Policy on Natural Resources

Posted: February 13, 2011 in Welcome

Irish gas and oil

Ireland has astounding wealth in natural resources and this could be the key to its economic regeneration. Current estimates of the size of Irish gas and oil resources can be derived from a range of sources. These include details released by individual companies, such as Providence’s disclosure of 870 million barrels of oil off the Dublin coast and Finavera’s reporting of a potential 9.4 trillion cubic feet of gas (1.5 billion barrels of oil equivalent (bboe) in the onshore Lough Allen gas field.
The Department of Communications, Energy and Natural Resources (DCENR) has been tight-lipped on the overall value of Irish hydrocarbons. However, a 2010 press release announcing the opening of the Atlantic Margin Licensing Round provides some clues to the possible value of Ireland’s resources. This press release declared that there were potential reserves of 10 billion bboe (gas or oil) in the Atlantic Margin, West of Ireland.
The value of such resources clearly depends on both the costs of recovering them and the amount which can be commercially recovered. But at current market prices of around €72 a barrel, the value is around €720 billion.
This potential wealth only relates to the West Coast and provides no insights into the wealth gained from commercial production in Kinsale, Ballycotton and Sevenheads, or the probable riches contained onshore and off Ireland’s East Coast.
It is therefore a conservative estimate.

An answer to Ireland’s economic crisis?

This potential wealth provides a means to solve Ireland’s long term economic problems. But this would require a fundamental change in policy.
Under the current licensing system, Ireland sees little benefit from its own resources. A report by Indecon Economic Consultants, which was sponsored by the Department of Communications, Energy and Resources, pointed out that the ‘current fiscal system…yields among the lowest government take in the world.’
Aside from some nominal fees, the only mechanisms for financial returns from Ireland’s gas and oil is a 25% tax rate under the 1992 Licensing Terms and an additional 5 to 15% tax which might be paid through the Profit Resource Rent Tax (PRRT) which was introduced under the 2007 Licensing terms. This latter additional tax only applies to licences granted after January 1, 2007.
However, companies can offset exploration and development costs over the previous 25 years against both these taxes. The PRRT is also only be applicable to highly profitable fields as it is calculated on a graded basis using a profit ratio of after-tax profits divided by the level of capital investment.

Ireland compared with other countries

A 2007 report by the US Government Accountability Office showed that Ireland had the second lowest rate of government take among 142 fiscal systems. Of the fiscal systems studied, 108 had government take of 50% or over – twice the rate in Ireland.
Another international study in 2008 examined 45 fiscal systems with Ireland having the lowest rate of government take – half the rate of countries with a similar economic approach such as the US, UK, Canada and Australia.
Our close neighbour Norway, with its comparable socio-economic transition from an agricultural to industrialised country, receives a government take that is over three times the Irish rate. This is because it imposes a 78% tax rate. The Norwegian state also participates directly in exploration and production through its 67% share in the major oil company Statoil and its ‘State Direct Financial Interest’ (SFDI). Managed by the state owned company Petero, the SDFI means the state retains a direct financial interest in production with the amount of State participation decided upon the awarding of licences. Once the State’s level of participation has been agreed, which differs between fields, the state behaves like other oil companies meeting its share of costs and receiving the equivalent share of profits.
In 2009, 27% of the Norwegian state’s total revenues came from the petroleum sector. Such revenue is allocated to a Government Pension Fund. The value of this sovereign wealth stood at €332.64 billion in 2009. The Norwegian Ministry of Petroleum and Energy forecast the state’s 2010 net cash flow from the petroleum sector to be nearly €33 billion.
The 2008 international study of 45 fiscal systems also showed that, aside from Ireland, only 6 fiscal systems resulted in government take of less than 50% with 22 fiscal systems resulting in government take of 70% or higher.
Countries such as Venezuela, Iran and Libya received a government take in excess of 90%. This report also showed how many countries are taking stronger economic control over their resources. The rates of government take increased in 16 fiscal systems, including countries such as the US, UK, China and Argentina.
However, rates of government take are only one way a state can benefit from its resources and many countries are re-asserting control over their resources in other ways. In 2010, for example, the Ecuadorian President Rafael Correa introduced a new oil law which saw the state seize control of all the country’s oil resources. International oil companies were told they would be compensated for their investments and production. Correa threatened to expropriate the assets of foreign companies which did not agree to the new contracts, informing them that “companies need to understand they should be governed by the rules of the game the country puts in place.”
This global pattern shows why an urgent change of policy is required in Ireland.

Energy security

Defenders of the current approach suggest that Ireland must provide “simple and extremely attractive” terms in order to attract companies to develop its resources. They also assert that Ireland is vulnerable on energy security because we import all of our oil and most of the gas.
In 2009 Ireland consumed the equivalent of 8 million tonnes of oil and over half this amount in natural gas (4.3 million tonnes of oil equivalent (mtoe)). Renewable energy sources met 3.9% of Ireland’s total energy consumption and 11.9% of the share of electricity generated.
However companies are not obliged to sell Irish gas and oil back to the country under the current terms. If they decide to sell to Ireland, which they may do as transportation costs will be cheaper, they can do so at full market prices.
This means that in addition to receiving one of the lowest rates of the returns in the world, the Irish state is not even guaranteed a supply of its own gas. Instead it must pay full market prices and compete with others for supply.

Steps to ensure Irish gas and oil benefits the country:

Take all oil and gas resources back into public ownership. People Before Profit –United Left Alliance will nullify all existing agreements with oil companies and place a moratorium on all licensing rounds until the new model of state management has been introduced.

Introduce a new model of state hydrocarbon management. This will be premised upon (a) public ownership of resources, (b) stronger state participation through production sharing and service contracts, and a new national oil company, and (c) higher rates of financial returns through increased rates of corporate tax and royalties.

The state will retain ownership of Irish gas and oil and will engage with oil companies through production sharing contracts or service agreements where this is necessary to access technical expertise. Alongside the state maintaining control over Irish gas and oil, such contractual arrangements will see the state having a direct financial interest in all production.
The new Irish National Oil Company (INOC), run through a participatory management structure, will be a key component of this new approach and other oil companies will be required to co-produce with the INOC until it has developed the necessary expertise and financial capabilities to produce independently.
The new fiscal system will include higher rates of taxation and royalties. These revenues, alongside profits from the INOC will be used to fund public services including education, health, childcare, community services, and social welfare.
Public ownership will therefore guarantee of supply and provide greater financial benefits for the overall economy.
Develop and fund an integrated industrial development strategy comprising upstream and downstream activities. Public ownership of our natural resources will become the corner stone of a new development strategy that will replace a reliance on foreign multi-nationals.

Such a strategy could include:
Training and upskilling workers for the range of exploration, development, production, refining and transportation activities and ancillary services.
Related research and development programmes
Supporting new and existing service industries.
Development of a new state run refinery with refined petroleum products used for: transportation fuels, fuels for heating, fuels for power generation, feedstock for chemicals and plastics, and components for lubricants.

The provision of such products will also be of benefit to other industries situated in Ireland, particularly petrochemical, pharmaceutical and energy.
Use funds and infrastructure from oil and gas activities to diversify Ireland’s energy supply, People Before Profit-United Left Alliance favours developing and moving towards more sustainable forms of energy production which would have additional industrial, economic and environmental benefits.

Such benefits include increased employment, reduced carbon dioxide emissions and increased energy security.
Ireland has a wide range of renewable energy sources including wind, wave and tidal sources, solar and geothermal energy which could be utilised productively.
The wealth generated from public ownership of natural resources will make this diversification possible.
Respond to the Corrib gas controversy in a transparent, fair, participative manner based on real engagement with the community in Erris, Co. Mayo around the location of the Corrib gas project.

Production of Corrib gas should only be permitted when there is community consent on the location of the refinery and pipeline.

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