On sections 76 and 71, which we went through quickly, these are parts of the ring fencing provisions. This approach was recommended by the Commission on Taxation. Obviously, it has emerged as valuable in all taxation regimes. The regime suggested by the Commission on Taxation was a field to field basis, it is not relevant to our position though it might be good if it was. In the context of the measures, as well as section 73, sections 76 and 77 are also part of the ring fencing provisions. Is the Minister satisfied that this area is tied up as tightly as possible because, given that we have an extremely generous regime of concessions, it is important that they would not be abused in any fashion or appropriated for any other purpose. If we come to the position of a substantial find it is important that only valid expenses be set off against tax liability. The other side is the dialectic effort to get this Bill right in the context of the total ring fencing provisions of which this is one. Will the Minister comment in general on his approach to this and the approaches taken here?
SECTION 76.
That is a fair question. In addition, to try 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 Deputy is concerned that the ring fence provided will not work and, that, like some other reliefs and shelters we have been discussing some people will try to use profits in one area against losses in another area to try to diminish the Exchequer's take. The fence set up around the company's oil and gas activities protects against oil and gas losses being taken out, and against losses from other activities being brought in. The 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. Earlier, the Minister for Energy spelled out how costly exploration work can be for the people involved and this is evidenced by the experiences many of them have had here. It is unlike many other situations where people have played with the system. The ring fence protects the tax payable from 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 incomes, such as royalties, or excessive interests by a producer to a connected person. The example given earlier was in relation to excessive interest paid by an Irish oil producing company to a foreign company, both companies being members of the same multinational group. This would result in a reduction in the Irish company's profits and Ireland's tax take if the relief for the interest was not restricted. When considering this Bill the Department of Energy and the Department of Finance agreed that while it is important to make the terms generous, they should be generous in the areas that we want them to be generous in, and for the appropriate purposes. This comes back to the point we were discussing yesterday on objectives and the criteria we have laid down are quite clear and the situation will be monitored. We have been waiting for this legislation for some time and we are satisfied that in the time available, both Departments, have ensured it will have the desired effect, which is to help exploration.
On that point, as this is a new area that we are going into, and a good deal of research has been undertaken to determine the manner in which it should be handled in the interests of the State, could we have an assurance that it will be kept under review depending, of course, on how successful the exploration will be?
I have no difficulty with that. Over the last 24 hours we have been discussing the campaign of this Government to try to close shelters and loopholes and to ensure that Exchequer money is targeted to best effect. Nobody has been more involved in these efforts than the Minister for Energy, Deputy Molloy and myself. We spent a good deal of time over recent years examining this subject, therefore, you can rest assured that any legislation that has been put together by us will have the desired effect. I have been assured that there are no loopholes, but if they do occur, I will ensure that we will return to amend these loopholes.
I would like to add that important legislation of this kind, which in a sense is new in certain aspects, will obviously be kept under review by the Minister for Finance. I want to emphasise that we are talking about huge sums of money. Therefore, it is essential that the task allowances or benefits — which it is proposed shall be made available — are covered by legislation that is drawn up tightly to ensure that there is no abuse of the allowances being granted. To give the House some idea of the amounts of money involved it might be helpful to give you an indication of what well drilling costs are like in modern day conditions. It is estimated that a total of £487 million has been spent on drilling in the Irish offshore in the 20 years since 1971. Updating that to 1991 prices, approximately £900 million has been spent already on drilling 111 wells in the Irish offshore. Bear in mind that only one had a major success and one other had a minor success.
Do we have a figure for the tax take?
Those figures exist and have to be written off against any profits. If we can encourage those companies to come back and continue drilling and they have a major success the rewards to the State are enormous. One major success like, Kinsale, has already benefited the State to the extent of approximately £2.3 billion — it has resulted in displacing £2 billion in imports and has brought a direct cash benefit to the Exchequer of approximately £300 million. There are no estimates available of the total cost of expenditure on seismic surveys which run into huge figures. It is very difficult to accurately forecast the cost for an exploration well as there are so many variables involved. The factors involved are the water depth, the drilling depth, the weather and the sea conditions and drilling rig availability.
During 1991, one exploration well was drilled in Ireland in a depth of 212 feet of water. The total depth of the well was 4,800 feet and the rig was on location for 33 days. The total expenditure on the drilling of that well was £2.49 million. The Irish content in that expenditure was 30.5 per cent, therefore the total Irish expenditure was approximately £0.76 million. Based on rig rates forecast for 1992, by County NatWest and the dollar-pound exchange rate of $£1.60 the average costs of wells drilled in the Irish off-shore are approximately as follows, for a 40 day well that would be about the average length of time it might take in shallow water in the Celtic Sea £3.5 million or £4 million; a 60 day well in deeper water, say in the West Celtic Sea or North Porcupine, £5.5 million to £8 million; a 90 to 120 day well in deeper water say, south Porcupine £8.5 million to £11 million. We know of course that the conditions can often deteriorate and costs can increase dramatically above the figures that I have quoted, but they would be the average expected costs for the drilling of one well. It is important, as the Deputy has pointed out, that the legislation is drafted very carefully in order to ensure that it is ring fenced in such a way that abuses will not be allowed.
There is a particular purpose in section 76 and subsection 6 of it reads:
(6) Section 157 of the Corporation Tax Act, 1976, shall apply for the purposes of this section, save that, for the purposes of determining whether a person is connected with another person whose profits or gains arising from a petroleum trade are chargeable to income tax and by whom interest to which subsection (1) (i) relates is payable, or by whom an annual payment to which subsection (4) relates is made, the provisions of section 16 (3) of the Finance (Miscellaneous Provisions) Act, 1968, shall apply.
I take it that for the so-called connected person's provision that there has been some evidence of problems here or that this is an area which required a specific provision. In the context of investors, in general; they do not have a detailed knowledge of the industry. I would be interested in having the context of this particular subsection clarified. Given that the vast mass of this section, ring fencing and so on is similar to the 1985 provisions and that we have drawn a good deal from international experience and from comparative measures in existence in other countries, could the Minister clarify that point in relation to subsection 6 and give a more general comment on how the ring fencing provisions compare. We have compared our generous concessions and, as I said, we are supporting those actively. In view of the interesting information the Minister has given us in relation to how expensive many of these operations are and how important it is to ensure that these are not incorrectly set off, perhaps he might refer to the seismic area and its funding. He referred to one programme undertaken directly by his Department and he also referred in earlier discussions to his concern about the lack of adequate seismic information generally. Will he also refer to the funding of that industry and is it in any way related to exploration provisions here? Who is involved in that industry generally here and how do we get it up and running?
Seismic work is the basic upon which all exploration activity takes place and in issuing licences, of course, there is always a requirement that the company being allocated the licence would carry out a certain level of seismic work in order to add to the geological knowledge of the area over which they were being granted the licence. The company pays for the licence and all the costs arising from the seismic survey undertaken by the licensee would of course be borne by the company.
Are those expenses allowed for in the Bill?
Yes, it would be considered a normal exploration expense.
Would the Minister clarify the reference to the activities particularly those undertaken by his Department in the last year.
My Department.
In relation to——
Seismic.
——yes a seismic survey.
My Department would, of course, first assess the application to establish that the company was a competent company, had sufficient expertise to undertake the work they were seeking to do under the licence and that they had sufficient financial resources to pay for the commitments they would be entering into if granted a licence. Matters of that kind would be carefully assessed by the Department and recommendations made on the matter. If a licence is granted my Department receives regular reports on the work carried out by the licensee and we have professional staff qualified to assess seismic information to determine the results of the work. Therefore, all the information gathered by the licensee has to be passed to the Department which carries out a professional assessment at all times.
When you were discussing seismic information you made reference to your own technical report which may be misleading, perhaps you could clarify it. I envisaged Department of Energy people working out in the Irish Sea, it would be helpful if you would clarify the technical report you are referring to.
In the case of a well being drilled?
You said you had your own technical report on the general seismic data, was that seismic data you had to hand?
The seismic data is made available to the Department, the Department assess it for their own purposes and make that information generally available. If the information is exclusive to the company, its exclusivity is retained for a certain period and when that exclusivity is removed the information can be made generally available to the trade and companies that may be interested.
In the case of the frontier round which I referred to earlier, in Slyne Trough and in that general region, that information has been compiled for the purpose of making it available to interested companies. The companies carrying out the seismic work will sell that information on to other interested companies. That is the value of the work, some companies do seismic work for the purpose of selling the information to the industry.
I understand that this is merely a definition section and indicates that a connected person is defined by citing the Finance Act of 1968, where the definition of the connected person is to be found.
The Minister spoke about the fact that he seeks regular reports from licensees in respect of exploration. In my experience his Department may not get regular reports from licence holders, particularly in respect of coal mining rather than petroleum activity. When the Minister talks about regular checks on the energy industry generally would he give an indication as to the level of mining inspections carried out by the National Health and Safety Authority and by his Department in respect of licensees who carry out activities from time to time? Perhaps he would specifically comment on the checks and balances that are brought to bear and the information sought by his Department in respect of the activities of licence holders in the coal mining as well as the petroleum sector.
If the Deputy is concerned about a company, who have received a licence to mine coal from my Department, I invite him to let me have the name of that company and I will check if they are complying with the terms of the licence that has been issued.
The health and safety matter is important and it gives me an opportunity to deal with another aspect of energy policy. The strategy involved in these matters is not confined to petroleum taxation. There are two aspects to the regime. One is the licensing terms themselves and the other is the taxation provisions that will apply to a company that makes a profit arising from their exploration work or development of any find. The offshore licensing terms which operate in Ireland were introduced in April 1975. Those terms set out how the Minister for Energy will discharge his functions in relation to regulation and control of hydrocarbons exploration, development and production in pursuance of his statutory powers, principally as set out in the petroleum and Other Minerals Development Act, 1960.
The original booklet contained a long dissertation on the general policy background. There were 66 sections dealing with the terms of these licences. These terms set out the rules on application procedures, on the general type of information to be supplied with an application and on the tax liability of licencees. It states that the exploration licence is an exclusive one; it sets out the period for which it will last, the area it covers and the rights of the licensee. Certain fees have to be paid and certain work has to be carried out, for instance, wells to be drilled. If the exploration work results in a discovery, then other sections set out what has to be done to obtain a petroleum lease. Production requires a lease and must be achieved within five years of such lease being offered. The term of the lease, possible extensions, cessations, etc., are set out in these terms. There is a requirement for the Minister to approve development plans and budgets. Sections on royalties, etc., have now been overtaken by time as has the question of State participation. There are rules on procedures for fields which cross block boundaries. There are emergency provisions and rights to lay pipelines across various areas. There are rules on approval of drilling and plugging and abandonment of wells. Issues such as prevention of pollution, drilling near cables and pipelines are set out. Such activities have to avoid interference with navigation. There are rules on flaring of petroleum. Records have to be kept, samples have to be kept, there are conditions of confidentiality. There are rights of access by the Minister to records and equipment. The Minister has approval rights on assignments and changes of shareholding in licensees and leases that have been issued. Companies must post performance bonds. There are procedures for the recruitment of labour and for training. There are health and safety regulations. It was a requirement that the operator have a base in Ireland. There are procedures for arbitration in the case of disputes. Although the terms, broadly speaking, have served Ireland well over the intervening years, they were introduced against the backdrop of, and in accordance with, a philosophy which has been overtaken by the passage of time.
To hand out a booklet published 17 years ago in response to queries in the 1990s from companies contemplating involvement off-shore Ireland hardly conveys the desired impression and the booklet is now, in my opinion, out of date. Various sections have been dropped, for instance, those concerning State participation and those relating to royalties. They are no longer implemented in practice or they are distinctly dubious having regard to some EC considerations, for instance, section 62 on the use of Irish goods and services.
In addition, it might be mentioned that the 1975 terms do not recognise the existence of the licensing option which has been very much in use in recent years. The clear need to undertake a complete and thorough review and overhaul of the licensing terms has been recognised by me and in early 1991 and on a number of subsequent occasions I indicated in public statements my intention of having such a review or overhaul and work on this item has been in train now for some months past. This work embraces elements such as tone, content and presentation and is aimed at submitting a set of new licensing terms for publication in June or July of this year. It is envisaged that the new terms will contain a number of elements not included in the 1975 terms in addition to reflecting many important changes to the existing regime. It is also intended that the terms will be supplemented by other information relating, for example, to health and safety requirements in the off-shore, to environmental standards and requirements and other things of that nature which would be of relevance to any company contemplating an involvement in off-shore Ireland.
The entire package will be attractively presented, I hope, in a manner which reflects a proper balance between regulation and promotion. Once I have approved the booklet and once it is published, the petroleum affairs division in my Department will ensure that the new terms will be brought to the attention of a very wide network of international industry, consultancy and specialist publication contacts so as to stimulate further awareness of the changes taking place in relation to the off-shore exploration scene in Ireland. It is important to note that the licensing terms are primarily concerned with regulation and control.
In conclusion, I would like to say that the new licensing terms will, of course, be separate from the provisions in this Finance Bill which deal with the other arm of this change in policy and this upgrading of the terms and conditions and the taxation regime which we are discussing today. I am informing the House in order to let the Deputies know how determined the Government are to do everything that they possibly can to create the right environment for investment in exploration in the hope of a successful development.
There were a couple of points in relation to the nature of the ring fence and I was anxious that the Minister might look at in comparison to other regimes. This particular section is one of many sections aimed at achieving a tightening in regulations and ensuring that the very generous allowances are not misappropriated. The Minister for Finance might comment on how this new regime will compare with the current one, particularly in relation to the 100 per cent setoffs. Perhaps the concessions are obvious. I am very interested in the comparison.
I welcome the Minister for Energy's details of his thinking in relation to the new licensing terms. We welcomed the Bill on the taxation improvements which are long overdue. It is extraordinary that it is 17 years since we had an update of our licensing terms in any full sense. I would certainly urge the Minister to move ahead as rapidly as possible. I gather he expects to have the whole package in place — and we support him in this — hopefully for the autumn bidding and investment plans of the major oil exploration company.
I wonder if I could ask the Minister one or two questions. Firstly, could I say that pressure of business in another place required me to be absent from this Chamber and this Committee and I would say to the Minister for Energy that his presence is very welcome here. In your absence, Deputy Noonan on behalf of the Fine Gael Party, frequently made reference to your Party in another context and so your presence here will certainly put a bit of petrol on the fire of the main Taxation Bill.
Deputy Noonan welcomed him.
We are not averse to being mentioned now and again.
A number of points in relation to the regime for which this taxation policy has to be looked at because obviously, as you said yourself, the licence terms and the regulatory framework within which exploration will take place is separate but complementary to the taxation regime that we are putting in place with this Bill. If I am in order, a Chathaoirligh, may I just ask a question? Presumably both this taxation regime and the terms to which you have made outline reference have been constructed in light of the real world and in the light of changes that have taken place in exploration and the supply of petroleum and petroleum products for the global market? Perhaps you might be able to indicate to me to what extend you have had discussions with prospective exploration companies, be they State-owned or otherwise, and what expectation you have?
Part of the reason for the 17 year delay, as I understand it, and I would not profess to be in any way very well informed on this matter, but certainly there were periods in the past when there were all sorts of wild claims made for terms of licensing conditions that would instantly produce exploration at every headland in the country with drilling going on right around the island and that was disputed by a lot of people. Perhaps the Minister might be able to explain what level of activity he would hope to get? Obviously he cannot anticipate, with any great degree of accuracy, but clearly he has pitched the new terms in anticipation of what the requirement of the current market of exploration is and presumably the product that would be produced would not be processed in this country or would it? Within the terms that he is talking about is there a requirement to make any of it available for processing or refining within Ireland and in what other sense do the new post-1992 EC Single Market requirements limit his options in terms of maximising the retained value of the petroleum products within the domestic economy of the Republic of Ireland?
Finally, when he says that it is no longer fashionable or it is no longer required that there would be a State share in exploration or a State share in the equity and that royalties have gone, is he reflecting the new standard range of conditions that prevail generally speaking or is it just a particular view that he might have himself? Is it designed to maximise the level of activity or is it designed to satisfy some particular view that he may have or is it a recognition that the only way the State on behalf of the taxpayer can maximise a return from this nationally owned asset is through the straightforward mechanism of a corporation tax as set out in this Chapter?
I appreciate that the Deputy could not be here for the earlier discussion. We covered that area satisfactorily. The petroleum taxation proposals being put before the House are the Government's considered opinion as to what is necessary to seek to attract exploration companies into the Irish offshore, bearing in mind that exploration in that area has been at a very low ebb in recent years. My Department carried out an extensive review of the petroleum taxation regime in the other countries who have offshore areas with which we would expect to be competing. In all cases, except Spain, the terms that we are suggesting now will leave us at an advantage vis-�-vis the legislative proposal on the taxation level.
The other places would be?
The UK and Denmark principally. On the question of whether consultations have taken place, the Deputy can be assured that we have met Irish offshore oil group operators on these issues on several occasions in the past few years and in particular in the period leading up to the preparation of the proposals. We have taken full account of the views they expressed and the options which they felt I should consider. I expect that they would be encouraged by the measures the Government are proposing today which are in line with the general thinking of the industry. What we are proposing follows very careful examination of the existing regimes and of the views of those who have been operating in our area.
Is the section agreed?
I do not wish to be difficult and I am going to agree to it but I asked about comparative data in relation to our concessions. I have managed to get a good deal of it in relation to how the incentives compared. I presume the restrictive measures compare favourably internationally and cover all of the areas that have caused difficulty in the experience of the industry and elsewhere as means of avoiding taxation?
Deputy Flaherty asked about that as did Deputy Hogan. The 40 per cent tax rate is down to 25 per cent for the limited period specified and the 100 per cent write-offs on capital expenditure have been eliminated from our tax code. That is a favourable system.
I was asked about the relevance of the 25 per cent rate and what we took into account. Deputy Quinn was not here for that. Hydrocarbon exploration development and production are highly speculative so there are substantial uncertainties at the exploration phase in terms of making a commercial discovery. The development and production phases led to further uncertainty as to the quantities which will ultimately be produced by any reservoir. In targeting exploration investment companies are looking for an attractive rate of return combined with maximum certainty. In our circumstances of seeking to attract exploration investment, which is what this section is about, the reason for putting it into this Bill was the advantage of speed, to be ready for the licensing round the Minister will undertake in the autumn.
Deputy Quinn raised a question last week about the programme of legislation to the summer. The Finance spokesman will have some concern about that because already we are fighting for time. We have the Swaps Bill, the Comptroller and Auditor General's Bill, the Estimates and work on the intermediary investments in stockbroking. In our circumstances of seeking to attract exploration investment we must show that we offer a better return on all levels of production that our competitors, all of whom have a significant advantage over us. In answer to the question which was asked as to what the rate of tax would be if we are to be successful in exploring offshore oil, we cannot afford the luxury of saying that would depend on what you find and how much you produce. We can reverse the decline in our exploration fortunes only by reducing uncertainty and not by adding to it. The lowest tax rate available in a key competitor country is 33 per cent in the UK. This is available at lower levels of production. We need not only to match the rate but to discount it to an extent which recognises the other attractions in the United Kingdom which has better prospectivity and well success rate. A rate of 25 per cent is competitive in the circumstances. That is why the Government are putting it forward in the Finance Bill. At higher rates of production, tax rates in the United Kingdom, Denmark and the Netherlands increase. Effective rates of 40, 50 and 60 per cent are not untypical at higher levels of production. However, prospectivity is better than here and proximity to large energy markets and to already established oil gas production and transmission systems, together with the fact that there are already substantial profit centres for the industry, enable these countries to sustain such tax rates. I would be the first person arguing as Minister for Finance for those rates if they were realistic. The objective and criterion is to be in the real world in this business. We are not in that position.
The imposition, in current circumstances, of comparable rates of tax would represent a disincentive to those contemplating exploration investment. It might be possible to devise an approach based on different rates of production such as field sizes; production profiles which would aim at pitching our rates of tax just below those of competitors at different thresholds. It would, however, be inordinately difficult to get interest in it never mind to administer, and would lack the presentation and the marketing impact of a single straightforward rate. It could work against optimising recovery and would be sensitive to any shifts in tax rates for competitors. It was considerd that, on balance, the adoption of a single rate which would undercut our key competitors at all levels of production would be best suited to meeting our needs in current circumstances. That is why we are here today. I am asking this committee to accept that.
The Minister for Finance has covered a lot of points. I may not have fully covered the matter raised by Deputy Quinn but the Minister for Finance has covered it adequately now. There was one other point I wish to mention. That is the question as to whether any finds would be landed in Ireland and other matters such as the Irish content and the landing requirements. Matters of that nature could be part of the terms. That aspect is being addressed in preparing these new terms which I hope to have ready for July. They are not yet in their final form and, while I do not want to pre-empt the outcome, I wish to assure the House that an element of our general approach will be to try to capture to the maximum economic gain for Ireland, consistent with whatever EC considerations we have to take into account. The Minister for Finance has elaborated on the rates in the other countries, Denmark, the Netherlands and the UK, and the necessity for us to pitch our terms at a level more attractive than theirs. The one single event which would galvanise the exploration industry would be to make a major find. There is nothing else that we can conceive of that would have the same result and we are operating in a situation where we have not had major finds. We are seeking to keep the Irish offshore exploration programme going in very difficult circumstances. That is why we are reviewing all the terms of the taxation legislation that applies in order to create the environment which will result in investment being made. It is important to bear in mind that the countries with whom we are competing, whose tax rates I and the Minister for Finance have been quoting, have had great success in their offshore exploration and they have achieved enormous wealth through successful development of the finds both in oil and in gas. That great day still eludes this nation but, as I said earlier, one must be optimistic in this business. We continue to retain a high level of optimism.
I do not think the Minister could accuse the Irish stock market investor in oil shares as lacking in optimism. If anything they have been abundantly endowed with madness in my view. They would have been better off employed in Leopardstown or Punchestown than investing in some of the stocks that were put out on the market. Can I ask the Minister——
It is a speculative business.
I have no problem with speculative business but speculative madness on occasions is something else but everybody is free to do what they like——
It is their money, not yours.
I was going to say that. I think you would probably get more enjoyment out of Leopardstown though.
People made a lot of money out of it if they got out in time.
They did. I would like to think though that the money had gone into explortion rather than hunting shares. I want to ask the Minister this. I take the point he has made that nothing would do so much for serious exploration by exploration companies than a significant find and the other countries that he referred to, the Netherlands and the UK, have had a track record of consistent finds over a sustained period of time. With the exception of the ongoing Marathon field we have not had that kind of success. To my knowledge there is no other well or field in exploration at present. Can the Minister indicate whether the available seismic information that has been supplied to his Department would give reason to believe that there are prospects of — albeit with all the caveats that exploration activities have to be surrounded with — the kind of find he is looking for that will drive a significant and substantial exploration business?
Acting Chairman
Before the Minister comes in may I point out that we have six sections left with three amendments. We will not get to them if we do not push on a little.
Deputy Quinn is inviting me to speculate. I said earlier on that there were good grounds for reasonable optimism in the Department based on professional assessment of the seismic information and the geological structures etc. to indicate that there were good prospects in the Irish offshore which have not yet been explored but one can never know until one drills. I said that the Marathon well to be drilled in July is considered by my professional advisers to be a reasonably good prospect. Having said that, I am also aware that on previous occasions other good prospects were drilled and did not produce the goods.
Deputy Flaherty asked me about ring fencing. Restrictive ring fencing provisions are common to all the countries because of the need to protect the non oil tax take and to ensure that the oil tax take cannot be sheltered. Our ring fence provisions are comparable with those abroad. The two way ring is very comprehensive. It covers losses, group relief, interest deductions and it essentially isolates petroleum. It makes sense and makes sure that the petroleum sector stands alone.
Questions put and agreed to.