asked the Minister for Energy if he will make a statement on whether he has any proposals for further oil and gas exploration; and if he will state specifically what his plans are in this respect.
33.
Ceisteanna — Questions. Oral Answers. - Oil and Gas Exploration.
10.
asked the Minister for Energy the reasons he felt it necessary to change the exploration licensing terms for the second time; if the changes have resulted in any further commitments to drill new wells under the second and third round; and the number of wells being drilled in 1986 and 1987 under the second and third rounds respectively.
I propose to take Questions Nos. 10 and 33 together. I presume that Deputy Reynolds is referring to the statements which I made in April 1985 and in September of this year concerning the Irish offshore exploration licensing terms of 1975.
The first of these two statements was intended not to change the 1975 terms but rather to clarify for the oil exploration industry the precise manner in which certain specific provisions of the 1975 terms should be applied in the event of the development of any marginal fields.
As the Deputy probably knows — and I adverted to this in my detailed statement — the 1975 terms provided the Minister for Energy with discretionary powers to reduce the levels of royalty and "carried" State participation if he was satisfied such measures were necessary in order to enable a marginal field to be developed and at the same time to provide a reasonable return on the expenditure to be incurred by the licence holders to secure such a development.
For some time prior to my announcement it was alleged both to me and to my Department by exploration companies that lack of certainty as to how I, as Minister for Energy, would actually apply these flexibility provisions at the time of a development was having an inhibiting effect on exploration offshore in that the companies tended to assume in their financial projections the maximum levels of State take and, on that basis, which was the worst scenario for them to assume, particularly in the case of small or marginal fields, their projections did not support the economies for development. The 1985 clarification of the terms, therefore, to meet a particular concern of the oil companies at that time, to that end set out to define a marginal field and set the limits for "carried" State participation in such a field.
The actual arrangements which I announced provided for a formula to governing royalites, State participation and carry on the basis of a profitability indicator.
The formula, as already indicated, applied only to marginal fields where I, as Minister for Energy, was satisfied that no other opportunity remained to enhance the profitability of the project. The new arrangement, designed to remove uncertainty as to how the discretion allowed to the Minister by the 1975 terms would be applied in practice, facilitated the more competitive and better endowed companies in committing the funds to exploration while at the same time it safeguarded the State's entitlement to a fair share of revenues from a developed field. It should be noted that at that time oil prices ranged between $28 and $30 a barrel.
In my statement of 19 September last announcing adjustments to the 1975 terms, I pointed out that prices were then hovering between $10 and $15 a barrel, that is, at about half of the price levels of last year, and were likely to remain so for the immediate future. As oil company revenues fell, exploration budgets generally were cut significantly, even in regions where oil reserves are well established.
Three main factors influence the exploration companies to invest exploration funds in any area. These are:
(i) the perceived geology of the area;
(ii) market price of oil and
(iii) the licensing terms prevailing in the area.
Of these, the only one which we can control ourselves is the licensing terms. Against the background of sharply falling oil prices and exploration expenditure cutbacks I had to ensure that our terms continued to be sufficiently attractive to invite people in to explore and develop, and sufficiently firm to ensure a fair share of that development for us, the people who own the oil. Our terms have to be competitive with those of other nations, especially when there is less exploration money to go around, and they have to reflect the realities of the day — a discovery considered valuable when oil is scarce and expensive will be seen as less worth while when oil is plentiful and cheap.
Exploration companies, for their part, when calculating the return expected from a development, assume that the State will take the maximum possible. As our terms specified a 50 per cent level of participation as a discretionary maximum they made the assumption, for the purpose of their own calculation of costs and benefits, that this is the actual figure they would have to pay.
For all these reasons, but principally because the dramatic fall in the value of oil has led to a very significant worldwide decline in exploration, I decided to bring forward the new schemes which I announced last September. They clearly represent a significant development of the 1975 terms and are designed to take account of the realities I have mentioned. I will be pleased to let the Deputy have copies of the detailed statements in question if he so wishes.
While seven wells have been completed offshore Ireland in 1986, it is not possible at this stage to be precise about the level of drilling in 1987. One further well is scheduled for drilling before the end of this year. Of the wells completed to date in 1986 none arose under third round licences while two were obligation wells under second round licences.
Earlier this year there were expectations that another two wells would be drilled in 1986 under third round licences but the contractual obligations under those licences do not arise until 1987 and there is no doubt that market conditions strongly influenced decisions not to drill them in 1986.
In accordance with specific obligations under particular licences, three contractual wells as a minimum are listed for 1987. Two of these wells arise under third round licences and one under a second round licence. There is also the possibility that further drilling commitments will arise consequent on the September 1986 terms announcement. While the general reaction of the oil industry to the new terms so far has been positive, it is too soon to say what new drilling commitments will result. Companies clearly must analyse the adjustments before they can take them into account in their constrained budgetary allocations of exploration funds. I hope for a positive response from the industry.
The extent to which our terms now are competitive cannot be precisely determined because of many different features embodied in other countries' terms. The view of my Department is that they are now competitive with terms obtaining in other north-west European countries apart from the UK terms for small fields.
I believe the 1986 adjustments to the 1975 offshore licensing terms have struck the right balance between the interests of the State and the concerns of the oil companies, one of the main objects in designing these provisions was to have a formula which gave due recognition to the present difficult realities of the exploration market which we cannot ignore and, at the same time, ensures a commensurately higher return to the State when the market improves.
I thank the Minister for his lengthy reply. Will he say briefly if there have been commercial activities over and above that which had been taking place before his clarification of the terms? Am I right in interpreting his reply——
The announcement was made in September and it would take the oil companies months to prepare their budgets. The timing was made with that in mind. I had information to suggest — it is normal commercial practice — that the oil companies would be making presentations to their boards on a worldwide basis and lodging claims for exploration funds. It is too soon to see the impact of the clarification issued in September. I was careful to make the details as clear as possible because it is in the best interests of everybody to understand the complexities of the oil industry not just here but internationally. I believe that in 1987 we will see a heightening of exploration activity as a direct result of the clarification in September. I would point out that we are a very small part of the world exploration scene. The Deputy will be aware from documents available of the cutbacks that have taken place by exploration companies. Even the very largest companies, the most economically sound ones, in oil exploration and development have been making enormous cutbacks in monetary and personnel terms.
Does the Minister agree that when he brought out his third licensing round it was a long time before there was any talk of a reduction in oil prices? Does he accept the third licensing round was a failure and that not one well has been drilled, only two being talked about for 1987, as a result? Does he agree that the clarification of the 1975 terms, as I told him time and again, were far removed from what the industry required to keep to the level of drilling that had been going on here? The Minister came with too little, too late. He missed the boat in relation to oil investment here. If he had announced terms when he was asked to do it, the level of activity would have been maintained.
If he had given the companies any more there would have been nothing left.
There is nothing left anyhow.
I do not accept what the Deputy is alleging. It is very easy to casually use the expression "too little, too late". It is very easy piece of jargon and I do not think it applies in this House.
Go back to 1983 and read the record of this House. I said it two years ago.
No former Minister ever decided to do anything about the oil terminals.
I told the Minister there was something about it a number of years ago.
What about question No. 11? It was to be dealt with nearly a quarter of an hour ago. Question No. 33, which is a priority question, was answered.
The Deputy should not assume the Chair is always wrong. The Chair is nearly always right.
It was seven pages of a reply.
It was a deliberate attempt on the part of the Minister to see that the next question would not be reached.
The Chair deliberately, at the request of the Deputy Leader of your party, insisted that Nos. 10 and 33 be taken together so that Deputy Keating would have a fair chance of putting supplementaries before we got into priority questions time.
Who could have anticipated that a reply would have taken 12 minutes?
That was all the more reason.