Review of Irelands oil and gas fiscal system – Pat Rabbitte

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http://www.dcenr.gov.ie/Corporate+Units/Press+Room/Speeches/2014/Review+of+Irelands+oil+and+gas+fiscal+system+-+Pat+Rabbitte.htm

SPEECH BY PAT RABBITTE TD

Minister for Communications, Energy and Natural Resources

REVIEW OF IRELAND’S OIL AND GAS FISCAL SYSTEM

Dáil Éireann,

3rd July 2014

A Cheann Chomhairle, I am pleased to have the opportunity this morning to open this debate on the Wood Mackenzie report on Ireland’s Oil and Gas Fiscal System.

In the mid 1970s, when Ireland’s first oil and gas fiscal terms were introduced, there was an expectation that the Irish offshore would be the next North Sea, particularly after the initial success of the Kinsale gas find in 1971. Those terms were set in a manner that reflected this very optimistic view.

Unfortunately, after the initial surge of exploration in the late 1970s and early 1980s, interest in the Irish offshore has waned significantly. In the 40-plus years since Kinsale, there have been only three further commercial gas finds and no commercial oil finds. A stark example of this reduction in interest is the fact that more exploration wells were drilled back in 1978 alone than have been drilled over the last 10 years.

The primary factors determining the level of exploration activity are the perceived prospectivity of the area concerned, world oil and gas prices, the applicable fiscal terms and the broader regulatory regime. Having very limited leverage over prospectivity and world oil and gas prices, Governments tend to focus on the fiscal and broader regulatory regime when seeking to influence activity levels.

In the last few years, we have seen sustained high world oil and gas prices and we have also witnessed a modest but welcome upswing in momentum in terms of exploration interest in the Irish offshore. It was therefore timely to review Ireland’s fiscal terms.

In May 2012 the former Oireachtas Committee on Communications, Natural Resources and Agriculture, chaired by Deputy Andrew Doyle, published its report on Offshore Oil and Gas Exploration. This wide ranging report recommended that, in the case of new exploration licences, the basic rate of tax should be increased from 25% to 40%; and that the rate applying to very profitable fields might be increased from 40% to 80%. The report recognised that retrospective changes to fiscal and licensing terms could risk long-term reputational damage.

In May 2013 I initiated a Dáil debate on that report and I stated my intention to seek further independent expert advice on the “fitness-for-purpose” of Ireland’s fiscal terms, with a focus on the level of fiscal gain achievable for the State and its citizens and, equally importantly, on the mechanisms best suited to produce such a gain.

On foot of a public procurement process, Wood Mackenzie, a major international company with very significant sectoral knowledge, understanding and expertise, were engaged to provide this expert advice.

The request for advice was deliberately framed in a broad manner that would allow the consultants to identify all the issues that should be considered and to have flexibility in terms of the outcomes recommended.

Wood Mackenzie were provided with the Oireachtas Committee’s report, the associated Oireachtas debates and a number of documents reflecting the wider public debate on Ireland’s oil and gas fiscal terms including publications by Indecon, Pricewaterhouse Coopers, the Irish Offshore Operators Association, SIPTU, Shell to Sea and Own Our Oil.

Wood Mackenzie were also requested to meet with the members of the Oireachtas Committee on Transport and Communications; with members of the former Oireachtas Committee on Communications, Natural Resources and Agriculture; and with a number representatives from the oil industry, trades union and other participants in the debate.

On conclusion of their assignment on 30 May Wood Mackenzie furnished me with a final report and, following consideration by Government, I published the full report on 18 June last.

In their report Wood Mackenzie provided their analysis in what I would consider to be a comprehensive, detailed and accessible manner. I have no doubt that this report will serve as a key reference point in terms of the factual detail it contains, the broad range of issues it discusses and the clear analysis informing its recommendations.

The report first outlines a number of observations and principles, which underpin its analysis of the fitness for purpose of our oil and gas fiscal regime, and recommendations for change to that regime.

As a starting point, it is worth noting that Wood Mackenzie make the observation that Ireland is a relatively high-risk and high-cost country for exploration and that, as a consequence, returns for commercial discoveries need to be relatively high to strike the right balance. Unfortunately, at times the debate around Ireland’s fiscal terms is not grounded in this reality. Too often the discussion is confused, and indeed sometimes deliberately confused, by reference to “potential reserves” as if they were actually “proven reserves”.

A second observation they make is that, in order to attract investment, Ireland needs to be competitive with a peer group of countries which have similar exploration profiles. While such observations have been made by others in the past, it is important to understand that they are central to the analysis and recommendations that follow in this report.

The recommendations are therefore informed by a detailed comparative analysis of nine other countries which, like Ireland, have a history of exploration at relatively low levels and are countries that we can be regarded as competing with for exploration investment. In addition to this “peer group”, the report also included Norway and the United Kingdom on the basis that, notwithstanding their very different exploration histories, these two countries are regularly referred to in public debates on this issue.

The central conclusion of the report is that, while new terms should not be retrospectively applied to existing licences, there is scope for strengthening the fiscal system to be applied to future licensing rounds in terms of providing for an increase in the overall State take; ensuring an earlier share of revenue for the State; and addressing inconsistencies in the current fiscal system.

The principal recommendations made by Wood Mackenzie are that:

· for now, Ireland should maintain its concession system, with industry rather than the State bearing the risk associated with investing in exploration;

· a production profit tax should continue to apply but, for discoveries made under future licences, the form of this tax should be revised;

· the tax should be charged on a field-by-field basis, with the rate varying according to the profitability of the field and charged on each field’s net profits;

· the revised tax should include a minimum payment at a rate of 5%, which would function like a royalty and would result in the State receiving a share of revenue in every year that a field is selling production;

· the revised tax rate should be higher than the current Profit Resource Rent Tax thereby ensuring a higher share for the State from the most profitable fields;

· the tax should operate on a sliding scale basis to be calculated on a producing field’s net income commencing at a rate of 10% and reaching a maximum level of 40%;

· the marginal tax take on a producing field, made up of both corporation tax and the petroleum production tax, should be increased from the current 40% up to a maximum of 55% for the most profitable fields under new licences; and

· the corporation tax rate applying to petroleum production should remain at 25% – which is of course twice the normal rate of corporation tax.

Wood Mackenzie also considered the question of capital allowances and the carry forward of exploration losses. In the case of capital allowances, they found that Ireland’s approach, which is only replicated in the United Kingdom and South Africa, is generous but they suggested it should be viewed in the context of the overall fiscal system.

On the carry forward of exploration losses, the report concluded that allowing a 25 year carry forward was neither bad practice nor likely to significantly reduce the corporation tax payable by the next field development. No change to the current system was recommended for capital allowances or exploration losses.

Having asked for advice as to how Ireland’s oil and gas fiscal regime should be revised, and having received clear advice that is underpinned by extensive data and robust analysis, it is important now to give certainty to the industry. I have secured Government approval for the broad parameters of a new fiscal scheme as set out earlier in my speech and as recommended in the report; the detailed instrument will be agreed with the Minister for Finance.

My Department will now work with the Department of Finance and the Revenue Commissioners to give operational effect to this approach and the new regime will apply in the case of future exploration authorisations, including those to be awarded under the 2015 Atlantic Margin Licensing Round which my colleague Minister O’Dowd launched on 18 June last.

By acting now and bringing closure to this matter, it is my intention to communicate an unambiguous message in relation to the stability of Ireland’s fiscal regime for this sector. For existing licences, no changes are proposed. For future prospective licence holders, a clear regime is being set out and the rationale for that regime has been clearly outlined. This should further engender industry confidence in the stability and predictability of Ireland’s oil and gas fiscal terms.

Bringing certainty on our fiscal regime, together with other important measures taken by this Government, will make Ireland a more attractive location for exploration investment. These measures included positive initiatives relating to licensing, data acquisition and the safety regulatory regime.

One such measure was the 2011 Atlantic Margin Licensing Round, which resulted in a number of significant sized exploration companies entering the Irish offshore with an immediate impact in terms of exploration activity. The next licensing round has just been formally launched and I am optimistic that industry will recognise the opportunity and respond positively.

I have said on many occasions since being appointed to this portfolio that Ireland needs to see an increase in the level of exploration activity and in particular exploration drilling, if the true petroleum potential of the Irish offshore is to be realised.

I look forward to hearing the views of Deputies in this debate on the Wood Mackenzie report. A report that I expect will be a very relevant and useful resource well into the future.