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New report proposes significant changes for offshore oil and gas exploration in Ireland

AUTHOR(S):
PRACTICE AREA GROUP: Energy and Natural Resources
DATE: 11.05.2012

Introduction

An Irish parliamentary committee has published a significant report regarding offshore oil and gas finds in Irish coastal waters, with its recommendations including a substantial increase in the tax take from any future licences.

The report, issued by the Joint Oireachtas (Parliament) Committee on Communications, Natural Resources and Agriculture, makes a number of significant proposals for the oil and gas exploration sector. In particular, the report calls for a more transparent system regarding licensing and public consultation, while also recommending regular reviews of fiscal and licensing terms.

The most noteworthy recommendation relates to the level of tax taken by the Irish state from oil and gas finds, including the introduction of a ‘minimum’ rate of tax on all future licences. This, if implemented, would mean that the Irish Government would double its resource tax take from large finds.

Significantly, however, this would only apply to new finds, with the Committee recommending against any retrospective changes to existing agreements.

Although reports from the Joint Oireachtas Committees (JOCs) can only make recommendations or proposals, as opposed to dictating or determining how legislation is formed, their reports are significant in terms of shaping future policy decisions.

Furthermore, given that the JOCs are multi-party in structure, they echo the views of a wider stakeholder base rather than just the views of the current Government, for example.

As such, it is worthwhile to assess each of the report’s recommendations with a view to how they may impact on future policy and / or impact on the various stakeholders within the offshore exploration sector.

The recommendations can be summarised as follows:

1. Implement a ‘simple and transparent system’ through a review of the Petroleum and Other Minerals Act, 1960

The first of the report’s recommendations states that ‘good basic law’ should underpin policy principles relating to Ireland’s petroleum resources. As part of this, the report recommends that the Petroleum and Other Minerals Act, 1960, should be reviewed. In particular, the report notes that policy ‘should be developed in such a way that it maximises the take for the State and its citizens at the same time as being sensitive to local needs in the host community.’

2. Retrospective changes to fiscal and licensing terms can risk long-term reputational damage. Existing agreements should be adhered to irrespective of changing circumstances.

This is a significant aspect of the report’s findings, in that existing agreements will not be affected. Furthermore, the report advocates that future agreements should be made in the context of the circumstances at the time, such as ‘a large increase in the number of commercially viable finds or the size of fields’.

3. Recognising that fields may be subject to corporation tax and profit resource rent tax (PRRT), the State should seek to maximise tax revenues from petroleum exploration and production without deterring petroleum investment.

The JOC’s recommendations in this regard are that, for all future finds, the overall tax take (for the Irish State) should be, at a minimum, 40%. This, the JOC recommends, should take place across a sliding scale, whereby the 40% rate would apply to small commercial discoveries, 60% for medium commercial discoveries, and 80% for very large commercial discoveries. The JOC also notes that  ‘any future changes to the fiscal terms should be clarified before subsequent licensing rounds to ensure certainty around the regime for the investing companies’.

4. The Joint Committee strongly believes that the State should keep fiscal and licensing terms under constant review. Specifically, the Joint Committee recommends that there should be reviews of the fiscal and licensing terms before each Licensing Round takes place.

This recommendation is in keeping with recommendation 3, with specific regard to ensuring clarity for investing companies.

5. The obtaining of geological data from all licensees is of paramount importance. For this reason, the Joint Committee believes the State should consider applying the principle of unitisation to future explorations activities.

This recommendation would, in effect, entail mandatory unified operations for a field extending over different contractual zones by different operators. The JOC also recommends that the ‘benefits of having at least two participants in a license area should be fully explored and considered.’

6. The State could explore and consider ways of controlling production volumes as part of its resource management.

In making this recommendation, the JOC refers to Norwegian policy, whereby production permits are used to ensure a ‘flat production rate’. This, the JOC says, has been shown to be effective in managing fields which turn out to be larger than expected, and help maximise production over the field’s life cycle.

7. The Joint Committee recommends that consideration be given to the prohibition of flaring of gas.

Again, the JOC’s report cites the Norwegian example, where flaring is prohibited.

8. There should be a clear and comprehensive process of public consultation beginning at the first substantive stage in offshore oil and gas exploitation.

With consultation and engagement forming a key aspect of the JOC report, this recommendation advocates greater transparency regarding selection (of the relevant development option), along with providing all relevant stakeholders with ‘a comprehensive and technical outline of the project and how it would operate.’ The report advocates that local communities directly affected by offshore exploration ‘would benefit directly from any rewards generated from the oil and gas resources’, including infrastructural and social development.

9. The Joint Committee recommends that the Minister for Communications, Energy and Natural Resources draw up a strategic policy document for petroleum exploration.

This could dovetail with, or feed into, where appropriate, other strategic policy documents and consultations.

10. The Joint Committee recommends to the Minister for Communications, Energy and Natural Resources that he consider whether his Department should have on-going contact with other countries, such as Norway and Portugal, with a view to establishing a forum to exchange ideas on best practice on various aspects of petroleum exploration and production.

In the report, the JOC presents case studies on both of these countries. In particular, the report notes that Norway ‘set out a basic law at the beginning and has avoided making significant changes since then’.

11. The Joint Committee recommends that the Minister for Communications, Energy and Natural Resources establish a forum, comprising key stakeholders, to improve communications between stakeholders and maximise the potential for Ireland‘s hydrocarbon resources for the benefit of all Irish people.

In keeping with the other recommendations within the report, the JOC advocates that this forum, in consultation with Government, would help ‘to ensure that employment opportunities are maximised within the State’.

Implications for stakeholders

As mentioned above, reports published by the various JOCs, while important in informing and shaping policy, do not necessarily constitute a concrete indication of future regulation and legislation.

However, in the context of current domestic economic conditions in Ireland, recommendations regarding increased Government revenue or tax takes are generally receiving positive responses, and it is noteworthy that media coverage about the report has focused on this particular aspect.  The Irish Offshore Operators’ Association has however expressed concern at the JOC’s recommendation that large oil or gas finds could be taxed at 80% of profits (Irish Times, 10 May 2012).

The JOC report acknowledges that there has been a ‘relatively modest level of development of the petroleum industry’ in Ireland.  Against this background, it is difficult to see how making the licensing terms significantly less attractive will encourage not only investment, but the right kind of investment in the sector. The recommendations are clearly made with regard to the potential for an increased tax take, along with improving the level of engagement between industry, Government and the community. There is however, little, if anything, in this report which would provide encouragement to investors.

In particular, given the fragmented and multi-layered nature of the foreshore and onshore permitting process in Ireland, some recommendations aimed at addressing the significant development costs and delays which arise from these processes, would, no doubt, have been welcomed by industry.

Equally, recommendations of this nature would also have been welcomed at a Government level, as the cost and time implications caused by the complexities of the system can significantly reduce and / or defer the tax take for the State.

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