Two members of this Committee are involved with the Employment Committee meeting in G2 at 3 o'clock, Deputy Quinn and I. I will be vacating the Chair temporarily and perhaps we could make an arrangement for cover for the period.
SECTION 70.
Question proposed "That section 70 stand part of the Bill".
I propose that we substitute Deputy John Dennehy for the duration of your absence.
Is that agreed? Agreed. I know he will keep the momentum going and try to get through the sections as quickly as possible.
I am pleased to be presenting in this Finance Bill a comprehensive code of taxation for Irish oil and gas exploration and production. Chapter 6 of the Bill is of major importance for the revival of interest and investment in Ireland's offshore natural resources. It creates an attractive taxation context for the new exploration licensing terms to be announced shortly by the Minister for Energy. It is a very positive package intended to stimulate and accelerate offshore activity leading to commercial production of Irish oil and gas.
At the outset, in introducing these new tax provisions, I would like to emphasise that they apply to "relevant fields" only, that is, fields discovered by virtue of the 1975 licensing terms or subsequent licensing terms. The new tax terms do not apply to activities conducted within what is commonly referred to as the "Marathon lease acreage".
The principal feature of this tax package is a corporation tax rate of 25 per cent. This rate will apply to production of oil and gas under leases granted before cut-off dates listed in the Bill. The cut-off dates for granting of leases qualifying for the 25 per cent rate vary with the difficulty of exploring the waters for which the lease is granted, and the 25 per cent rate will only apply to production profits or royalty income earned under leases granted before the cut-off dates.
Why has the Government decided to reduce the corporation tax rate in respect of oil and gas production under leases granted before the cut-off dates? Unfortunately Irish offshore exploration activity has wound down in recent years. There was only one well drilled in 1991 as against a peak of 15 wells drilled in 1978. Ireland is currently competing for internationally mobile exploration investment against countries with better drilliing success rates, established oil and gas production infrastructures and better tax terms. In addition, oil prices in the medium term are unlikely to encourage exploration in areas with no track record of production.
Government policy can do little to influence most of the factors depressing exploration activity in Irish waters. The Government, however, can signal strong support for renewed exploration activities in Irish waters and by the tax regime it chooses for such activity. The tax terms set out in Chapter 6 of the Bill have been carefully chosen to match the tax terms of our competitors for mobile exploration investment. Indeed the proposed new Irish terms will undercut those of our competitors. However, these advantageous tax terms will only be available for a limited period. The 25 per cent rate is intended to put wind in the sails of Irish exploration activity currently in the doldrums. The message is clear. There will be an attractive tax regime for companies who get on with exploring Irish waters without delay. I am convinced that an incentive rate of Irish corporation tax is essential if we are to see the development of an Irish oil and gas industry and unless an industry develops there will be no Irish oil and gas profits yielding additional revenue to the Exchequer, whatever the rate of tax.
Few would disagree that exploration shares are exceptionally high risk stocks. In recognition of the exceptional risks borne by investors in exploration stocks, I have decided to maintain the normal tax credit in respect of dividends paid out of oil or gas profits which are charged at the reduced corporation tax rate of 25 per cent. The effect of this will be that, instead of receiving credit for only half of the corporation tax on profits, Irish investors will receive credit for the full 25 per cent corporation tax charged on the oil or gas profits out of which their dividends are paid.
The new provisions extend the period for write-off of unsuccessful exploration expenditure against subsequent oil or gas profits to 25 years. Many companies may have incurred substantial exploration costs, without success following the 1975 licensing round. The extension of the time limit for relief for abortive exploration expenditure to 25 years invites such companies to try again. Accumulated abortive exploration expenditure may be used to shelter profits from an oil or gas trade begun up to 25 years after the unsuccessful exploration.
The new terms also provide for a 100 per cent write off for tax purposes of capital expenditure on the development of fields discovered under the 1975 or subsequent licensing terms. Development expenditure incurred in respect of a field will be written off against the oil or gas profits of the company when production of oil or gas in commercial quantities from the field begins. Linking the write off of development expenditure on a field to the commencement of commercial production in the field is intended to ensure that companies persist with the development of a field until commercial production is achieved.
In addition to allowing full write offs against oil and gas profits for exploration and development expenditure, the new terms also make provision for expenditure which companies may incur in withdrawing from or shutting down an oil or gas field. While such expenditures may appear to be well down the line, it is wholly appropriate that the proper care of our sea should be provided for in this year's tax blueprint for an oil and gas industry. Accordingly a 100 per cent write off of abandonment expenditure against oil and gas profits is provided for. If allowances for abandonment expenditure create or increase a loss for tax purposes, a company may carry back the loss attributable to its abandonment expenditure against the profits of the preceding three years. If the company ceases trading before incurring abandonment expenditure that expenditure will be treated as expenditure of its last period of trading. If there is then an abandonment loss in that last period of trading it may be carried back through the three years preceding that last period as I have already mentioned. If at that stage any allowance for abandonment expenditure remains unused it may be deducted from the profits of a subsequent oil or gas trade carried on by the company.
The new tax terms also facilitate disposals and acquisitions of interests in licensed areas. The Minister for Energy must be satisfied that the sole purpose of the disposal of an interest in a licensed area is the proper exploration and development of the area. If the Minister is satisfied in that regard, tax will not be payable as long as the proceeds of the disposal of an interest are applied to exploration and development activities or so long as the interest is disposed of in exchange for an interest in another licensed area. To the extent that the disposal of the interest does not involve a farm out or an exchange of interests, capital gains tax or corporation tax will be charged on any capital gains on the disposal at the normal rate of 40 per cent.
A person acquiring an interest in a licensed area will be entitled to a write off of the exploration expenditure incurred in connection with the area when he begins to work the area under a petroleum lease. The write off of an exploration expenditure will be limited to the cost of acquiring the interest in the area.
The new terms recognise that the scale of costs associated with oil and gas exploration or production requires special measures to protect tax revenues. The tax yield to the Exchequer from other sectors of the economy will be protected by confining relief for oil and gas exploration and production costs to set off against income and profits of oil and gas production. Accordingly the new terms include extensive "ring fencing" measures restricting relief for oil and gas profits and income.
In addition, to protect the State's tax take from oil and gas profits chargeable under the new provisions, the "ring fence" also prevents losses from other sectors of the economy being set against oil and gas profits. The fence set up around the company's oil and gas activity therefore protects both against oil and gas losses being taken out and against losses from other activities being brought in. This ring fence recognises the unique potential of the oil and gas exploration and production industry for exceptionally large costs and losses and also for exceptionally large profits. The ring fence protects the tax payable by other sectors and also ensures a tax yield from profitable oil and gas production.
The new tax terms also provide against the reduction of the Irish tax yield from oil and gas production by the payment of charges on income, such as royalties or excessive interest by a producer to a connected person. For example, excessive interest paid by an Irish oil producing company to a foreign company, both companies being members of the same multinational group, would reduce the Irish company's profits and Ireland's tax take if the relief for the interest were not restricted.
Provision is also made against artificial pricing arrangements between connected persons which would have the effect of reducing the profits and therefore the tax from Irish oil and gas production. For tax purposes, all transactions in Irish oil and gas between parties who are not dealing with each other at arms length will be recomputed on the basis of market prices for oil and gas at the time.
The central thrust of the new provisions is clearly to provide a much needed boost to the development of an Irish oil and gas industry. At the same time, care has been taken to protect the State's interests as respects revenue from other sectors and future revenue from the oil and gas industry. I am happy that the correct balance has been struck between the need for incentives to renewed investment in exploration and the State's entitlements to a share of the profits from the extraction of Irish oil and gas. The new terms offer a substantial inducement to companies to begin exploration without delay. They send a positive signal to exploration companies and their investors. I look forward to their equally positive response.
I thank the Minister for offering a wide introduction to this section of the Bill, an unusual section in a Finance Bill. It is a Bill within a Bill effectively and is in many ways a repeat of the Petroleum Taxation Bill published in 1985 although it differs due to the addition of a small number of amendments highly significant in quantum or value. When I began to research this area in advance of the Finance Bill it struck me as extraordinary that a Bill published in 1985 was finally seeing the light of day in 1992. That would not be exceptional in Irish legislative history but when one assesses what has happened to the petroleum industry in the interim it is a most serious omission, going back over a number of Ministries which should be explained. I hope the Minister for Energy will account for his three years' stewardship and I would like to have the previous Minister account for his two years and perhaps for 1985 and 1986 period where one could accept the need for a period of analysis and assessment of the Bill's provisions by the industry. A Bill is being introduced now as part of the Finance Bill which was framed as a separate piece of legislation, published in 1985, taken off the books in 1987 and finally resubmitted in 1992. Line for line it is the same Bill apart from a small number of great improvements. Ministerial inaction should be explained, because as the Minister for Finance has confirmed, oil exploration has come to a virtual halt or declined very substantially. We need to be careful so that we protect this industry as I hope we will with this package of measures designed to create an environment which might give it a kick start. I could use more dramatic terms but I will not in case I undermine confidence.
The Minister indicated that activity in oil and gas exploration is at a low level. At the Minister for Energy's party conference last week he admitted that the level of oil and gas exploration offshore in Ireland has declined and reached an all time low in 1991. Such frankness might be admirable except for the fact that that Bill was published in 1985 by the Fine Gael/Labour Coalition, was dropped in 1987 by the Fianna Fáil Government and only now with a small number of significant amendments does it see the light of day. Why did that happen? Why was the Petroleum Bill left sitting around? The environment for offshore exploration has worsened considerably since 1985 in Irish terms. Offshore exploration is a highly competitive area with limited finance available. We are competing, not just with the other local fields, but internationally for limited resources. In this grim situation, Fine Gael warmly welcomes measures which will introduce an attractive tax regime for a highly competitive industry comparable to, and in some ways significantly better than, the regime under which major local competitors in the North Sea and the Norwegian oil fields compete. We will propose one additional major amendment to improve the package and we cross our fingers — along with the Minister and the Government — that these measures will be the jump lead required to kick start exploration of our natural offshore resources.
The Minister for Energy in his party conference speech last weekend admitted that much acreage is still unexplored and in other areas further exploration is possible. Both Ministers have admitted that only one well was drilled in 1991. Conditions around our waters are varied and certain large areas present geological difficulties. Relative to our nearest competing fields — the North Sea and Norwegian fields — our activity is on a small scale which leads to substantial extra costs as plant, service and expertise are in general not locally available and must be imported. Furthermore, international oil prices remain stubbornly low. Environmental lobbies are hostile to the industry which may lead to further reductions in oil usage in the decades ahead. It is because of this difficult environment locally and internationally and because drilling in other regions of the world enjoys 80 per cent success that Fine Gael heartily endorses this favourable and necessary regime.
It is interesting to look at the Commission on Taxation report of 1985 and to acknowledge how much taxation measures have changed. Only a tiny element — the ring fencing restriction element — is relevant to what is being done here. The special 25 per cent rate of corporation tax the Minister referred to is the single most important proposal comparing well with 33 per cent tax in the best of the North Sea fields. The extension of the time period for tax deductions for costs incurred from 15 to 25 years is open to most companies involved, some of whom may have given up exploring. This measure may attract back some of those companies who have drilled unsuccessfully to date. We support the proposal.
The new abandonment concessions are important to an industry where the number of failures has been high. The increase in relief from 40 per cent to 100 per cent is a substantial concession and we welcome it. We will look at the details of the ring fencing by which the Minister has tried to ensure that the State's return will be adequately protected and not set off by companies against non-exploration activity.
Fine Gael proposes one further improvement in the tax regime by allowing the cost of development of second and subsequent fields to be relieved before production. The Minister rightly indicated that the reliefs would not become applicable to a first find until production began. I am led to believe that the UK regime and the Norwegian special tax legislation allow the development costs of the second field to be set off against profits made on the first find. If we are to be consistent in this legislative package which updates and improves previous provision this final element should be considered favourably.
Petroleum development can be costly and protracted. Under the provisions of the Bill, sums expended cannot be relieved until production has commenced which may not be for several years. In the case of the development of second and subsequent fields, the deferral of relief until such a field comes into production will have a significant adverse impact on company cashflows and protected economies of development. This is an argument the Minister will be familiar with and one which I find convincing. For marginal fields the consequences may be that resources are not considered to be commercial.
None of the provisions of this Bill apply to the Marathon field but appear to be intended for subsequent development when conditions may be more favourable. It should be adopted now to provide for the possibility of successful drilling, which would be of net gain to the State, even though payment of revenue may be deferred in the short term. In the case of a second successful find which would ultimately come into production, all costs would be offset at that point. This measure should encourage greater activity.
The disincentive feature compares most unfavourably with the UK where for corporation tax purposes once a company has commenced trading by reference to a first field, the writing off of the costs of the development of the second and subsequent fields begins in the year in which the costs are incurred and likewise with the Norwegian special tax regime.
With that amendment and a request for clarification of a number of areas I welcome the Bill. I would like the Minister to explain why it has taken so long to produce it and does he think the delay has been partly responsible for the lack of activity? In other environmental areas international investment is often discouraged not by regulation or over-regulation but by lack of clarity and certainty. I would like the Minister to explain why the Petroleum Bill is being introduced as a section of the Finance Bill rather than as a separate measure.
I welcome the Minister for Energy to the Committee; it is good to have him here. Many of us would have preferred this section as a separate Bill rather than as a chapter in a Finance Bill. Our criticism of that approach will be muted however by the Minister's presence to answer any questions from the Department of Energy point of view we may wish to put.
I remember a time when the oil exploration business was like winning over £1 million on the national lottery now. In Cabinets in the seventies and eighties there was competition to be Minister for Energy because everyone wanted to be the first Irish person to bring oil ashore. Those days have gone now and people have a more pragmatic approach——
If it is there we will get it and bring it ashore.
Do not be surprised.
There are points of clarification which we will request and Deputy Flaherty has put down a number of amendments but we welcome the Bill in general for one reason. There is nothing happening at the moment in exploration and nothing has happened for a number of years. Unless something is changed nothing will happen.
We can only change that over which we have some control and the tax regime is really the only thing we have control over. Be that as it may, I wonder to what extent oil exploration is susceptible to changes in the tax regime. Oil exploration, in my view, is more susceptible to the price of oil than to the tax regime provided for drilling companies. If oil is $15 or $16 a barrel, there is little scope for an extensive offshore exploration in deep water because there is no level of capital investment to bring it ashore which can compensate for that level of oil price. If you go back over the years, you will find that when oil went up into the middle $30s — $35 or $36 a barrel — there were always people willing to drill and drill in out of the way places, but in more recent times there has been very little activity. Therefore, I do not think a change in tax regime is necessarily the magic wand but obviously it will improve the situation, and I hope it will improve it to a degree that activity will recommence.
Some people were amazed when oil was found under the North Sea both by the Norwegians and the British, but everybody knew for years that the geology of the bedrock under the North Sea made it very likely that there were extensive deposits of oil. It was just that it was uneconomic to go after it, and it was only after the first oil crisis that it became economic to go after it. The price of the barrel of oil delivered has probably much more to do with the amount of activity in the oil exploration business than the actual tax regime.
I would like to ask a couple of questions about the Department of Energy. There seemed to be a policy attitude in the Department of Energy — before the present Minister took office — that the Department were the guardian of natural resources and that in certain circumstances they would have preferred to keep the natural resources under the ground in case predatory politicians would dissipate the wealth of the nation. There was much ideology in the Department of Energy at one point; is there now a more pragmatic approach there? I would also ask — this is a neutral question, there is no implication in it — what level of expertise is in the Department of Energy now in the oil business and the gas business? What is the structure there? I do not want to mention names, but what is the level of expertise of the people who are dealing with this matter? There were newspaper articles and reports in the media some years ago suggesting that the reporting systems between the exploration companies and the Department of Energy were inadequate. In other words that the exploration companies were not putting their cards on the desk of the Minister for Energy and that, in effect, the Department of Energy did not know whether exploration companies had found reserves of oil or gas. There were suspicions that oil and gas had been found but the exploration companies were capping out wells waiting for a more profitable time to bring them ashore and that, in effect, there were wells off the Irish coast which were capped out which will be part of the reserves of the oil exploration companies against some unforeseen circumstances in the future, but which, if they were brought ashore, would have certainly made this country self-sufficient. I would like the Minister to comment on that point. I know there is a great deal of folklore attached to these areas which is not necessarily true, and I would like a clear statement on that point from the Minister also.
Let me also ask the Minister if a full seismic and geological survey has been completed both of the country and right around the coast to provide the Department with more accurate geological information than was there in the past for the issuing of licences.
I would like the Minister to comment on the Kinsale Head gas field. I take it that it is not affected by the terms of this legislation, but what are the reserves of gas there now? At present downtake how long will it be before they run out? Associated with that, what are the Minister's plans on a gas interconnector to ensure that if they run out, adequate supplies of gas will be available for both domestic and industrial use to those who have invested in gas as their energy source? If it is not straying too far from the main point, the Minister might comment on what corporate arrangements he is putting in place to ensure that Bord Gáis will not have a monopoly of imported gas at the turn of a tap on the interconnector. How is he going to ensure a competitive situation where European gas prices will reflect on the Irish gas market where there is a monopoly at the moment?
What are his views on that? I know he has views about an ESB interconnector and how a different corporate structure should be put in place so that imported electricity would be in competition with locally generated electricity. Has he something similar in mind for gas?
I would like to ask the Minister for Finance what arrangements he envisages for the taxation of the workers on the oil rigs. This is a key issue for may of the workers because exploration is far less than it used to be and the expertise on the offshore rigs now is very much international in its attitude. They move from the summer time off the west coast of Ireland to the coast of Egypt or West Africa when the heavy winter storms hit here. They also move to the North Sea. What arrangements are being made? Will they be subject to Irish PAYE or will it be possible for them to get their money paid into offshore accounts where they will not be subject to Irish PAYE tax regimes? That may be as crucial a factor as the corporate tax regime the Minister is putting in place. Much money was lost in the past in oil exploration and many Irish nationals lost money speculating in shares. In the well known company where shares hit £6 they are now two-pence ha'penny. A great amount of money was made there and a great amount of money was lost. I do not think anything can be done for those who took the gamble, but I welcome the new arrangements for corporate taxation. I would like the Minister for Finance to reflect on the PAYE structure as well for those who work on the drills.
How does the Minister for Energy envisage the offtake of oil taking place now if the programme goes ahead and some exploration company is lucky and strikes it rich in terms of gas or oil reserves? What is the state of the technology now? Can it be piped directly on to tankers and taken for refining to, say, continental refineries, or are we still confined to the traditional method of piping ashore? Four or five years ago, the suggestion was that if oil was found in certain Irish waters it would be too deep and too expensive to pipe ashore and the traditional idea of landing the oil on the south coast might not be a viable way of doing it. Has the technology changed now so that it can be piped in, offtaken on the spot into tankers and can the tankers be moved to wherever the refining is? I know I have gone away from the financial implications of this, but we want a short Second Stage debate on the issue because we are agreeing the Bill subsequently. I do not think we will be voting on it at 5.30 p.m. That is not our intention, but we have a couple of amendments that we would like to put.
This is by way of a preamble. We will get down to the specific sections fairly quickly.
We have finished the section so I suppose we are in order.
I am very pleased at the reception the House have given to these proposals. Deputy Flaherty's question is legitimate; if a Bill along similar lines was proposed in 1985, why has it taken so long for the legislation to be brought before the House? When I say "similar proposals", of course there are some major differences between what I am proposing now and what was proposed in 1985, but the fact still remains that Ireland does not have petroleum legislation as such.
The Bill that was published during the then Coaliiton of Fine Gael and Labour in 1985 has acted as a guideline, but the situation was unsatisfactory from the point of view of seeking to interest companies to take blocks and invest in exploring in the Irish offshore when the legislative regime was so uncertain. I cannot answer Deputy Flaherty as to why the Bill that was prepared in 1985 was not brought before the Dáil by her party who were then in Government. All I know is when I came into the Department in July 1989 there were a number of areas I had to acquaint myself with. At the time of the budget of 1991, it was my intention to have the necessary legislation for the petroleum industry agreed at Cabinet but because it was complex I was unable to have the matter passed in time to have it included in last year's Finance Bill. I announced at the time that agreement had been reached at Government level and that it would be included in the 1992 Finance Bill. That is the position we are in now. The 12 months' delay — for which I say mea culpa— was because it was impossible to have all the preparatory work done in time. The important point is that at last, we are here with these major proposals which clear up much of the indecisiveness and doubts that exist in relation to our tax regime and what our tax take would be in the event of somebody making a major investment which resulted in a major find.
The lack of legislation may have been an inhibiting factor but it certainly cannot be blamed for the lack of success that has, sad to say, been the case in the exploration industry offshore here over the years. For every four wells drilled in the North Sea there has been a find and our success rate unfortunately, has been about one in 50. The total number of wells that have been drilled on the Irish offshore is 111 and we have had one major find, Kinsale gas, and one minor find, Ballycotton gas. We have had a number of very minor oil finds, none of which has led to commercial production. Two oil finds which have not come to production yet are the Atlantic one referred to by Deputy Noonan and the Porcupine for which the lease is held by Aran Energy. It is not true to say that activity has come to a halt but it certainly has been falling off. I think one of the main reasons has more to do with the lack of success rate with the wells that have been drilled than with the indecision in regard to the taxation regime.
As Deputy Noonan rightly said, we have very little influence in areas of this industry. We can issue the licences if there are people seeking them and we can control the legislation and the tax take and the tax regime that will apply. The price of oil on the international market which, was referred to as being a determining factor, is the other ingredient; we have no control over that either. Therefore, the only one area where we have some real control is legislation, and I think it is incumbent on us now to have a clear policy laid down in legislation offering attractive terms. I would deem it important that our terms be seen to be at least as attractive or more so than those available in the areas we are competing with. That is the whole purpose behind this section of this year's Finance Bill.
It was deemed by the Government and the Department of Finance that the most appropriate way to bring forward this legislation was in the Finance Bill, not as a separate Bill. I am not too sure where the dividing line is or what the arguments for or against are. The important thing is that it has been included in the Bill and the House now has an opportuinity to debate it. I am very pleased at the obvious acceptance of the point of view I am putting forward in offering attractive reduction in the corporation tax take from 40 per cent to 25 per cent.
While activity has not come to a halt it has, as has been explained by my colleague the Minister for Finance, come to what we would consider an all time low. Only one well was drilled last year as against a peak of 15 wells drilled in 1978. Apart from Marathon, only two exploration wells are in prospect in the years ahead, at least one of which is problematic. I have a commitment from Bula and Santa Fe have bought into that block with them, so in the Bula-Santa Fe block there is a commitment to drill, and I am hoping that it will come to fruition. The commitment there is to drill by the end of August this year. The Marathon company will be drilling one of their commitment wells in July of this year. I do not mind saying publicly that, in relation to the Marathon well, I am reasonably optimistic that the prospect they are about to drill has some chance of being more successful than some of the other wells I have referred to. In the exploration business one has to be optimistic and those who are investing substantial sums of money will not do so purely on optimistic assumptions, but will do so on sound geological research and following detailed seismic surveys of the areas and careful analysis carried out over a very long period. Ireland is currently competing for internationally mobile exploration investment against countries with better drilling success rates than we have had. I have already told the House what our success rates have been.
Established oil-gas production infrastructure is another area that would attract investment. It is something that we just do not have. The other factor is better tax terms which we are now seeking to improve. Unless radical action is taken, there is a real danger that exploration offshore Ireland will die out all together in the next few years. If this happens the potential for oil-gas production to generate substantial tax revenues for this country may never be realised. We have vast offshore areas and it is incumbent on the State to encourage a very active exploration programme in them to see whether the geological structures are there to attract drilling into those areas. Since becoming Minister, I have sought to encourage as much activity as I can into offshore exploration.
The State can receive tax only if there is commercial production, and the whole purpose of these tax changes is to achieve the production of oil and gas. That is why the tax is structured in the way it is. Of course, you cannot achieve production unless you have successful exploration. Tax terms will have a major impact on whether Ireland is seen by the industry as an attractive location for exploration investment. I am undertaking a major effort this year to increase the level of exploration activity in Irish waters. A definite competitive tax regime is critical for exploration investment. If the tax terms are positive the omens for increased interest are good. The measures proposed in the Chapter VI of the Bill combine certainty as to the tax treatment of the sector with measures designed to stimulate early activity. Application of the standard rate of corporation tax would not now enable Ireland to compete successfully at all levels of possible production against the tax attractions of our key competitors. Assessments indicate that a rate of 25 per cent would be required to provide the necessary competitive edge. Such a regime would not involve any loss of revenue to the Exchequer from current gas production operations. Industry perceptions of poor prospectivity and other handicaps require that Ireland must be clearly competitive at all levels of production and increasingly so in relation to large notional fields for which companies would not be inclined to look here.
Following the Government decision of 25 September 1987, the then Minister announced that a supplementary levy would apply in addition to corporation tax at a stated higher level of production to bring the State take to 60 per cent. I now consider that the prospect of any such application of tax rates proportionate to levels of production would damage Ireland's ability to compete for exploration investment and would seriously undermine the efforts we are making to increase exploration activity — and I am pleased that view is shared by my colleagues in Government — so thus we are making this change.
In order that the proposed tax measures will induce companies to obtain exploration licences, drill wells and, it is hoped, achieve commercial production sooner rather than later, the 25 per cent tax rate will apply only in cases where petroleum leases have been issued and where commercial production has commenced no later than certain specified dates. The cut-off dates which have been selected should afford companies who, in the first instance, act in a timely manner in obtaining exploration licences reasonable time within which to drill wells and in the event of commercial discoveries to complete the steps prerequisite to the issue of a petroleum lease. In any given circumstance, the relevant cut-off dates can be determined by reference to the initial period for which the exploration licence under cover of which the discovery was made was issued. Production under any lease which is not issued by the relevant cut-off date will attract the standard rate of corporation tax even where discovery is made prior to that date. The precise duration of different categories of exploration licences which necessarily reflect the demands in terms of time and otherwise of undertaking exploration efforts in different areas offshore will be set out in the new licensing terms which I intend to publish shortly and which will dove-tail in with the proposals in this Bill.
Deputy Flaherty referred to the tax take in other areas and to the British rate of 33 per cent. That, of course, only applies in the case of smaller finds in the UK area, that is less that 100 million barrels, so, as a starting point, Ireland has to match that rate. However, the United Kingdom, as we know, is a proven oil provence with a highly developed infrastructure. In order to compensate, Ireland's tax rate must therefore be lower than the tax rates which apply in the United Kingdom and in other key competitor countries. If one looks at the various countries in Europe and their petroleum taxation terms, one is struck by the fact that Spain has the lowest state take. Corporation tax in Spain applies at 40 per cent but operators receive a depletion allowance which has a dramatic effect on the take itself. The impact of this allowance is to bring the effective tax rate down to approximately 20 per cent or lower in some cases. Despite this apparent generous allowance, Spain has as yet a low level of exploration activity by foreign companies so there is no great interest in the offshore there.
A standard rate of 25 per cent would ensure that, with the exception of Spain, Ireland could be highly competitive with all countries for medium to large fields while still being attractive for the smaller finds. Rates above 25 per cent would result in a greater relative tax take in money terms for small fields which would not compensate companies for the higher geological risk of exploring in Ireland. The outcome in such a case would be a failure to encourage a sufficient number of companies to take the risk of engaging in exploration in our waters.
Deputy Noonan raised a number of questions he wants me to address. He referred to the notion — I do not know whether it is factual or otherwise — that the policy in the Department of Energy, in the past at any rate, was based on an ideological objective to protect Ireland's natural resources from development and to save them from over generous exploitation by any outsider on behalf of the State and therefore unattractive terms were applied which resulted in a low level of activity. That may or may not have been so in the past. Certainly during my term and during the term of this Government, the objective is to seek to exploit our offshore natural resources to the maximum extent possible and, of course, the very fact that we are here with this Bill is obvious evidence of our intention to do that in an equitable way, a way that will, we hope, achieve results for the State and bring whatever great benefits would flow from a major find while ensuring that the State takes a reasonable proportion of the profits that are made.
It is certainly not the intention of this Government that whatever natural resources might be lying under the waters off our shore be left there. In fact, I have encouraged major seismic surveys in the most difficult and, indeed, largely unexplored areas right along the west coast, the Slyne Trough and the Porcupine. That exercise was undertaken last year and will be resumed during the summer months this year. The results of that survey work have been made available to internatioal companies, 33 of whom have already purchased the results of the survey and are expressing keen interest. It is our intention to release some of the blocks for exploration in 1993. That exercise has been carefully worked out by my Department with the express intention of attracting greater interest in the Irish offshore.
The level of expertise in the Department is of a very high quality. I am absolutely satisfied on that. There are excellent, highly professional, well qualified people in the Petroleum Affairs Division in my Department and in the Geological Survey Office, which I have recently restructured, and I have every confidence in the expertise of the officials in that area. This great story that the oil companies are so smart and so cute that they can carry out their drilling programme without passing on the real results of their testing to the State is just a myth, and if Deputy Noonan were to consult with any of his colleagues in the Governments who held this portfolio of Energy and ask them the question, I am sure they will give him the same answer that I am giving him. His current leader who was one of my predecessors as was Deputy Spring.
I was, for six weeks.
I do not remember the period. That was over Christmas. There were no great finds during that period anyway.
The Deputy asked if the seismic survey of the Irish offshore area had been completed; far, far from it. We have a huge unexplored area and it is my hope and intention that we attract major seismic survey activity into that area and some of the steps which I have already mentioned were taken with that in mind and have been successful.
The Deputy inquired about Kinsale Head gas reserves. It is very difficult to make an accurate scientific assessment of the life of any gas field. The rate at which gas is extracted begins to slow down as the field is depleted and as the pressure drops. All sorts of illogical phenomena can come into play. The presence or otherwise of water in the area can also have a major effect on the matter.
The expert opinion on the life of the Kinsale Head gas field has been that we could draw gas off at the current rate up to the year 2000, and that is approximate. That opinion could be short a year or two, or it could be a year or two longer. If a major disaster occurred it could dry up in one or two years. One just does not know. The expert opinion is that there is sufficient gas there to allow us to draw on it at the same level up to the year 2000. Because of steps that I have taken, and the new agreement I have entered into with Marathon, together with that company's commitment to introduce additional compression into the extraction process, we have managed to extend the life of the Kinsale Head gas field by about another three years. That is a very valuable extension. It eases the pressure on us in relation to demand. It also extends the period during which we can continue our exploration work in the hope that we will make another find.
I do not mind sharing with the Members of this House, and with the Irish public, that there is an aura of confidence all the time in the Department of Energy that we will make further finds. It is probably more likely to be gas in smaller fields rather than in larger fields, but that is not pie in the sky or making optimistic assumptions. Based on the prospects indicated by the geology that is there, it is reasonable to come to the conclusion that there is a strong propect of making some further gas finds and, hopefully, some oil finds also.
The exploration programme which we have agreed on with Marathon involves that company drilling a further seven wells over the next five years, starting with one well this year. It is not confined to gas exploration. We are exploring for gas and oil. I cannot say what the exact life of the Kinsale Head gas field will be, but because of the extra compression that has now been agreed upon one could talk about the year 2003. One has to exercise great prudence in managing an energy policy, because so much of our heavy industry is now hooked into gas, using it and dependent on it as its main source of energy. The security of supply to those customers is crucial. We have been very vulnerable. There is just one pipe coming offshore from Kinsale and carrying gas up along the east coast as well as to Limerick and Kilkenny. That is why it has been considered of extreme importance that an alternative source of gas should always be available. We should not, in our policy, be satisfied to have one source or one pipe supplying gas to large numbers of industrial, commercial and domestic customers. That is the raison d’�trebehind planning the gas interconnector to the United Kingdom. Connecting with the United Kingdom gas network will in time, ensure that the Irish gas customer will, in fact, have access to European gas and even to Russian and Norwegian gas. It is a very important part of the energy policy to achieve the construction of this interconnector.
I have informed the Dail on a number of occasions and issued statements from my Department in relation to the interconnector. As Deputy Noonan raised the matter, it is important that I repeat it here. Some major contracts have been entered into. Up to £130 million or £140 million has been spent in relation to the purchase of steel and the manufacture of piping, on contracts for laying and cementing the pipes and our contracting for barges. This is a very big task. The individual pipes will weigh about 150 tonnes each. A very large barge will be required to lay those pipes on the ocean bed. Those vessels are not available for hire just at the drop of a hat so one has to enter into a contract quite some time ahead so that one can have the barges at the time they are required. We have entered into those contracts. I am confident that we will meet the timescale that has been laid down for the construction of the gas pipe line.
The question was asked as to whether the technology has been developed in relation to any major oil find off the shore. The Deputy is probably referring to the comments that were made when the oil show was found in the Porcupine region, which is very hostile territory. At the time the find was made, the technology was not available to bring oil ashore from such a location in such a hostile area. It was a long distance from land in the very rought waters of the Atlantic. The price of oil would want to increase very substantially to make it commercially viable to bring oil ashore from such a location. In the intervening years the technology has been developed. There are a number of ways in which that oil could be brought ashore if the price was right. The cost of bringing it ashore would be a major determinant for anybody planning to undertaken that exercise.
As the House is aware from press releases, the Aran Energy Company have been carrying out some research into that aspect of the block where the oil has been found in the Porcupine region. They are the major shareholders in that block. Again, the price of oil at the moment will be the determining factor there.
The Deputy asked about the position of Bord Gáis Éireann and the kind of policy they might adopt in relation to the supply of oil if they were to be in a monopoly position. I would like to say that natural gas is a crucial element of our fuel mix. It accounts for over 16 per cent of our total energy requirement. The displacement of imported fuels by the use of natural gas has meant a saving to date of over £2 million on our energy import bill. Dividends from Bord Gáis Éireann to the Exchequer have exceeded £260 million. One can add to that the royalities paid by Marathon, which are in the region of £40 million so £2.3 billion is the gross benefit to the State of the gas find off Kinsale.
Bord Gáis Éireann's marketing and pricing strategy has meant that natural gas has become the dominant fuel in the industrial sector. It is playing a major part in our strategy to control emissions of environmentally harmful gases and to help meet our international commitments in that regard.
The offtake from Kinsale at Ballycotton — which I mentioned earlier — is currently fixed at around 80 billion cubic feet per annum. That is about the volume we are taking off. These volumes are up on previous years as a result of the agreement that I mentioned with Marathon for the installation of the additional compression. Kinsale gas is allocated throughout the gas market on the basis of the highest possible economic return from each sector beginning with the premium, or residential, market where we can displace the more expensive oil product imports and smoky coal, and ending with the bulk industrial and electricity generation markets. Given that the gas must be extracted in accordance with the contractual schedule of volumes, there is not a better way to ensure efficiency of use. The residential market has now begun to grow rapidly. With the increasing importance of environmental concerns, gas is uniquely placed to play an important role in our future fuel mix. This includes the electricity sector where, because of advances in turbine efficiency and the concerns about sulphur and CO² emissions, gas use is likely to grow.
This implies potential growth for gas use in the period up to the year 2015 which could double our existing rate of gas use. I favour a balance between oil, solid fuels and gas which would accord with this growth rate. The pipeline that I mentioned will be administered by a subsidiary company of Bord Gáis Éireann. Bord Gáis Éireann are open to investment by third parties in the ownership of that and are offering equity in the gas pipeline to private investors. Some discussions with possible investors are underway at present. The ESB were offered equity in the pipe, but the ESB and Bord Gáis Éireann did not reach agreement on terms. Because of the time factors which influenced the period during which we had the opportunity to sign a contract relating to the availablity of the laying barge, it was necessary to make a decision about the contracts. As the ESB and Bord Gáis Éireann had not reach agreement on the terms under which the ESB would participate in this subsidiary gas operating company, alternative arrangements were made. Bord Gáis Éireann went ahead and signed the contract on the basis of the alternative arrangements that we made with the Department of Finance. The position is that it is open to the ESB to come back in and take equity in the pipe, if they so wish. There is still plenty of time for them to do that, but it was necessary to sign the contract at that particular time. Otherwise the whole project would have gone back several years and we would have lost the European Community grant worth nearly £90 million. There were a number of factors carefully assessed and taken into account before the final decisions in this matter were made.
Who will fix the price?
Which price?
The price of the gas that will come in through the pipeline.
Bord Gáis Éireann.
Will they have a monopoly on it?
A benign monopoly. The situation is that with the development of the internal energy market there has to be absolute transparency in regard to any pricing arrangement entered into by any utility, be it a national utility or otherwise, within the community. The development of the internal energy market is leading to a situation where, in time, there will be third party access to the transmission networks of gas and electricity utilities. The whole intention is to ensure that there will be competition. The statements that I have made in relation to introducing open competition into the electricity business in this country equally apply to gas. Because gas is at the developmental stage still in regard to major infrastructure, I am moving ahead in the electricity area before dealing with the gas area. I would like the House to accept that the policy will be to introduce open competition in accessing gas and electricity to consumers in this country so that we get the best possible price.
I favour the principle of access to the interconnector by large customers and producers where this is practical and where it is not inimical to the security of supply. That would mean, of course, that large users would be able to source their own supplies of gas, whether at home or abroad, and that Bord Gáis Éireann would then provide the transit through this interconnector pipe. It would provide the transit through this interconnector pipe at fair terms through the piping system. The European Commission is bringing forward additional proposals in this area. Agreement may take some time yet. I am convinced, if the Community continues to direct its energies towards establishing the internal energy market, that those things will come to pass that we will have third party access. That covers most of the questions that I have been asked.
I welcome the presence of the Minister for Energy. He has been very informative and gave a comprehensive account of the up to date position in relation to the exploration fields and the whole energy question.
I welcome the tax regime which has been introduced in this Finance Bill. It is generally designed to give greater incentives to oil companies, and so forth. I agree with Deputy Noonan that we have matured quite a lot in our approach to the oil and gas industry. I can remember in the late seventies the headlines in the Cork Evening Echo and the Cork Examinerproclaiming Cork as the oil capital of Europe and the oil capital of Ireland. Tremendous bonanzas were to be available to us all. The future was rosy in the huge distribution industry. Of course, that did not come to pass. Allied to that, we also had a tremendous ideological debate in the country for many years about a resource which we do not have at the moment. We certainly do not have it anywhere near coming on-stream yet. We had some ferocious debates about selling off the assets to exploitative multinationals, who might intend to take the last penny out of the Irish working class and exploit us to the zenith. That was a bit unreal as well. If this Bill is doing anything, it is restoring the balance somewhat. As the Minister and most spokespeople have said, the international price situation is the critical factor in determining whether oil companies will increase exploration and whether or not they will bring certain marginal finds ashore. There is also, of course, the success rate of exploration programmes. This will determine subsequent exploration activity. Whatever degree of influence we have, we should exercise it well. We have some influence over the type of tax regime that we put in place. Essentially, the purpose of the measures before us is to create a more favourable regime so that we can become more competitive in that particular area.
Obviously, I was interested in the comments which the Minister had to make on the Kinsale gas field. I welcome the fact that he has achieved an extension of the field, albeit a limited one. We all witnessed the very beneficial impact that that gas field has had, not only on the national economy but also on the whole environmental area. Perhaps a greater degree of activity could mean co-operation between Government Departments, particularly between the Department of Energy, Bord Gáis and local authorities. Perhaps co-operation could be achieved in the usage of natural gas, particularly in new local authority housing schemes. This is an issue because, as we know, the whole question of smokeless zones and the generation of smog in our larger cities is one of public concern. It has become a very important issue. I am amazed at times at the lethargy of certain local authorities towards the question. There is a lack of imagination and innovation. Why, for example, do they not approach Bord Gáis and seek natural gas as the major primary fuel for the various housing estates that they are constructing? Bord Gáis should look at that particular area. They would save the State some money because the State would have to bring in incentives and allowances for people in smoke free areas. The clean fuel of gas could be used from the very beginning in the construction of new housing estates and could also be used in the adaptation of existing housing estates. I would like the Minister to give consideration to that.
We have had approaches from people working in the exploration area in the past. The conditions of employment will always be a matter for on-going negotiations. Very few employment opportunities are now being created in the exploration field because of the low level of activity. If these measures manage to increase the level of activity they will be successful. We have arrived at the point where we are satisfied that there is not going to be a rape of national resources as a result of these measures or as a result of any developments that may take place in the future.
Arising from the Minister's comprehensive and welcome response to our earlier remarks, I would like to take this opportunity, to ask one or two specific questions. In relation to the general discussion on gas, the Minister indicated that the changes made at Marathon could now extend the life of the field to the year 2003. Is that based on static annual usage or does it allow for any element of growth? In the context of the environmentally desirable objective of doubling gas usage, does the 2003 projection allow for that, or is that in anticipation of having static constant usage at current levels? It is wonderful to have this kind of opportunity rather than having to speak under the constraints of Question Time in the Dáil to pursue some of these matters because it enables us to have a better discussion on them. The Minister's information is interesting but occasionally he can overwhelm us with great volumes of it. At other times, unless one asks a precise question one does not get information.
Debates are usually more interesting in the Seanad because we have more time.
It is a better environment. The Minister has given both party and his own personal commitment to the ending of monopolies and to removing any kind of anti-competitive environment, and to encouraging competition. Having discovered how difficult it is to disestablish existing practices and monopolies — and the Minister will find out more about that as the years go on — why, in the context of a totally new supply of gas arriving into this country, when he had a new green field, did he not set that up independently and manage it independently from Bord Gáis Éireann thereby separating their supply from the distribution, until we have other national finds? I wonder why, when the Minister had a green field, he hesitated to take on possible buyers in achieving this objective in other fields? I know he believes that third party access would come and would achieve a certain amount. I would be interested, given that we have raised this point, to hear his reply. The Confederation of Irish Industry very actively looked for separate control in a separate company in relation to the supply. I do not understand the Minister's hesitation in taking this opportunity.
Finally, to turn back to the more substantive elements of the Bill, the Minister has made it quite clear that the Marathon regime is outside the context of this Bill, and separate. I am aware that there was some interest in the industry in merging them but my understanding is that there was a fundamental, contractual obligation with Marathon. Perhaps the Minister might make some comment about why there was such a clear policy approach that it should be kept separate. I am not sure whether this is, essentially, an energy or a finance matter. They are obviously linked in this case. There are broad differences in the two regimes as a consequence of the passing of this legislation.
There were a few questions on financial aspects also, such as taxation of employees. Deputy Martin wishes to come in now, and perhaps the Minister for Finance would like to take a few points after that.
Competition is a matter I am interested in also. To what degree does competition policy in energy — and not just in gas and electricity — conflict with, or relate to, the national strategic objectives in relation to energy supply? We should always remember that we are a very small market. We are beginning to discover this in a number of other enterprises. It is good to talk about bringing in competition, but the market is so small that very often it does not sustain competition particularly in large areas of activity. I would be concerned about that in the area of gas and electricity.
You are talking about the ESB.
No, I am not. The same principle applies to the gas.
I will deal with a few of the questions raised by Deputies Flaherty and Noonan. On the question of the treatment of workers, the focus of the Bill is on taxation of production profits to the extent that the special PAYE measures are necessry. They have been enacted by the Finance Act, 1973, Chapter II, section 33 (5) which says, "any emoluments from an office or employment in respect of duties performed in a designated area in connection with exploration or exploitation activities shall be treated for tax purposes as emoluments in respect of duties performed in the State". The obligation would be on the employer to return his or her employees in any records sent to the Revenue Commissioners.
There was talk about the time when there was a downturn in exploration. In my speech I gave the figures over the last number of years. Last year only one well was drilled. Previously, there were only four and three respectively. We have to go back a number of years before we come to anything more substantial. The new tax regime will dovetail with the licences to be released this year. We are dealing with this as part of the Finance Bill in order to facilitate the enactment before the key period in the autumn for decision making by the industry and investors. A separate Bill would get through by that time, and we would have missed another year, which would have been unfortunate.
What about last autumn?
I cannot take responsibility for either the Finance Bill or the Minister for Energy last autumn. The Minister for Energy has said an effort was made to prepare them at that stage. Since I took up office in the Department of Finance the Minister for Energy has been signalling to me, that we have to get it through in this year's Finance Bill. In this way we have certainly saved the process. I thought Deputy Mitchell would be supporting the process. Every day on the Order of Business he stands up and asks why we have this delay and that delay.
An awful lot of delays are caused by the time it takes to go through the whole legislative process. This is an imaginative way of trying to deal with this matter. Deputy Flaherty's point about development expenditure and the UK comparisons comes up in the amendment. Perhaps the Deputy would like me to make a comment on it now. There is a very generous 100 per cent write-off for tax purposes in respect of plant, machine structures and other assets used in the winning of petroleum under a petroleum lease granted by the Minister for Energy. The focus of these development expenditure allowances, therefore, is on the production stage of petroleum activities rather than the exploration stage. The allowance involved is 100 per cent write-off of the development expenditure; the 1985 Bill, which lapsed, provided for the writing down of development expenditure at 40 per cent per annum. The acceleration of the write-off of development expenditure to a single 100 per cent allowance confirms that the allowance is a generous tax incentive unrelated to the period of write-off of such expenditure for commercial purposes.
The purpose of providing the tax incentive of 100 per cent allowance for development expenditure is to encourage production of oil and gas. The 100 per cent allowance will be given when the expenditure to be wrttten off has begun to result in production of oil or gas in commercial quantities from the new field which is being developed. The purpose of this field by field restriction on development expenditure allowance is to ensure that the allowance has its intended incentive effect. The development expenditure allowance rewards oil producers who persist with the development of a new field to the point of a commercial production. The producer becomes entitled to a very generous allowance when the allowance has its intended effect. That is when the producer has encouraged the development and production of oil and gas from new fields. It should be the case for any well targeted tax incentive that relief only becomes available when the activity encouraged by the incentive has clearly commenced. I acknowledge that there may be a considerable lead-in time between development expenditure on a new field and the commercial production from that field. However, at the end of the day, the purpose of the incentive allowance is not to encourage additional expenditure for its own sake but rather to encourage new oil and gas production. The need to ensure a real return in terms of increased production from the incentives is part of the balance struck in this package of petroleum taxation measures. While the 25 per cent rate would only be available to those who progress to production without undue delay after receiving petroleum leases, the 100 per cent development expenditure allowance will only be granted where the expenditure leads to commercial production from new fields. Therefore, they are inter-related.
International comparisons are misleading. As the Minister for Energy said, we are confident that our 25 per cent corporation tax rate and the 100 per cent write-off allowance match the most generous petroleum taxation regimes with which we must compete and this is what we are seeking to do. For example, the UK rate of tax is higher than our 25 per cent rate because the UK do not have a 100 per cent write-off of development expenditure and comparisons which fail to acknowledge these fundamental differences are essentially misleading. I know we will be making some of these points again in relation to the amendment but that is the detail of the matter.
The last question Deputy Flaherty asked related to Marathon leases and the financial provisions involved. The provisions in the Bill only apply to exploration development activities conducted under the 1975 licensing terms or any amendment or substitution thereto. Marathon conduct activities on 19 leases and 33 blocks. These leases were granted under an exploration licence that the company's predecessor, Ambassador Oil, received following an agreement in 1959. These leases are not subject to the standard licensing terms. Production under these leases are subject to the payment of a royalty at the rate of 12.5 per cent. In respect of fiscal treatment, the 1959 agreement provides that where the total of royalty paid and the tax paid in any accounting period exceeds 40 per cent of net income as defined, the leaseholder is entitled to receive the lower of either tax paid or the excess above 40 per cent. The remittance formula was seen in 1959 as necessary to encourage oil and gas exploration. For the purpose of the operation of the remittance formula, the company are entitled to claim notional expenses which would not be allowable under normal taxation rules. The 1959 agreement is a contract between the State and Marathon, the terms of which cannot arbitrarily be altered by either party.
Accordingly, it is considered that the benefits conferred under the 1959 agreement should not be extended by bringing those existing leases within the scope of the provisions contained in this Bill.
Marathon have partners in many of the leases and those partners will enjoy the same rights under the 1959 agreement. Any activities that Marathon or its partners engage in outside the 33 blocks are subject to the normal licensing terms and will be subject to the provisions of the Bill. Effectively, there is a ring fence separating activities conducted under the licensing terms and activities subject to the 1959 agreement.
Can we take the sections right up to the point where the debate has been alternating?
Question: "That section 70 stand part of the Bill" put and agreed to.
Sections 71 to 75, inclusive, agreed to.