carried by the operator, it changes the cost and economic equation for the operator. In that regard, it is simply a reconfiguration of what Indecon addresses, namely, the question of what is the balance between the benefits and costs. State participation would be a very significant change.

 

On profitability and how the figures are validated, while I do not know the details of how the Revenue Commissioners would do this, I expect they would apply tax terms in the normal way. I stress that tax terms on exploration or production are dealt with under tax law and not in the lease. They are not addressed separately or differently in the lease.

 

On the question of whether a big strike changes the position, the State’s policy on this matter is reasonably clear. As the energy White Paper produced in 2007 stated most recently, if prospectivity changes, the State will re-examine its tax terms. This was also addressed in the Indecon report which specifically states that if prospectivity changes, the State should re-examine the terms. It is my recollection that the Minister stated in the course of the recent debate on a Private Members’ motion, that he would keep the matter under review. It is clear, therefore, that if prospectivity were to change profoundly, it would be surprising if terms did not change.

 

On the question of Irish people working on rigs and the development of the industry here, the reality is that very little is happening. Last year, there was, I believe, a rig off the coast of County Mayo in June, July and August. We will not have an industry established in Ireland with full harbour support on an ongoing basis until we achieve a much higher level of activity offshore. Similarly, on refining products, we have to have something to refine before this issue arises. Beyond that, questions will arise concerning the size and type of the find, whether it is feasible or economically advantageous to have a particular type of refinery in Ireland and whether we would want such a refinery. It will be some time before I am in a position to answer the question.

 

On the question as to whether gas coming ashore from Corrib will change the cost of energy in Ireland, the consultation paper by the Commission on Energy Regulation addresses this issue. The paper deals with the interconnectors between Ireland the United Kingdom, which are funded over a period of time. Annual repayments of the order of €50 million or €60 million must be made and if gas is not coming through the pipelines, there will not be any transport to remunerate the €50 million or €60 million. The question then arises as to how this cost would be met and this question is being addressed in the consultation. We cannot end up having stranded assets.

 

Mr. Murphy will address the questions on data and refineries. While security of supply arises in respect of gas, physics dictate that gas will be brought ashore in Ireland. If a company can obtain the market price for gas in Ireland, it does not have any incentive to pay transport costs to move the product off the island. We are also part of the common market for gas with the United Kingdom.

 

A question was asked as to whether the pipelines could be reverse-flow engineered, as this is not the case at present. This is a question for an engineer but I presume a pipe can be reverse-flow engineered. This would give rise to questions such as who would pay for the process and what would be the cost. Ownership issues would also arise. For this reason, I do not believe it would be as simple as solving engineering issues.

 

Mr. Murphy will answer the question on whether technology is available for deep water exploration. I understand that while technologies have been incrementally improving, a magical solution has not found for very deep water and very difficult conditions.

 

The question as to whether Ireland should carry out its own seismic surveys is fairly understood. To date, we have not carried out such surveys. Seismic technology is not cheap and shooting one costs several million euro. Questions arise as to whether one would use two-dimensional or three-dimensional technology and the areas covered are extensive. Industry is making choices, spending its own money and deciding which areas it believes are most prospective. I am sure there are many views on whether officials in the Department would make a better shot at this. It would not be cheap to carry out seismic surveys.

 

On the figure of 10 billion barrels of oil, while a great deal of data are available, there are also many data gaps and filling them would require drilling exploration holes to acquire further knowledge from drilling that would strengthen the reliability of any estimates, including the 10 billion figure. To drill a single hole in the Atlantic seabed costs between €30 million and €120 million. If the State were to decide it wanted to fill the data gaps, the expenditure required would be significant.

 

The issue of tax write-offs against success is clearly addressed in the Indecon report, which makes the strong point that the tax terms are attractive for a company which makes a significant oil or gas find off the Irish coast. Only four out of 156 companies have so far benefited from these terms, while the other 152 have not enjoyed any benefit. The attractive terms are the incentive for people to engage in exploration off Ireland. It is only those who find something and make a profit who can write off their exploration expenditure.

 

Deputy Éamon Ó Cuív: The questions were much more specific than the answers I am being given, which are flippant. This problem has bedevilled the entire debate from the beginning. Let us be specific. On the tax write-off on exploration I specifically asked to be given details of the terms. In other words, what exploration costs can be written off? Do they include the cost of drilling for the well in question, the cost of drilling carried out under the particular licence or the drilling done by the company in question historically in Irish waters? Do they include its worldwide drilling costs? We need straight, detailed answers rather than the flippant replies we are being given.

 

Mr. Michael Manley: I am happy to do as the Deputy requests. I indicated I would first give an overview, after which my colleagues would respond in greater detail. I certainly do not wish to avoid giving a full answer. I ask Mr. Murphy to address the detailed issues on the data side.

 

Mr. Noel Murphy: The first question is whether there is a low cost way of preparing the area for licensing with further data acquisition. I believe INFOMAR was mentioned. INFORMAR is a good example of a large data acquisition programme. It is expensive and ambitious and covers very large areas but it does not have petroleum data. What we are talking about in the first instance is regional seismic data, which is what we need. I cannot be specific on the results of the round but it is evident that companies have not gone into the areas where the data is thin on the ground, for obvious reasons. How do we acquire that data? Generally speaking, when we have a round process - we do not do one every year but may leave two or even three years between rounds - the idea is that we can show there is an intention to license a particular area to the seismic and geophysical contractors. The contractors are acquiring the data, not the companies, and if they see a commercial opportunity or if they believe there may be customers to buy their data they will acquire it. Much of our effort goes into promoting the potential of the area, in organising licensing rounds and so on. There is a type of timeline and a framework in which we can get the contractors to play their part. We are not always successful. Sometimes the contractors do not acquire data. We will go into a new wave of trying to encourage them. To acquire that data ourselves would be extremely expensive.

 

To make that sort of quantum leap forward we need to have new wells, as Mr. Manley said. We need wells to provide solid information about the geology or the hydrocarbons in these areas, which can be tied into the seismic data. On its own, the seismic data can be used for a lot but it needs to be calibrated with well data. One hopes that with more drilling activity we can succeed in paving the way for a better and more effective exploration of the Irish offshore. We will never get as much as we want in any round we hold and that would also be typical in other regions. We are looking for other ways of dealing with the issue. We are collaborating with the Canadians who have more data on their side. Some of their acreage would have been fairly close to our basins in the past. We are looking at all sorts of imaginative ways of filling data gaps.

 

There was a question about wells under appraisal. I will have to check that again but I believe it refers to the fact that of the discoveries we have made here, all are licensed, not by the original companies that found them but by a new generation, sometimes even a second generation of companies. In many cases companies have tried to develop these fields, have not succeeded, have relinquished the acreage and somebody else comes in and tries it. There are always opportunities like that in the oil industry. I must check to see if that is the case but it would be my feeling that under-assessment means that somebody is looking for an opportunity, or trying to revisit a discovery and look at it again to see if something was missed.

 

I might jump to the question of the deep-water finds in the Porcupine Bank. I will not say I was involved in the finds but I was on the rigs back then, although not on one that found oil. The most significant find was the Connemara field, in about 500 m. of water, or something like that. Then there are the Burren and the Spanish Point field discoveries made by Phillips Petroleum, all in the late 1970s or early 1980s. Those were the three significant discoveries. Spanish Point and Burren are their new names. Spanish Point was Well 3518-2, Burren was Well 3518-1 and both were Phillips wells. Providence and its group are looking at Spanish Point and Burren. They shot some 3-D data and are now evaluating the acreage again. Hopefully, we may get a new appraisal well there next year, many decades after those accumulations were found.

 

There has also been a 3-D shot over Connemara and there are a number of large leads, as I would call them, in the vicinity of Connemara. One would be hopeful that something will mature or evolve from that. The problem with some of these discoveries is that we know every well and every inch of every well. Connemara is a heavily faulted structure and within the fault blocks even the reservoirs are lenticular - they come and they go. One can get into one of these fault panels with a well and start to produce but after a short time the pressures begin to run down and production rates fall back. Statoil came in in the mid 1990s and got a licence there. Its people said they were going to shoot some new 3-D data but there had already been a survey. They spent a long time assessing where they might locate some new wells. They drilled two horizontal wells and reckoned that if they drilled laterally, from one fault panel to the next, they might be able to create some sort of connectivity. I would say they were modestly optimistic about it. They brought in a storage tanker to take some production and achieved some production. Then the pressures dropped. That was very disappointing.

 

Looking again at the whole Connemara area, there is a reasonable amount of oil in the structure but the problem is recoverability, getting the oil out. A new generation is looking at the area again and seeing some structures within the vicinity of Connemara. Between them and with some luck they may be able to generate a new opportunity. Spanish Point is a deep Jurassic gas condensate find in what are generally low permeability reservoirs. Providence and its group have been able to make a case that there could be a reservoir section missing in the discovery well and that there are parts of the reservoir that could be of much higher quality. They have done a lot of work and it is now time to drill that appraisal. We are very pleased to see they are going in that direction. That is what we mean by under-assessment. Five or six years ago, many of those fields were just sitting there with nothing being done. In a way, it is a good story.

 

Where is the data coming from and who is acquiring it? Most of the data on offshore Ireland is coming from the industry. On occasion, however, we have acquired data otherwise. In 1994-995 we did a survey on the very margin or our designated area for UN claims. By and large, however, the money involved is too great for us to handle.

 

Those are the discoveries the Deputy referred to. I agree that the shale shaker is where the data comes from. I was probably one of those guys who was sitting in one the logging huts but I know we were giving the data to the Government at the time. I have been in the oil industry for many years and in many countries. In the petroleum affairs division, PAD, we have the capacity to analyse data which is streaming at us all the time. We get the same data as the companies and we talk to them. We say: “Have you got this? Did you see that log? Have you seen this trend in the reservoir?” etc. A dialogue takes place on an ongoing basis. It would be a phenomenal effort for anybody to try to cheat on this, particularly in circumstances where people are aware of the data expected. The latter will point out instances in which certain data were not provided, etc. It is usually the case that one has more data than one can handle. In such circumstances, we are quite satisfied.

 

The audits we carry out relate to the evaluation of data provided in petrophysical and wireline logs. In this regard, we have available to us gamma ray, neutron and sonic logs and various other spectral tools currently in use. As soon as these become available they are sent via weblink. There is no longer a need to obtain paper copies of these logs. The data are streamed to us and we can generate plots in respect of them. We analyse the logs to which I refer to establish the rock’s lithology or type and to discover its level of porosity. In the context of the porosity, we seek to establish whether the rock contains water, gas or oil. If it contains gas or oil, we seek to discover whether it can move within the reservoir or whether it is locked in. On occasion there are pores within a reservoir which do not communicate one to the next. In other words, the throat which links pores may be blocked with cement or other material. I do not believe anyone would dispute that we are unable to analyse well logs or seismic or test data. We have done this for decades.

 

The Deputy is correct with regard to the success rate in exploration off the west coast. Six discoveries have been made in that area and 42 wells drilled. This represents a success rate of one in seven. Unfortunately, the industry just seems to pick the headline rate - that is, one in 30 - whereas we would state this is an over-simplification. If one considers the position on the Slyne Basin and the Bandon prospect, two out of a half dozen wells - one gas and one oil - have been successful. What we are discussing is technical success, namely, the probability of finding something. The figure of one in seven for exploration off the west coast does not relate to commercial success but rather to technical success. The figure in that regard is one in 42. That is the unfortunate aspect. The difficulty in playing with the statistics is that they are only statistics. What might be taken for a technical success would be a field or a slight blip of an accumulation which yielded 100 barrels of oil as opposed to what one is really seeking, namely, millions of barrels.

 

I hope I have provided answers to all of the questions put to me.

 

Mr. Ciarán Ó hÓbáin: To be absolutely clear, the only direct State take is the 25% tax rate. Deputy Ferris inquired about the provision under the 1975 terms for the Government to take a share. That is not in place. Production-sharing is one of a number of public policy options. However, if one were to opt for this type of sharing and retained one’s current tax rate, one would fundamentally change the balance. Whether that would be sufficiently attractive to encourage investment is another matter. If one opted for that model, one would be faced with an either-or scenario and one would reduce the tax rate and take one’s production share. It is part of the menu of options available.

 

In the context of what can be written off and how the tax treatment operates, what is at issue is exploration expenditure anywhere in Ireland. This relates to exploration which takes place onshore or offshore in the country. Costs relating to exploration which takes place elsewhere or other costs incurred by other companies are not considered. To be clear in this regard and in the context of the profit resource rent tax introduced in the 2007 terms, when calculating whether the rate of 5%, 10% or 15% applies, the only costs contemplated are those which are field specific. On the general corporation tax rate of 25%, all exploration expenditure in Ireland can be written off. That is not the same as a situation where the State would put the money in up front. I will leave aside the difficulties associated with finding such money. A company obtains relief on tax on the amount of money involved. It is not a payback for the cost of a well. What happens is that the cost of the well can be offset against the 25% tax rate.

 

With regard to any discovery which is under appraisal under an existing licence, there is an agreed work programme in place and there are timelines involved. This aspect is very specific and clear in the context of when a company is obliged to move to the next phase, which might be to drill a well. It is also clear that when this phase ends, the company must make the next decision expected of it. There are time constraints involved. If we were to consider each of the licences in place, the Department would be in a position to indicate the decision dates for each and also to state when they would be expected to expire or move towards the development phase.

 

Deputy Pringle made an interesting point on a report compiled by the House of Commons’ Scottish Affairs Committee. The purpose of the Department’s research of the position in other neighbouring European countries was not to illustrate how Ireland should pitch its terms and what models these should mirror, rather it was to provide a contrast. In the general debate on this issue, Ireland’s terms are often contrasted with, for example, those relating to Norway and the United Kingdom. That is just not appropriate. If one were to consider the Department’s study from a production point of view in order to try to discover how Ireland rates, one would find - in view of the low rate of gas production and zero oil production - that it is at the bottom of the table.

 

Deputy Ó Cuív inquired about the advice given to Ministers in advance of licensing terms. I carried out some research into this matter a couple of years ago in the context of a particular matter the Department was examining. I am, therefore, in a position to state the decisions taken and the changes made to the terms were broadly in line with the advice provided by the officials at the time. Ministers may have gone slightly up or down, as was the case in the recent decision. In the latter the final 5% came about on foot of a Government decision, rather than on the basis of advice from the Department or Indecon.

 

The question of security of supply is raised on a regular basis. Deputy Ferris asked about the point of bringing natural gas ashore here if such gas was then exported. In that context, the interconnectors can be re-engineered, at a cost, to flow from west to east. There is no policy reason Ireland would do that in circumstances where it needed to import gas. At its peak, the Corrib field will produce 60% of Ireland’s annual gas demand. If we had two new fields producing gas at some point in the future and if we were more than self-sufficient, the interconnectors could be reconfigured at that stage and we could become a net exporter of gas. There would be a number of benefits for the people in that regard, principal among them being the tax take. If we had been in a particular position with regard to having a number of producing fields, then perhaps that tax rate might have changed. There would also be the benefit of knowing that we would have security of supply and that we would not be at the end of a long pipeline.

 

A number of members referred to the number of jobs created by the industry in Ireland. From an exploration perspective, these jobs are principally located in the supply areas such as, for example, when drilling rigs arrive here. It will not be until exploration activity increases to a reasonably significant level that we will achieve a correspondingly significant concentration of effort. At that point, a serious exploration industry would develop here. When it comes to the development phase, it is clear from the experience with the Corrib field that jobs are created over a shorter period. Therefore, there are benefits from the point of view of employment in the development phase.

 

I cannot respond in detail to Deputy Ó Cuív’s question on Indecon and the figures it uses. As the report indicates, in producing its analysis in 2007 Indecon took a long-term view because of the nature of the matter on which it was being asked to advise, namely, the tax terms that would need to be in place in order to entice exploration investment to Ireland. It also took cognisance of the fact that potentially it could be ten to 15 years before production would begin and that the production period would be a further 15 years. If one took such a view in 2011, there could be a modest change. However, I would need to consult the report in order to find the actual figures used by Indecon. There could be a modest change, but I would need to go back to the report to find the actual figures used. I believe I have covered most of the questions there.

 

Deputy Noel Harrington: I thank the officials for their presentation. Mr. Murphy mentioned the enormous amount of data available in the Department. Under the terms of the licensing and as the processes continue, is there mandatory sharing of information between the industry and the Department? With all the data and all the experts who analyse those data what is found seems odd. The Department’s report mentions that in the Bandon well discovered by Serica in 2009, oil was found instead of gas. It was mentioned as a curiosity. In Corrib they were targeting Sherwood sandstone and discovered something else entirely. Do we share analysis of these data with other states which might have greater expertise than we have in offshore exploration?

 

With the information we were given in this paperwork, perhaps we should be drilling for ink. I ask the officials to supply electronic copies of the presentation because some of the maps did not come out very well, which leads on to other questions I have. For example, when issuing licences for exploration or licences for interest, who decides where they will be issued? For example, in Porcupine Bank there might be depths of 500 m, but the Department might issue licences for the Porcupine Trough or the Porcupine Seabight where it could be up to 4,000 m and the Department is showing the industry a dark room instead of something with more information. Who decides that? Are we issuing licences for areas on which we have more information? I do not want the Department to be asking the industry to go out and supply it with the information, making it an information gathering exercise. It was reflected in the presentation, but I would not like it to be the case. We should be enticing the industry for commercial activity and not as an information gathering exercise.

 

The officials have answered the questions I had on investment cost. The Department is responsible for licensing, information and overseeing the industry. Revenue is overseeing revenue issues. Are we sure we have everything copper-fastened? Do we have inspection and enforcement regimes with respect to what the industry can and cannot do? I know we take corporations at face value, but it is legitimate to ask those questions.

 

One of the biggest considerations is the fiscal regime versus commercial activity, but we did not receive a correlation of those. We have seen two or three separate presentations outlining the fiscal regime in 1997, 1975 or 1977. What was the resultant commercial activity based on that fiscal regime. While I know the Department is dealing with a low base and the peaks and troughs might seem stark on a graph, I would like to see the effect on commercial activity.

 

When the Department grants a licence to a company, is it mandatory for it to carry out work, whether it is information gathering or taking it to the next step? Are we sure such companies are not just getting the licence for an area and sitting on it in order to prevent another company that may be more interested getting it? Can we say that it is mandatory for it to move to the next step?

 

Regarding regulation, licensing and delivering a project, the communications between the Department and exploration companies have let us down and in one case was appalling. Reference was made to geopolitical issues in the future. I can imagine a company considering coming here and being horrified at the communication failure. There may well have been mistakes. While the potential exists, many people believe that it was given away. There is nothing to give away at this stage, but that message simply has not got out there. That information deficit has been hijacked which is regrettable.

 

It has been reported this week that a shipwreck has been found at a depth of 4,500m to 5,000m. The salvage company involved believes it has the technology to access it. There must be areas in the world where companies are drilling commercially to a depth of 4,000m or deeper, possibly in more hostile natural environments than we have. Even though it is the Atlantic Ocean with storms prevalent, we do not have the seismic or volcanic activity that other areas have and we have no severe fault lines. It is reasonably predictable and we have political stability. However, there must be instances of such technology - is it being shared?

 

I ask Mr. Murphy to outline his role in the Department. Is he a full-time official or an adviser?

 

Chairman: I will take Deputy Dowds, followed by Deputies Colreavy, Barry, O’Mahony and Mulherin. The normal protocol is to call members of the committee first.

 

Deputy Robert Dowds: I thank the officials for their presentations. My question ties in with something Deputy Harrington said. Is it reasonable to assume that the level of exploration will increase? On what is that based? Is it because the need for oil is greater or that the technology has improved? I believe Mr. Murphy - or it may have been Mr. Manley - said that some parts of the Irish area of exploration are better mapped regarding geological information and so on. To what extent does work remain to be done there? Do we have good information on the more shallow waters which are presumably easier to drill?

 

I was interested in what Mr. Murphy said about the Connemara well. It seems that it might contain a reasonable amount of oil but the problem is getting it in a unified lake, so to speak. Is it that in such an area a company might just be lucky, strike the right place and hit the jackpot? I would like him to explain the variation between the 25% and 40% tax take. My understanding is that if profits are relatively small, the figure would be around 25%, but if it they were very substantial, it would increase to 40%. Will the delegates explain in more detail what they mean by writing down expenses? Is it written down against tax?

 

The delegates compared information with the Canadians, which seems like a good idea. Is that because the geology is similar on either side of the two plates on which North America and Europe are floating?

 

Deputy Michael Colreavy: I thank the delegate for their presentation. My head is spinning because I have learned some new words today. I will not go through the questions others have asked, but I will ask a few additional ones.

 

There was no mention of environmental impact or the impact on human or animal health, but I expect this is because it would not be included in the brief for this presentation. That brief probably lies with the Department of Agriculture, Fisheries and Food, but it is an area in which there is obviously a need for close co-operation and communication.

 

I agree with the point made by Deputy Ferris. The inability to deal with new profits retrospectively effectively means we cannot claim to protect the interests of the people. I do not know of any sensible firm which would buy or sell a shed full of cattle without knowing exactly what was in that shed. If there was a good Friesian herd in the shed, the seller would make sure to get full value for it.

 

My next point is unashamedly parochial. Page 23 of the presentation displays the gas transmission network. There are no blue lines along the west coast. In fact, the blue line has been deliberately distorted to pull away from the north west. People who are living and in business in the north west say this is a disgraceful neglect of the region. I know that the delegates’ brief covers offshore operations, but to people in the north west, it seems the only time the region is mentioned is when new technology such as hydraulic fracturing is considered, which might have the potential to poison the place. We are good enough for hydraulic fracturing, but we are not good enough to receive gas from the Corrib field. That is simply not good enough.

 

I imagine there would be a small pool of qualified individuals to deal with the technical aspects of this issue. How many technical personnel do we have in the Department? As it is such a small pool, is it common to see a transfer of expertise from the Department to the oil and gas companies and from these companies to the Department? Is there a sharing of expertise and knowledge?

 

Co-operation with the Canadian authorities is very good. The last time the Minister was here, I asked him about the possible benefits of greater co-operation at European level. I think he misunderstood the question, but perhaps it was the way I put it. I was not suggesting we ask the European Union to pay for a State oil company for Ireland, rather I was arguing that there was a legitimate EU interest - from the point of view of oil security and maximising European resources - in supporting member states which might have the potential to be producers.

 

My next question is related to onshore activity, but it could just as easily be applied to offshore activity. What will happen when new technologies come on board such as hydraulic fracturing if international experience indicates there may be serious concerns about these technologies? How do we go about assessing potential damage to the environment or to human, animal and plant life in the event of new technologies being used, especially those involving chemicals?

 

My final question is on exploration. Is it unusual for a company to purchase or lease land in advance of exploration being carried out? Some have concerns that if there was a major investment by a company in the purchase or lease of land prior to exploration being carried out, it would indicate one or two things. First, the firm involved had sound data to show that there was a relatively high chance of success and, second, it might indicate that the firm had received some form of commitment that if the exploration went well, the development would follow come what may. Is that scenario unusual?

 

Chairman: We have a few more committee members who want to ask questions, but perhaps Mr. Manley might answer this set of questions now.

 

Mr. Michael Manley: A question was asked about Indecon and the extent to which it assessed the impact of prices in its analysis. I have located the report. It conducted a sensitivity analysis on the effect of prices and the issue of high prices. It states the high prices scenario raised the estimated multi-value for Ireland from €8.1 million to €25 million, but the price rise did not affect Ireland’s ranking. In other words, we are still broadly in the same place following its assessment of the relative advantage of going with Ireland, as opposed to other countries, because if the price rises here, it rises elsewhere. It does not change our ranking. Obviously, however, it changes the economics for the company.

 

Deputy Éamon Ó Cuív: Indecon uses a particular scenario for prices. What is that scenario compared to the current price of oil?

 

Mr. Michael Manley: I can get that figure for the Deputy, but its analysis is that a change in price does not change the position of Ireland compared to other countries.

 

Deputy Éamon Ó Cuív: It does not change it in respect of others, but-----

 

Chairman: Mr. Manley has indicated that he will get the information for the Deputy. We have to move on in order to be fair to everybody.

 

Deputy Éamon Ó Cuív: We need to get some answers.

 

Chairman: Mr. Manley indicated that he would give the Deputy the answer. Let us continue.

 

Deputy Éamon Ó Cuív: He does not seem to understand the question. My question is quite simple. Indecon used a price.

 

Chairman: The Deputy want to know the impact of today’s prices.

 

Deputy Éamon Ó Cuív: If Indecon’s price was low, it would not affect us internationally, but it would affect the profitability of the company. Therefore, if the price scenario was too benign, the company’s profits have been underestimated; therefore, the tax take has been underestimated. This has nothing to do with the rest of the world; it has to do with Ireland.

 

Chairman: I presume the costs track each other, but that is only an opinion.

 

Mr. Michael Manley: There is mandatory sharing of data. There is also mandatory sharing of work programmes. A company must comply with a work programme, or there will be implications for the lease.

 

We were asked if we worked for other states. We are undertaking a major project with the Canadian authorities.

 

Mr. Noel Murphy: There is a two-year plate reconstruction project between Ireland and Canada.

 

Mr. Michael Manley: It would be relatively easy to establish the data for the outputs from production. The company sells gas into the Irish network, therefore, it is easy to establish by revenue how much it has sold. We have a good relationship with the exploration companies in terms of regulation and oversight. The reality is that under the terms of the leases and licences, they are obliged to provide information for the Department. Mr. Murphy has elaborated on how it is interrogated and our capacity in that regard.

 

Deputy Dowds asked whether the level of activity would change. There have been 15 applications for licensing options, but we must be very clear that these are licensing options, not exploration licences. It is essentially a low cost opportunity to enter the sector. They are for a period of two years, in which the companies concerned would have a chance to gather seismic data, reprocess existing data and try to improve upon it.

 

The licensing option round announced last year is against the background of declining interest in licensing rounds in the past ten years. The presentation shows that there were just two applicants in the Rockall round in 2009 and four in the licensing round two years previously. In the past ten years the State has tried to focus the attention of the industry on different basins, but the interest has been very poor. A very large tract of approximately 250,000 sq. km. was offered in the recent licensing option round, with applicants covering approximately 50,000 sq. km. and some of the areas overlapping. We are working through them and trying to find whether the companies can agree to work together and separate the areas.

 

Deputy Noel Harrington: I would like information on the licensing offers in the relatively shallow waters of the banks as opposed to those offered in the deeper troughs.

 

Mr. Ciarán Ó hÓbáin: In previous licensing rounds we focused on a particular basin, but in this case the entire acreage was offered. Following the round, the information will be available in order to show the Deputy the areas the industry applied for. The position is that the Atlantic is closed until there is a licensing round. The State may decide, for example, to open the Porcupine Basin or the Slyne-Erris-Donegal Basin and seek interest. It would then be up to the industry to decide what areas it would like to apply for. In the licensing round that concluded this year, all of the major Atlantic basins were included and it was for the industry to decide which areas it wanted to opt for. Although the details of the applications have not yet been published, an indication has been given that they principally focused on areas for which more data were available. Some disappointment was voiced that not much interest was shown in areas in which there had not been much exploration to date. Overall, the entire Atlantic margin, including all of the major basins, was included in the round which is about to conclude.

 

Deputy Noel Harrington: I would like a better schematic of that information.

 

Mr. Michael Manley: The map we provided covers all existing licensing blocks. There is a separate map showing the depth of the water.

 

Mr. Ciarán Ó hÓbáin: We can post the information to the committee, if required.

 

Mr. Michael Manley: Mr. Ó hÓbáin has elaborated on the writing off of expenses against tax. The expenses incurred in Ireland can be written down, provided the company concerned has had a successful find, namely, something to write it off against. Deputy Colreavy raised the matter of environmental impact, an issue which is assessed very rigorously in terms of production.

 

Reference was made to hydraulic fracturing, an issue we discussed with the environment committee last week. There is no authorisation for exploration involving hydraulic fracturing in this jurisdiction. What the companies have in play is a licensing option. They are gathering and assessing seismic data and will have to decide within the two years of that licensing option whether they want to proceed to seek a licence. If they do, this will require a full environmental impact assessment which will involve the Department engaging with the NPWS, the EPA and all other relevant bodies. However, that is some distance away. Ours is a small Department with a small cadre of technical staff, but I can get the details for the Deputy. While I cannot provide the figures off the top of my head, it is not an enormous number.

 

With regard to co-operation with the Canadian authorities, Mr. Murphy would be happy to outline in considerable detail the plate reconstruction project. I have covered the question on new technologies. It would be unusual for a company to lease land in advance of exploration, although this could indicate it had good data or an expectation. It is perhaps an indication of the companies’ perspective, but there are no foregone conclusions. In terms of hydraulic fracturing, if the companies choose to use that technology, they have a licensing option and will have to decide whether they want to apply for an exploration licence, which would have to be fully assessed. It is up to them to decide how much confidence they have.

 

Mr. Noel Murphy: We have been working with the Canadians for a number of years in trying to develop joint projects, co-operation and collaboration in the area of petroleum research. In June 2010 we commissioned a contractor-led study to restore both sides of the Atlantic through modelling exercises. It is a large-scale project, regarding which I refer members to the Atlantic map included in the presentation. The point is that the entire area coloured blue effectively has no sedimentary rock worth talking about. Where there is sedimentary rock, it is in basins on the continental shelves of North America and north-west Europe. At one time, approximately 120 million years ago, the Atlantic was closed and, while the crust was stretching, it had not broken away. At the time, the basins would have been continuous. We think we know how the individual basins might line up with the Canadian basins, but a lot more work will have to be done on that subject. Atlantic Canada has some very large fields, as members know. We hope we can extrapolate from what the Canadians have learned of the geology across the Atlantic through this work.

 

I was also asked about the technology for drilling in deep waters. Our deepest well, the Dooish well 12/2-2, was 1,720 m deep. While that is as deep as we have gone, in the broader Atlantic drilling would have gone down below 2,500 m and perhaps 3,000 m, but not much more than this. On the question of whether the technology is available to develop such areas, the answer is yes, it is available and evolving in tandem with discoveries. If there is a large find, it will be possible to develop it.

 

Mr. Ciarán Ó hÓbáin: On the tracking activity regime, the diagram included in the presentation shows the situation, with the best tracker being the number of exploration licences. There is obviously a range of factors which impact on this, for example, what is happening elsewhere in the world, a company’s particular business approach and the price of oil at the time. It is not as simple as saying the licensing terms have changed or that the number of applications in the next round has increased. However, it is a reasonable basis for a correlation.

 

There are mandatory work programmes with every licence. A typical frontier exploration licence would be for about 15 years and will be broken into four phases. The first phase generally involves acquiring seismic data, takes three to four years and will involve a couple of million euro in expenditure. To move forward, a company must commit to drilling, which is the second phase. The third phase will either involve further drilling or giving back a good chunk of acreage. If the company has not drilled a second time, it will be gone in the fourth phase. The work programme is clear, it can be broken into tranches and tracked at any point in time. It is mandatory and reported on annually.

 

Deputy Dowds asked how the profit resource rent tax worked. It involves the use of a very straightforward ratio. Until one reaches the point where the ratio reaches 1.5, the tax rate stays at 25%. When the profit ratio is greater than 1.5 and less than or equal to three, the rent tax is an additional 5%. When the profit ratio is greater than three and less than or equal to 4.5, the rent tax is an additional 10% and for profit ratios greater than 4.5, the rate is 15%. It is a ratio of the actual profit to the capital invested.

 

Deputy Tom Barry: I thank the delegates for their attendance to make this presentation. As an aside, it is not good enough to receive papers for a presentation containing boxes with nothing in them. As Deputy Harrington noted, perhaps we should be drilling for ink. The proper equipment must be available to enable members to view the presentation because otherwise everyone’s time will be wasted.

 

While there has been much discussion on the costs involved, I understand €6 billion a year is spent here on fuel alone. I am unsure whether this figure is in the right target area, but in that context, €100 million is not a great deal of money. I seek the figures from Norway that were discussed but which were not made available to members. A criticism I have of this presentation is that members appear to have been given the Ladybird explanation. This is for transition year students, in that it is lovely and interesting, but it does not really dig down deep and I seek much greater detail, although I acknowledge members have heard a little more in the last few minutes. I had a question on how long a round lasted, while Deputy Harrington asked who decided these rounds and what were the time constraints. It finally has been ascertained that there are four phases in this regard. I would like such detail to be provided in a proper presentation. The level of detail provided does nothing more than stimulate members’ interest, as it does not dig down to the requisite level of detail. This issue has received poor publicity during the years. While people have been led to believe there are considerable resources and that it is only a question of drilling a well, I seek the reasons this is not the case in writing. There is only so much one can absorb at a meeting and the level of detail provided on areas with which members must get to grips has been hit and miss.

 

I have an issue with the position on tax. While the delegates have explained the tax law and the leases are two separate items, many things in Ireland needs to be linked together. Everyone says it is someone else’s business, but we need to get this right. I run a business and would be delighted were someone to tell me I could simply write up invoices to write off against tax. The Department is telling the company engaged in drilling that it can write off against tax whatever invoices it can create. There is no accountability to ascertain by how much such a company will increase the cost. This is leaving too much slack and does not sit easily with me as the State cannot examine the company’s books to ascertain whether it has charged too much for a particular item. This is also about getting value for taxpayers.

 

Moreover, I wish to tease out a reference made by Mr. Ó hÓbáin. He mentioned a 15-year period, I am unsure whether it extends from the initial licensing, followed by a production period of a further 15 years, which means a cycle could last for 30 years. I refer to a scenario in which the State does a deal now that gives it the right to have gas or oil if it works out. I note that 30 years ago in 1981 a gallon of petrol cost approximately £1.60, which at present would be 38c per litre. Were the State to do a deal based on extraction from the present and were it to pay market value, it cannot be credible that it would be obliged to pay whatever will be the price in 30 years’ time because present costs will be far lower than the costs that will then obtain.

 

There must be something to indicate to those who use a lot of diesel, petrol and so on that value is discernible. One could argue that even though the hit rate is low, the State may be giving away too much. The diagrams provided for members do not enable me to discern whether we are drilling in the best areas and whether the rougher areas are being left until later. It may be that were we to hit something in the good areas, we would have given away our best possibilities. Peak oil is gradually becoming a reality. While cheap fuel has been available for many years, it does not look as though this will continue. From the perspective of agriculture, we live in a manufacturing country. I, for instance, burn a great deal of diesel, which is my single largest cost. If we are to remain competitive, we need fuel and fertiliser at prices we can afford. Fertiliser is directly linked with the price of fuel and while one can argue about greenhouse gas emissions etc., in the absence of competitively priced fertiliser, the agriculture industry on which economic recovery is being based to a large extent will be goosed. Consequently, it is really important that the deals being done be advantageous to production in 30 years time.

 

I acknowledge the delegates probably have all this information in their heads and that it was hard to guide what they intended to say today. However, I seek a belt and braces explanation for the current status of what has been covered at the meeting. I seek the facts behind their statements because some members will read such information in depth.

 

Deputy John O’Mahony: I will be brief. As it was necessary for me to be in the Chamber for some of the discussion, I apologise in advance if some of my questions have been asked.

 

In common with a number of speakers, I was struck by the data deficit. My impression was that different parties could allege anything because there was no information to contradict the data. The question that arises is whether the Department’s representatives, as the people at the coalface, are satisfied they have all the expert knowledge. Alternatively, could they avail of some expert knowledge that would help them to reduce this data deficit to enable the State to argue from a more accurate perspective as to what actually is there?

 

I am unsure whether this specific issue in respect of the Corrib gas field has been raised. While I do not wish to rehash the arguments as to the reasons for the delay, has the delay in bringing ashore the gas from the Corrib gas field cost the State and, if so, is that cost quantifiable?

 

The advances in technology seem to be relevant to Ireland because of the deep waters involved. Broadly, how will technology change the picture in 20 years time? Will it mean that whoever is sitting here in 20 years time will be told there is huge interest in drilling offshore?

 

Deputy Michelle Mulherin: I come from County Mayo where people have personal experience of the attempts to develop the Corrib gas field. I suggest, albeit without much scientific evidence, the reason drilling is not taking place to a great extent is that Ireland has been blacklisted by the various commercial and industry interests around the globe - the industry operates within a global village - because of the way that development has been handled. The political side certainly has not been handled well. A Minister delegated authority to decide where a gas pipeline would run to a terminal on land. It was no wonder people had no faith in the system. In north Mayo, from where I come, any rumour or conspiracy theory would have legs because those in authority and government let them down. A multinational company was demonised. The responsibility of any multinational, whether it produces fizzy drinks, oil or gas, is not to meet the general will of the people. That is the political side.

 

Chairman: A vote has been called in the Chamber.

 

Deputy Michelle Mulherin: I have been a member of Mayo County Council and seen many demonstrations. As Deputy Ó Cuív has been involved with the issue, I am surprised that he has so many questions and does not know what has happened. The previous Government made decisions, stood over them and stated, “This is as good as it gets.”

 

On the regulation side Bord Gáis decided from where the pipeline would run to the terminal, for which planning permission was received from Mayo County Council. A ministerial order was also issued. Does the critical infrastructure Act address this issue or is there a better way?

 

Another issue is that of foreshore licences. In some instances, it has taken up to ten years to have a licence issued. That is not the way to do business with commercial concerns. While we have to get the best deal for the people, we also have to know how to deal with big business and know how not to be subsumed into it. We need to give the people confidence that we know what we are about. Very good questions have been asked; issues I would not have thought of have been raised. It is thought provoking. Can the regulatory regime and the system for issuing foreshore licences be changed? How are we going to deal with the issue which is also related to the development of offshore renewable resources such as wave and wind energy?

 

Reference was made to the cost of the electricity interconnector. Will it be connected to oil or gas supplies? Sitting suspended at 6.25 p.m. and resumed at 6.35 p.m.

 

Chairman: I am conscious that we have been here for three hours ith a couple of interruptions for votes. We will proceed to hear the answers to the questions asked by Deputies Barry, O’Mahony and Mulherin.

 

Deputy Éamon Ó Cuív: To give them a chance to come back, I have a few more questions to ask.

 

Chairman: Is the Deputy referring to the officials?

 

Deputy Éamon Ó Cuív: No, the three Deputies who asked the questions.

 

Chairman: I announced that the sitting was suspended until after the vote was completed. Most of the members are back. Deputy Pringle has indicated that he wishes to speak. Deputy Ó Cuív has had two or three opportunities and can wait until everybody else has had his or her chance.

 

Mr. Michael Manley: Deputy Barry asked about the Norwegian tax terms. We do not have them to hand, but we will forward them to the committee. I regret that the quality of the print in the presentation is very poor. We will send a soft copy.

 

Chairman: We will circulate it by email.

 

Mr. Michael Manley: We were asked how long rounds typically lasted. A licensing round is usually open for 12 to 18 months, but the real question is for how long do licences last. That would depend on the type of licence issued. If it is a standard licence in the Celtic Sea, it lasts three to six years. If it is a frontier exploration licence in the deep Atlantic, it can last up to 15 years. The licences are graduated. All of the information is on the Department’s website, but I would be happy to forward it to the committee.

 

Deputy O’Mahony asked about the opportunity to make statements, given the data deficit. We have covered that issue a number of times. We have only drilled 156 wells in the Irish offshore, whereas in the United Kingdom there are almost 2,500 in the North Sea, while the Norwegians have over 1,000. Around 30,000 wells have been drilled in the Gulf of Mexico. With that data, we can be a lot more firm in validating the seismic elements. However, we have a long way to go.

 

Has the length of time taken to develop the Corrib field had an impact on the cost to the State? The answer must be yes. When money is spent on development in bringing the gas field to production, that obviously is part of the cost to the operator and will be charged to the cost of the project, just like any other. It will not be possible to figure out how much it will cost until we reach the end of field experience. It will depend on how much is produced, the time phasing and the revenues over time. Money spent in bringing something to production is part of the cost of the project and, therefore, not available for taxation as profit.

 

Mr. Murphy dealt with the new technology issue in the Connemara field where horizontal drilling was used in attempt to exploit it. It did not work on that occasion, but the technology will continue to evolve. One Deputy has asked whether the time will come when new technology will enable small accumulations to be exploited commercially. We hope so, but I cannot say authoritatively that this is with us.

 

Deputy Mulherin spoke about the Corrib field and Ireland being blacklisted, as she described it. The Minister for Communications, Energy and Natural Resources has said the experience of the Corrib field and the publicity around it have impacted negatively on Ireland’s reputation. It is very difficult to quantify something like this, other than the fact that it has clearly received a lot of publicity, very little of which has been flattering.

 

The Planning and Development (Strategic Infrastructure) Act 2006 has changed the position on such projects. The Act will govern all onshore elements of a project such as the Corrib project. The issue of foreshore licences comes within the responsibility of two Ministers, namely, the Minister for Agriculture, Fisheries and Food and the Minister for the Environment, Community and Local Government. I understand matters traditionally linked with agriculture such as aquaculture are staying with the Minister for Agriculture, Fisheries and Food, while energy and major infrastructural projects have been assigned to the Minister for the Environment, Community and Local Government. I cannot speak authoritatively on the matter, but I understand there have been significant changes in the development of a methodology for the prioritisation of projects in order that projects will not just form part of a queue and emerge in the order in which they entered. If there is a large project of economic significance in terms of employment, it will be dealt with more expeditiously than simply joining a queue. However, that will be a matter for the Department of the Environment, Community and Local Government.

 

Mr. Ciarán Ó hÓbáin: Deputy Barry asked a question on the 30 year cycle. It would be reasonable to expect the period of exploration through to development could run to 15 years. If it reaches production, it could run to over 15 or 20 years. We are not determining the return to the State. As it is a percentage tax rate, it will be determined by profitability as it changes over time. If the price of oil is increasing, profits are increasing and the return to the State will increase according to the ratio involved.

 

The issue of where drilling occurs is led by the industry. The State can lead by offering licences in particular bases at a given time, but over a period, all of the bases will be open. It is more about determining at a given time where might we obtain the best level of interest. It is a subjective judgment. If a company obtains a frontier licence in the Atlantic, it does not have to commit to drilling because there is a three year initial phase during which it will shoot some seismic data. It will then decide whether it should drill. The principal point is that it will decide whether it wants to seek acreage at a particular location. We will agree on the drilling target, but the company makes the decision.

 

Deputy Mulherin asked about the potential for electricity interconnectors and collaboration on a gas interconnector project. I am stepping outside my brief, but my understanding is that the gas interconnectors have sufficient capacity which could be increased through additional expenditure on re-engineering. The need for additional gas interconnectors would only arise in circumstances where we did not have an indigenous supply, where there was a very substantial increase in demand for gas, or where we had a very significant indigenous supply and needed to export. I do not think that is an investment somebody would anticipate at this stage.

 

Deputy Thomas Pringle: I would like to go back over three points made and tease them out further. In respect of the verification of the information received during the exploration and drilling phases, I take it that the officials receive the information live. Is there any audit or cross-check to see if it is the same as that achieved during the drilling?

 

The discussion on production sharing contracts and the taxation arrangements was not clear. What consideration was given to alternative forms of agreements through the Indecon report? What cost-benefit analysis was made? Was it focused solely on a taxation regime to be developed?

 

An explanation was given about the government takes in France, Portugal and Spain. Will the delegates explain this in a little more detail? I did not quite understand it, especially the fact that it did not appear in the House of Commons Scottish committee data.

 

Mr. Noel Murphy: If we are approving a well, we approve the location, the target depths, the engineering and evaluation programmes. We know exactly what will be carried out at every stage in the surveying of the well. We follow the history of the well on a day-to-day basis and can see when data are being acquired. That is the audit phase. We require all of the data and have a checklist for it. If we are approving a seismic survey, we will approve the actual line layout and the specific parameters of the data acquisition programme. After the programme has been completed, we will require, obtain and easily check the receipt for all of the data. I hope that might answer the Deputy’s question. We are on top of every piece of information and every process for every offshore activity. We have to approve the programmes for it in the first instance.

 

We have disagreements with companies and might tell them they need to put in place another device or that they need to undertake sampling more frequently for cuttings. We need a core at this point. All of the issues are debated and thrashed out before a well is drilled and there is no way of concealing it. It is included in the agreed programme.

 

Mr. Ciarán Ó hÓbáin: I may not have been as clear as I would have liked to have been in addressing the question on France, Portugal and Spain. What I was attempting to say was that the purpose of the two slides was simply to illustrate that, in the context of a debate in which Ireland’s terms were being linked, discussed and contrasted with those in Norway and the United Kingdom, one needed, in European terms, to move to the opposite end of the spectrum and compare Ireland with countries that had had low levels of exploration and production more similar to those in this country. The point I made on the study was that they did not feature in the study for whatever reason. If it had dealt with the level of production in all of the 60 or more countries mentioned, I would expect production levels here would have placed Ireland at the bottom or next to bottom of the table. Our production levels show that we produce 5% of our gas needs and 0% of our oil needs. The two slides were provided for illustrative purposes to show that in the context of a discussion on where Ireland’s tax terms should be pitched, one was starting at the wrong place if one compared us with Norway and the United Kingdom or suggested our tax terms should mirror those in place in these two countries.

 

Mr. Michael Manley: Deputy Ferris asked whether Indecon had examined the issue of production sharing contracts. The Department made an analysis of production sharing and was scored across ten headings, including “Fair Sharing” and “No Government Investment” and “Marginal Fields Viable”. The Indecon report examined this analysis and in its published report Indecon made the following key statement: “As will be evident in Section 6 of this report Indecon agrees with the rating of these regimes by DCMNR but believes that more focus is needed on the key issue of prospectivity and taxable capacity”. Having considered a production sharing operation, it rejected it.

 

Deputy Martin Ferris: Between 16 June 2010 and 31 May 2011, applications were submitted for 55 full and seven part blocks. The options for blocks last for two years. How many of these applications have proceeded to an application for a licence to drill?

 

On exploration costs, it was indicated that tax write-offs would only be available for exploration costs incurred in Irish waters. How far back does the tax write-off provision extend? If, for example, a company drilled unsuccessfully ten years ago, could it claim for the costs incurred in that process?

 

According to the presentation, there are large data gaps. Is this due to the small number of wells drilled in Irish waters? I understand the figure is 136 in contrast to the North Sea where thousands of wells have been drilled. One large commercial find would generate its own momentum. Once we have such a large find, which is a certainty, it will be worth damn all to the economy after exploration costs have been written off. Such a find would open up a new exploration process along the coast from the Porcupine Basin through to the Corrib fild and up to Rockall.

 

As the chart shows, exploration increased when we increased the tax rate in 2007. It is a fallacy, therefore, to suggest a low tax rate will increase interest. Interest increases when the supply of a commodity is threatened, as is the case with oil and gas as a result of turbulence in Iraq, Libya, Afghanistan and elsewhere in the Middle East. It is in response to such threats that energy companies take risks to secure supply. Given the size of the exploration area available to Ireland, the number of wells drilled - 136 - is very small. If there is one large commercial find, we will be on the pig’s back.

 

Mr. Ciarán Ó hÓbáin: The Deputy’s final point raises an issue about which I was asked earlier but which I did not address, namely, that if the low tax rate of 25% does not produce increased investment, something else must be at play. No one is suggesting the only factor that impacts on decisions to explore in Ireland is the tax rate. Indecon stated in its report that two factors were at work. First, a company will do very well if it makes a find and, second, the perception of prospectivity is critical to getting industry to come here. Since 2007 the number of exploration licences has gradually increased. As I indicated to Deputy Harrington on the correlation between terms and activity levels, a range of other factors is at work. Clearly, developments in the oil price and the fact that exploration effort is drying up elsewhere are positive factors. The promotion the Department has been doing internationally, as demonstrated by the recent licensing round, is having a positive impact. It is, however, difficult to measure which of the factors is impacting to which degree.

 

Deputy Ferris asked about the period for which write-offs could be made. The write-off period is 25 years.

 

Deputy Martin Ferris: If a company drills 25 holes over 25 years before achieving a strike, it can write off the costs incurred in the entire 25 year period, irrespective of whether the strike is made in the same block as the drilling. Is that the case?

 

Mr. Ciarán Ó hÓbáin: Yes, although no company has done this. If a company had done so, there is no doubt we would have had more discoveries than we have had.

 

Deputy Martin Ferris: Opportunities are available to the exploration companies.

 

Mr. Ciarán Ó hÓbáin: On the Deputy’s question on applications for 55 full and seven part blocks, this appears to be a reference to the applications in the recent licensing round. As the final decision has not yet been made, an announcement of awards as to how many of the blocks will be licensed has not been made, although one is imminent. Mr. Murphy will respond to the Deputy’s observations on data gaps.

 

Mr. Noel Murphy: I very much agree with Deputy Ferris that data gaps will be filled if there is success. This is all down to the perspective of potential. If there are discoveries, there will not be a problem in filling the gaps. That point is still a long way off.

 

Deputy Éamon Ó Cuív: It was stated it would be extremely expensive to acquire the regional seismic data. What does “extremely expensive” mean in that context?

 

I am still trying to get a handle on the appraisal wells. I understood from the comments made that companies had struck oil and gas but had indicated the finds were not commercial. Is it possible to provide for the joint committee a list of all the appraisal wells, the expectation of each well, in other words, what the Department knows about each of them, and the length of the licence, in other words, how long the company can sit on the well as prices increase? In what timeframe must a company use or lose its licence and for how long can it sit on a well? It is often stated outside the House that certain companies know they have a good quantity of oil or gas but have decided to sit on it until the price reaches a certain threshold and are not in a rush to bring it ashore. I am giving our guests an opportunity to debunk this view if it is untrue. They should show us clearly and concisely in writing the reason this is not true because half the country believes it is.

 

When a company sells on a licence - Atlantic Resources, for instance, bought into a licence held by another company - what is the position on tax write-offs? If a company involved in exploration sells on its exploration rights, can the company purchasing the rights offset the seller’s initial costs?

 

I must take at face value what Mr. Manley claims about all the data he has, that he can second-guess everything and that there is no way companies can hide anything from him. The regulator in the Central Bank would have said the same about the banks. That is the problem. We thought we knew, but we did not. As one who was in government, I can assure the committee we did not know. When we asked those who should have told us, they told us they did not know either. When one reads all the documentation provided in their annual reports, it appears they did not know. It would also be fair to say the markets did not know either because they gave us a AAA rating until summer 2008. There is a big worry, that everyone claims to know, but nobody actually does. Perhaps the delegates might send us a précis explaining why they are so convinced they know all of this information and that nothing is being held back.

 

Today has been frustrating. We did not receive in concise form the information I thought we would be given. My understanding is that licensing takes place in blocks, large areas of sea.

 

Chairman: That matter has been explained.

 

Deputy Éamon Ó Cuív: If I was given a block, would it be 50 miles x 100 miles, of that size?

 

Mr. Michael Manley: The blocks are based on geographic co-ordinates.

 

Chairman: Can we conclude questions?

 

Deputy Éamon Ó Cuív: I have a question, but I need this information.

 

Mr. Michael Manley: Typically, the blocks are 200 to 250 sq. km. They are drawn up along lines of longitude and latitude; as one moves further north they become narrower and smaller.

 

Deputy Éamon Ó Cuív: My question is relevant to the pertinent question asked by my good colleague. Is it correct that in a licensing round I might receive four or five blocks, or more?

 

Mr. Ciarán Ó hÓbáin: Yes.

 

Deputy Éamon Ó Cuív: If I strike it lucky in one of these blocks, do I, according to the current licensing terms, receive all of the blocks at the same tax rate? In other words, do I get the whole heap at the same tax rate when it is too late to say that if I find oil in large quantities, the Department will rejig the terms? At that stage I would haver blocks covering a huge area. If the delegates cannot answer that question today, perhaps they might reply in writing in clear unambigous terms.

 

Regarding tax breaks, will the delegates confirm, once and for all, that if I were to spend €1 billion, I would receive a tax break on that sum of expenditure, thereby saving myself €250 million in tax. Is that correct? Some think there is a 100% write-off. While one can put all of the expenditure against tax, it is taxed at a rate of 25%, or whatever the appropriate is. The actual saving is the rate of tax applying to that part of the expenditure. Therefore, one would save €250 million for every €1 billion spent. The remaining €750 million would be borne by the company. Is that correct?

 

The Corrib field was mentioned. My experience is that we have all learned many lessons. The process now in place, in terms of safety and planning, etc, is much more robust, at arms’ length and better than it was at the beginning. If only it had been that way, some of the difficulties would not have arisen. There is a black and white or a cowboys and Indians view of the debacle in Corrib, but I am not sure that if any of us was living in Rossport, we would be over the moon about what happened. Has the Department given any thought to the issue of community gain versus community pain? In other words, we must put in place vital infrastructure. In many cases, for the host communities there is no gain, rather there is a lot of pain when it comes to infrastructure. For others there is a gain.

 

Mr. Michael Manley: I will respond to those points, while Mr. Murphy can respond to another. Deputy Ó Cuív asked about wells under appraisal. Some of this information is still confidential. It depends on the phase they are at.

 

Deputy Éamon Ó Cuív: What cost is involved?

 

Mr. Noel Murphy: I would have thought €10 million to €20 million.

 

Deputy Éamon Ó Cuív: Therefore, it is not big money.

 

Mr. Noel Murphy: I would have thought it was big money.

 

Deputy Éamon Ó Cuív: Some put €30 billion into banks.

 

Mr. Michael Manley: That amount will only secure an improved regional grid; we would still have to take it further, with more data.

 

Deputy Éamon Ó Cuív: We would get much more information for €20 million.

 

Mr. Noel Murphy: That would be my estimate.

 

Mr. Michael Manley: The question I was trying to answer concerned the terms for the schedule of deep wells under appraisal. We will certainly supply that information to the committee. Mr. Murphy wanted to deal with the point about how we could have confidence in data received from the company. We answered that question in terms of the tax position if a sum of €1 billion was spent.

 

We were asked whether the Department had given any thought to the issue of community gain.

 

Deputy Éamon Ó Cuív: What about the tax break if the licence was to be sold on?

 

Mr. Michael Manley: It would be according to the normal company law provision, whereby if one buys a company’s trade name, one must have the costing. When one takes over a company, lock, stock and barrel, there are assets and liabilities and one is able to carry forward historical issues. It would depend on the nature of the contract. One cannot simply buy the nameplate and import, one must take on the full provision.

 

The issue of community gain is dealt with primarily through the Planning and Development (Strategic Infrastructure) Act. In the case of the Corrib field, a figure in the order of €8 million was provided for investment in north-west Mayo. The Deputy is correct to say the Planning and Development (Strategic Infrastructure) Act was not in place when the project started. It has significantly changed a number of points about the consent process.

 

Mr. Noel Murphy: I apologse. I was confirming the question. The quality of the data we obtain from companies is checked by us and we use the date for analysis purposes. Our analyses will ultimately be compared with those of the company; therefore, the circle is always closed. If something is wrong, it will come out.

 

Deputy Martin Ferris: Mr. Murphy stated a sum of €20 million would help to provide the delegates with the data necessary to advance the project of discovery.

 

Mr. Noel Murphy: It would be more towards helping us do engage in licensing. If we had €20 million worth of regional data, for example, in the southern Rockall area, it would be very helpful in carrying out further work to demonstrate in a better way the available potential.

 

Deputy Martin Ferris: Would satellite data be of any help?

 

Mr. Noel Murphy: Satellite data are a help, but it all comes back to seismic data. That is what we really need. Satellite data are used to fill gaps betweeen lines and have other uses.

 

Mr. Michael Manley: The issuing of seismic data would be a great help to us. If €20 million worth of seismic data were to help companies to find oil or gas off our shores and solve all problems, it would be a very good bargain. However, providing €20 million is not the answer. I would not wish the committee to think we have suggested €20 million worth of seismic data would help. Greatly increased drilling would help us to validate and interpret the seismic data.

 

Mr. Noel Murphy: Seismic data worth €20 million would not be enough to locate wells, or even to develop prospects. We are talking about trying to get good data across very large deep-water basins.

 

Deputy Éamon Ó Cuív: There is a critical issue. How does one obtain enough information in order that when one awards a licence, on the one hand, one secures interest and, on the other, can charge the maximum amount of tax? The more information one has before one licenses the more one will be able to pinpoint the hotspots. Therefore, the tax rate would decrease as the determining factor because it would be counter-balanced by further information from companies. In other words, at a very low level one shares the risk, but one will also share the benefits.

 

Mr. Michael Manley: I suppose the answer to that question - Mr. Murphy can correct me if I am wrong - is that one needs the extensive, comprehensive data available to the United Kingdom and Norway in the North Sea after drilling 4,000 wells and spending billions, but that is not meant to be a glib answer. We always need to learn and obtain more data to continue to get better. It is only in the past ten years that the State has actively engaged in trying to focus on basins and programmes and gather data. If providing €20 million was the answer, it would be a very good bargain. If it would be of assistance to members to visit the Department in order to see the data logs in our possession and the information, systems, etc., available to us, we would be perfectly willing to facilitate them.

 

Chairman: Thank you, Mr. Manley. I thank all of our guests for the detailed answers they have provided for members’ questions. I do not believe anyone thought for one minute that we could deal with this matter simply by receiving a presentation on it and that there would not be a need to put the forensic questions posed by members during the meeting. When drawing up its work programme, the committee decided make this issue one of its main priorities in the context of investigation. As everyone is aware, it has been the subject of a great deal of controversy and there has been speculation and differing stories about the value of finds, etc. Our guests’ contributions have helped to inform members on this matter. However, we are at the beginning of a process rather than at the end. I am sure that when members have had an opportunity to discuss the matter, they would love to take up the invitation extended to them. I am sure it would be similar to our visit to EirGrid because we would get to see how things happen on site.

 

The joint committee adjourned at 7.10 p.m.

Posted Date: 
6 October 2011