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Private Members Motion – Oil and Gas Fiscal Licensing Terms Minister Rabbitte's speech

I move amendment No. X

To delete all words after Dáil Éireann and substitute the following:

“recognises that the true potential of Ireland’s indigenous petroleum resources can only be established through effective exploration and calls on the Government to continue to take measures to attract an increased share of mobile international exploration investment to Ireland by:

· maintaining fiscal licensing terms that appropriately reflect both the risks and rewards of investing in petroleum exploration in the Irish offshore and onshore, relative to investing in exploration in other competing jurisdictions; and

· offering appropriate licensing opportunities designed to attract new companies to Ireland, supported by an active promotion campaign underpinned by petroleum research projects.

Dáil Éireann further recognises that having regard to the fact that only four commercial discoveries of petroleum have been made in the Irish offshore since the 1970s and to the significant costs involved in exploring for oil and gas in the deep waters of the Irish Atlantic Margin, that the cost of such exploration should be borne at this time by industry and not by the Irish taxpayer.”

I welcome the opportunity for this House to have an informed discussion on the question of the tax terms that apply to petroleum production in Ireland.

The Private Members Motion proposed by Sinn Féin, which is along the same lines of some earlier commentary both in this House and in the media, clearly demonstrates the need for a well informed debate on this subject. Too often, public discussion of Ireland’s tax terms relating to production of oil and gas is informed by a gross misrepresentation of the facts.

In my contribution to this debate I will focus on facts and realities.

· I will convey to the House the rationale underpinning Ireland’s fiscal terms for oil and gas production and will demonstrate why Ireland’s existing terms are appropriate.

· I will present the facts that demonstrate why, from an exploration perspective, the Irish offshore should be differentiated from the offshore of the UK, or Norway.

· I will address the “developing myth” that a simple change to Ireland’s tax policy in this area could be a panacea for all the challenges faced by our economy.

I would like to address this last point first. There is as I said a “developing myth” that Ireland has vast discoveries of oil and gas off our shores and that imposing a higher rate of tax on the production of these petroleum resources would eliminate all of our financial worries. Unfortunately, the reality is quite different.

There is periodic publicity about a research finding from a study sponsored by my Department that estimated there could be in the order of 10 billion barrels of oil equivalent in the Irish offshore. That estimate is an estimate of the “yet-to-find potential” of the offshore frontier basins west of Ireland and is based on petroleum systems studies. It is an estimate of what might be present based on geological criteria and regional comparisons.

Some commentators have chosen to represent this estimate in a manner that would suggest that this volume of oil and gas had actually been discovered offshore Ireland. This is quite clearly not the case and it is misleading to suggest otherwise. To do so is to ignore the fact that this is just an estimate of what may be out there, but has “yet to be found”. It also ignores the fact that it would take hundreds, or thousands of exploration wells to discover if the estimate is accurate. And it ignores the fact that even with a very intensive and expensive exploration effort, the benefits that would accrue to Ireland would only be realised in ten, fifteen, or thirty years from now.

It is also important to recall that the cost of drilling even one hundred exploration wells in the Atlantic would be well in excess of €10 billion. Having regard to the high risk of unsuccessful exploration, it is very difficult to make the case that the Irish taxpayer should invest billions in an intensive exploration effort at this time. Instead, this should be left to the industry, who can include exploration in the Irish offshore as part of a balanced international exploration portfolio.

The rationale underpinning Ireland’s tax policy approach in the area of oil and gas production is quite simple. The oil industry is a truly global industry and Ireland competes not just with other European countries, but with other regions of the world, to attract exploration investment to Ireland. As a result Ireland cannot set its tax terms in isolation, or we would risk discouraging all potential investment.

Industry decisions on where to invest in exploration are principally driven by two key factors: geology; and economics. Where the industry views an area as being highly prospective, it will be prepared to invest in exploration even if the tax terms are relatively tough. The opposite is of course also true.

While the Irish offshore has recognised petroleum potential, it is quite under-explored when compared with other offshore areas such as Norway, or the UK. The high level of successful exploration in the UK and Norwegian offshore areas has resulted in exploration companies being prepared to invest heavily in exploration in those countries, despite the fact that the State’s tax take is much higher than in Ireland. For example, more than 1,200 exploration and appraisal wells have been drilled to date in Norway and more than 4,000 in the UK…/

That compares with a total of 156 wells for Ireland.

The statistics are even more dramatic when it comes to producing fields where the UK has in excess of three hundred producing fields and Ireland has only three with a fourth in development. The number of wells drilled, or the number of producing fields, do not tell the full story, as the size of producing fields can vary significantly. For example, the giant Troll field offshore Norway is in the region of fifty times the size of the Corrib gas field.

The bottom line is that if Ireland’s petroleum tax terms were fixed at the same level as those of the UK or Norway, then we could expect that no exploration investment would actually locate in Ireland. That would mean no new exploration wells and no new oil or gas discoveries. Those who say our tax terms are too low might be happy, but I would remind them that 60% of zero is still zero.

If a reasonable person were looking for countries to compare Ireland’s petroleum tax terms with, they would look to countries such as Portugal, Spain and France with more similar success records to Ireland…/

Under the 2007 Terms, the tax rate in Ireland varies from 25% to 40% depending on the profitability of the oil or gas field. This compares well with a tax rate of 27.5% in Portugal, 30% in Spain and 34.4% in France.

It is true that when Ireland’s first licensing terms were introduced in 1975 they provided for the then prevailing rate of Corporation Tax, which was 50%, along with royalties. At that time there was a perception that the Irish offshore would be the next North Sea and the licensing terms were written to reflect that. With only four commercial discoveries of gas since then and no commercial discoveries of oil, it is clear that the optimism of the 1970s was unfounded. The revisions to the licensing terms since 1975 addressed the emerging reality that Ireland was not the new North Sea and that there was a need to take measures to incentivise mobile international exploration investment to choose Ireland, over other areas that had more success to date.

The abolition of royalties in 1987 was one such measure. Ireland followed the lead of Norway and the UK who had both moved from a royalty based regime, to a tax based regime…/

Royalties are a relatively blunt instrument, in that the charge is not related to actual profit. A tax on profits is a more predictable charge for both industry and Government.

I recognise that setting the tax rate for a sector such as the petroleum exploration and production sector is not an exact science. The experience of the last twenty five years since royalties were abolished in Ireland and the past almost twenty years since a 25% basic tax rate was introduced, however, provides ample evidence that Ireland had not set its terms too low. There was no stampede of exploration investment after a petroleum tax rate of 25% was introduced in 1992, at a time when the general rate of corporation tax was 40%. In the following decade an average of three wells a year was drilled in the Irish offshore. This compares with an average of almost eighty wells per year in the UK for the same period.

In 2007 the tax terms were again reviewed. The review undertaken by independent economic consultants considered the appropriateness of Ireland’s licensing terms in comparison to other European countries that Ireland competes with…/

That independent review concluded that there might be potential to capture a higher share for the State on more profitable finds, but that the potential for this should not be over estimated. Accordingly, it recommended the introduction of a supplementary tax in the case of more profitable fields. The 2007 terms apply to all exploration licences granted since January 2007. Under the 2007 terms, the State’s tax take on very profitable fields will be up to 40%.

I would like to turn now to the matter of the Corrib Gas Field and the manner in which the State stands to benefit. While construction of the facilities to date has generated significant employment opportunities, the principal financial benefit to the State will be in the form of the 25% tax rate that applies to profits from the field, under the 1992 licensing terms. In the normal way, the tax provisions applying are set down in the Finance Acts and not in a contract with the developer. The 2007 tax terms do not apply Corrib as they do not apply to exploration licences granted prior to 2007. To do so would have been to introduce what would in effect have been a retrospective form of taxation and such an action would not have been in Ireland’s interest.

The second way in which the Corrib Gas Field will benefit the people of Ireland is that it will significantly strengthen Ireland’s security of energy supply. Corrib gas will meet approximately 60% of Ireland’s gas demand in the first four to five years of production. That will represent a significant strengthening of Ireland’s natural gas security of supply as Ireland currently import approximately 95% of our natural gas needs.

I reject the call made to revoke existing exploration and production consents. Ireland needs more exploration for oil and gas not less. Ireland needs more discoveries like the Corrib Gas Field. While it might suit conspiracy theorists to suggest otherwise, the reality is that the number of commercial discoveries made in the Irish offshore is very low. Exploration levels have also remained stubbornly low, despite a range of initiatives directed at attracting an increased level of investment. This represents a real challenge for Ireland.

Without an increase in the level of exploration activity Ireland will not benefit from its indigenous natural resources. It is somewhat of a Catch 22 situation. More exploration effort, in particular exploration drilling, is needed if the petroleum potential of the Irish offshore is to be proven…/

Yet, until more commercial discoveries have been made it will continue to prove difficult to attract a significant level of new exploration investment to Ireland.

In an effort to attract exploration investment to Ireland, my Department actively promotes the opportunities for investment in the Irish offshore. It also supports research initiatives directed at developing knowledge of Ireland’s petroleum potential. At the end of next month, the 2011 Atlantic Margin Licensing Round will close. This licensing round is structured differently to previous rounds and is aimed at stimulating a new momentum in exploration activity. In particular, it has the objective of attracting some new exploration companies to the Irish offshore.

I look forward to the conclusion of that licensing round in six weeks time. I am hopeful that it will bring a new momentum to the level of exploration activity in the Irish offshore. This in turn would increase the chance of much needed new commercial discoveries being made.

To conclude, I know that I will not have to remind the Deputies in whose names the private members motion was submitted, that the 1919 Democratic Programme also provided that:

“It shall be our duty to promote the development of the Nation's resources, in the interests and for the benefit of the Irish people.”

I trust that I have clarified for this House that the Government does indeed have a clear, sensible and rationale approach in this area of public policy. It is a policy approach with a clear objective of ensuring that the people of Ireland do benefit to the maximum degree possible from our indigenous natural resources.

It is a policy approach that recognises that Ireland needs to attract a significant increase in the level of mobile international exploration investment. It is a policy approach that offers the best chance for the people of Ireland to benefit from our indigenous oil and gas resources.

Ireland’s oil and gas tax regime is fit for purpose. The challenge for Ireland now is to encourage a sufficient increase in exploration activity to bring about further commercial petroleum discoveries. It is only by doing this that the people of Ireland will benefit fully from our indigenous oil and gas resources.