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Ireland’s Offshore Potential

Ireland Offshore Potential

Irish Offshore Operators’ Association, 3rd November 2010

Contents

1. Introduction
2. The Issues
3. The Opportunity
4. What are the implications of all this?
5. The Question?
6. So, what’s to be done?

1. Introduction

Founded in 1995, the Irish Offshore Operators’ Association (IOOA) is the representative organisation for the Irish offshore oil and gas industry. Its members are companies licensed by the Government to explore for and produce oil and gas in Irish waters.

Ireland is now facing a very challenging economic environment, (Section 2). The following document is our contribution to the debate on how we as a nation address these serious challenges.

The IOOA believes that the Irish offshore oil and gas sector has significant potential, which, however, can only be confirmed if the level of exploration is significantly increased. Success in exploration could make a real and tangible contribution to addressing the fiscal and economic challenges facing the country. For instance, the development of a major oil discovery off the North West Coast, of the order of 750 million barrels recoverable, would deliver some $22 billion in taxes to the Exchequer ( Section 3). The implications are significant (Section 4).

However, at the moment exploratory drilling is running at one, maybe two wells per year. To put our situation into context, a recent offshore Licensing Round in the UK attracted 350 bids for licences. Ireland’s most recent round, in 2009, received only two bids. (Section 5)

Given the potential benefits of a successful offshore industry, why is so little happening offshore Ireland?

From the industry point of view,the low success rate of exploratory drilling to date; the delays in bringing the Corrib gas field into production; the relative absence of infrastructure; the harsh and difficult operating conditions; and the high cost of operating offshore Ireland, have all been discouraging factors. Unless the number of exploration wells can be substantially increased, the potential will not be realised.

So what do we need to do to increase exploration off our shores? (Section 6)

We need to learn from the mistakes of the past and put in place a transparent, robust and legally binding administrative and regulatory regime for field development, so that all stakeholders have a clear understanding of the issues involved and how they are to be addressed. We need to separate the regulation and promotion of the sector, and properly resource promotional activity. We need to demonstrate to the international industry that there is political and public support for the development of our offshore oil and gas resources.

The risks are borne by the industry, but the rewards, if realized, are shared by everyone. The measures needed are modest, the benefits potentially immense.

2. The Issues

The issues facing Ireland today are many and challenging, so much so that many are of the view that we will be lucky to get through them without serious damage to our society.

They include:

• Meeting the cost of restructuring the banking system
• Closing the gap between public expenditure and tax revenue
• Reducing the high cost of borrowing
• Creating jobs for our 14% unemployed
• Reducing our high energy costs
• Increasing competitiveness

There are many others, in areas such as health and education, which can only be addressed in the context of resolution of the above.

3. The Opportunity

In addressing these issues, the options are limited. Devaluation is no longer possible. Increases in taxation must be balanced against further depressing the economy. Borrowing is now prohibitively expensive.

However, one area, currently largely ignored, has the potential to make an important contribution to the solution of these problems. This is Ireland’s offshore petroleum resource, of both oil and gas.

The Department of Communications, Energy and Natural Resources (DCENR) estimates that our offshore area, nine times bigger than the land area, has “potential, yet-to-find” recoverable reserves of some 10 billion barrels of oil equivalent (boe). This is around 100 times Ireland’s annual consumption of oil and gas.

The words “potential” and “yet-to-find” must be emphasised. The industry has, since 1970, spent in the region of €3.0 billion drilling some 130 exploration wells, with limited success. To date, just four fields, all gas, have been declared commercial. A single exploration well off the West coast now costs more than € 50 million . Realising even part of the above “potential” will require a great deal of high-risk investment, specialised expertise and hard work, and, as the industry can testify, success is by no means guaranteed. There would be disappointments and losses along the way, before any of the above could be classed as “proven”.

That being said, however, the implications of success are very significant.

Let us look at two practical examples taken from the report “Cost-Effective Field Development Study for Atlantic Margin Basins” published by the Department of Communications, Energy and Natural Resources (DCENR).

Firstly, a major oil discovery off the North West Coast, of the order of 750 million barrels recoverable, would deliver some $22 billion in taxes (€16.5billion) to the Exchequer over its lifetime.

In another example, a substantial gas/condensate field, say twice the size of Corrib, located in the South Porcupine area, would, over its lifetime, pay $6.7 billion in taxes(€5billion).

Taken together, these two would make a big hole in the bill for Anglo-Irish!

Alternatively, they would make a significant contribution to the management of our public finances deficit.

It might also be pointed out that, had the Corrib project come on stream on schedule, substantial tax revenues would, at this time, be flowing into the Exchequer.

4. What are the implications of all this?

Major offshore development projects take some time from discovery to production, typically five to seven years. However, in the event of a major discovery, the probability of revenue streams of the above magnitudes would have an immediate and possibly dramatic impact on the market’s view of Ireland’s economic prospects. The cost of borrowing would fall significantly, easing the immediate financial pressure. As projects reached the production stage, tax revenues would flow, further easing the situation.

The development stage of a gas discovery, as we have seen with Corrib, creates large numbers of jobs, typically in areas of low employment. Each one of these jobs will support further employment in the community. In addition, the supply of gas in the area and along the pipeline route creates the opportunity for the growth of process and other industry, for instance in food processing. The notable cluster of chemical and pharmaceutical industries in Cork Harbour substantially grew out of the availability of gas from the Kinsale Head Field from 1978 onwards.

Our existing dependence on gas for electricity generation, at around 60%, seems likely to continue, and it is worth noting that, at present, electricity generated from gas is the cheapest on the island. The focus on renewables has an undoubted rationale. However, in the short term, renewables, together with peat, need to be subsidised to be competitive, and will always need back-up generating capacity, most probably fuelled by gas. The development of our offshore resources is not, in fact, a matter of competition with renewables. Regardless of our progress with renewables, Ireland will continue to consume significant volumes of oil and gas for the foreseeable future.

The issue is, whether this oil and gas will be imported, thus paying taxes and creating employment abroad, or will it be indigenous production, contributing massively to our national economy.

Should we find ourselves in the fortunate position of having gas production greater than Irish demand, (two more Corrib’s would do it), the pipelines already exist to export to the UK and beyond. This surplus gas would put downward pressure on gas prices within Ireland, which would reduce our energy costs and increase our competitiveness.

Security of supply remains an important issue given that we import some 90% of our total energy needs. The discovery of additional indigenous oil and gas, together with enhanced gas storage facilities, would transform Ireland’s energy security situation.

5. The Question?

Given the potential benefits of a successful offshore industry, why is so little happening offshore Ireland?

Exploratory drilling is running at one, maybe two wells per year. To put our situation into context, a recent Offshore Licensing Round in the UK attracted 350 bids for licences. Already, 144 licences have been awarded.

Ireland’s most recent round, in 2009, received only two bids, with one licence awarded.

Success in exploration is exponentially related to exploration effort, and unless the number of exploration wells can be substantially increased, the potential will not be realised.

Why are more wells not being drilled?

From the industry point of view:

• The low success rate of exploratory drilling to date;
• The delays in bringing the Corrib gas field into production;
• The relative absence of infrastructure;
• The harsh and difficult operating conditions;

and

• The high cost of operating offshore Ireland;

have all been discouraging factors.

In addition, there is a perception internationally that public and political support for the Irish offshore industry is low.

6. So, what’s to be done?

6.1. Learn from our mistakes.

Prior to Corrib, the only sizeable offshore development was Kinsale, which was completed in 1978. It is therefore not surprising that when Corrib came along in the late-1990’s, the administration and the public were relatively unprepared, and that in the early stages, mistakes were made by all parties which have caused difficulties as yet unresolved.

The primary need is for a transparent, robust and legally binding administrative and regulatory regime for field development, so that all stakeholders have a clear understanding of the issues involved and how they are to be addressed. This should include consultative mechanisms, defined time-lines for permitting, and unambiguous definition of the technical standards to be applied to the various aspects of field development.

In the case of a major discovery, with licensing and permitting across many administrative lines, a mechanism should be established to coordinate and optimise the inputs of the various State agencies. It is worth remembering that such a mechanism was put into effect during the successful and uncontroversial development of the Kinsale Head Gas Field in the 1970’s. Most importantly, if the industry is to be persuaded to drill offshore Ireland, thereby putting large sums of money at serious risk, there must be the assurance of a reasonably predictable field development process.

6.2. Increase the Promotional Effort.

International competition for exploration dollars is fierce, and Governments go to considerable lengths to attract the industry. For instance, the Norwegian Government reimburses some 78% of the cost of an unsuccessful well. At the other end of the world, New Zealand has announced a significant strengthening of promotion of its offshore resources.

In between, there are numbers of “hot-spots” such as West Africa, North Africa and offshore Brazil, where the chances of success are good and the overall ambience is welcoming.

The DCENR has engaged constructively with the industry to try to increase the level of exploration, as evidenced by the recently announced and innovative Atlantic Margin Licensing Round, the Atlantic Ireland 2010 Conference on 2nd November, and participation in many international oil industry promotional events. However, their resources are limited when compared with other nations, and are divided between the functions of regulation and promotion.

It is important that that the disparate functions of regulation and promotion are separated and that the DCENR should be appropriately resourced to enable a significant additional focus on promotion.

6.3. Understanding of the Industry

Investment in offshore exploration and development should be as welcome as any other Foreign Direct Investment. It requires no financial support or State aid, and once established, the jobs and the tax revenues cannot be helicoptered out to South East Asia. They are here for the long term.

The Irish fiscal terms have been independently examined and the current terms have been demonstrated to be appropriate to the Irish situation, given the high level of risk and costs.

The industry, and indeed the administration, have been subjected to a great deal of unfavourable comment, much of it poorly informed. For instance, the absence of royalties in the Irish fiscal regime is frequently adduced as evidence of incompetence, or worse, in the Irish administration. This is notwithstanding the fact that the UK abolished royalties on new production in 1982, followed by Norway in 1986. Ireland followed suit in 1987 to remain in some way competitive, followed closely by the Netherlands and Denmark. Such mis-information needs to be vigorously rebutted by all concerned. Proactive steps should be taken to assure potential applicants for licences that their presence and their investments are welcome.

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In summary, the risks are borne by the industry, but the rewards, if realized, are shared by everyone. The measures needed are modest, the benefits potentially immense.

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