Listening to the Minister's clarification at the end of his speech, I say he should go back to the drawing-board and get more clarifications in relation to yesterday's hastily put together press conference and today's announcement. As I said earlier, I deplore the manner in which this matter has been handled by the Tánaiste, the Taoiseach and the Government because I got a commitment here on Tuesday that this matter would first be announced in this House but, unfortunately, for reasons best known to themselves, whether it was the handlers who decided that this was the best way to approach it or otherwise, they sought to ignore the House and undermine the primacy of Parliament once again.
I will now try to tease out exactly what is in this statement, not an easy job because there are people better qualified than I in the public arena who cannot tear it apart either. There are certain fundamental principles to which we should address ourselves this morning and we must wait until we can do the final calculations on the profitability ratio and formulae the Minister mentioned today.
The first thing we must look at and appreciate is that Ireland is not an oil producing province. Secondly, we are looking for scarce exploration funds in competition with every other country around the world. We want these companies to come into an area which is not proven. For the past 18 months I have been pointing out to the Government that the third round licensing would be a failure if they did not take decisive action to solve the problems which still exist in the licensing terms which came into effect in 1975. I was not in politics at that time but I remember reading that we were on the verge of discovering a major oil bonanza off our shores. Over the last ten years we have found oil in the Porcupine and off the Waterford coast, but we still do not have any proven oil reserves, we are still not an oil producing province. The terms set ten years ago may have been right at that time but they are not right today.
Let us look back at the activities over the last ten years. There were more wells drilled in the first six months in the United Kingdom sector of the North Sea than have been drilled in our waters over the last ten years. That puts the level of activity off our shores into perspective. As I said, I knew the third round would be a failure as anybody looking at the situation realistically could see. The closing date of the third round, 15 February, had to be postponed because there was little or no interest expressed. The Government postponed the date in the hope that the taxation terms set out by the Minister for Finance on 14 January would increase the interest in applying for licences but that did not happen. There were elements that needed to be clarified because there were still many other areas of uncertainty, and they are still there.
If the Minister and the House appreciate how exploration funds are allocated to various regions around the world, they would know what I am talking about and they would not have taken this approach. Everybody knows economic models covering the various areas for which exploration funds are sought are fed into the computer. There is no point trying to tell anybody who understands the situation that one can feed into a computer words like "uncertainty", "flexibility" and "bona fides of the Minister". That will not produce anything from a computer in Texas or anywhere else and for that reason I regret to say we will remain an area with a very low level of activity. That is not the objective of this party, and I hoped until today that it was the objective of the Government to accelerate exploration, to find the oil in commercial quantities and then to sit down and say where we will go.
We know what the development of oil in Norway and the United Kingdom has been. We see that the ninth round in the United Kingdom has been very successful. Why has it been successful? Because they have approached it in a realistic common-sense manner knowing there is a scarcity of exploration funds and setting out with the objective of getting the maximum share of this money into their area. We sat on the fence far too long and when the Government finally addressed themselves to the problem they went about it the wrong way.
As I said, exploration funds are scarce and cannot be found too easily. When we look at the cost of exploring for oil around the world we see that it works out on average at a cost of $12 a barrel. What do the multinationals find on looking at companies listed on the stock exchanges which have reserves of oil and have discovered proven reserves of oil? They can buy from companies with reserves of oil at $8 a barrel. Why then should they spend $12 a barrel exploring for oil? The cheapest place to explore for oil is the world stock market. This is the climate in which we operate and we should not fool ourselves.
There have been promising signs lately, especially in the last well. I do not know exactly what the details are but maybe this is an attempt to get something done with that well. Maybe when this fudge formula is put into the computer it will produce something for a specific company in a specific area. If that happens, then I say shame on the Government for having ignored the broad perspective of the industry for so long. The objective behind the terms announced today should be to attract people into the third round but I do not believe that people will be breaking down the door trying to get licences as a result of these terms.
We must strike a balance between getting the maximum for the State and the hard-pressed taxpayer and at the same time leave a proper return on investment for those who place such huge sums of money at high risk. How can the taxpayers' interests be best protected? I say without hesitation that the first approach by the Government has been misguided and misdirected. I do not know if this approach followed on from ideological hangups but from the point of view of the hard-pressed taxpayer the one thing that should not have been given away is royalties on the barrels of oil produced. The track record and economic history will prove time and again that the only safe way to protect the taxpayer is to take the royalties on the barrels of oil produced. The Government have decided not to do that but rather to waive the royalties on the first 25 million barrels of oil produced on wells up to 75 million barrels. With the average price of oil today in a well of 75 million barrels that could mean, from the taxpayers' point of view, giving away £60 million to £70 million.
Is that what it was designed to do? Are the Government foolish enough to think that it will have the beneficial effect in the third round that they thought it would have? If they think that they will not be left long in ignorance when they try to find applicants for the third round. To my knowledge there has been no complaint from the industry in regard to our terms in relation to royalties and corporation tax. No argument was ever put forward to me either as Minister or as Opposition spokesman in relation to royalties or taxation. Why should the Government choose to give away royalties when the industry did not ask them to do so, instead of directing their attention to the real problem which is the uncertainty which exists in relation to the State's participation in any well?
It may sound complicated but it is as simple as this. A company go out and drill for oil and if they find it in commercial quantities they come back to the State under the 1975 terms and the State can say, if it so wishes, that it is taking up 50 per cent of that well. They can also say to the licensee that they want the licensee to pay the total development cost. Although the licensee has only a 50 per cent share of the well the Government can say they want him to pay 100 per cent of the development cost. Think of what that means to people trying to put hundreds of millions of pounds together to get a development going. They only own 50 per cent of the well and yet they have to find the total amount of finance.
Like insurance companies and others in big business normally oil companies share the risk around. They give 5 per cent to one company and 20 per cent to another and so on but if they only own 50 per cent one can see the severe limitations which will be placed on them in trying to spread the risk in what is accepted as being a risky business. As a result of the uncertainty that exists no company can come up with an economic module which will tell them that it is correct for them to go ahead. That is the root cause of the problem in relation to exploration off our coasts and the Government have ignored this.
We can talk about having 50 per cent now and we have spoken about this for ten years but 50 per cent of nothing is nothing and what we have been clapping ourselves on the back about for the last ten years has turned out to be nothing.
What is in the best interests of the economy and the taxpayers? It is certainly not giving away royalties. When we deal with the oil business we are dealing with high risk capital and development costs over which the State has no control. We are going into a business we do not know anything about. We can try to estimate what the expenditure and development costs will be and out of that must be paid the 50 per cent carry for the State. The result is that the State has no say over the sale of the oil until its 50 per cent carry has been paid. Our approach would be to protect the taxpayer and get the maximum benefit for him by holding on to the royalties and our taxation system which have not proved objectionable to the industry nor have they been the cause of people not coming in here to drill for oil. I do not know why the Government have approached it in the way they have. I asked many times about all the early morning visits and about the Rolls Royces which were lined up outside of Government Buildings one Friday morning at 9 a.m. Was that visit in vain? Until all this has been teased out no one will be in a position to say.
From a business point of view, when one tries to work out what this means and the Government's position in relation to what is a reasonable return the answer comes out at 10 per cent. When one studies the make-up of that formula it appears to start off from a premise of 20 per cent in one part but it finally turns out, using the 1.85 profitability ratio, at 10 per cent.
Is the Minister saying to the oil industry that 10 per cent constitutes a reasonable return? Does he expect the industry to knock down his door for application forms and spend hundreds of millions of pounds for a miserly 10 per cent? The Government have not been able to keep money in the country. Look at the amount of money which has flowed out through the black hole. If the Minister can confirm that the rate of return will be higher than 10 per cent I would be delighted to hear it. Where did the figure of 1.85 come from? No economist understands where it came from. When one uses the figure of 1.85 and works through the formula the bottom line is 10 per cent. If that is the case then the Minister will not get anywhere.
Unfortunately and regrettably the announcement errs on the side of getting the maximum benefit for the taxpayer. We are left in an uncertain situation where we cannot control our destiny. It appears now that if there are applicants for the third round we will not get any return from them. There cannot be uncertainty in the world of business. People in Houston or Texas do not love Ireland. They do not have to drill in our waters. They will go where they can get a return on their money.
There are people in the public arena today who say that the ninth round from the UK Government was designed for marginal fields only, and that marginal fields only had been discovered since they introduced it. They should get their facts right. Since the ninth round was introduced the new terms are that there is no State carry whatsoever. Corporation tax in England is 35 per cent. There are no royalties either. Fields of 150 million to 300 million barrels have been found over there since the new terms were announced.
An incentive must be given. Uncertainty has to be removed. At the same time the Government do not have to sell the taxpayer down the river in an approach to what I well appreciate is a complex problem. Wherever the Minister got his advisers, they do not live in the real world of commerce and business. If they have an ideological hangup which suggests selling the taxpayer down the river in the situation of a 75 million barrel field to give away £60 million or £70 million straight out of the taxpayers' pocket, so be it and the responsibility is on the Government's head.
The Minister has not convinced me that somewhere in this well disguised operation there is not a benefit to a particular field, ignoring the long-term development of the industry. If the Minister is thinking in terms of early production systems, it has been proven time and time again that early production systems damage the total reserves and do not give the returns that could be got out of any field. This can be seen in the North Sea and in Norway. If that is what the Minister is trying to do, to get, as most members of the Government have been trying to get, a good perception — action does not matter, performance does not matter — that is short-term. You can fool some of the people some of the time, but you cannot fool all of the people all of the time.
