I propose to take Questions Nos. 167 and 168 together.
There have been four commercial natural gas discoveries since exploration began offshore Ireland in the early 1970s, namely the Kinsale, Ballycotton and Seven Heads (Kinsale area) producing gas fields off the coast of Cork and the Corrib gas field off the coast of Mayo. There have been no commercial discoveries of oil to date.
The Kinsale area gas fields are now nearing depletion and currently provide approximately 5% of Ireland’s annual gas requirements. The Corrib gas field is under development and first gas is not anticipated before late 2014. All four gas fields are held under petroleum leases issued by my Department.
In terms of the direct financial contribution to the State, profits from the three Kinsale area gas fields are taxed at a rate of 25%. In addition, royalties from the Kinsale and Ballycotton gas fields are payable to the State at a rate of 12.5% of the fair market value of the gas at the well head. The combination of tax, royalties and rental fees currently provides for a State take of 40% of net income from these two fields.
Royalties are not payable on production from the Seven Heads Gas field or from future production from the Corrib gas field as Ireland moved away from a royalty based payments system to a tax based system in 1987. Profits from the Corrib gas field will be taxed at 25% when the field goes into production.
A comprehensive review of Ireland’s licensing terms was carried out in 2007 following which both the fiscal and non-fiscal licensing terms were revised. The revised terms seek to strike a balance between attracting those willing to invest in high-risk exploration while at the same time ensuring the State receives a fair share of profits where a commercial discovery is made. The revised licensing terms provide for a new profit resource rent tax of up to 15% in addition to the 25% corporate tax rate previously applying. The revised terms ensure that the return to the State will increase to a maximum of 40% in the case of the most profitable fields. The revised terms apply to all exploration licences issued since the beginning of 2007.
Countries that have petroleum production use a range of models to obtain a financial return from their natural resources. These models vary both in terms of the instruments used and in terms of the level of take which the State seeks to obtain. Some countries use a combination of instruments, such as: State participation in licences; production royalties; along with taxation, while other countries, including Ireland, take an approach that is principally based on taxing profits. Each country’s fiscal system tends to have its own individual characteristics.
In determining the appropriate approach at a national level a range of factors must be considered, with the principal factor being the relative prospectivity of the area. Directly replicating the fiscal regime of another country is unlikely to provide the optimum outcome. Regard must also be had to the approach adopted by countries with whom we are directly competing for a share of international exploration investment.
While there has been a modest but welcome upturn in the level of interest in exploration off our coast in recent years, the reality is that the only commercial discoveries of hydrocarbons made in the Irish offshore to date are the three producing gas fields in the Kinsale area and the Corrib gas field. Despite the low level of commercial discoveries to date, working petroleum systems are known to exist in many of Ireland’s offshore basins, as demonstrated by a number of non-commercial discoveries as well as other oil and gas indicators such as hydrocarbon shows in wells. Nevertheless, the oil and gas potential of the Irish offshore is largely unproven and is likely to remain so until there is a significant and sustained increase in the number of exploration wells being drilled from the current levels of 1 to 2 wells per year.
To this end my Department encourages exploration investment through an active and targeted promotion campaign, regular licensing rounds and by supporting petroleum research projects that deepen knowledge of the petroleum potential of the Irish offshore. Maintaining an appropriate fiscal regime is also critical to attracting this much need exploration investment to Ireland. Ireland does not have proven resources equivalent to those of major oil producing countries such as Norway, and as a consequence Ireland’s tax terms for oil and gas production are deliberately aimed at attracting new investment and are set at a level comparable to countries such as France, Portugal and Spain, who, like Ireland, have limited petroleum production and proven resources and with whom we compete for exploration investment.