Ireland’s oil exploration sector has, over the years, produced a lot of guff but very little gush. Could this all be about to change as estimates on the value of the Barryroe field start to rise?
This week, Liberum Capital Analysts doubled its estimates of the recoverable reserves at Barryroe to 200m barrels.
The company behind the development of the field, Providence Resources, has raised its estimate on the total amount of oil in place in the field to 1bn barrels, with a ceiling of 1.6bn.
Mouths are beginning to water. Could Barryroe be just the start?
Pat Rabbitte, the energy minister, was quick to hit the airwaves, expressing notes of caution, dampening aroused expectations.
He welcomed the latest news, but the welcome was as watery as the terrain in which the prospectors may soon be operating.
Rabbitte has been around. He knows how accusations of a sell-out to foreign oil magnates could soon be heard far and wide, with Sinn Féin, in particular, beating the drums.
Over the years, men with big hats talked up our prospects and, just occasionally, a big find was made.
The first commercial discovery was in 1971 at the Kinsale field, followed by Seven Heads in 1973 and Ballycotton in 1989.
The Corrib gas field was unearthed in 1996 — the natural gas should finally be piped onshore at the end of 2014 after years of delay and public disorder resulting from mismanagement of local opinion.
Ireland has never been the blank space in the exploration game. Think of lead and zinc, Galmoy and Tara, and before that, Silvermines.
Professor Richard Conroy continues to seek out gold in Monaghan and now the inshore natural gas “frackers” have arrived to stake out part of Leitrim
The existence of gold in the hills of Wicklow once preoccupied Charles Stewart Parnell.
The Celts were at it, way back.
Thousands of investors swarmed into Atlantic Resources shares in the early 1980s only to encounter bitter disappointment.
It took many years for Tony O’Reilly to live that one down, yet it seems this family dream could be due for revival, the battered O’Reilly fortunes boosted by what was the patriarch’s great sideshow.
However, it is early days. What is happening now is that old discoveries are being revisited.
Barryroe was discovered in 1973 and deemed to be non-commercial.
Other 1970s and 1980s finds so deemed include the following: Ardmore, Burren, Connemara, Spanish Point, Helvick, Galway Head, and more recently, Dooish, the Old Head of Kinsale, Schull, Hook Head, and Bandon.
The State has had to work hard to attract outside interest over the years. It is not hard to reason why.
In 2007, Indecon consultants estimated that Ireland had a 4.8% success rate when it came to commercial finds.
According to the IOOA, the offshore industry body, the industry has spent €3bn over the past 40 years “chasing the sweet spots”.
This helps to explain why Ireland is adjudged to have the most attractive tax regime for oil exploration in the world.
Ireland applies a 25% tax on corporate profits — reduced from 50% in 1992. Since 2007, it has also applied a rate of up to 15% on profits above a certain level, above 1.5 times the sum invested. This rate is applied on a sliding scale.
This compares with a rate of 75.72% in Norway, 49.64% in the Netherlands, and 51% in the UK. Only Papua New Guinea comes near to us in fiscal attractiveness at between 34% and 38%.
Back in the heady days of 1975, the then Fine Gael-Labour coalition government introduced a CPT rate of 50% along with 12.5% royalties and a right to State participation in profits.
But the big discoveries never came and in the 1980s, oil prices plummeted to barely $10 a barrel at one pont, leaving Ireland at the back of a long queue of countries seeking interest of the exploration community.
Humble pie was eventually swallowed. In 1987, the Irish followed the British and Norwegians in abolishing royalty payments. Capital costs could also now be written off.
In 1992, the corporation tax rate was reduced to 25% — currently twice the standard Irish rate.
All this means the tax take is likely to be a lot less than many expect, even assuming large quantities of oil are brought ashore.
Some believe the effective tax take could be less than 10% once write-offs on accumulated expenditure over the past 25 years are taken into account.
A benign tax regime has not been enough in itself to attract a great wave of interest until recently.
In Apr 2009 there were only two applications for licenses under the Rockall Basin Licensing Round, with one exploration license being awarded to a UK company, Serica Energy. Four exploration licenses were awarded the previous year.
In the UK, a recent offshore licensing round attracted 350 applications; 144 licenses were awarded.
The State has responded by upping its game. In the 2011 licensing round, the entire Atlantic seabed was opened up. Exploration companies were offered two-year licenses to allow for pre-exploration assessment.
In October, 15 applications were received from 12 companies, including Dublin-based Petrel Resources and the Spanish group Repsol.
None of the oil majors applied. They may join in the fun under farm-out arrangements with the smaller exploration companies where finds are adjudged to be commercial.
The real game-changers, however, lie elsewhere. The price of Brent crude stands close to $110 a barrel.
At these prices, exploration activity in new areas is much more feasible. Countries such as Italy and Spain are now pitching for investment, hoping to be the next Brazil.
The other big change has been in technology. New equipment and techniques are opening up deep water areas such as the East Atlantic.
Deutsche Bank has estimated that deep water supply will account for 10% of total global supply by 2015, up from just 2% in the year 2000. This has obvious implications for Ireland, with its difficult deep water prospects.
The Joint Oireachtas Committee on Natural Resources issued 11 recommendations aimed at overhauling the tax and non tax regime.
It proposes a review of the Petroleum Act, 1960, the governing piece of legislation, which would involve putting in place a more transparent, straightforward, fiscal and licensing regime.
A minimum 40% tax rate would be introduced, rising to 60% for medium and 80% for very large finds.
The committee did come out against retrospective changes. Their proposals run the risk of scaring the horses. Some favour a windfall profits tax designed to hit firms benefiting from a surge in the oil price. Siptu favours a share of production revenues.
But are we getting ahead of ourselves or simply making correct preparations to handle the possibility of a production boom?
It might be better to attract the big money first; we are far from being in a position yet to start dictating terms.
Pat Rabbitte remainscautious, though admits he has changed his tune since the 1970s. The long investment famine has dictated this change in outlook.
As Davy analyst Job Langbroek makes clear, there is real potential for profit. In a recent report on Providence Resources, he cautions that “the next phase will determine just how much oil can be recovered from the Barryroe field”. It could be anything up to five years before oil could actually come ashore.
But the Barryroe discovery has put Ireland back on the map as far as the serious players are concerned.
“Beyond Barryroe, the 2013 drilling programme demonstrates the scale of the portfolio offshore Ireland.”
Providence will drill up to five wells in the next two years, he predicts.
Two are scheduled for the East coast, Dalkey Island and St George’s Channel, south of Wexford.
The Dunquin prospect off Kerry is the really big prospect, albeit a high risk.
The optimists suggest our fields could be worth several hundred billion euro.
All we can say for sure is that it is a case of “game back on” for an Irish offshore exploration sector which for decades has been something of a vale of tears.
* Number of wells drilled in Ireland: 182, of which 129 are exploration wells.
* Number of exploration licenses granted, 2011: 24.
*First commercial gas discovery: Kinsale Head field, 1971.
* Company behind Kinsale Head discovery: Marathon.
* Barryroe — March 2012: First potentially viable commercial oil discovery in Irish waters.
* Governing Act: Petroleum Act, 1960.
* Full deduction of accumulated capital expenditures by the relevant company, group, over 25 years, in the Irish area.
* October 2011: Result of latest licensing round announced. Fifteen applications received.