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Read more about: Energy
Sadly for us, no one in Ireland is going to find some bubblin’ crude about the place, so we have to make do with what we got. One of the big issues for a nation nowadays is energy security. While renewables need to be a bigger part that picture, we also can not ignore the benefits gas/oil supplies would give us, so we really need to maximise our resources. What is the best way to do this. Is it the present system? Or were we had, ripped off by Ray Burke and his Fianna Fail cronies?
One off the points many people make is that we should have had our own gas exploration company and that everything should be in national hands. And that does sound really good. Imagine all that money being put into schools, health tax cuts. It would be savage. However there is a caveat.
First off, there is only one successfully operated gas operation in Ireland. That is the Kinsale gas field—it is actually three locations, all near each other—and it has paid in royalties about €150 million to date. Now, the royalties from the Kinsale field are charged at about 6%, so that means that the total value of the field is to date about €2.5 billion. About 121 test drillings have been made on Irish territory. The cost of a test drill in the Atlantic is quite high due to the water depth (the North Sea is a lot shallower thus cheaper). It is about €20 million to drill a test hole, so that means the cost of drilling that many test holes would be €2.4 billion. Now those calculations are quiet crude really. Obviously inflation has meant that the cost of drilling has increased, but also as technology has improved, drilling is probably more efficient and thus cheaper in relation to inflation. Also some of the drilling has taken place in cheaper to drill places like shallower waters and Cavan (Seriously 
) but more or less the cost would be well into the billions. The value of the royalties are also affected by inflation—i.e., 6% now is greater then 6% in the 80s—and indeed the current high prices of gas compared to low 80s/90s prices when Kinsale was at it’s height increase that disparity. So I can’t really say what the actually money spent on drilling in Irish waters is, but it probably is quite substantial and the royalties figures do not include the value of money gained from corporation tax which was first at 50% and later at 25%, which means we got more then €150 million.
The calculation needs to take in a lot of different values and amounts of money. But I would wager that the actually money that it would actually require to drill 121 test holes compared to the money made from Kinsale is probably not that much different. Certainly not a country-changing windfall. Indeed, when you throw in the value of royalties and corporation tax take and the cost for a semistate to develop the technology, expertise and platforms to explore that the Shells of this world have, I have to wonder does the cost of Kinsale cover the cost of exploration? Remember, the 121 test holes were split over many companies each with equipment and expertise. If Bórd Gais was out drilling holes would we be much better off? Would political pressure come to bear? Would people be saying, “Why is there so much drilling in Mayo, my constituency should have some drilling too!”
We also have the Corrib Gas field, which is about 60% the size of Kinsale (Kinsale is not particularly big by international standards). Since the royalties were got rid of, we will not have the equivalent income of €150 million that Kinsale brought in. So why were royalties got rid of?
When the royalties were removed in 1987, the oil market was quite low, thus lowering demand and lowering prices. In 1982, the UK removed royalties; in 1986 Norway did for new fields. Denmark and Holland also did. Now these countries have far, far better strike ratios then Ireland. Does it make sense that these countries to charge no royalties and Ireland to charge royalties? Where would you invest. A place where you had a 1-in-30 chance of striking and have to pay royalties or a place where you have a 1-in-3 chance to strike and pay no royalties? That is why Ireland had to get rid of royalties in the 80s; it was a competitive environment.
Now back to the Corrib field. As of 2005, Shell has spent €500 million on developing the Corrib field, a field yet to yield any gas. But as you can say that this would produce a profit for a semi-state body as the above calculation I did was up to the present day. But what happens if we continue to drill at the same rate as we did before. With the same 1 in 30 strike rate (we have had 4 commercial strikes 3 of them off Kinsale the other Corrib hence some say we have a 1 in 50 strike rate) eventually we are going to come to the same situation where the gain vs expense is not clear. So then we come to the high taxing and high licensing idea.
In the comments of this post. William referred to the ability of companies not to pay tax as they can transfer the profit out to tax havens and Keith mentioned that extraction rights are given away for free. So I will deal with those 2 points. Firstly I don’t have knowledge of Irish tax law but maybe someone can help me. Why is it that they would transfer their profits in Ireland when they do not in Norway ? Where according the Norwegian Petroleum Directorate the corporation tax and special corporation tax, accounts for about 90% of the tax from oil? What would be different? And also from that link it can be seen that the remaining royalties (phased out this year) combined with area fees (extraction rights) account for only 4% of the tax take from oil. Indeed not only do the Norwegians allow for companies to write off costs against the corporation tax (like in Ireland) but they can also write off their area fees against the corporation tax (same link as phasing out). So going by the country that most people put up as the beacon of how to use oil money. The most money you are going to get is from Corporation tax. So why should we be different?
The main difference between the Norwegian and Irish example is that along with the corporation tax (28% in Norway with write off of area fees so similar to 25% here) you pay 50% the special corporation tax ( they are considering halving it to encourage more exploration.) for non-marginally profitable fields (marginally profitable fields get an uplift of 30 % of investments whatever that means, to shelter from the special tax.) And the Carbon tax which is another debate for another day. That 50% is the difference between the 2 countries. So companies pay 50% to get a 10 times more probable big strike. Are put another way. Say ever field is worth 7 billion after corporation tax. In Norway you will earn 70 billion minus 35 billion special tax i.e 35 billion vs 7 billion earned in Irish waters. For the same initial investment. (Actually shallow waters in North Sea make the initial investment cheaper).
There is also the argument that we should leave it in the ground until the price rises so high that we make more money. But when the price of gas rises (and we can already see this happening) the market is going to move to renewables and the gas will stay in the ground, it is not oil it can not be used in cars (We have tried) it is replaceable. The market for gas probably will not exist in 25 years time. We might as well cash in when we can.
The Celtic tiger owes its self to competing with tax rates. We under cut other countries because it was the only thing we could offer that they could not. And it worked spectacularly. We are in the same situation right now. Drilling in Norway is like trying to find a Daniel O Donnell fan in a bingo hall, drilling in Ireland is like trying to find a Daniel O’Donnell fan at a Metalica concert. We cannot expect to get the same treatment for an inferior product. We have to under cut and that is what we do. Considering that many of the big companies Elf, Total, BP et al have left Irish Shores maybe this not the time to ask are we giving away resources to cheaply. Maybe the question is are we too dear? Because in the end of the day it is better to tax something low then tax nothing high.
Edit: I would like to offer my sincere apologise for having a Beverly Hillbillies opening quoted it was terrible.
Simon, I am not sure where you get your ‘energy’ from, you really are a ‘gas’ man. Or as some might add after this evening a ‘leviathan’ of a fellow. Will it take you long to get ‘oiled’ up for this evenings performance? Don’t refrane from ‘crude’ jokes now.
Jack
I know I am very ashamed by what I quoted I am not well.
By the way I never meant the “crude” pun. But I do like it
Also I think you could be mixing me up with Simon McGarr I am not at leviathan
Indeed I have. I still say your a leviathan of a fellow
(Just noticed I have invented a new way to spell refrain)
“The market for gas probably will not exist in 25 years time. We might as well cash in when we can. ”
This is pure speculation, or can you cite some source on further energy that states natural gas will be phased out in favour of ??.. Most experts I’ve read(mainly from south American sources) state that natural Gas will overtake oil as the leading Future energy resource in the coming decade or too, for the following reasons. 1) very clean energy compared to oil/coal, 2)large untapped quantities/reserves available (I believe Venezuela has the largest known reserve), unfortunately many of these reserves are expensive to extract using current day technology, so are left in the ground.. The original point of considering our natural gas as saving in the bank is still quite valid. If you compare the USA’s history of squandering/exploitation of there home resources, there extracted and wasted much of there reserves selling cheap oil to the masses during the last century (big gas guzzling cars became very fashionable), now they are stuck dependent on other nations for there energy needs, I believe less then 20% is now home based (still better then us, but it’s a wee bit bigger country), with their only remaining reserves in protected areas (Alaska/Florida). Wouldn’t it be nice to have some known reserves for a rainy day?
My second point/question is related to shell Corrib field. You state that they have already spend 500 million, and have yet to make a penny. The Corrib field is 60% the size of Kinsale, lets say that the Corrib gas will be worth 4 billion over the next 15 years. How much profit will Shell state they have made from that field, well they can fiddle away with the book, selling gas at what ever rate they wish to there own distribution companies, and report a profit of 5% of that 4 billion, or 200 million or which we get 25%.. 50million from 4billion field?.. whose the winner there? This is just speculation, of course Shell may be a very honest company believing in fair practices and treat Ireland like an equal partner, but somehow I just don’t think that’s going to happen.. For instance, 500 million startup costs seem very high, but then when you consider that this can be written off against future profit, resulting in less tax paid, it make sense.. Its in Shells interest for it to be high.. I wonder what is consider startup costs, new transportation ships/Dublin HQ/holiday to ireland for the execs/new surrounding fields rights/land purchases?
It seem to me a much better deal for Ireland to drop the Corp Tax on oil/gas exploration (25% of zip is zip) and just charge royalties(20%?) on what they extract based on current gas prices per year. We get paid regardless of how little corporate profit they make.. When you have teams of accountants behind you figuring out every loop hole that can be exploited, it doesn’t make for a trustworthily relationship. It boils down to - We should take our cut before they take theirs.
I believe Venezuela has the largest known reserve
No. Venezuela is the largest known reserve of oil not gas. And that is based on oil sands which are supposedly very difficult to extract from and require a higher oil price extract from. The second is Saudi Arabia which has very little exploration in the last decade or so may have much more. But that is a moot point
The largest Gas reserve is in Russia. With 3/4 quarters being in Russian and the middle east. Who as we all know from the Ukrainian incident are not afraid to use it for political means. I am surprised that I am argueing with a person who links to the Green Party site on the merits of renewable energy, but anyway I think renewables are going to be the major source of energy for electricity. Certainly they are coming to the point where they are economical in comparison to gas With oil still being needed to run cars. Their is alternatives to gas/oil powered power stations, how ever no alternative to the internal combustion engine is particularly good. Hence why I think gas is replaceable. If even the Greens don’t think renewables can replace hydrocarbons we are fucked.
I wonder what is consider start-up costs
Probably the exact same start-up costs as the start-up costs that the Norwegians allow companies to write off aswell.
well they can fiddle away with the book, selling gas at what ever rate they wish to there own distribution companies,
How are they going to “fiddle the books”? How come they don’t “fiddle the books” in Norway. They base their taxation system not on the value of the gas but the companies profits not royalties.
Why should we do the exact opposite to what is generally considered the best hydrocarbon economy in the world?
Please give me some solid facts not vague sound bites. I tried my best to give as many facts and terrible puns as I could in this post. I quoted the Norwegian tax code you give me “fiddle the books”
Some facts & figures
1) “Venezuela, with its 148 trillion cubic feet of natural gas, has the largest proven gas reserves in America” (http://news.bbc.co.uk/2/hi/americas/4713404.stm).
2) Clean energy from natural gas - http://www.eere.energy.gov/afdc/altfuel/natural_gas.html
3) 5 million natural car vehicles worldwide - http://www.eere.energy.gov/afdc/afv/gas_vehicles.html
4) Gas burning plant emissions - http://www.epa.gov/cleanrgy/natgas.htm
Yep i’m a proud green party supporter, but i’m also a pragmatist and no one solution will resolve our current environmental crisis .By this I mean that we need to select the cleanest of energy sources currently available as we make the transition to renewable energy over the coming century. As gas is the cleanest of all the hydrocarbon products on offer, it should be preferentially utilized over oil/coal over the next 50 years for our electricity needs until wave/wind/? is in place. Natural gas produces half as much carbon dioxide, less than a third as much nitrogen oxides, and one percent as much sulfur oxides emissions from power plant when compared to a coal/oil plant (cite 4)
As far as comparing Ireland to Norway.. well I’ll though out an appropriate euphemism, you don’t shit on your own doorstep. Here’s an Nigerian example of Shell fiddling the books http://www.project-syndicate.org/commentary/okonta3 “This image of Shell as a sensitive, caring company mocks the evidence. At the heart of Shell’s oil reserves scandal is the desire for profit and the elaborate mechanisms that it nurtured in collaboration with corrupt military dictators over the years to ensure that its operations yield enormous dividends at the expense of ordinary Nigerians” . Or if you want a more reputable source here a 2004 BBC article http://news.bbc.co.uk/2/hi/business/3524438.stm “Shell overstated oil reserves by 250 million barrels in Norway. That’s after discovering 3.9 billion barrels had - metaphorically, at least - evaporated in January.”
The point I’m trying to make here simon, is that oil companies are not to be trusted based on historical evidence. Therefore royalties seems a safer and surer bet then asking for a cut from net profit.
Sorry the comment was caught in moderation. Spam tends to have lots of links so hence why yours got caught in the filtering. If it ever happens feel free to drop me an email on thedossingtimes at gmail.com
Venezuela, with its 148 trillion cubic feet of natural gas, has the largest proven gas reserves in America
Yes but not in the world. In your comment you did not stipulate America. Interesting point on gas powered cars. But it is still quiet expensive to transport it to the petrol (I guess that would be gas) station. Pipelines would not be an cheap option so then it has to be done by LNG or CNG which would vastly increase the price of the fuel at the pump.
As far as comparing Ireland to Norway.. well I’ll though out an appropriate euphemism, you don’t shit on your own doorstep. Here’s an Nigerian example of Shell fiddling the books
1 Shell is Dutch and English not Norwegian so it is not their doorstep. Indeed if you consider Norway it’s doorstep that makes Ireland the porch.
Here’s an Nigerian example of Shell fiddling the books
And 2 are you comparing operations in Nigeria to Ireland. Are you saying that we do not have more policing of revenue in Ireland then Nigeria. The business practices that you can get away with in Nigeria you can also get away with here yet you can not get away with in Norway? Please show me how you can “fiddle the books in this jurisdiction”
The article you linked to also said .
Because the operational budget is set by Shell, and because the NNPC is plagued by corruption and lacks the expertise to verify production claims, the operating company has a powerful incentive to inflate costs.
Are you also saying that the revenue commissioners in Ireland are plagued by corruption? In that case how come we get any corporation tax at all. Surely everyone would “fiddle the books” and pay no tax.
The BBC article you have shown that they misstated their reserves and got called on it. That shows that the system works.
Indeed I don’t see your problem with overstating reserves. In your plan you are taking royalties from their reserves so you would get more money then they should be giving you. You should welcome them overstating rather then understating.
You have yet to tell why Norway the best hydrocarbon economy in the world, with possibly the best record in using resources, indeed more experience in dealing with oil companies then you are me. Choose to use tax on profits not royalties as the means to get money from oil and Gas. They deal with the exact same oil companies as well.
there is a solution. hydrogen