How much is the Barryroe oil find actually worth to Ireland?

With Ireland still in turbulent financial water’s the news recently that we had struck oil may have seemed like a golden ticket.

Certainly, the suggestion that the well at Barryroe, south of Cork, can pump oil at a rate of around 4,000 barrels a day is a good indication that the well has decent resources – particularly when the explorer, Providence Resources, says the well could have a total capacity of one billion barrels.

The price on Friday afternoon of a barrel of crude oil in US markets stood at $107 – meaning the well could, if the price held steady, have a total trade value of $107 billion – that’s about €81 billion.

But how much of that would the Irish government expect to receive? And would the advent of oil drilling off Irish waters provide any real economic stimulus?

Successive Irish governments have adopted a relatively hands-off policy in trying to reap material benefits from any oil or gas taken from Irish waters. Under laws first introduced in 1987 and changed most recently in 2007, Ireland doesn’t take any stake in an oil venture – nor does it require any explorers to guarantee any supply to Ireland.

So, even though oil and gas would be recovered from Irish waters, there is no implicit guarantee that it could be used to offer supplies for Ireland – even though, in some cases, the rigs drilling for oil could be visible from the Irish mainland. There is, also, no guarantee that the oil being harvested from Ireland could be sold back to Ireland at a discounted rate.

Sliding tax rate

Instead, the government’s sole revenue is through corporation tax – where the State takes a 25 per cent cut of the profits made from the extraction of natural resources within its territory.

This rate can get higher in line with the company’s profits: once the profit is 1.5 times larger than the money spent on extracting it, the tax rate gets higher – up to a ceiling of 40 per cent, once the ratio hits 4.5:1.

Even still, this rate is among the lower rates of any country in the world – other territories with a better track record in securing oil levy a higher tax rate. Norway’s tax, for example, is 75 per cent. The UK’s is just above 50 per cent.

In exchange for this tax rate, the Irish government effectively signs over the ownership of the oil or gas – content to allow a private company do the hard work of extracting the materials, and simply taking a larger cut of the profits when the process is complete.

The difficulty in trying to ascertain where Ireland’s sliding tax scale would kick in for Barryroe, or anywhere else, is simply that no exploration operations have yet begun since the current tax regime came in. Extraction of gas at Kinsale took place under the previous tax regime in the 1970s.

William Hederman, a journalist who maintains the Irish Oil and Gas blog, fears the open-ended nature of the tax laws – which allow companies to deduct their exploration and development costs from their tax bill – could mean a smaller tax take than we might hope.

“That can include costs going back 25 years before a field goes into production,” he says. “It could include other unsuccessful wells drilled. They can write off the costs of other wells drilled in Irish waters.”

The taxman cometh

Not only that, but the fact that most companies drilling in Ireland have larger operations abroad – and are more likely to bring those staff to Ireland instead of hiring locals – means it’s possible that companies could claim tax refunds for cash spent abroad.

“The Irish taxman, I would suggest, is going to find it very difficult to establish just exactly what costs are related to the project,” he offers.

He points out that estimates offered by Eamon Ryan in 2008, about the Corrib gas project, suggested a net tax take to the State of around €1.7 billion – just under 18 per cent of the €9.5 billion that the field was worth at that time.

He also says a study compiled by private consultants for Shell in 2003, which gave a more realistic account of precisely how much gas was available in those waters, suggesting the project would pay just over €340 million.

While the market price of such gas perhaps doubled between those two dates, Hederman believes the net tax take from Corrib would be only about 7 per cent – and fears a similarly low cut could be taken in Barryroe.

An offer they can’t refuse

Industry figures, however, believe the comparatively generous tax regime is necessary in order to bring explorers to Ireland. David Horgan has previously told this site that the sliding scale of tax was ‘an intelligent one’ in the eyes of explorers.

The Irish Offshore Operators’ Association, the representative body for the oil and gas industry, suggests that one of the ways Ireland can encourage more investment in exploration is to ‘learn from our mistakes’.

“In the case of a major discovery, with licensing and permitting across many administrative lines, a mechanism should be established to coordinate and optimise the inputs of the various State agencies,” it says on its website, adding:

It is worth remembering that such a mechanism was put into effect during the successful and uncontroversial development of the Kinsale Head Gas Field in the 1970s.

It paints a clear example as to why Ireland, they say, needs to keep a lower tax rate – pointing out that the UK, which has a stronger history of oil exploration than Ireland does, attracted 350 bids for exploration licences in a recent licencing round. 144 were awarded.

In Ireland, in a similar round in 2009, only two bids for exploration licences were received. Only one was awarded.

Under the radar

Pat Shannon, a professor of geology at UCD, believes the apparent viability of Barryroe could mean that the “rest of the oil industry will now look at Ireland and see, ‘Oil’.

“Ireland has gone under the radar to an extent,” he says. “Any success we’ve had has been in terms of gas; the oil industry will certainly look at Ireland anew now, and with renewed interest.

“There are some other discoveries made over the years – some of these may start to be looked at.”

Hederman, however, fears that the Irish plan of seeking investment does not necessarily consider whether that investment is of any use.

Exploration may be less useful than considered, because many Irish operations would allow oil to be pumped to a tanker and then brought to a refinery outside of Ireland.

“Oil is now easier to carry than gas – you can just stick it on a tanker and move it. There maybe doesn’t need to be any onshore infrastructure at all,” Shannon suggests.

A fluid asset

The professor adds that oil technology is now so advanced that an oil rig can simply be moved from one place to another – with its staff moving wherever it goes.

This is a concern of Hederman’s – because the mobility of oil means that not only may it be brought abroad and not used to satisfy Ireland’s domestic needs, but it might also result in a total lack of employment.

“In the case of, say, Dalkey, while the project is very close to the shore in environmental terms, in economic terms it might as well be off the coast of Brazil.”

If there was a similarly located gas field in the area, he adds, “industry sources have told me that if it was a bit further out, they could pipe it to Wales instead of the east coast of Ireland. Our terms don’t improve our security of supply.”

While few would disagree with the general need for Ireland to offer the right terms and conditions to make it attractive for explorers to come here, the government’s main concerns must be trying to balance this with the broader national interest.

“I can see the State needs to offer terms that encourage companies to come,” Hederman ponders. “To what end, though? The terms and the way our legislation is drawn up… is very pro-business – it doesn’t really examine down the road, what are the benefits? Why is this going to be better for Ireland?

Currently, he argues, private companies “get to keep it all, and do what they want with it.”

A map from the Providence Resources website showing the various oil and gas prospects it is examining off Irish waters.

A map from the Providence Resources website showing the various oil and gas prospects it is examining off Irish waters.
 
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