JOINT COMMITTEE ON COMMUNICATIONS, ENERGY AND NATURAL RESOURCES debate -
Wednesday, 22 Oct 2008

Offshore Oil and Gas Exploration: Discussion with IOOA.

Chairman

I welcome Mr. Fergus Cahill, chairman, Irish Offshore Operators Association, Mr. Karl Prenderville, commercial director, Island Oil and Gas, Mr. John O'Sullivan, exploration manager, Providence Resources, Mr. Julian Cetti, head of commercial and business strategy, Shell Exploration and Production Ireland, and Mr. John Conroy, licence and operations manager, Statoil Exploration Ireland.

The representatives of the Irish Offshore Operators Association, IOOA, were invited by the committee to give a presentation and participate in a discussion on the development of indigenous oil and gas offshore. Before we begin, I draw attention to the fact that while members of the committee have absolute privilege, the same privilege does not apply to witnesses appearing before the committee, which cannot guarantee any level of privilege to witnesses appearing before it. Furthermore, under the salient rulings of the Chair, members should not comment on, criticise or make charges against a person outside the Houses or an official, by name or in such a way as to make him or her identifiable. I understand Mr. Cahill will make the presentation.

Mr. Fergus Cahill

I thank the Chairman for the opportunity to address him and the committee. We would like to start by giving an overview.

The key issue, as far as we are concerned, is security of supply. Ireland, as has been frequently stated, is very insecure in terms of energy supply. We import 90% of our gas. We import all of our oil. We are at the end of a long supply chain. Although I suppose there are other issues which are occupying people's attention at present — even though I am a pensioner, the committee need fear nothing from me this morning——

Chairman

Are you one of the 5%?

Mr. Fergus Cahill

That remains to be seen.

Deputy Simon Coveney

Mr. Cahill should not put us all in the same bracket on that issue.

Mr. Fergus Cahill

Secure and affordable energy is key to our economic and social well-being. The Right Hon. John Hutton, the former Secretary of State for Business, Enterprise and Regulatory Reform in the UK put it very well when he stated, "No lights. No power. No future". We cannot do any better than that. This committee, in June 2006, issued its seventh report in which it recognised this position. We fully endorse the recommendations of this report on renewables and other ways of supplying energy.

Renewables have a place, certainly in the medium to long term, but at present they are expensive. There are production limitations in the case of wind. There is weather dependency. There are long timescales for development in the case of wave energy. As we have seen, bio-fuels have unforeseen impacts on global fuel prices. There is an article in this morning's Financial Times about the relative collapse of some ethanol firms in the US because they are unable to operate commercially. While renewables will be useful, they are not nearly the whole answer and for the foreseeable future we will depend on petroleum for the vast proportion of our energy mix.

We import most of our petroleum, 90% of our gas and all our oil, and we generate 60% of our electricity from gas. We are at the end of the European supply chain. The recent bank crisis has given us an interesting insight into the way individual governments respond to particular crises. Although the International Energy Agency, IEA, has various measures in place to control energy crises, these remain to be tested in a real scenario and we are significantly exposed. The IEA and Forfás have identified this exposure. Therefore, the first point we want to make is that it is of crucial importance that exploration continues and intensifies and that the development of indigenous oil and gas is supported and encouraged.

There are other benefits. The first aspect we would like to look at is gas prices and my colleague, Karl Prenderville, of Island Oil and Gas, will speak about that.

Mr. Karl Prenderville

We believe indigenous production and exploration should be fully encouraged. For example, if more gas was discovered than could be absorbed by the Irish market, then the additional production would have to be exported. Imported gas is priced at market price plus the cost of transporting it to Ireland but if we were to be exporting gas, the marginal production would have to be exported at market price minus the cost of transportation because the UK prices would be lower and that would have the effect of a downward pressure on the domestic market as well. We believe that is a very important point. All that would take would be the discovery of another field larger than Corrib and we would have more than enough domestic production to satisfy the market and be exporting.

Deputy Simon Coveney

Can we ask questions as we go along? There is a small number of members here and perhaps we could have such interaction.

Chairman

Yes.

Deputy Simon Coveney

This is an issue on which we had discussions with the regulator when it was here a few weeks ago. I have real concerns that we will face the ironic situation of bringing Corrib gas ashore eventually and seeing gas prices increase as a result of indigenous supplies of gas. That would be a totally unacceptable irony.

I would be supportive of bringing gas ashore for reasons such as security of supply. If we do not supply all of Ireland's gas demand indigenously but we increase it dramatically from where it is currently, which is what will happen with Corrib, we will still import some gas and gas prices will still be determined by the cost of imported gas because it will still remain the supplier for some 20% of Ireland's needs. However, the cost of the gas imported will increase because we will be importing far less gas via the same interconnectors. As we will incur the same capital costs in terms of a functioning interconnector but will be importing much less gas, the cost per unit of gas will increase in Ireland in terms of imported gas, which will then become the market leader in terms of the price of gas in Ireland. Gas produced at Corrib will be sold based on the cost of international gas, which will have increased as a result of importing less gas through the same physical infrastructure. Are our guests following what I am saying?

Mr. Fergus Cahill

Very much so.

Deputy Simon Coveney

The regulator told us we are correct. At present, if we do not change the way in which gas pricing is regulated in Ireland, by bringing gas ashore from Corrib we will see potentially an increase in the price of gas on the basis that imported gas becomes more expensive and that becomes the determinant for the price of gas being produced and coming ashore in Corrib.

I understand what Mr. Prenderville is saying, that if we produce more gas from Irish offshore fields than is consumed in Ireland, then we can export. I can see how that would drive down prices, using our interconnection facilities to export rather than import gas.

If, however, with the position which will arise in the medium term, while we will have more of our own gas it will not be enough to fulfil Ireland's total needs, therefore, imported gas will be the price leader. In view of this we need to look at a new mechanism for regulating the price of gas in Ireland, if Irish consumers are not to see an increase as a result of Ireland producing its own gas, which is a totally unacceptable consequence of what should be a positive development for Ireland in terms of security of supply. It would be useful if the members of the delegation could address that anomaly.

Mr. Fergus Cahill

Chairman, could I ask Mr. Julian Cetti to respond to that point?

Chairman

We will now return to finish Mr. Prenderville's presentation.

Mr. Karl Prenderville

The reason for that is because of the building of the second interconnector, which is not required and is sitting empty, not because of the producers, and the way it is being treated. The second interconnector was built, we are led to believe, for security of supply reasons for a start. That is not an issue for the producer. That is only the way it is being treated. If the costs were to be recovered over a longer period of time, say, 100 years or 50 years rather than the way it is trying to be done at present, then it would not result in an increase in cost.

Deputy Simon Coveney

With respect, I know it is not the fault of producers that we invested in the second interconnector that is not now needed. However, it is not the consumer's fault either. It is our job to ensure consumers are protected from potential unnecessary price increases as a consequence of Ireland producing more of its own gas supplies. Whether it is the fault of producers is not that relevant.

Mr. Karl Prenderville

I accept that.

Deputy Simon Coveney

The net issue is whether consumers will be obliged to pay more if Ireland produces more of its own gas supplies. The regulator has indicated that this is likely to happen. Do the producers accept that a new regulatory regime is required in respect of gas pricing in order to avoid increases?

Mr. Julian Cetti

That is a crucial point, particularly when one considers the treatment of the interconnectors. As the Deputy stated, the pricing methodologies being adopted could potentially send the wrong signals. It is wholly inappropriate to state it is the producers' fault or that of LNG. What we must consider is how we treat these. One of our concerns is that if the interconnectors are heavily subsidised, we will arrive at a situation where the entry charge for gas into Ireland will actually be cheaper in Scotland than it will for indigenously produced supplies. The Moffat entry charge could be lower than that at Bellanaboy or Shannon, which would have the effect of reducing security of supply because it would discourage any form of exploration, as well as LNG. The latter will go through the United Kingdom, where lower throughput charges apply at the larger terminals and where negligible entry charges obtain at the interconnectors. The company will not come to Ireland. This matter must be treated with caution because how the interconnectors are priced is crucial.

As producers, we are not stating we want prices to go through the roof. What we are saying is the charge for using assets should accurately reflect the cost of those assets. There needs to be a debate with regard to how this might be achieved in practice. The provision of absolute subsidies is probably not the right way to go for a number of reasons.

Mr. Fergus Cahill

That is the issue of prices dealt with, unless members wish to return to it.

I turn to the growth opportunities that result from the production of indigenous gas supplies. Bord Gáis Éireann's north-west pipeline would have been uneconomic were it not for the gas scheduled to be pumped through it from the Corrib gas field. This has led to the connection of 12 towns in the Mayo-Galway area. Bord Gáis has a new policy of grouping towns. As a result, towns which would previously have been viewed as uneconomic to supply with gas can now be treated as a group and facilitated with such a supply.

If members consider the way pharmaceutical and processing industries in general have grown around Cork Harbour, they will see the potential for new industry in the north west. If they examine the map of the pipeline from Cork to Dublin, they will see the spurs that have been run off into various towns. This has brought great prosperity. There is major potential in this regard.

On industry investment, our member companies have spent well in excess of €2 billion exploring in the seas off Ireland. We have an explicit policy of giving full and fair opportunity to Irish companies to compete for that investment. We estimate that approximately 30% of this money is directly invested in Ireland. Members will appreciate that many of the services we use are unique to the oil industry and simply are not available in Ireland. I refer, for example, to deep-water drilling rigs. There are perhaps a couple of dozen — or perhaps not as many — such rigs throughout the world which can drill in the deep water off Ireland's coasts. We make considerable efforts to ensure Irish companies get a full and fair opportunity to compete.

If one visits Killybegs, one will see fishing vessels worth tens of millions of euro tied up and fishermen walking the streets. The work of the offshore service industry is helping to counter that downturn. There were, for example, 214 vessel movements connected with the offshore industry in and out of Killybegs last year. There were 620 additional flights into Donegal Airport. In Cork there were 252 additional vessel movements and 1,560 additional helicopter flights, as well as over 100 extra fixed-wing flights. During the development of the Seven Heads field, which is small off and the south coast, the direct spend in the Cork area was approximately €14 million. The Corrib project is spending in excess of €180 million in counties Mayo and Donegal. Mr. Cetti may wish to elaborate on the latter.

Mr. Julian Cetti

Another important aspect of the exploration industry is that when things start to happen, the benefits they bring to local communities can actually be large. The Corrib gas terminal at Bellanaboy is the largest construction site in Ireland. In excess of 800 people are employed there, many of whom are from the local area. This is important because, traditionally, employment has been hard to come by for the people to whom I refer. Projects of this nature can help bring real benefits to a community. In the long term up to 150 jobs may be associated with the ongoing activities of the Corrib project, not only at the terminal but also in the context of the spin-offs that will be enjoyed by other businesses. It is important to encourage these developments, not only from an energy perspective but also from the point of view of the community.

Mr. Fergus Cahill

There is a reference to a report by Goodbody Consultants in our submission. We will make copies of this report available to members for their perusal.

Everything we have said represents the good news. The bad news is that Ireland, for a variety of reasons, is a difficult place in which to operate. Mr. O'Sullivan, exploration manager of Providence Resources, will comment on this aspect.

Mr. John O’Sullivan

The oil industry or petroleum exploration business is somewhat similar to the property business in that it is all about geology. The geological system off Ireland is extremely difficult and more complex than that in the more mature areas such as the North Sea. This is borne out by our drilling record to date. We have drilled approximately 140 wells off Ireland in four fields which have been or are in the process of being developed. These are Kinsale, Seven Heads, Ballycotton and the Corrib. On those odds, the chances of success are low. This makes it difficult in a normal environment to attract or leverage investment into projects in this country because the risk is so high. Based on the historical position, our chances of success are one in 30 or one in 40.

Geological matters form a very basic aspect of our business. In addition to these is the deep water nature of the west coast which is where the majority of activity will be focused. It is a harsh environment and there are many environmentally sensitive issues with which we must deal. These two elements make it a high-cost environment in which to operate. We also face challenges in the context of there being no infrastructure in place and the fact that we are situated a long way from the main markets for drilling rig services, etc. When a drilling operation occurs off the west coast, we tend to be obliged to bring in the services of major contractors. The latter land at places such as Killybegs, Shannon and Foynes. The cost is extremely high and the risk in terms of geology is disproportionately high. This makes our operations extremely difficult. We are obliged to offer to our partners or companies willing to make investments propositions they can sell to their boards at international level. The geology and the environment are both harsh.

Another issue is that the offshore fields around Ireland have a tendency to be gas prone. I refer to the Corrib in the west and Kinsale in the south. By its very nature, gas is more difficult to deal with than oil because there is a need to put in place infrastructure, pipelines and onshore reception facilities. Pricing is difficult because it tends to relate to the local market. For example, gas prices in west Africa are different from those in north-west Europe. It is lucky that the price in north-west Europe is decent because this makes it attractive. For an exploration manager chasing oil developments in deep water where floating facilities can be put in place, the economics are significantly better. We do not need to provide a vast amount of infrastructure in deep water and hope gas prices will hold up and that the economics will make the proposition viable. With oil, it is much easier with floating facilities and we can take a facility away if the oil field does not perform as we expect. That is another big issue.

Those are three key messages about the challenges we have: geology, the harsh deep water environment and the fact that it is, in general, a gas prone area, which makes projects expensive. Ireland has not attracted significant investment because of the perceived risk. The ongoing issue in the capital markets has made the situation even worse. Our task as an industry has become more difficult in attracting inward investment within our companies and with our partners. The total spend offshore from Ireland in exploratory drilling programme in summer 2008 between Shell's West Dooish well, Statoil's well in the Erris basin and our two wells off the south coast is approximately $300 million. It is pure exploration. While the Shell results have to be released, we and Statoil were disappointed with the results. They were interesting but they were disappointing commercially. The $300 million invested this summer has disappointed the industry. We are going forward into a situation with a tighter capital market trying to attract further investment in exploration.

Deputy Simon Coveney

I seek clarity on the figures. Six months ago we met in Buswells Hotel and the briefing was useful. I took from it that it costs the company approximately $70 million to undertake an extensive exploration trial and in 2008 the industry expected to undertake eight such trials off the Irish coast. Did that happen? Did companies withdraw owing to a lack of finance? Were the expectations outlined six months ago fulfilled over the summer? Is the cost I cited correct?

Mr. John O’Sullivan

With the increase in the price of oil, costs for offshore service and drilling rigs have increased significantly. For example, Providence Resources contracted a rig in 2004 at approximately $50,000 a day whereas in today's market that would cost between $400,000 and $500,000 a day. Oil prices have not jumped by that amount and, therefore, there has been a disproportionate shift in the cost for offshore support services and drilling rigs. In addition, Shell was drilling in 6,000 ft. of water in its West Dooish well off the west coast. One can imagine the complexity involved in drilling at the water depth, maintaining position with a mobile drilling rig compared with being in a shallow water in the Celtic Sea. The €70 million sum reflects more shallow water drilling whereas deep water drilling costs between $100 million and $150 million in a success case.

We outlined the total drilling programme we anticipated could occur in 2008. A number of wells were deferred to 2009, primarily owing to lack of availability of equipment or slippage in certain programmes. We drilled four exploratory wells.

We have drilled approximately 140 wells offshore and four fields have been developed. The chance of success of wells off the west coast costing $100 million is about one in ten or one in six. The risk is very high and it is still a challenge for us to attract investment in larger companies from internally sourced funds and new investment from third parties.

The recent licensing rounds were disappointing in so far as the same players have been in place offshore from Ireland for the past ten years. We have attracted few new entrants, which is disappointing, because we do not have the competitive edge one expects in the oil industry. If Members watched the movie "There Will be Blood", they would think everybody was chasing after the same blocks and doing deals in smoky pubs, but that is not happening, which is disappointing. We would love to see people competing with us for acreage and companies vying with us for blocks and utilising the same rigs, which shares costs and reduces overall costs.

The UK is a mature area which is quite different. Industry representatives were very proactive when they witnessed the downturn in the North Sea. They introduced serious incentives for small companies, including one and two-man operations, entrepreneurs and so on who had retired and left the mainstream industry. They promoted acreage at a low cost and turned acreage over to the larger companies to which it had been promoted and which are resource constrained generally in terms of people to examine vast amounts of data in new areas. One of the larger companies, which may not have focused on Ireland, would then assess a prospect generated by prospect generators and make an investment.

One wonders why the industry continues to explore given the high risks, the high costs, etc. Some significant and perhaps even world class discoveries have been made. The Kinsale and Corrib fields drive us forward to find the next major accumulation but, within organisations, the question is continually asked, as it is asked in every area in multinational companies, why we continue to invest in these areas if we are not seeing a return. It is a serious question offshore from Ireland given the rate of success with more wells being drilled and the same discoveries sitting there. The Corrib field was found in 1995. As an industry, we would like more promotion of the Irish offshore area given its inherent risks as well as the high cost environment.

Mr. Fergus Cahill

Our members are working hard to attract outside investment to share risk and to increase the possibility of success.

Mr. Karl Prenderville

We are continually trying to bring in new investors. I met some last night. We acknowledge the initiatives of the Department in promoting Irish acreage but we would like an expansion of that effort, especially in the current environment. The cost of a rig is still between $400,000 and $500,000 a day but the price of oil has halved over recent months. We are at the worst point in the cycle and we would appreciate any help we can get from the Department to bring in more companies.

Mr. Fergus Cahill

There is a perception that a great deal of exploration has taken place offshore from Ireland and this is not the case.

Mr. John Conroy

Mr. O'Sullivan referred to the risk factors in exploring offshore from Ireland. Those of us who are here are part of a legacy. Large new companies are not coming in, which is a concern, but nevertheless a number of areas offshore are under-explored in deep water, which is challenging, where there have been no discoveries so far. Like most things in life, the lifeblood of any project is success. One would hope, at least, that someone, even if not oneself, would have a successful project or win. One could then envisage doing the same the following year.

We are in a situation where we desperately need some success similar to the Corrib gas field. The fact there are difficulties associated with planning issues on that affects our status worldwide. In terms of exploration, we have worked on four wells this year but have made no discovery. This has an impact internationally. What we need now is to kick-start, somehow, exploration and discovery in some deep water region that is high cost in terms of drilling and very high risk until someone makes a discovery. We need to do this to provide encouragement to get the industry active and competitive again. We must do this if we are ever to be able to address the security of supply issue.

There is often much in the press about the fiscal terms attaching to exploration, but these are probably the only advantage I see in terms of promoting Ireland for exploration, even within our company. Ours is a company that looks at exploration and drilling in a global sense rather than a national sense. We consider exploration as part of a global kind of portfolio. The fiscal terms are still held up as something to encourage companies to continue coming here, despite our not having had the success yet. Despite what is portrayed in some of the press, issues such as fiscal terms are important and until there are significant discoveries that will generate momentum, those kinds of incentives must be kept in place.

Mr. Fergus Cahill

Our members remain committed to making further discoveries, bringing them into production, increasing our security of supply, generating economic activity and employment and providing much needed tax revenues to the Exchequer. It might be worth mentioning that if the original schedule for the Corrib gas field had been attained, tax revenues would probably now be flowing into the Exchequer. There are probably some people not too far away from us who might have found that welcome.

Exploration is a high risk, challenging environment. The permit process is complex and needs to be simplified, and the mechanisms for promoting Irish acreage abroad need to be intensified. The Commission for Energy Regulation's approach to the second interconnector needs to be revised significantly because it is counter-intuitive. It is difficult to accept that a situation could be contrived in which the production of indigenous gas would be held to be responsible for an increase in gas prices. We do not accept that.

This completes our presentation. We are happy to answer any further questions the committee may have.

Chairman

I thank Mr. Cahill.

Deputy Simon Coveney

I have a number of questions. I am interested in hearing more about the recent disappointing licensing round. I assume the motivating factors for large companies are a combination of risk, cost and potential return and that they are motivated to drill in Ireland either by the prospect of finding gas or oil or by the tax regime in place here compared with other parts of the world. In terms of the tax regime attached to a potential find of gas or oil, Ireland, on the face of it, does not compare particularly favourably with other parts of the world and the cost of drilling in many of those parts is far cheaper and there is a much less harsh environment. That said, it would be helpful for the delegation to put on the record the terms of the current tax regime in Ireland and the details of the changes that were made last year. What is the industry's view on it and does it think there is sufficient incentive to encourage people to invest in exploration drilling and so on?

How can the Government be more proactive in terms of encouraging more activity while at the same time reassure people here? There are many very sceptical people and the delegation will have heard their views on many occasions. People wonder what is going on here and suggest the Government is giving away our natural resources to the private sector. They believe that if a large gas field is found off the coast of Ireland, it is a natural resource that is owned by the Irish people. They want to know what they are getting for it in terms of tax revenue. Cogent arguments are made that we are not getting enough in return. I know the argument the exploration companies would make, namely, if it is such a favourable regime, why are more people not drilling? It would be helpful if the delegation could put its side of the argument on the record for members. I was not aware that the cost of hiring or renting a rig has increased to the extent it has. That is interesting information.

The other question I would like to ask relates to value for money for a project into which the State has put significant money and research, namely, the Irish seabed survey in which the Marine Institute has been involved for a number of years. Is information shared between the Irish offshore industry and the Marine Institute? This committee went to the Marine Institute and spent a significant amount of time discussing the value of the seabed survey and the geological information it can provide to companies that may want to explore the possibility of the seabed. Should that survey be used as part of the marketing process for acreage offshore to encourage people to come here to explore, drill and spend money? The seabed survey has been a valuable exercise, but I wonder whether we are maximising the value of the very detailed results that have been produced which could be the basis for encouraging more investment offshore.

Chairman

We will take questions from a few more Deputies and then members of the delegation can give their replies.

Deputy Liz McManus

I apologise for being late and for missing the beginning of the presentation. Deputy Coveney has asked pertinent questions but I would like to make a general point. The message the delegation is giving is that the Government should be more proactive in assisting exploration. At the same time, however, the message we are getting is that gas and oil will become scarcer, there is an issue with regard to peak oil and we will have to find new sources of fuel. If that is the case, does it not mean that time will necessitate more exploration and competition and that we will find ourselves in the scenario of people killing each other for oil? Will that not happen anyway and is it unnecessary, therefore, for Governments, especially in the current difficult times, to get involved?

I was very interested in Mr. Cahill's presentation and found it very useful, particularly as someone who is relatively recent to this area. I noted on the map he showed that there was one area on land with capacity. Since it is so difficult to explore offshore, what is the attitude to developing resources that are underground?

Deputy Joe McHugh

I welcome the delegation. It is important to have meetings such as this frequently. Like Deputy Coveney I welcome the fact we had the opportunity to have an informal meeting in Buswell's Hotel a few months ago. It would be important to continue that dialogue. I will not ask the same question as Deputy Coveney regarding the public's concern with the difference in benefits between the public and private sectors. I hope the delegation will elaborate on this issue because there are genuine concerns but I know the delegation has also articulated the opposite argument, which refers to the high cost.

Last week I attended the Joint Committee on Agriculture, Fisheries and Food at which a similar argument was put forward by members of the aquaculture industry that if the Department had a different licensing policy, the industry would be able to create revenue for the Exchequer. For example, those in the salmon farming sector have been waiting for up to 70 months for licensing. The delegation may not be making the same argument or complaining about lethargy or indecision when it comes to licensing but does it believe the sector receives enough assistance from the Department?

Mr. Cahill referred to the 282 vessels coming into Cork. I have been told anecdotally there is a demand within the industry for skippers for vessels such as merchant cargo ships, tugboats or dredgers. We have an abundance of boats tied up in Killybegs. The fishermen are available for work. The skipper of the Atlantic Dawn does not have a licence for a 50-foot tugboat so there is a need for upskilling and a different licensing regime but so far as I am aware, all it would require would be a six-week course to acquire this new qualification. I have been in contact with BIM and with the Departments of Agriculture, Fisheries and Food and Enterprise, Trade and Employment. As an Opposition spokesperson I have been telling them this is a way of taking people off the dole and getting them back to work. Is there a demand within the industry for skippers to skipper these merchant cargo vessels? Is the industry putting pressure on BIM or on the relevant Department to set up these courses as they are not available in this country as yet?

Senator Jim Walsh

Like Deputy McManus I apologise for being late and missing most of the presentation but I have read through the submission. It is interesting that since the 1970s only 150 wells have been drilled. I am old enough to remember much of the discussion in those early days about the optimistic prospects of us securing supplies off the coast and we have had limited success in the interim.

I acknowledge that exploration is a high-risk capital investment and the correct environment is needed in order to encourage and incentivise participation. Reference was made to the promotion of Irish acreage. How should this be done and what steps should be taken? I concur with the thrust of the argument put forward. I note the comparison with the neighbouring island where the figure is 4,000 well appraisals, which is significantly ahead of the number in Ireland. The reason may be that they have a more benign environment in which exploration takes place, given the difficult weather conditions on the west coast of Ireland. I ask the delegation to identify those issues.

What are the overall packages of incentives in Britain and Norway compared with the incentives offered in Ireland? What should be the policy to increase well appraisal? I take it the delegation presumes this is the key to generating activity in exploration if we are ever to have success in the area. People will expect that the country as a whole will benefit from any significant finds, apart from the individual companies. I am conscious that the companies take a significant capital risk in initiating the exploration and therefore the framework in place must be attractive to exploration companies.

Mr. Fergus Cahill

That is a substantial bundle of questions which I will pass around to my colleagues. The issue of tax was raised by Deputy Coveney. This is a vexed question. The Irish tax regime considered in isolation appears to be generous by comparison with some other countries. The then Minister for Communications, Energy and Natural Resources, Deputy Noel Dempsey, commissioned a study about two and a half years' ago which was handed over to the current Minister, Deputy Eamon Ryan, about a year ago, or perhaps a little more, by Indecon Consultants. It carried out an extremely detailed review of the Irish fiscal regime by comparison with many other countries and concluded that the tax rate of 25%, which is twice what all other industry is paying, was reasonable under the circumstances, taking into account the relatively unsuccessful drilling results. It recommended an increase in taxation to 35% on what are described as the more profitable fields. Our members would love to be in the position to pay 35% on a profitable field. The committee may find it unusual to hear some people suggesting they would like to be paying more tax but we would far prefer to be in a situation where we were finding big fields that were extremely profitable and paying a high rate of tax rather than being in a position of finding virtually nothing in a low tax regime.

We are frequently compared with Norway but the people who compare us with Norway really only tell half the story. If one drills a dry well in Norway, 75% of the cost is returned by the Norwegian Government. I can imagine the outcry that would ensue if we proposed that the Government should pay us 75% as a rebate. This would mean the Government would be handing over a cheque for €200 million to our members. In Norway the taxation rate is high but the risks are very low because if one is not successful, 75% of one's costs are covered by the Norwegian Government. It is a complex equation and a difficult one to get a hold of unless one can see the whole picture.

On the value for money of the seabed survey and as a former member of the board of the Marine Institute, I agree completely that we made the right decision in that regard. The petroleum infrastructure programme is related to that issue and my colleague, Mr. John O'Sullivan may wish to speak about it.

Mr. John O’Sullivan

I will talk about the seabed survey. I am a former employee of the Marine Institute and I was manager of the seabed survey.

Mr. Fergus Cahill

He made a good decision too.

Mr. John O’Sullivan

I only spent a couple of years there. From the standpoint of Providence Resources we have utilised the seabed survey data in the west coast where the deep water survey was acquired. The survey is very much limited to the shallow seabed substrate, ten to 20 metres below the seabed and the seabed itself. From a petroleum standpoint this is of limited interest in the context of reservoirs which are 10,000 ft. to 15,000 ft. below the seabed. It can be useful when laying a pipeline or other infrastructure on the seabed. A company locating a facility or drilling rig would normally carry out its own survey of the location for insurance purposes so that there is an up-to-date analysis of the seabed since the seabed can move quite catastrophically over very short time periods. From an insurance standpoint we always carry out a miniature seabed survey over a well location prior to drilling. It has been useful in terms of just looking at the west coast.

The Marine Institute was mentioned. A number of members of IOOA have utilised the Marine Institute research vessels the Celtic Explorer and the Celtic Voyager. They are very high specification. While they are State investments they have provided the industry with a very good service which we normally buy in from overseas, while also providing the Marine Institute with a certain amount of revenue which we pay at a commercial rate to the Marine Institute. The localisation of that is quite good in terms of reducing mobilisation and demobilisation of a vessel.

The other point Mr. Cahill raised was the petroleum infrastructure programme, PIP. This is something the Department of Communications, Energy and Natural Resources petroleum affairs division, PAD, levies on licences off the west coast. We pay just over €80,000 per year per offshore licence. For instance, in the case of Providence Resources, we hold five licences in the Porcupine Basin. We pay more than €400,000 per year into the petroleum infrastructure programme. Those moneys are used primarily to fund research into the offshore environment. Money goes into universities, Trinity, UCD and so on and the reports become available to the PIP members. Obviously there is a view within some of the members that this creates a hurdle for some smaller companies coming in, which are locked into paying €300,000 on a four-year cycle as a fixed cost against the licence before doing any work. They must pay that as it is mandated against their licences. It is something we are discussing and we will submit a paper to the PAD in the next week or so. It creates a hurdle for promoters coming into the sector — small entrepreneurial groups — who have some interesting ideas but could not provide a guarantee with that type of funding.

Deputy Simon Coveney

Is that levy the same on all companies regardless of their size or level of exploration?

Mr. John O’Sullivan

Yes. We pay the same as Exxon Mobil or the smallest one or two-man outfit.

Mr. Fergus Cahill

It is a disincentive. The UK has a system called "promote licences" where licences are given for a short period, I believe one or two years, to small companies — even one-man enterprises — to investigate acreage and try to identify prospects and then farm in potential partners to invest in drilling. There is a somewhat similar scheme here. Nevertheless the requirement to pay significant amounts into the petroleum infrastructure programme must be a disincentive for small companies. We also feel the focus of how the money is spent could perhaps be redirected towards selling acreage, not to put too fine a point on it.

Mr. John O’Sullivan

We will have a meeting with the petroleum affairs division officials next week. We will put some proposals to them in terms of maybe where the moneys are being channelled, more into promotion of certain material that will encourage more companies in. As Mr. Cahill has said, not only are we in a position where we would be happier to pay more tax — through having some success in some of these developments — but we would also like to see more competition in our sector. We want to see some intensive competition, which increases activity and drives all of our costs, which are significant given our geography.

Deputy Simon Coveney

Mr. O'Sullivan might also send those proposals to the committee, as they would be useful to us.

Mr. Fergus Cahill

Deputy McManus suggested that with peak oil around the corner, it would happen anyway that we would find a queue outside our door. Mr. Conroy might have a view on the matter. My view is — we should live so long.

Deputy Liz McManus

I would have the medical card.

Mr. John Conroy

We might group that issue in with Ireland's natural resources and who owns what as part of it. Most of us who are in the industry and even people who are not if we engage usefully around the issue realise that the State probably would not want to pay out the kind of money that we are paying as a private enterprise. The people who are clamouring for it would be in uproar asking why we were wasting our money doing this. That is a general point.

The assumption underlying that — it is a subtle point — is that we know it is out there and therefore we just wait and then we can one day find it. However, we do not know it is out there because if we did we would more than likely have found by now. One might say we represent our generation of people. We have been trained and have our own intelligence to bring to bear. At one level we have failed in some respects to bring the offshore industry to the next level. One can look at that in two ways. It may be a kind of an intellectual argument rather than a practical one. One can say it is out there and we just failed or one can ask why we have not succeeded when people like us have succeeded everywhere else in the world and our companies, through which we leverage all that knowledge, have been successful in other places. Therein lies the crux of the problem. My view on this would be that every generation needs to bring everything to the next level.

In terms of the broader tax regime, if somehow we found the key to unlock the potential that might exist, none of us on this side of the table would complain if the Government of the day suggested revisiting the tax regime at that point and through the increased income incentivise more, as happens with the Norway model that was presented where there is a high tax regime but incentives to keep the income coming in. It is like a chicken and egg.

That is the answer. If one waits, there is an assumption that it is there. However, one could find oneself with nobody at the door. That is it. That is where we are. The ideological view of regarding it as our resource is simplistic. I am Irish and I understand it is our resource, but let us find it. If we do not find it we have nothing. Regarding the big debate about 25% tax and why it should not be the equivalent of Norway, we have not paid it because we have not found it. It is ridiculous to talk about increasing tax as if we had the resource. When we have the resource I would love to sit at this table with members of the committee challenging us to pay more tax. None of us would have a problem with that because we have lived through many failures in trying to make discoveries. It is not easy. We drilled a well this year, spent a considerable amount of money and it was not successful. That sent ripple waves throughout our company. We need to stand here and say we were not successful. Our colleagues in the UK and west Africa are saying they have managed to do this. While no one is being overly critical, the Irish taxpayer is not benefiting. We are ultimately not benefiting. No one is benefiting. That is how I would answer that question.

Mr. Fergus Cahill

Would Mr. Conroy like to like to speak about onshore exploration?

Mr. John Conroy

I am not sure who mentioned onshore exploration.

Deputy Liz McManus

I did.

Mr. John Conroy

The suggestion that such exploration is a cheaper and more cost-effective way of producing hydrocarbons is absolutely right. If one goes to the United States, one can see small "nodding donkeys" everywhere. It is a much more competitive market. The one major caveat in this regard relates to geology. We do not have the appropriate onshore geology for the generation of hydrocarbons. We do not have reservoirs to trap hydrocarbons. If we did, we would have gone down that route.

Deputy Liz McManus

There is one area of interest.

Mr. John Conroy

Yes. The rocks in the north west of Ireland are carboniferous, which means they have an oil and gas source in them. There are some reservoirs in that formation. There is a unit in the north west. Many wells have been drilled there. No one has been able to find a commercial accumulation. The same formation has produced oil and gas fields in many onshore areas within the UK. It is not unusual for them to exist. Ireland's onshore geological landscape means that it just does not work for us. We have to go offshore. We have not been as successful offshore in Ireland as we have been in other areas. That is where the exploration industry began. It makes sense to start in one's own back yard, if one has the technology. The technology needed to drill in the field behind one's house has been available from the US since the 1940s or 1950s.

Deputy Liz McManus

Is Mr. Conroy saying that we know there is a suitable location in the north west, but it is not commercially viable to exploit it?

Mr. John Conroy

Many companies have tried it.

Deputy Liz McManus

It is much cheaper to drill there than it is to drill offshore.

Mr. John Conroy

Absolutely. In recent times, a number of small companies with low cost bases have tried to make it viable with a smaller accumulation. They are in the market place. If one could do it, it would definitely be done. One would imagine that it would be much easier to commercialise. It has not been done. It cannot be done because the resource that is in place is neither sufficiently defined nor sufficiently large. It is down to that.

Mr. Fergus Cahill

Deputy McHugh asked whether we are putting pressure on Bord Iascaigh Mhara regarding the employment of fishing skippers, etc. We would be delighted to see people getting qualifications, such as safety qualifications, to allow them to work in our industry. In conjunction with FÁS, we placed advertisements five or six years ago to offer FÁS training to people with a background in the fishing industry who wanted to get into our industry. It was not successful. I will qualify that by saying that it was of limited success. We did not get a lot of interest. I think we got 12 applications on foot of the advertisements we published. The FÁS staff member who was dealing with the scheme retired, for his or her own reasons. FÁS then decided not to continue with the scheme. We are aware that the Shell facility in Killybegs employs many local people who used to work in the fishing industry. The Deputy also asked what can be done to improve the marketing of Irish acreage. Senator Walsh made a similar point. Perhaps my colleague, Mr. Prenderville, would like to respond.

Mr. Karl Prenderville

I am not too keen to make specific recommendations to the Government on how that can be done. There is already a shining example in Ireland of how it can be achieved. I refer to the IDA Ireland model, which was hugely successful in bringing inward investment into Ireland. I suggest that the members should speak to representatives of IDA Ireland if they want to ascertain how that was done. A similar approach can then be taken in the oil industry.

Mr. Fergus Cahill

It might be somewhat rude of me to remind the committee that the grants system and the low tax regime are among the principal weapons IDA Ireland has at its disposal. I will put that point on the table and leave it at that.

Mr. Karl Prenderville

We have a relatively low tax regime relative to the rest of the world. That weapon is available to us.

Mr. Fergus Cahill

IDA Ireland is extremely proactive. Senator Walsh also asked why the UK and Norway are more attractive than Ireland. Perhaps Mr. Cetti would like to respond.

Mr. Julian Cetti

Large companies are resource-constrained in what they are looking to do. They cannot drill everywhere and look all over the world. They have to rank opportunities as they see them. They need to consider factors like the cost of exploration, the possibility of successfully finding something, the ease of ultimately getting to the market and the size of the market. We represent the companies that are active in Ireland. In a way, the committee should be asking other companies why they are not involved here. I think they would mention that they have other opportunities which they find slightly more attractive. Nothing breeds success more than success. We need to see some success in Ireland. We need to find some fields, make progress with the Corrib project and demonstrate that we can make things happen here. As soon as we do that, we might begin to see some more interest from other companies.

Senator Jim Walsh

Is it not a chicken and egg situation? If one does not have the level of activity, one's prospects of finding something are diminished as a consequence. We have drilled approximately 150 wells over 30 years. The delegation mentioned that 4,000 wells have been drilled in Britain and 1,200 have been drilled in Norway. What level of success has been enjoyed in such countries? What proportion of their wells have been successful? That would give us an indication of how successful we are likely to be. I presume the same template would apply everywhere.

Mr. John Conroy

No. It is a question of geology. There is a one in three success rate in the North Sea, which is shared by the UK and Norway. Every time they drill a well, they have a 30% to 35% chance of being successful. In Ireland, we have made four commercial discoveries from 150 wells. That is a big factor.

We should not under-estimate the point made by Mr. Cetti. The Corrib field is a good example, because it is the only discovery off the coast of the west of Ireland that can be commercialised in a challenging environment. If there is a pipeline coming in, there is infrastructure. If infrastructure is in place, another company might decide to come to Ireland on that basis. It might decide that it is worthwhile to proceed because the infrastructure — the producing system — is working. When a company looks at Ireland Inc., it has to consider the length of time it takes to become productive after something is found. When a company puts such figures into its commercial or business model, it might decide to wait. It might realise that Ireland is not such a safe bet.

One might think the issues to which I refer are local issues — that is how they are often portrayed in the media — but they are international issues. When companies examine Ireland's oil and gas potential, they will note what has happened in the Corrib project and get some feedback and scouting information on it. The press that has been associated with the project has had a negative impact. Would one go to a country that has a reputation for being difficult for doing business in? When one is examining one's model for doing business, one wants to make sure one can work in a climate of sound regulation that is timely and efficient. One wants to deal with a Government, if it decides that a project is important for the country, that can make things happen. It is crucially important for any business venture, anywhere in the world.

Chairman

How many companies are engaged in exploration off the Irish coast?

Mr. Fergus Cahill

The figure in Ireland is ten, as compared to about 140 in the United Kingdom. To reinforce Mr. Conroy's point about the time required to achieve a development in Ireland, production in the Corrib field will not commence for some time. The field was discovered in, I believe, 1996 which gives a timescale of at least 14 years. In a speech in Aberdeen the other day the British Chancellor of the Exchequer, Mr. Alistair Darling, congratulated a company on bringing a find on stream in two years. One can, therefore, understand the reason companies choose the UK rather than Ireland.

Senator Jim Walsh

What action should we take to address the problem? I presume the shenanigans in County Mayo do not make exploration in Ireland an attractive proposition. How much of a deterrent are these activities?

Mr. Fergus Cahill

Without wishing to discuss the nuts and bolts of the Corrib case — these are a matter for another day — there is no doubt that the planning process has been lengthy and cumbersome. A significant number of agencies are involved in the process and it is not stretching the point to suggest that their requirements are sometimes contradictory. While the new infrastructure methodology will help, we would like the administration to be streamlined to take account of concerns while at the same time making possible a more rationalised approach.

Mr. Julian Cetti

The large number of developments in the United Kingdom means people there are used to more fields being brought on stream. They are not a big deal. The infrastructure and procedures are in place to do this and the process is relatively simple. In Ireland, where there is little history of bringing on fields, we are still learning. Until people have gone through the hoops and loops and become familiar with the processes and what is required, developing new fields will continue to be more difficult here. If we can get some fields up and running it will make things easier in future. Everyone involved will learn and more projects will come on more quickly when they are found.

Mr. Fergus Cahill

Mr. Cetti is correct. Following the development of the Kinsale field in the mid-1970s, we did not have another development in Ireland until the mid or late 1990s, by which time all those involved in the administration side of the Kinsale Head project were long gone. I am probably the only person involved in the project who is still around. This means everyone had to start again from scratch. Mr. Conroy wishes to comment.

Mr. John Conroy

I wish to make a point that has not been made. This issue is clearly important to the delegation and members of the joint committee who have asked what can be done about it. We spoke about a number of the initiatives which the technical division of the Department, known as the petroleum affairs division, could take. If the Government or joint committee were to articulate a policy and state precisely what they want to happen in this industry, they will make an important contribution. While they cannot effect change directly, in making a statement that they support exploration and the bringing to market of hydrocarbons, whether onshore or in another form, they will send out an important message. This committee has considerable authority and any such statement would be of great help to the industry.

Chairman

We shall note and discuss Mr. Conroy's point.

Deputy Joe McHugh

From listening attentively to local people in County Donegal, they anticipate that exploration for oil around Rockall will be successful. I accept this is speculation and the delegation will have an inside track on this matter. I sense, however, that the delegation believes we are in a rut and the industry needs to secure some type of victory or success. Does the delegation expect oil to be found in Rockall?

Mr. Fergus Cahill

If the Deputy tells me which company he has in mind, I will buy shares in it.

Deputy Joe McHugh

I base my remarks on local knowledge.

Mr. Fergus Cahill

I mean no disrespect when I say local knowledge is about as good as listening to a guy in a bar at the Galway Races.

Deputy Joe McHugh

We need to differentiate between the guy at the Galway Races and people with local knowledge. Seven years ago those with local knowledge told us the boom would not last, money is not free and the economy would crash. I would not dismiss the speculation.

Mr. John Conroy

It is not unreasonable for a layperson, that is, someone who does not know the exploration industry and is not a geologist, geophysicist or petroleum engineer, to conclude that given the enormous area under Irish territorial waters, it must be full of oil and gas. When I put myself in such a person's shoes——

Mr. Fergus Cahill

Or Wellington boots.

Mr. John Conroy

——it is not unreasonable to arrive at such a conclusion. However, there is no real evidence that there is significant——

Deputy Joe McHugh

There is some evidence.

Mr. John Conroy

Yes, there have been oil and gas shows and some companies have engaged in drilling activity. We await development in the forthcoming Rockall round. Some companies believe they will produce a new model or idea which will give them an edge. It is possible that another well will be proposed down the line. However, the problem arises if a company believes there are finds of the magnitude of the Saudi Arabia or North Sea wells. I can state, with 100% confidence, that Irish territorial waters do not contain finds similar to those in the North Sea because if they were there, they would be in production.

Mr. Fergus Cahill

I heard a distinguished Secretary General of the Department with responsible for energy state he could not believe the good Lord had put so much oil in the North Sea without putting any in Irish waters. Perhaps a prayer is appropriate.

Senator Jim Walsh

The joint committee could address this issue in a productive manner. While we are not in a position to make a positive impact on many of the issues that come before us, the delegation has provided ideas to equip us to focus on the correct issues, including geological surveys, the Marine Institute and so forth. Will Mr. Cahill outline what the Government should do to promote the exploration industry?

Deputy McHugh is awaiting developments in County Donegal. We, in County Wexford, are depending on providence to produce a find off the south coast of the county as this would benefit the general economy and deliver downstream jobs. The joint committee should focus on this issue and assist the industry to the greatest possible extent.

Mr. Fergus Cahill

We would be pleased to make progress in that regard.

Chairman

I thank Mr. Cahill and his colleagues for a most informative and useful exchange of views. There is a genuine feeling that if there is something we, as a committee, can do to help and assist the delegates in their work, we will be only too keen to do it. I will ask the clerk to keep in touch and we will meet informally after the meeting to see what we can do. I thank the delegates for what I found to be a very stimulating meeting.

Mr. Fergus Cahill

I thank the Chairman and his colleagues for a good discussion. We also express our appreciation of the co-operation of the clerk to the committee and his colleagues in arranging the meeting. They have been very helpful.

The joint committee adjourned at 11 a.m. until 9.30 a.m. on Wednesday, 5 November 2008.