Taxing question of what we should do with our own oil discoveries
It is expected that Bord Gáis’ rivals will be allowed similar price increases by the energy regulator. Petrol and diesel prices have soared to over €1.70 per litre at the pumps, meaning that motorists are paying more for their fuel than they have ever done before: the AA has estimated that the average motorist is paying €1,400 per annum more on fuel now than he or she did three years ago. The weather may be very mild and pleasant this week, but those who depend on home heating oil have to think of stocking up because such conditions cannot last. A survey by the National Consumer Agency released yesterday suggested that 1,000 litres of this essential will cost buyers €964, on average.
Why is all this happening? There are a variety of reasons, including significant Government taxes, which can be held responsible. Rising international oil prices are often blamed on political uncertainty in oil producing regions for fear that supply might be interrupted. (Tell me, when is there ever anything other than such uncertainty). But gas prices globally are falling because of the controversial extraction of shale gas by environmentally dubious methods. The fall in the value of the euro against the dollar is a major problem, a 16% drop making imports from non-EU regions more expensive, and oil and gas are priced internationally in US dollars. Our energy dependence on imports is a major negative at times like this.
If only we had our own supplies of oil and gas. However, we may have considerable volumes upon which to draw. We enjoyed considerable benefits from the old Kinsale gas field and these could be bettered by what should flow, eventually, from the Corrib gas field off Mayo.
But it is the oil that may be more interesting. What if this country had enough to be largely self-sufficient, to not have to worry about the vagaries of international availability, its price and movements of the euro against the dollar? It seems that the successful discovery of quantities of oil in Irish waters that can be exploited has raised the exciting possibility.
This week Providence Resources — in which Tony O’Reilly’s family is the controlling 20% shareholder — made the latest in the series of announcements that have been both exciting and intriguing. The latest was somewhat speculative, but it is clear that a lot of oil has been discovered at, and may be extracted from, its licensed areas at the Barryroe field, a 300sq km site about 50 kms off the coast of Cork.
There could be between one and 1.6bn barrels of oil, although how much can be “recovered” remains to be seen. It has been known for many years that oil existed in Irish waters but the depth of the water, the structure of the rock and the pooling of the oil beneath, were blamed for making the oil too expensive to recover. New technology has discovered that the oil is better positioned and pooled than thought previously and other modern drilling technology means that it is more easily extracted.
All of this had prompted Providence to try long dismissed fields again, to see if they could be made to work profitably. It is spending up to €500m in its hunt, which is a sizeable bet when some experts say it has a one-in-ten chance of success. (The company itself says more like one-in-four).
It is a very expensive process but the recently reported estimates of recoverable reserves mean that Providence may be in a good place to sell part of its interest in the Barryroe field to experienced international oil players. Indeed, Tony O’Reilly junior, the chief executive of the operation, has found it much easier to get meetings with possible investors in recent weeks, intriguingly many of them from China.
Comparisons between Barryroe and North Sea fields are being made, with one Providence person quoted recently about producing 20,000 barrels of oil each day. North Sea oil finds provided enormous benefit for both Scotland and Norway, providing both taxes and well-paid jobs.
But this raises difficult questions as to who should profit from the exploitation of this valuable natural resource. Why allow commercial interests, either domestic or foreign, benefit from the profits on the sale of the oil that surely belongs to us all? The obvious solution is through tax.
Eamon Ryan, as minister in the last government, introduced a profit resource rent tax that is added to the 25% corporation tax rate that applies (and which, it should be noted, is double our normal corporate tax rate). And on larger more profitable fields there are provisions to increase that tax to 40%.
Ryan’s improvements of the position are not regarded as a sufficient safeguard by some. The Irish Congress of Trade Unions economist Paul Sweeney has claimed, and seemingly with merit, that clever accountants can manipulate profits by using development costs and other expenses to reduce the amount of the taxable profits. He has the idea of an extra royalty tax of 12.5% on production beyond a certain threshold, believing that production taxes — levied on easily measurable output — are “much harder to fiddle. That is why oil and gas companies do not like them.”
The recent report of a joint Oireachtas committee recommended that the State double its resource tax take for large oil and gas finds off the Irish coast, and initiate a “transparent” system of public consultation in exploiting new finds. The committee found that 40% should be the overall “minimum” tax take for future licences, and said the profit resource rent tax should increase on a sliding scale from 40% for small to 60% for medium to 80% for very large commercial discoveries. It also demanded that the State should review terms before each new licensing round and that it explore ways of controlling production volumes as part of resource management.
However, this committee advised against “retrospective changes” to terms of the existing agreements for the Corrib gas field and the Providence finds.
The likes of left-wing TD Richard Boyd Barrett and Socialist Party leader Joe Higgins want to go much further, by bringing successful funds into State ownership and control. The former has argued for nationalisation of the nascent “oil industry” while the latter is in favour of the creation of a national exploration company.Both are unlikely to find too much support for their approaches.
If the public is expected to pay for the private gambling debts of Anglo Irish Bank and all of the other banks through higher taxes and reduced living standards, and the debts of Sean Quinn’s insurance company through higher premium payments, even if they were never customers, then why not have it work the other way? Why not give the benefits of the discovery of national resources to all of the people instead of a chosen few?
As it happens Providence Resources was last month offered a new licensing option on five blocks, which covers an area of 500sq km located to the north and west of the Barryroe field. Barryroe is just one of six sites being prospected by Providence around the coast over the next two years, including an area near to Dalkey Island in Dublin Bay. If it hits more oil it deserves financial reward for the financial risks it took. But how much profit should it be allowed and how much should the State seize on behalf of its citizens? The price of home heating and fuel for cars could depend on the outcome of that debate.
* The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.
