Our offshore resources are hard to exploit

DRILLING for oil and gas off the Irish coast is by no means easy. Results are far less encouraging than, say, in Britain, and Scandanavia.

Success rates in 2003, according to the Department of the Marine and Natural Resources, showed Britain and Norway had one-in-eight and one-in-10 success rates, respectively, between 1982 and 2001. Ireland’s rate in the same period was one-in-20.

Little wonder then that the Government is encouraging multi-national energy companies, such as Shell, to explore our sea beds.

Considering the national need for gas, the Government was always certain to give the green light to the controversial Shell Corrib gasline, despite opposition in north Mayo and concerns among some experts about dangers to communities living along the route of the pipeline.

We import 85% of our gas requirements — compared to 10 years ago when 95% of our gas requirement came from indigenous supplies through the Kinsale Field.

If we don’t have native supplies in the future, we will find ourselves at the end of a very long supply chain bringing gas from Russia. Such a situation would leave us vulnerable, with uncertainties about supply.

At school, fadó fadó, we were told Ireland had no natural resources worth talking about — something that we now know to be inaccurate. Perhaps, it would have been more correct for the school textbooks of the 1960s to say we had resources, but those were mainly offshore and difficult to get at.

The experience over the past 40 years has been that trying to tap into gas and oil off the coast is risky for investors — a 20/1 chance is not great after all.

Out of 121 exploration wells drilled in Irish waters since the 1960s, there have been only four commercial finds. Up to 1987, when the present financial incentives for exploration companies were introduced, Ireland had made one commercial find.

Over the same period, Norway had made 60 commercial finds and, on average, each was significantly larger than Kinsale.

This lack of success has been reflected in past difficulties in sustaining exploration effort. For example, in January 1999, there were 25 offshore exploration licences. Today, there are 13.

The conclusion, according to Natural Resources Minister Noel Dempsey, is that the industry does not regard attractive terms as compensating for the lack of commercial finds.

Another key issue is the cost of drilling exploratory wells in Irish waters is high because environmental factors require the use of deep water drilling rigs. These are much more expensive to operate than shallow water rigs.

In the North Sea, the average water depth is less than 200 metres and an exploration well costs €8 million. The last two exploration wells drilled offshore Ireland were in 1,500 metres of water and cost €20m each.

Also, says the minister, the relative lack of existing infrastructure for handling these resources means that the cost of exploiting the fields, should finds be made, are much higher. The thinking behind the current financial incentives/terms is to encourage companies to exploration in the Irish offshore. The terms are being reviewed.

“Despite the fact that some people view them (terms) as excessively generous, there have been very low levels of exploration over the last 30 years and much of our offshore remains under-explored,” Mr Dempsey states.

“If we were as generous as the ideologues claim, surely we would have a greater response and interest. However, the reality of the situation is that it is still difficult to sustain interest in prospecting in Irish waters. Of the 26 Frontier exploration licences awarded between 1994 and 1999, each to run for at least 15 or 16 years, fully 21 have been relinquished.

“Surely, if we were sitting on these huge reserves, and were intent on giving them away, we’d be under siege from people looking for licences?” he went on.

“If it is possible to extract a royalty payment without killing off interest in exploring Irish waters, then that will be done. But before we get to that point, we must have a viable sector to tax.”

Until 1987, the terms did not exempt gas and oil developments from royalty payments. Therefore, the Kinsale gas field, from the outset, paid royalties in relation to its production. This is still the case. While this field is now in its depletion stage, royalty payments received to date amount to just over €150m.

Mr Dempsey rejects suggestions that the State should itself get involved in exploration saying it would be a “huge, costly and very, very risky exercise”.