ONE OF THE traits of humans is to reach for the divine. Only the most ardent atheist has not in a moment of trouble stared into the sky and looked for a miracle. The hope that there is some salvation in their darkest hour. Ireland is now in one of our darkest hours and again people are looking for the miraculous miracle to save us. For many that miracle is oil.
The Irish corporation tax rate is one of our most prized possessions. Even though only in existence since 2002, 12.5 per cent is like the book of Kells, a national monument. We cling to it as if it is our life raft, as the good ship LE Ireland sinks. To us, the rest of Europe is better, Lufthansa or BA offering first class and meals. So we figure we can never be like that, me must become Ryanair and compete on price to over come our intrinsic disadvantages.
This belief in competing on price is also applied to oil and gas exploration in Ireland. Yet many in Ireland who would defend 12.5 per cent against any attack, also attack the exact same principle on oil and gas. Looking at the likes of Norway and thinking if it wasn’t for the government giving away our oil and gas we would be as prosperous as Norway. This merits a closer look and begs the question: If we have loads of resources and are giving it away why is Irish coast not ringed with oil rigs?
Roughly since the late 60s there has been about 130 test holes drilled in Irish waters. Of these four have produced commercial finds. Corrib and three off Kinsale. This equates to a strike rate of about 1 in 30. So in theory to find gas in Ireland you have to sink 30 wells to get 1 strike. No commercial finds of oil have yet to be found in Ireland. Compare this to Norway where the strike rate is 1 in 4. Now coupled to this Ireland’s acreage tends to be in the Atlantic, deep, rough and therefore expensive to drill (an exploration drill in the Atlantic costs about €50 million, so if you had to do that 30 times it will cost €1.5 billion) compared to the shallower North Sea. Norway just offers exploration companies a far better deal. They are offering Concorde. All we have is Ryanair’s inflight magazine.
It is fanciful in the extreme to expect oil companies to pay the same price for Ryanair as Concorde so we do what we always do in Ireland, we compete with price. We want to get some benefit from our scant resources. Ideally we want companies to explore Irish waters and find lots of oil and gas, confirming us as the new Norway. In which case we can change the tax regime on new fields, for all the multinationals that would subsequently pour in, or indeed form an Irish Statoil and exploit it ourselves.
But until that time, if it ever comes, we need to get exploration on the cheap. At the moment there is one or two interesting prospects in Irish waters Dunquin being the brightest hope which may prove successful. Which demonstrates that a favourable taxation regime can attract prospecting in a barren region of the world as least as well as Google Headquarters in Dublin demonstrates the validity of 12.5 per cent corporation tax.
One of the many arguments made against our tax regime is that we do not charge royalities on the gas extracted. We stopped charging royalties on new fields in 1987 under Ray Bourke. To put this decision into context, the UK stopped in 1982 and Norway in 1986, as did the Netherlands and Denmark. So we were hardly unique in the abolition of royalties.
One alternative is to leave it there. Hoping that technology improves, making marginal field viable and indeed profitable. That indeed could be a good idea. But what happens if the technology that improves is alternatives to oil, making what ever we have as valuable as day-old gravy? Its a gamble either way.
Another argument is based on ideological position that natural resources should not be in the hands of private individuals and that the benefits occurring due to these resources belong to the people as a whole. However, oil and gas are not our only natural resource. By far and away our most profitable natural resource is in the hands of private people. That resource is land. Agriculture is our most profitable indigenous industry and depends, like oil and gas, on the state allowing the private ownership and exploitation of a resource. So if the debate is about the private exploration of a resource then logic dictates all resources in private hands must be nationalised and that includes farm land, as ludicrous as it sounds.
To do an Irish Statoil would cost around €1.5 billion to strike lucky. On top of this there is the cost of getting it up and running with Corrib, for instance, costing about €2.5 billion. The total outlay would thus be approximately €4 billion before the gas or oil flows. On an international scale Corrib is not a very large field, indeed it is smaller than Kinsale, with the value of gas being not much more than €13 billion. With pessimistic predictions of the tax take being around €500 million (Government estimates about €1.7 billion) the monetary advantage of the state drilling itself would be €7-8 billion, which seems astounding and the miracle we need.
However Corrib – which is not online yet – was discovered 14 years ago and will not return its value on year one of operation. Instead its value will be returned over an estimated 15 years. To put this profit margin into context. Prior to the world wide economic collapse of 2008, the National Pension Reserve Fund averaged a return of six per cent per year. €4 billion invested over 29 years at six per cent will return a gain of €17 billion. Until Ireland has more commercial finds and of a larger size, the logical course of action is to let others take the risks.
Simon Tuohy is a doctor of physics currently working at Oxford University. He is originally from Tipperary.
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