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Hopes rise as exploration companies step up their activities off Irish coast

Barry O'Halloran - Irish Times

Despite mixed results in the past, exploration groups are once again planning to dip their toes into Irish waters

Oil and gas giant Exxon Mobil is due to begin exploratory drilling in the Porcupine Basin off the Republic’s southwest coast early in 2013.

The group will be one of the first “majors” to drill seriously in the State’s territorial waters since Shell began work on the Corrib gas field in the 1990s.

Exxon owns 27.5 per cent of the Dunquin prospect in the southern part of the basin. Its partners include two other big players – Italian group Eni and Spanish operator Repsol – along with local player Providence, which has a series of licences dotted around Ireland’s coast.

It is too early to say whether the company will find anything, but Exxon has exercised its option to take out an exploration licence for the area in block 44, whose nearest point is about 130km off the southwest coast.

So, on the basis of the information it has, it at least believes it is worth drilling.

Exxon bought 80 per cent of the licence in 2006 from Providence, whose shareholders include Anthony O’Reilly’s Fitzwilton investment vehicle. At that time, it was estimated that Dunquin could hold up to 25 trillion cubic feet of gas and four billion barrels of oil.

Its owners are a long way from confirming that and, given that four decades of drilling in the Republic’s waters have so far yielded just two commercial finds – the Kinsale and Corrib fields, both natural gas – you would have to be cautious about what block 44 actually contains.

Drilling costs are likely to be in the region of €80 million a well. Exxon’s scale – net profits were $41 billion in 2011 – means it will not be the end of the world if block 44 were to disappoint.

On the other hand, positive results, particularly those giving an indication that early estimates of what it contains were accurate, would mark a reasonable gain for the company.

One organisation that will be watching closely is Providence. It still has 16 per cent of Dunquin. On top of that, it has the broadest spread of interests in licences offshore Ireland of any company, so it is likely to benefit on several fronts if the news from Exxon is good.

Providence generated more column inches than any other player in 2012. This was largely down to its Barryroe field in the Celtic Sea off the south coast. Like a lot of properties in that area, drilling in the 1980s indicated that it held hydrocarbons, but prevailing prices and other factors meant it was not considered worth pursuing at that time.

Barryroe sits in block 48, directly south of the Cork coast. It is closer to shore than Dunquin and in considerably shallower water.

In its last update, issued in October, Providence said it believed it could recover 280 million barrels of oil from there.

As an added bonus, Barryroe also holds commercial quantities of natural gas and it is located conveniently close to an existing pipeline that connects the mainland with the Kinsale field.

Providence owns 80 per cent of Barryroe with Lansdowne Oil and Gas holding the remaining 20 per cent. The reality is that it will have to bring in a partner or partners to develop the field. Chief executive Tony O’Reilly jnr said earlier this year that a number of likely suitors had already approached the company.

Once it gets down to brass tacks, it will be a question of just how much it is willing to give to a partner and how much that partner is willing to pay.

Small companies such as Providence typically operate this way – doing the exploration legwork and going as far down the road as they can towards proving they have something worth chasing, then getting someone with the resources to exploit the prospect to buy into it.

Separately, Providence has managed to arouse the ire of the citizens of Dalkey and other parts of south Dublin. The Government granted the company an exploration licence for part of block 33 in the Kish Bank, close to the east coast. The Department of the Environment recently gave it a foreshore licence to allow exploratory drilling about 6km from Dalkey.

Background of opposition 

A number of local groups claim there was inadequate consultation and want the process of granting the foreshore licence to start again.

The issue became more complicated when it emerged that the Minister for Arts, Heritage and the Gaeltacht, Jimmy Deenihan, recently designated an area stretching from south of Dalkey to north of Swords as a special area of conservation.

It is not clear just how this will affect Providence’s plans, but coming against the background of opposition from a prosperous area with a lot of political and media clout, it’s unlikely to make life easy.

That said, the company intends only to carry out exploratory drilling there and the State has already given it the green light to do this.

Providence recently stepped up its bet on Irish exploration by announcing it is selling its British interests, including the Singleton field in the south of England, for about €50 million.

Singleton produces oil and is therefore a source of cash for a company whose portfolio is otherwise made up of licences and options in various stages of exploration – necessarily involving a fair amount of hope value.

Difficult to extract 

While Providence generated plenty of coverage in 2012, another homegrown player, Fastnet Oil and Gas, seems likely to do so in 2013.

The company recently announced that it acquired two Celtic Sea licences, 49/13 and Shanagarry, where oil and gas had also been discovered in the 1980s.

Fastnet’s managing director Paul Griffiths and shareholder John Craven were involved. The oil in 49/13 was found to be “heavy” – that is more dense than normal crude oil – meaning it was too difficult and expensive to extract back then. Changes both in prices and technology mean it could now be viable.

The gas simply was not wanted; the Irish market at the time was well supplied from Kinsale and there was no connection with Britain, therefore no place to which it could be exported. That, too, has changed – Kinsale is running out and there are two pipes connecting Ireland and Britain’s gas networks.

Along with Craven, Fastnet’s backers include other figures from Cove Energy, which was this year sold to Thai-based PTT for €1.5 billion, netting €150 million for its Irish shareholders.

Its executive chairman is Cathal Friel of Raglan Capital and formerly Merrion Stockbrokers. The company is making no secret that its main aim is to build a portfolio of suitable assets, bring in partners and possibly sell the operation.

Another familiar figure from the Irish exploration game, John Teeling, recently made headlines when Petrel Resources, which he founded, announced it had identified a reservoir in the Porcupine Basin that could potentially hold one billion barrels of oil.

The area is further west than Exxon’s interest, making it that bit more risky and difficult.

Difficulty is unlikely to dissuade Petrel, which previously targeted Iraq as the main focus of its operations, following the overthrow of Saddam Hussein.

However, if the oil and gas giant were to find that the basin holds commercial hydrocarbons, Teeling could well find a few people knocking on Petrel’s door. He and a lot of others in the industry will be paying close attention to Exxon in 2013.

Money trail: What the State gets 

The Republic has one of the “most favourable” fiscal regimes for oil and gas exploration in the world, largely because the industry has not shown huge interest in coming here in the first place.

As things stand, profits from oil and gas production in the State’s territory are taxed at 25 per cent, twice the standard corporate rate. The charge could potentially rise to 40 per cent if the licence turns out to be particularly lucrative.

Pat Rabbitte, the Minister for Communications, Energy and Natural Resources, has defended the current system, pointing that the State simply cannot afford to invest the vast amounts of money needed to explore for oil and gas in its own waters and risk getting nothing in return.

The Government could well come under pressure to look again at the rules if current prospects start to deliver.

At a recent briefing, Fastnet Oil Gas suggested adopting the Moroccan model. Under this, the State gets a free 25 per cent carry in all licences, up to the point that the resource is proven and development and production is ready to begin.

At that stage, it invests its share of the development costs, which it can borrow, securing the debt against the asset itself.

In return, it gets a 25 per cent share of the profits in the same way as any shareholder. At the same time, it also gets tax and royalty payments.

Under such as system, it may have to keep the tax rate at 25 per cent as well.

At least some civil servants in Mr Rabbitte’s department are said to be taken by the idea.

Know the drill: Who's who in energy exploration 

* Dragon Oil: Headquartered in Dubai and listed in Dublin, Dragon’s main asset is the Cheleken contract area in the Caspian Sea.

* Kenmare Resources: Irish headquartered and Dublin-listed, Kenmare operates the Moma titanium feedstock mine on the coast of Mozambique.

* Ormonde Mining: Irish-based and listed, Ormonde is focused on tungsten, copper and gold, with three assets in western Spain, Barruecopardo, La Zarza, and Salamanca and Zorza.

* Petroceltic: Dublin- and London-listed Petroceltic has interests in Algeria, Egypt, Bulgaria, Romania, the Kurdistan region of Iraq and Italy. Last week, the Algerian authorities approved its development plan for Ain Tsila, a large gas field in the south of the country.

* Petroneft: Petroneft has two licences in the Tomsk Oblast region of Siberia in the Russian Federation, from which it is producing oil and where it has an ongoing exploration programme.

* Tullow Oil: Tullow has grown to near major status on the back of its success in Africa, where it has onshore and offshore licences right a long the coast and a significant interest in the Lake Albert rift basin in Uganda.

It operates the Jubilee field off Ghana’s coast, which is on track to produce 120,000 barrels of oil a day next year. It has begun exploration work off the Atlantic coast of South America and is also poised to expand into Norway following a recent deal.

It has a Dublin office and a significant hub in Sandyford. Its main listing is in London.

Posted Date: 
28 December 2012