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Free offshore ride for Tony O’Reilly highlights total inadequency of offshore licencing terms

Colm Rapple - Irish Mail on Sunday

Independent Newspapers’ boss Tony O’Reilly has secured himself a free ride in an exploration venture off the west coast which will personally net him a 7% stake in oil and gas finds that could be worth over €20 billion according to some analysts.

The drilling has yet to start but seismic exploration has already pinpointed two large oil and gas prospects under the seabed some 200 miles south west of Kerry. O’Reilly’s company Providence Resources estimates that they could contain over 25 trillion cubic feet of recoverable natural gas and over 4 million barrels of oil. That’s very big, even by international standards.

Providence has got someone else to foot all of the exploration costs including exploration wells costing up to €40 million each.

The deal highlights the ridiculously generous terms at which the Government is giving away rights to our potential oil and natural gas reserves. A little over a year ago it gave Providence Resources and a private Scottish based company, Sosina Exploration, an exclusive licence to explore and exploit the so called Dunquin area off the South West coast. Now those two companies have sold an 80% share in the licence to ExxonMobil. Under the deal Exxon will bear all the exploration costs while Providence and Sosina simply sit back and look forward to a 20% share in any find.

Providence is retaining 16% and Sosina 4%. Tony O’Reilly personally owns 45% of Providence giving him a 7.2% stake in the total venture. His son Tony O’Reilly jnr. is chief executive of the exploration company.

It’s a very good deal for the O’Reilly clan and the other shareholders in Providence. The shares which are quoted on the Irish Stock Exchange were as low as 2c last year but jumped to 8c on news of the ExxonMobil deal before settling back down to 6c. Many of those who follow Tony O’Reilly’s search for oil don’t wait for a find to make their money. They make it by shrewd trading in the shares. If you can buy at 2c and sell within the year at 8c, you are not doing too badly.

But some of those who followed O’Reilly’s oil fortunes in the past got badly burned. His initial oil exploration vehicle Atlantic Resources enjoyed a roller coaster ride on the stock exchange fuelled by speculation, leaks and rumours, many of which proved false. It eventually plummeted from favour leaving many with a sour taste and has since been subsumed into Providence.

It’s disturbing that Monday’s important announcement which was obviously going to have a marked impact on the share price, was leaked over the weekend. There is no suggestion that there was any insider dealings in the shares but shareholders have every right to be worried when they see important price sensitive information being made available to a few even during the weekend when the exchanges are closed. At the very least they must be concerned that those to whom the information is leaked may be inclined to repay the favour with biased comment at some future date.

A lot of money can be made and lost in trading exploration shares. On Monday after the Providence announcement over 57 million shares worth €3.8 million changed hands in Dublin. There were a total of 458 deals recorded during the day.

Of far greater concern, however, than the prospect of another bout of speculative exploration fever, is the clear evidence that the Government is giving away our offshore resources on the cheap. ExxonMobile has leaving Providence and Sosina with what is known in the business as a “carried interest” in the licence. It will be bearing all the costs in return for an 80% stake.

Had it been of the same mind fourteen months ago when the licence was first issued, it presumably would have been willing to do a similar deal with the State. Instead of giving the licence to Providence and Sosina who have no direct experience of drilling offshore Ireland, energy minister Noel Demspey could have dealt directly with the giant ExxonMobile keeping the 20% stake for the Irish people.

It may well be that ExxonMobile would not have been interested at the time. Maybe the current deal reflects the changing environment for energy pricing. But either way the deal is a fact and proves conclusively that the current terms applied to offshore licences are far too generous. It’s time the Government looked for more.

But it’s failing to act. Mr Dempsey is getting ready to issue new licences to another large tract of the offshore area ranging from due west of Clare to north of Derry. When he sought applications he promised that the licencing terms first introduced in 1992 would apply. But no application has yet been accepted and given the sharp rise in energy prices he should renage on that promise.

Under the current terms, the oil companies effectively own any oil or gas they find. The State gives up its ownership rights and the oil companies simply pay tax on their profits at the rate of 25%. But before they are deemed to have made any taxable profit they can write off all exploration and developments costs and the estimated costs of eventually shutting down the wells at some stage in the future. It has been estimated that many finds would be at least half depleted before the State would get a cent in tax revenue. And there is no requirement on the oil companies to land any resources found in Ireland. Oil could be piped up into tankers and shipped straight to Britain or even the US.

Noel Dempsey can look for more and get it. The Providence deal proves that.

Posted Date: 
20 February 2006 - 10:00am