Rabbitte adopting a short-sighted approach to offshore oil and gas resources

Labour minister Pat Rabbitte is doggedly going ahead with his intention to grant more offshore exploration licences on the basis of the flawed objective of encouraging more exploration activity. It’s flawed because the real aim should be to get the maximum return for the Irish people from their natural resources. Some exploration is necessary to achieve that result but maximising exploration won’t necessarily maximise the return.

2006 - Pat Rabbitte presenting Vincent McGrath & the people of Rossport with a collection of Michael Davitt's prison notes

The return to the State depends on the terms attaching to the licences, not on the level of exploration.

Yet during the week on Today FM Mr Rabbitte declared that his “entire approach is to generate more economic activity in terms of the exploration levels off our coast.”

That single statement epitomises the flawed rationale that has informed the policies generated within his Department and accepted seemingly without question by both Mr Rabbitte and his predecessors. Success is measured solely in terms of exploration activity.

How short-sighted can you get?

But the return that we get as owners of the resources is crucial. There is no doubt, in our current financial straits, that we could do with getting some of it as soon as possible. But Mr Rabbitte’s policy won’t achieve that objective.

The 15 applications currently being considered are for options which will run for two years giving rights to get licences at the current terms. Only at that stage do the oil companies have to enter drilling commitments. It could be another two years before a well was drilled and another three or more before a find was declared commercial and perhaps another three or more before any oil or gas flowed ashore.

At that stage a successful company would be entitled to write off all of its exploration and development costs against revenue for declaring a taxable profit. It could even write off the estimated cost of decommissioning the find and the cost of any ongoing exploration in Irish waters.  We’d be very lucky to get any revenue into the Exchequer for at least ten years from the time the options were issued. That’s possibly a conservative estimate.

The economic benefit to Ireland from any exploration activity including the drilling of wells would be minimal. Rigs are usually serviced and crewed from abroad. There might be no development benefit for Ireland either, since, under the current terms, any oil or gas found doesn’t have to be landed in Ireland. Both can be pumped into tankers and taken away. The technology has long been available for pumping oil from the sea bed into tankers and more recently the Norwegians have been exploiting Arctic gas finds in this way.

But once the options are granted, if Mr Rabbitte goes ahead with his plan, we’ve given away rights to the areas off the west-coast most likely to contain oil and gas. Éamon Ryan and Conor Lenihan sought applications for any of the remaining Atlantic areas not already licenced. The whole area has been well studied and the most prospective sub-sea structures identified.

To claim, as Mr Rabbitte has, that the areas to be given away might only cover 6% of the total ignores the fact that there is unlikely to be any recoverable oil or gas under most of the area on offer. The applicants will have cheery picked and the 6% could cover all or most of what’s out there.

There are alternatives. Let’s ignore the Atlantic margin for a while. It’s a long-term bet anyway and it’s not going to go away. Oil and gas can only rise in value. Let’s zone in first on what might be achieved in the short-term.

To achieve some short-term return for the Exchequer we could impose a windfall royalty on the output from the Corrib field when it starts to flow. It’s justified by the increase in gas prices since the find was made. Some reduction in the royalty might be negotiated if Shell and its partners belatedly adopts a more people and environmentally acceptable approach to exploiting the find.

Then let’s use a carrot and stick approach to the companies sitting on the thirteen finds already made but not yet declared commercial. There have been two oil finds and three gas finds since 2002.

The stick could be wielded by setting new deadlines for relinquishing existing licences. That would promote speedier activity than giving out licence options for the Atlantic. And as a carrot those first to get oil or gas ashore could be given first option on licences off the west coast to be granted later and at more advantageous terms for us.

It’ll be time enough to issue new licences when the massive Dunquin prospect off the west-coast has been drilled by Exxon/Mobile in 2012 or 2013. A dry well wouldn’t leave us any worse off. But a successful well would greatly enhance the value of Irish licences and what we can look for them.