At the outset may we thank the chairman and members for the invitation to appear before the joint committee? On 27 September 2011, officials from the Department of Communications, Energy and Natural Resources appeared before the committee and presented a comprehensive picture of the science and technology underpinning oil and gas exploration. During these proceedings, the members of the committee expressed the opinion that we should develop an indigenous offshore industry. At the outset let me say that the Irish Offshore Operators Association, IOOA, shares this view and rather than go over that ground covered by the departmental officials, we propose to examine the reasons that we do not have such an industry at this time; to review the benefits that can accrue from such industry and which have already accrued; and to suggest measures which would assist in this.
The Government is frequently urged to introduce a Norwegian-style licensing regime. We should remember we had such a regime, from 1975 until 1987. During that time, there was not a single commercial discovery. So, the Government of the day did what Governments do when they wish to stimulate a failing regime, it reduced tax, initially by abolishing royalties, as had already been done all over north-west Europe, and later by reducing the tax rate to 25%. In spite of these measures, interest continued to decline. During the period 1994 to 2009, 40 frontier exploration licences were issued and of these, 23 have been surrendered to the Government. In 1985 our association, IOOA had 17 members. Of that 17, only four remain. Since 2008, with the introduction of the Indecon terms, only four exploration wells have been drilled and all of them were dry.
The reasons for this decline may be summarised as follows. The first is the lack of drilling success. There has been one successful commercial discovery in 35 years of explorations. In terms of drilling success, Ireland lags far behind the North Sea, and is seen as a poor bet when it comes to exploration investment. The offshore environment, especially in the Atlantic, is extremely challenging, and operating costs are high. For instance, just to drill a well off the west coast, it will cost €6 million to relocate the rig from the North Sea to the west coast, before a metre of well is drilled. A single deep-water well off the west coast can now cost around €70 million. Ireland is perceived as an unrewarding and difficult place in which to do business. We recently heard the CEO of an Irish exploration company, which is successful in Algeria, Italy and more recently in Kurdistan state that his board would not countenance involvement in Ireland, because it was "too risky". The extreme difficulties and delays in bringing a discovery into production are well appreciated internationally.
The policy background to offshore exploration is the White Paper on Energy Policy, 2007 to 2020 which states the primary strategic goal of Government is "creating a stable and attractive environment for hydrocarbon exploration and production". In that year the International Energy Agency, IEA, reviewed Irish energy policy, and recommended that: "great care should be taken not to increase the risk for developers by tightening the rules". In that year, the Government also received the Indecon report. Let me digress to say the Indecon report models 15 development scenarios in 15 comparable licensing regimes. I should emphasise that the only way to achieve an accurate comparison of licensing regimes is to model fields, taking all the factors into consideration. Headline comparisons of tax rates mean very little. Indecon recommended - and its full recommendations are in the paper, which has been circulated - that there should be no change to the fiscal terms for the less profitable fields; there should be a resource rent tax of between 5% and 10% for the more profitable ones and in the future, if significant commercial discoveries were made, then additional increases could be applied to new licences. In the event the Government went further than Indecon's recommendations and increased the maximum tax level to 40% which was contrary to the advice of the IEA. It is in that context and the failure of previous policies to develop an industry that we reviewed the results of the recent Atlantic margin licensing round.
The Minister announced that he had offered licences to 13 applications and at the outset we acknowledged that this was a significant improvement on previous rounds and it is understandable why it might be presented as a success. In 2009, there were only two applicants, both for the same acreage, which resulted in the award of one licence. However, when one examine it a little more closely, the areas for which the new licences were sought amounted to just 6% of the area on offer. That is not 6% of the total Irish offshore but 6% of the area on offer. None of these licences is an exploration licence proper, rather licensing options, which do not carry major work programmes and may or may not be converted into exploration licences after two years. The Financial Times summarised the position rather well, it stated “in a blow to the Irish Government’s drive to increase offshore exploration, none of the world’s oil majors applied”. In other words, no major companies applied at all for the new round. Let us put that into perspective. A recent UK round, the 26th round in 2010, attracted 350 applications and 144 licences were awarded. Appendix 2 lists the companies awarded licences and that puts the points vividly into perspective. This is not an isolated instance. In 2005, the UK offered 152 licences. Members can read the numbers on page 5 of the submission. We must realise that Ireland is not regarded by the oil and gas industry as a fat goose waiting to be plucked. As far as the international oil and gas industry is concerned, Ireland continues to have serious reputational problems and it is important that we recognise this.
This perception is fuelled by the uncritical acceptance of urban myths. The first is that oil companies are sitting on huge areas offshore where they know there are vast resources and they are waiting for the optimum time to develop them. It is a fact that 3% of the total area off Ireland's coast is under licence. If all the recent offers are accepted - it is by no means certain that they will be - this figure will increase to 5%. The terms of licences are specifically designed, as departmental officials have explained to the committee, to prevent people holding on to acreage.
The second urban myth is a dodgy deal was done with the industry to remove royalties and reduce taxes. The UK removed royalties on new production in 1982, Norway followed suit in 1985 and Ireland did so in 1987. For practical purposes, royalties have disappeared in north west Europe for the good reason that they are disproportionately penal on high risk, low return projects. The adjustments to the fiscal regime during the 1980s were a measured and rational response to the utter failure of previous licensing terms.
The third urban myth relates to the question of why we cannot be like Norway, which takes a 78% share in projects. If one drills a well in Norway and it is dry, one gets back 78% of one's investment. Furthermore, one's chances of finding something and achieving commercial success are approximately 1 in 5 as opposed to 1 in 40 in Ireland. Either way, it is much more attractive to work offshore in Norway. The only valid comparison, as the Minister has recognised, is with France, Spain and Portugal, which have broadly similar regimes and poor success rates. There is an erroneous domestic belief that vast offshore riches are waiting to be tapped and, on the other hand, there is the industry's perception that Ireland is a cold church for offshore exploration.
Despite this, the offshore industry has brought significant benefits to Ireland, at both national and local levels. I will not go into these in detail as they are outlined in the submission. The Kinsale Head field, 33 years into its life and in decline, maintains 100 jobs directly with a spend in the local economy of approximately €30 million per year. The Corrib project, at the peak of its construction, employed 1,400 people and, more important, it will provide 130 well paid and secure jobs for the long term. These jobs cannot be helicoptered out of the country at a month's notice, as we recently witnessed in Waterford.
Another benefit is the extension of the national gas grid to the north west, which would have been uneconomic without the support of Corrib gas. A recent report by the Western Development Commission said that another extension of the grid, which is the responsibility of Bord Gais, would save an additional €20.6 million in local towns.
Involvement with the offshore industry often materially assists the long-term development of a local contractor. Appendix 3 describes just two such companies. Project Management Limited got a contract from Marathon in 1976 for offshore work. It built on that and it now employs 1,600 people worldwide and carries out projects in 30 countries. Roadbridge, a local construction company, worked on the Corrib project and the north west gas pipeline and it is emphatic that this opened the door for it to secure contracts in Scotland and Australia. Even the current low level of exploration brings benefits. In the port of Killybegs, 23,000 additional man hours were worked servicing the Corrib operation. The port has been devastated by the failure of the fishing industry.
With regard to taxation, a recent study by the Department shows that a so-called "giant" oil field offshore Ireland would over its lifetime pay €16 billion in tax. Even small fields would pay a proportionate amount. The only downside has been for the industry. Since 1969, the industry has spent €3 billion in today's money. The vast majority of companies that have drilled offshore in Ireland have lost huge sums and at least one went bankrupt.
The first thing that has to be done is to put in place a regulatory and administrative regime that facilitates a predictable field development process. It is crucial if a company spends €300 million or €400 million getting an offshore oil or gas field to the stage that it can be developed, that it has an assurance that the development process will work. We have asked the Minister to set up a group to study this, to see why the current system is not working and to recommend measures to improve the situation.
Second, promotion needs to be intensified. There is a feeling that there is a queue of people on Adelaide Road waiting to knock on the Minister's door to take out licences. Nothing could be further from the truth. There is a queue in Norway. The New Zealand Government has spent a great deal of money acquiring seismic data, which it gives free of charge to potential licence applicants. That is the competitive environment we are in and the Department should be resourced properly to do the promotion properly internationally and to separate the regulatory from the promotional function
Third, we should assure potential applicants for licences that their presence and investments in offshore Ireland will be welcome. We require no financial support or State aid, and once established, the jobs and the tax revenues remain in the State for the long term. We suggest that proactive steps be taken by public representatives and relevant Departments and State agencies to increase understanding of the industry and to assure potential applicants for licences that their presence and their investments are welcome. In particular, applicants for licences need to be assured of the long-term stability of the licensing regime.
At the outset, we indicated our agreement with the committee regarding the development of an indigenous oil and gas industry. This can not be achieved while exploration remains low level and spasmodic. It can only happen when there is a substantially higher level of offshore activity leading to commercial discoveries and development projects. Our association would be grateful for the assistance of the committee in reaching this objective. We would like to thank the committee for the opportunity to explain our point of view and we invite the committee to endorse the policy of both the previous and the current Administrations, as set out in the White Paper, to create a stable and attractive environment for hydrocarbon exploration and production. We also invite the committee to express its support for our industry, which takes such immense risks and which offers serious long-term benefits to Ireland.
