Drill tax set to be a burning issue

The coming year is set to be another interesting one in terms of the development of Ireland’s much mooted, though still largely unproven, offshore oil and gas potential.

Depending on whose opinion you seek, 2014 will either be a pivotal turning point in the early development of a breakthrough new sector for the Irish economy, or another 12 months spent crossing fingers and hoping the Government doesn’t scare prospective overseas parties away.

It will probably prove to be a mix. With virtually no drilling activity pencilled in, most developments will be via government updates. April looks particularly interesting, in that regard.

At that point, we’re likely to have more clarity on two pivotal aspects — the opening of a new licensing round (the first since 2011 and, likely, the largest ever in terms of overseas interest levels) and, just before that, the results of the tax regime review currently under way.

Currently, the Government stands to receive between 25% and 40% of profits from any commercial field in Irish waters — of which there are none at present. The Department of Natural Resources is seeking advice as to the right level of tax it should slap on firms drilling off the country’s coastline.

There are fears that any change in the tax scale could scare off potential overseas investors ahead of any further drilling news. Those fears wouldn’t have been helped by Oireachtas committee calls for the profit take to be as high as 80%. While that would mirror the successful Norwegian model, that country has a much more advanced exploration sector and its government also repays the same percentage of drilling costs to companies if discovered fields are found to be dry — something which Ireland could clearly not afford to do.

But, the department is making positive noises on the issue while it awaits independent findings.

“We need to make sure companies can find it attractive to take a punt on Ireland,” junior minister Fergus O’Dowd said recently.

He has said the increasing interest shown in the Irish offshore has made it timely and necessary to review the existing fiscal terms and that more clarity will “ensure regulatory certainty” ahead of the next licensing round.

He added that the Government competes for exploration investment in the same way it does for other forms of foreign direct investment.

“It is important, then, that the State provides suitable opportunities for international investors and provides the right environment to encourage industry to take the risk associated with investing in exploration,” he said when addressing the recent Atlantic Ireland Conference in Dublin.

“A key element will be not altering the fiscal regime. There’s a view, abroad, that the objective of the Irish Government is to increase fiscal terms. That, in our view, would be a great mistake,” according to Fergus Cahill, chairman of the Irish Offshore Operators’ Association.

“There is an increasing interest in the Irish offshore, but that can easily be discouraged,” he added.

“The logic of increasing tax before you find anything escapes me, but at least knowing what it will be will help,” one industry source said.

As well as the tax issue and the opening of a new licensing round — covering the Atlantic Margin and expected to remain open until the autumn of 2015 — next year will see results of the main €20m 2D seismic study, of waters off the west coast, undertaken by Italian multinational Eni (on behalf of the department.)

All this activity bodes well, Mr O’Dowd referring to them as structural foundations for the sector, adding to knowledge and removing risk and doubt for prospective investors.

But Gerry Hennigan, exploration analyst at Goodbody Stockbrokers, said that good old drilling, and nothing but, will be the only real catalyst for the sector.

“Overall, though, we need more offshore drilling success to kick-start things. A discovery will do that. The most important thing that can happen in 2014 is drilling activity,” he said.

The Irish Offshore Operators’ Association’s Fergus Cahill agrees. “There’s a view that we’re on our way, but we’re still some way away from that. Ireland desperately needs a serious commercial find. Only one well is due to be drilled in 2014.

“In the long term Ireland needs to be in double figures of wells being drilled per year.

“Between 80 and 90 is the North Sea average,” he said.

As part of his firm’s recent year-end review, Providence Resources CEO Tony O’Reilly Jr welcomed the arrival of new entrants to the market (including Kosmos and Cairn Energy) and said he hoped it would lead to more drilling activity.

“There are still too few wells being drilled in the region, averaging only one a year,” he said.

Mr O’Dowd claims 2014 will be “very important” in honing Ireland’s exploration potential, with more players investing in our waters, with more serious commitments, on the back of the extra building blocks being put in place.

“In terms of commitment for the future, 2014 could be a seminal year,” he said.

So far, the only rig on order to drill off the coast of Ireland next year is in the Spanish Point, off the west coast where Scottish explorer, Cairn Energy farmed into as operator earlier this year.

The appraisal well is the third in secondary shareholder Providence Resources’ ongoing multi-well campaign.

One source suggested that a good result from Spanish Point should “prick industry interest”, but noted that as an appraisal well, the discovery has already technically been made.

Despite increased interest (Cairn Energy, Woodside Petroleum, Europa Oil & Gas and Kosmos Energy all investing in the Porcupine Basin), Ireland’s attractiveness to potential entrants has been knocked — some believe — by protests at Shell’s Corrib Gas Field project (something which the Government says won’t be repeated) and ExxonMobil’s failure to make a meaningful find at the highly-anticipated Dunquin prospect off the west coast.

All the same, company heads are still talking the talk, Providence’s Tony O’Reilly saying the prospects for the Irish offshore have never looked better and the sector, here, is undergoing “a major renaissance”; and Europa Oil & Gas’ (which has farmed-out most of its Irish interests to Kosmos Energy) Hugh McKay saying the Porcupine Basin is potentially a whole new play rather than just a one prospect wonder.

Overall, with drilling plans from the likes of Cairn, Providence, Fastnet Oil & Gas and Kosmos Energy still, largely, in the planning stages and fresh interest still being awaited; Ireland’s true oil and gas potential will take longer than 12 months to unlock.

“The general geological understanding of the Atlantic margin is improving and helpful. This and the higher level of seismic work should eventually increase the level of industry interest.

“It’s a long game and the next five years will be crucial in determining the outcome,” one source suggested.


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