Gas Lads - Indepth report from Magill (2002)

The politicians who sold Ireland's family silver in the great oil and gas give-away
The massive finds of oil and gas on our western seaboard could ensure Ireland's financial security for generations. Wealth approximating that of the Arab countries is within our grasp, but the Irish government seems content to sell off our birthright for a handful of votes and a few dollars.
In a special Magill report, Sandra Mara investigates just what we are giving away, and why. Ireland, by conservative estimates, contains thousands of oil- and gas-bearing zones in her 650,000 square kilometres of water. In recent years, the Marathon Oil company has discovered large quantities of natural gas in the Celtic Sea and, more recently, the indications are that the Corrib North gas fields off the shores of North Mayo look set to produce massively lucrative gas finds. In the current economic climate, Ireland is expected to suffer a downturn in employment figures, with a corresponding drop in tax revenue and increased inflation. The discovery of massive natural resources of gas within our territorial waters should be a godsend: something that will ensure our fiscal security, creating jobs and revenue for the foreseeable future. Such resources have been a guarantee of success for countries like Norway and those of the Middle East which, before the discovery of oil, were bereft of any real income-generating industries.
Now, like them, we have won the oil and gas lottery - only to find we've thrown away the winning ticket: a loss of unimaginable proportions to Ireland for generations to come. The problem stems from the fact that since the first offshore exploration licences were granted by the Irish government in the late 1960s, the balance of power has been with the oil companies. Marathon Oil (USA) was granted a licence that effectively gave it control of the entire south coast of Ireland for the princely sum of £500 [€635]. Marathon went on to discover large quantities of natural gas in the Celtic Sea and, in the process, generated some work for Irish rig-workers, with ensuing economic and commercial spin-offs for the Cork region.
There should have been a lesson learned there. However, as recently as 1992, long after the benefits of the North Sea finds had been realised, Ireland introduced an oil tax regime of 25 per cent - the lowest in the world. Norway's oil tax is currently 78 per cent. Ireland offered the oil companies a further benefit, in that all costs could be written off against this levy. In a bizarre and inexplicable decision, the government of the day also agreed to abolish royalties and all other production-related levies, without any commitment from the oil companies to offset these unique benefits by guaranteeing a single Irish job, or indeed any agreement to use Irish goods or services. Any business deal which could benefit one party only would appear to be foolhardy. In a deal of this magnitude, and with such long-term consequences for the country, it is incredible. That it was done in the name of each and every Irish citizen, by an elected government, demands explanation. The oil companies secured a deal with the Irish government which will only benefit the oil companies. That they have done so is no reflection on them; they, after all, are in business to make money - big money - and this deal will ensure that they do. The sale of our vital national resources in this way means that Ireland cannot benefit in terms of economic spin-offs through the provision of services, manufacturing, ship and rig construction, infrastructure and development of port services, refineries, petrochemical industries, or the thousands of on- and offshore jobs and ancillary services needed to support the oil industry.
The Norwegian experience Norway, only a century ago, was one of Europe's poorest nations, until it experienced a reversal of fortune with the discovery of oil in the North Sea in the 1970s. Suddenly thrown on to the world stage, Norway was invited to discussions with military superpowers and wealthy oil nations. Taking full advantage of its new-found status, the Norwegians set about constructing some of the largest and most advanced offshore production facilities in the world: virtual floating cities, designed to withstand waves 30 metres high, and even hurricanes. By the mid-90s the cost of this infrastructure was in the region of $100bn, or $23,000 per head for each and every Norwegian citizen. The pay-off, however, has been substantial, and Norway is now the second largest exporter of crude oil worldwide, after Saudi Arabia. The Norwegian continental shelf will continue to be a major source of natural gas for the next 100 years, ensuring the long-term economic strength of the country. Ireland, too, could have been a major player on the world's stage. Instead, it chose to throw away the best opportunity we have ever had. The state sold the family silver.
After confirming the commerciality of the Corrib North find, Enterprise Oil lobbied the government for a reduction of the already small, by industry standards, tax rate to 12.5 per cent. The oil industry in Ireland, the Irish Offshore Operators Association [the IOOA], then proposed that a $5 subsidy be paid by the state for any oil found in Irish waters, a proposal which smacks of the deal done with the American Indians to buy New York for a handful of beads and a few dollars. Informed industry sources suggest that the oil companies view the west coast of Scotland as being the main base of operations for the Atlantic Margin, described as the new oil and gas frontier. The North Sea oil and gas fields, they believe, have a finite life span, which is expected to stretch into the latter part of this century. To base their operations in Scotland makes sound economic sense for the oil companies which have built up the Scottish infrastructure for the past 25 years, where the Atlantic Margin stretches from west of the Shetlands, west of Scotland, down as far as the western seaboard of Ireland.
With such a potentially lucrative new source of gas and oil in Irish waters, the Irish government has been remiss in not securing a deal that would ensure similar structures and benefits were set up here as part of the licence requirements. Industry experts say our politicians and civil servants must be held accountable, and explain their actions in exposing Ireland to such losses and in failing to protect our interests. The initial tax deal was offered as 'an incentive' to encourage oil and gas exploration in Ireland, but since 1992 only a small number of wells have been drilled, despite the evident potential of viable finds. One industry source explained: 'The vast bulk of licences and drilling options or leases are so-called efrontier licences' that the oil companies can sit on for up to 20 years. Technology has moved on rapidly, and deep-water production techniques have already been developed for drilling the deep waters of the western Atlantic, but the proper exploitation of our natural resources had been delayed until the oil companies decided when to drill and produce; not to fulfil our needs for oil and gas but their own.' Other experts within the industry allege that many claims of 'dry holes' drilled by the oil companies in the past were in fact positive finds, held over for a later day. In contrast to standard operating procedures elsewhere in the world, Ireland has no government officials based on oil rigs operating in Irish waters. Instead, they visit the rigs from time to time, and by appointment. The state relies on the information supplied to it by the oil companies as to the viability of each site.
Justin Keating: protecting Ireland's interests
In the early days, the then Energy Minister Justin Keating introduced oil and gas exploration taxation, which would protect Ireland's interests in the event of any commercially viable finds. The tax then was levied at 50 per cent, and gave the state a right to an automatic 50 per cent shareholding in the find, together with royalties in the region of six to seven per cent. There was also a clearly defined understanding that Ireland would benefit from the spin-off industries associated with any such find.
Following an international slowdown in oil exploration and production, in 1985 Labour's Dick Spring modified Keating's well-thought-out 1975 agreement to allow for a sliding scale of royalties and state participation, while continuing to protect Ireland's interests. The Ray Burke intervention In a move yet to be adequately explained, former Fianna Fail Minister Ray Burke met with the oil companies against the advice of one of the most senior advisors in his department. He subsequently reversed the policies of both Justin Keating and Dick Spring by amending their agreements, abandoning Ireland's right to a 50 per cent stake in any commercially successful find. In what could only be described as yet a further inexplicable move by any government or business concern, not alone did he give away our right to a stake in our own natural resources, but he abolished royalties, while at the same time introducing a scheme which would allow massive write-offs for the oil companies. On the surface, it could only appear that poor amadán Ireland had been hung out to dry while the oil companies, it seems, reaped the rewards of an exceptional sweetheart deal.
Who could blame the oil companies? They are, after all, in business. But there remains bewilderment over Ray Burke's move. Was it a lack of sophistication and knowledge of the oil industry norms, or a simple mistake? Burke indicated that it was done to encourage the oil companies to come into Ireland in a time of little activity by oil companies internationally. At the time of the original agreements secured by Keating and Spring, expert opinion took into account the long-term benefits that could accrue to Ireland, and the agreements reflected this; they were designed to protect Ireland's interests. But, without any visible benefits in return, these interests were given away by Ray Burke's deal. On this subject, trade union leader Des Geraghty remarked recently: 'I believe that from the start the concessions that were given were unbelievable. There were no jobs in it. There was very little for the Irish economy and we are now suffering the consequences of a very bad policy which former minister Ray Burke has to answer for.'
In 1992, in a further unusual move, Bobby Molloy, following intense lobbying by the oil companies, reduced the tax rate levied on oil and gas to 25 per cent, the lowest anywhere in the world. Industry sources believe this was 'naive' on the part of Molloy, but they accept that at the time he needed to boost exploration ventures in Ireland. 'Frontier licences' were introduced, allowing the oil companies to hold a licence for up to 20 years on a drilling location option. This, together with 100 per cent write-offs, left the door wide open for Ireland, already plundered, to be raped of its resources.
Again, no one can blame the oil companies; they are in the business of making profits and if a government facilitates them in this, they would be failing in their responsibilities to their shareholders not to take advantage of it. Expert speaks out Mike Cunningham is a former director of Statoil Exploration (Ireland) Ltd. Cunningham has wide experience in offshore exploration and production and, in particular, the acreage off the western coast of Ireland.
A former chairman of the IOOA's Environmental Committee and former chair of its Labour Relations Committee, Cunningham, now an independent oil and gas consultant, told Magill: No other country in the world has given such favourable terms as Ireland.
Following the 1992 concessions when royalties were abolished and oil and gas companies were given a 100 per cent write-off against development and recovery costs, the tax rate was reduced from 35 per cent to 25 per cent. Now, once production starts from the Corrib field, the oil companies will be able to write off all costs going back 25 years. These are the same companies that operate elsewhere in the world under far more stringent regulations. In the Faroe Islands, for example, no company can operate without agreeing to a minimum government take of 55 per cent by way of taxes and royalties. The oil companies are also obliged to give a commitment to develop a sea port in the area, and these are the same companies operating off the west of Ireland.
In Norway, the government take was up to 79 per cent on some of the fields, and that compares to zero per cent here. The Norwegians have also benefited with the development of infrastructure for their ports and other services. The government here should, at the very least, introduce a nominal two per cent levy on production which could be used for local development and employment. Cunningham found it 'most unusual' that the Taoiseach made the announcement of a joint venture to build the pipeline even before there had been a declaration that the Corrib was commercially viable.
In 1995, Michael Lowry issued many of the licences to the various interested parties, Enterprise Oil among others. Enterprise Oil holds the bulk of licences in Irish waters, including the much-lauded Corrib North gas field, in which it has a 45 per cent stake. Statoil Exploration (Ireland), together with Marathon International Hibernia Ltd, hold the remaining shares. Enterprise Energy Ireland Ltd, the operating company for the project, is headed up by Enterprise Oil personnel, and is now known as Enterprise Fuinneamh Eireann. The Corrib find, a 230-million-year-old gas field, is part of a geological structure up to 30 times the size of the Kinsale Head find and is believed to be worth billions. Enterprise first came to Ireland in 1984, just one year after its formation by Britain's Margaret Thatcher.
Twelve years later, in 1996, it began its first drilling operation in Ireland. Enterprise Oil UK, along with Statoil and Marathon, the companies behind the development of the Mayo gas field, made the massive gas discovery - believed by industry sources to be the biggest find yet in European waters. It lies some 35 miles offshore. Following the award of the petroleum lease to the consortium by Marine Minister Frank Fahey, trade union leader Geraghty spoke out against the major concessions granted to Enterprise Energy Ireland and its partners in the Corrib field development. He was an angry man. Blaming Burke 'I think there should always be a take for the state,' Geraghty said. 'I think that the gas is extremely important as an indigenous energy source for economic development, but I believe that from the start the concessions that were given were unbelievable. There were no jobs in it. There was very little for the Irish economy and we are now suffering the consequences of a very bad policy which former minister Ray Burke has to answer for.'
Siptu National Offshore Committee spokesman, Padhraig Campbell, told Magill: 'I think it would be a core demand of Siptu that if it is in any way suspected that there was undue influence in the drastic changes to Ireland's oil and gas exploration terms from 1987 onwards, then the state should immediately freeze any existing licences and leases issued since then, including Corrib, in the national interest. The 1987 changes should be referred to the Flood Tribunal because they were so drastic, and they followed on from strongly unadvised meetings between Burke and the oil companies.'
Ray Burke has already given evidence to the Flood Tribunal in relation to other issues. Meanwhile, Irish rig-workers, in claims made to Magill, said: 'Enterprise Oil refused point-blank to hire any Irish-based rig-workers on drilling rig, The Petrolia, owned by Maersk. They'd hired the rig to drill appraisal wells at this massive gas field. Despite the fact that there had been an agreed involvement of highly skilled and experienced Irish rig-workers on rigs operating in Irish waters since drilling began in 1969, there were no Irish rig-workers initially hired. Eventually, we managed to get about 26 jobs. In the 70s, we had about 80 jobs per rig, so it was down a lot, but we figured that that was as good as we'd get at that time - they [oil companies] were starting to cite EU law [free movement of labour within the EU] and other new equations. The excuse of pay was also used, but that wasn't the issue: the Brits were on higher pay; the Dutch and Norwegians were higher, too.'
Magill spoke to one rig-worker who said: .Irish rig-workers believe the real reason behind this is that it's an effort to remove the only people in Ireland who would know what the oil companies are really finding in Irish waters; guys with local educated knowledge. To add insult to injury, Enterprise Oil and Statoil want Bord Gais, at Irish taxpayers' expense, to build a gas pipeline from Mayo to Dublin via Galway, so they can sell the gas to the ESB for their new gas-fired power station. It doesn't end there. They also want an interconnector gas pipeline laid from Ireland to the UK, so they can export surplus Irish gas, owned by the oil companies, into Britain and then on to Europe - while Ireland will have to buy its domestic gas needs from the oil companies at the going rate. It seems too far-fetched to be believable that anyone, much less a government, would agree to such a deal.' Siptu's Campbell confirmed to Magill that the union met with Enterprise Oil in 1996 to discuss jobs on the rig.
At that time, there had been a long-standing agreement in place with the drilling companies that an agreed number of experienced Irish-based rig-workers would be employed on rigs drilling in Irish waters for the duration of the drilling season, with the option that these workers could remain on when the drilling moved out of Irish waters. However, things were not straightforward, and it took difficult and prolonged negotiations to reach an agreement with Enterprise which resulted in some Irish rig-workers being employed. At one point, Enterprise threatened to pull out of Foynes, which was being used as a service base, and relocate to Ayr in Scotland. This move was prevented when Emmet Stagg TD told the oil companies that they could not claim Irish tax breaks while operating out of the jurisdiction. Following these negotiations, a number of experienced Irish rig-workers got jobs on board the Petrolia drilling rig and were there when it hit a 'huge gas find - almost a blow-out', as one worker describes it. The pressure of the gas find was so high that it caused major 'technical difficulties' and drilling was abandoned until 1998.
Eventually, almost two years later, the Sedco 711, owned by Sedco Forex, was contracted to drill and Enterprise agreed 34 jobs for Irish rig-workers. However, Enterprise refused to meet with Siptu and there followed a series of peaceful protests by Irish rig-workers. Enterprise then moved operations to Ayr on the west coast of Scotland, and outsourced the bulk of its goods and services requirements. Enterprise, for its part, says it has no objection to hiring Irish rig-workers. 'Absolutely not,' spokesperson Pat Keating told Magill. 'My understanding of the issue is that rigs come in on contract for two, three or five months and have specialist work forces which come with them. You can't just send anybody out on a rig. It would be a delight to have Irish workers, but there's not enough specialist Irish staff out there. So that issue really is a red herring.'
As for Ray Burke's rather generous terms, Keating says they would have had little impact on Enterprise's decision to drill here. 'Exploration off Ireland had not been a great success, and it needed a regime to attract more exploration. Enterprise never came here [because of] of a deal, but in the hope of making a discovery. But the amounts of discoveries to date hasn't been great.' And on the subject of whether the terms of Irish licence agreements are more attractive than those of other countries, he said: 'I wouldn't have said so, because so many factors come into consideration in different countries. It would be like comparing apples and oranges. Every area has its own frameworks and parameters.' Again, he stresses that companies would come to Ireland not because the terms of licence agreements would be attractive, but rather in the hope of making a significant oil or gas find, and 'Ireland has been dismally disappointing' in that regard so far. Meanwhile, sources say that compulsory purchase orders are being issued to landowners along the Mayo/Galway route of the proposed pipeline to ensure that the framework of the pipe network is in place prior to the general election this year.
The American Keyspan pipeline construction company recently offered to fund the development cost of a North-South interconnector, at no cost to Bord Gais, in order to pool all of the state's existing gas infrastructure with Keyspan. This, say industry sources, allied with the impending privatisation of Bord Gais, will end any possibility of Irish involvement in the distribution of our own natural resources. In another transaction described by experts as 'incredible', the government recently disposed of the Irish National Petroleum Corporation [INPC] at a time when its raison d'etre was finally coming into force. The business and commercial assets of INPC, the state-owned oil company, were sold off in another disposal of the family silver to the American oil company Tosco, raising concern in the EU at the time.
In the Dail, Socialist Party TD Joe Higgins opposed the deal, saying that the 'safety record of Tosco in the US [was] appalling'. At the time of the sale, Tosco was in the process of being taken over by Phillips, the American oil multinational. The deal was clearly a good one for Tosco and Phillips, who now have not alone the product, but the markets and distribution facilities within Ireland. Fergus Cahill of Phillips was a former head of INPC many years ago. When INPC was brought to the market, Tosco made a successful bid for it. In a sale which appeared to net the state €126m, the real gain is another matter. The state agreed to write off over €101m in debts, believed to have been incurred in the refurbishment of INPC just prior to the sale. In terms of guarantees, INPC gave an undertaking that it will underwrite any claims for environmental damage or pollution up to €95m, and provide an open-ended guarantee in regard to any claims in respect of the Whiddy Island incident, where the oil tanker Betelgeuse exploded some years ago. These guarantees and undertakings could potentially not alone wipe out any perceived gains, but leave the state in a negative-equity position. Noel Tracey TD, Minister for Science, Technology and Commerce, told the gathering at the annual dinner of the Institute of Petroleum in November last: 'The Tosco transaction represents an excellent deal for Ireland. It radically improves the situation for both the refinery and the terminal by placing them squarely within the fold of a major integrated oil business, where opportunities for profitable trading are maximised and a culture of investment in both plant and people predominates.'
Joe Higgins, though, condemned the sale of INPC in the Dail, saying that it was 'a policy which has been dictated not by the interests of working or ordinary people, but by the interests of multinational corporations exerting huge pressure on governments.' Industry experts say that INPC, which dealt with the retail end of the business, was well placed to win contracts from organisations such as the ESB, Iarnrod Eireann and other state agencies for the supply of fuel, and at the time of the sale already had a substantial turnover. For its part, Enterprise Energy Ireland claims that the capital cost of bringing Corrib gas ashore will be in the region of €634m between 2000 and 2005, with estimated additional costs of €152m to connect up to the main Galway ring later this year. While much of this will represent outlay in respect of equipment - which can be off-set against taxation - it states that there will be 'a significant number of workers involved, around 500 for two seasons on the off-shore pipeline and terminal, and 1,000 for one season on the pipeline to Galway.' They admit, however, that 'while many of these workers would not be local residents, they will be based in the area during construction. The local spend generated by these workers will exceed €25m over two seasons of construction. In addition, significant sums will be spent on local supplies for the construction sites. While it is difficult to be precise about how many temporary jobs might be created, it is reasonable to estimate that it could run into hundreds.'
The Corrib co-venturers estimate that ongoing employment would be 'in the region of 50 to 65 people, most of whom would be likely to reside locally.' In an October 1998 report on the Corrib North region, international consultants Wood McKenzie, independent oil and gas assessors within Natwest's Markets, Corporate and Investment Division, indicated that the find could yield between five and seven trillion cubic feet [TCF] of gas. Current estimates for the immediate Corrib area is around one TCF, with a monetary value of almost €3bn. If the area does yield seven TCF, then the find could be worth in excess of €21bn, and this, with write-offs and tax breaks, a no-royalties deal and no state cut, means Enterprise Energy Ireland can make massive profits for its stated capital costs of €634m, plus ancillary costs. In the run-up to the election, the taxpayers of Ireland should be demanding answers to the enigma of the Corrib gas deal. It was a deal described on 21 June last in the Dail by Joe Higgins 'as an outrageous robbery of an extremely valuable asset that properly belongs to the people', which he said 'has been handed over to Enterprise Oil'. Higgins went on: 'The commercial and economic benefit from it has been handed lock, stock, and barrel by a Fianna Fail-dominated government to yet another multinational corporation on foot of a deal which they cannot possibly believe is so favourable to them, with no royalties, and with a corporation tax rate which they can write off against expenses not only incurred in Ireland but elsewhere. Incredibly, when the Minister for the Marine and Natural Resources [Frank Fahey] stood up in the Dail and asked how much value should be placed on the one trillion cubic feet of gas estimated to be in the Corrib field, the minister, on behalf of the government, admitted that he had no idea how much this resource was worth.'
Some of those most directly affected in the West, meanwhile, told Magill: It is an opportunity for an incoming government to re-write our history - to return the family silver - by amending the terms and conditions of this most unusual, and seemingly inequitable, deal.' They say that, for them, this will be a major election issue. They told Magill: 'Only those politicians guaranteeing a reassessment of the deal and a restoration of an interest in our natural resources will get our vote.'
by Sandra Mara