Speech by Minister Pat Rabbitte, T.D. Minister for Communications, Energy and Natural Resources opening debate in Dáil Éireann
on the Report of the Joint Committee on Communications, Natural Resources and Agriculture on ‘Offshore Oil and Gas Exploration’
14th May 2013
Dáil Éireann, 14th May 2013
A Cheann Chomhairle, I am pleased to open this debate on the report of the former Joint Committee on Communications, Natural Resources and Agriculture on the subject of offshore oil and gas exploration. I am grateful to the Government Chief Whip for acceding to my request to make time available for this debate.
While issues relevant to the subject matter of the report have been discussed in this House from time to time under a range of business, today’s debate provides an opportunity for a more detailed discussion. I look forward to the contributions of Deputies on the report and its recommendations and, more generally, in relation to Ireland’s approach to this policy area. My colleague, Minister of State Fergus O’Dowd will close the debate on behalf of the Government.
This is both an interesting and topical area of public policy. The report discussed a range of diverse subjects and issues and I know that the joint committee invested considerable time in its preparation. Detailed evidence was taken from a range of parties and considerable time was spent in considering that information.
The report accordingly represents a valuable contribution to the debate on how we should manage our indigenous oil and gas resources, to ensure the best result for the people of Ireland. The 11 recommendations reflect the broad nature of the report and address a number of themes. The report recognises the importance of our legislative and strategic policy approach being fit for purpose. It brings a focus to specific aspects of the non-fiscal regulatory regime. It considers interactions involving the public in general, as well as those relating to communities living in areas where development activity is planned.
The theme, however, that has generated the greatest level of comment relates to the tax terms that should apply in the case of future commercial discoveries.
There have been occasions when debate on this subject has been premised on myth rather than fact and it is a positive aspect of the report that it captures so much detail in a single document. Understanding Ireland’s petroleum exploration experience over four decades is important to any balanced consideration of the nature of fiscal terms that should apply to this industry.
Understanding our experience relative to that of neighbouring jurisdictions is also critical. Understanding that the hopes and aspirations that many of us held out for the industry in the 1970s have not been realised, and that tilting at romantic windmills amidst the dreamy spires of Princeton won’t change that. It is helpful, therefore, that the report contains considerable detail of Ireland’s exploration history together with some detail on neighbouring jurisdictions, in particular Norway.
An examination of Norway’s experience as a major oil and gas producer demonstrates a stark contrast between their fortunes and ours over the past half-century. Today there is a significant difference in our respective fiscal regimes, which reflects very different levels of exploration success. In the 1970s our fiscal terms were similar but, in the subsequent decades, the optimism that existed in the 1970s about the potential of the Irish offshore diminished, as significant and repeated commercial discoveries in the North Sea were unfortunately not replicated here.
There are times, however, where some contributors to the debate on fiscal terms advocate policies that clearly ignore the stark contrast between our exploration experience and that of Norway and the UK. While contributing nothing constructive to an important public policy consideration, such interventions can give rise to confusion, deflect focus from the real questions to be addressed and do little to engender confidence amongst those considering the relative merits of investing in the Irish offshore or elsewhere in Europe, or even further afield.
In general terms, some of the report’s recommendations appear both sensible and desirable. Others are, I believe, already provided for in the existing licensing and regulatory regime. There are a number of recommendations that could usefully be explored further, including several which have wider public policy implications. Finally, there are a number of recommendations in respect of which I would have strong reservations and remain to be convinced that their adoption represents the best way for us to proceed.
As examples of recommendations I would endorse, the report proposes that there be a clear and transparent fiscal and licensing regime, which provides certainty for the State and industry alike. It stresses the need for a clear strategy governing Ireland’s approach to petroleum exploration. It goes on to recommend that the 1960 Petroleum and Other Minerals Development Act be reviewed.
The 1960 Act is important in setting out the high level exploration licensing regime and the rights conferred by the various authorisations. Since it was enacted, a broad body of legislation at national and European Union level that is directly relevant to petroleum exploration and production activities, including planning, safety and environmental legislation, has been passed. Against that background, my Department is indeed currently engaged in a review of the 1960 Act.
Our overarching strategy in this area is to seek to maximise the benefits to the people of Ireland from indigenous natural resources. The most significant way in which Ireland stands to benefit from successful exploration is through tax revenue. We have continually reviewed, adapted and evolved our regulatory and fiscal terms to ensure they remain fit for purpose – and that process will continue, as I will outline later.
Apart from tax revenue, additional benefits would accrue from the economic activity generated by development and production. For example, over 1,000 people were employed at the height of the construction phase of the Corrib gas terminal. Even today the project continues to provide both direct and indirect local employment opportunities in North Mayo. A more active exploration and production industry would also encourage the development of a range of support services, in particular around key port facilities.
And, finally, further commercial discoveries would of course also strengthen Ireland’s energy security of supply.
It is a core element of the State’s strategy for this sector that private industry rather than the Exchequer should carry the financial risk associated with exploration. Given that the cost of a single exploration well in the Atlantic can cost in excess of €100 million, this is a policy which I strongly endorse. It is important then that the State provides suitable opportunities for international investors and provides the right environment to encourage private industry to take the risk associated with investing in exploration. We do this in a number of ways, including:
· offering attractive and innovative licensing opportunities, such as the 2011 Atlantic Margin licensing round;
· providing a fit-for-purpose, transparent and robust regulatory regime;
· deepening knowledge of our offshore petroleum potential, in particular through data acquisition and supporting key research projects and;
· actively promoting the opportunity to invest in exploration in the Irish offshore, in particular to companies not currently active here.
A fundamental matter recognised in the report is the need for our licensing regime to communicate both stability and certainty to industry. This is especially true where we are competing with other countries to attract investment and where the nature of the business requires the taking of a long-term view. For this reason, I welcome the recommendation that no retrospective changes should be made to licensing terms.
In relation to recommendations which I believe may already be provided for under our licensing regime, I want to comment briefly on the recommendations relating to the maximisation of production from a commercial field, the principle of unitisation and the issue of flaring of gas. If I am clear in my understanding of what the committee had in mind on these recommendations, then these issues are already addressed to a considerable degree by the existing licensing terms, together with the Department’s own industry-specific rules and procedures. I am of course open to suggestions as to how existing provisions could be improved.
I have said that some of the recommendations could usefully be explored further. In that regard it is important to address the recommendations relating to public consultation and “community gain”. I don’t know whether the recommendation on consultation is a statement recognising the value of public consultation and advocating continuance of the status quo or a suggestion that adequate public consultation is not provided for.
The reality is that all major infrastructure consent processes involve a public consultation phase, which generally includes an oral hearing. These requirements are not industry-specific and they flow
from both national and European legislation. This means that any future oil or gas development project would be subject to a number of consent processes, each of which would have a detailed public consultation phase.
It may be that the circumstances which gave rise to the Committee’s focus on public consultation pre-date the passing of the 2006 Strategic Infrastructure Act, which provides for a more holistic, transparent and strengthened approach to the assessment of applications for major transport and energy projects.
I believe that, in its earlier development, the companies involved in the Corrib field took their eye off the ball and that there were genuine local community interests which should have been properly addressed. Since that time, however, the State has bent over backwards in every way it can. In so far as it is known to man to make safe the bringing ashore of gas, this has been done. Uniquely, we are engaged in constructing a tunnel under Sruwaddacon Bay, at a cost of €400 million. That €400 million cost will be written down against the costs of developing the field, which means the Exchequer must forgo €100 million in taxation.
The “community gain” concept discussed in the report is clearly not industry-specific. It is also complex, as communities are not homogenous and so what some may consider to be a gain, others may consider a loss. The Strategic Infrastructure Act now enables Bord Pleanála to attach specific community gain conditions to a planning consent.
The Government fully supports a community gain approach in the delivery of energy projects. This is explicitly referenced in the Government’s Policy Statement on the Strategic Importance of Transmission and Other Energy Infrastructure which we published last July and which now guides the planning authorities in their decision-making. That Policy Statement stresses the need for developers to examine appropriate means of building community gain considerations into project budgeting and planning.
I now turn to the recommendation that has generated the greatest interest, for an almost doubling of the existing tax rate applying to petroleum production. A comprehensive review of Ireland’s licensing terms was carried out in 2007, following which both the fiscal and non-fiscal licensing terms were revised.
The revised terms sought to strike a balance between attracting investment in high-risk exploration and also ensuring the State receives a fair share of any profits.
The terms provide for a profit resource rent tax of up to 15%, on top of a 25% corporate tax rate, ensuring that the return to the State will increase to a maximum of 40% in the case of the most profitable fields. The revised terms apply to all exploration licences issued since the beginning of 2007.
The changes in that tax regime that are now proposed are not minor or modest in nature. What is proposed is a fundamental re-positioning, that would raise our tax to a similar level as that of the UK and, in the case of very profitable fields, would impose a higher tax here than would apply in Norway.
It may be the case that, with this recommendation, the committee was signalling where Ireland should seek to re-position the tax regime over time. However, I struggle to understand how anyone could expect Ireland to have Norwegian style tax rates without first having Norwegian levels of commercial discoveries.
It also appears to me that this particular recommendation does not logically flow from the Committee’s own report. The report sets out four main reasons for proposing these tax changes, namely:
· high oil prices;
· the impact of advances in technology on exploration success rates;
· the fact that not all regions with petroleum potential are politically stable locations for investment; and, finally
· recent positive indications from exploration off Ireland’s south coast.
The first two of these factors, high oil prices and new technologies, do not give Ireland any comparative advantage. They do not make investing in Irish offshore exploration more attractive than investing in the North Sea or elsewhere. I should add that advances in technology in the exploration sector, like most other sectors, tend to be of an incremental nature. It is still a fact that without exploration drilling, no new discovery will be made. This is a critical factor for Ireland, as drilling levels in the Irish offshore remain very low. Incremental technology advances may help but more drilling is essential.
Political stability as a location for investment is an advantage that Ireland has over certain other regions. However, this is by no means a new, or indeed an exclusive advantage. It is an advantage that is also enjoyed by Norway and the United Kingdom.
The final factor that seems to underpin the report’s tax recommendation is the positive news from the Barryroe well. While the drilling results there are encouraging, further work is required to establish whether this discovery can be declared to be commercial. If it is declared commercial, then that should attract more exploration investment to the region.
However, the potential impact should not be overestimated and it needs to be put in context. It would be positive as a new commercial discovery, Ireland’s first ever commercial discovery of oil. It would, however, also be Ireland’s first commercial discovery in nearly two decades, since the Corrib gas field was discovered in 1996. While it would be positive news, it would not by itself make Ireland the new North Sea.
I do not wish to be negative, or to undersell Ireland as a location for exploration investment – quite the contrary – but we must deal in realities. The reality is that the Irish offshore is under-explored and its petroleum potential is largely unproven, particularly when compared with other petroleum regions such as Norway and the United Kingdom.
The statistics speak for themselves. A total of 156 exploration and appraisal wells have been drilled to date in Ireland’s offshore, compared with more than 1,200 wells in Norway and 4,000 wells in the United Kingdom. The United Kingdom has in excess of 300 producing fields while Ireland has only three, with a fourth in development. Norway is the second largest gas exporter and the seventh largest oil exporter in the world. Ireland on the other hand imports more than 95% of its gas and 100% of its oil.
In my view, Ireland’s focus should be on how to encourage an increase in the level of exploration investment and exploration drilling. This is what we need if we are to establish the true petroleum potential of the Irish offshore.
The principal factor driving exploration investment decisions is the likelihood of making a new discovery. The challenge is how to improve the industry’s perception of Ireland’s prospectivity relative to that of other countries. Exploration drilling and new seismic acquisition are both key. Between 2011 and 2012 we had just one exploration well and this year it seems that Dunquin will be the only well drilled offshore Ireland. That is the backdrop against which we are having this debate. We have to recognise that Ireland is competing with countries such as Norway and the United Kingdom to attract mobile international investment and that we cannot set our tax terms in isolation.
It is a complex and challenging position in which we find ourselves. There is a clearly recognised potential and there have been positive recent signs, in terms of the number and quality of exploration companies getting involved in the Irish offshore. The exploration cycle is, however, a very long cycle. Many current authorisations are at the stage where exploration drilling has yet to be undertaken – or even yet to be committed to.
The joint committee signalled clearly in its recommendations that it considered a review of the fiscal terms would be appropriate. It was also very clear that an adjustment to the fiscal terms should not be retrospective. I am completely in agreement with this latter point.
While I have clearly indicated my reservations about Norwegian style tax terms, I am conscious that long-term investment decisions on exploration expenditure would benefit from the maximum degree of certainty on the stability of the fiscal regime.
With that in mind and having regard to the fact that the last review of the fiscal terms was in 2007, it is my intention following the conclusion of this debate to seek further independent expert advice on the “fitness-for-purpose” of Ireland’s fiscal terms.
Such expert advice would focus on what level of fiscal gain is achievable for the State and its citizens and, equally important, on the mechanisms best suited to produce such a gain.
In conclusion, certainty as to fiscal terms is a pre-requisite to attracting oil and gas exploration investment. In that regard, and particularly in the context of planning for the next licensing round, it would be my intention to bring my consideration of this matter to a conclusion before the end of this year. That would ensure that the next licensing round could be launched against a backdrop of regulatory certainty and encourage much needed new investment in exploration in our offshore.
I thank the former joint committee for its detailed
report and look forward to hearing the views of the Members in this debate.