Wednesday 16 August 2017

Richard Curran: Shell's textbook lesson on how to lose $1bn on a Mayo gas gusher

Workers with the boring machine which created a 4.9km tunnel linking the Corrib field to a gas-processing terminal in Co Mayo
Workers with the boring machine which created a 4.9km tunnel linking the Corrib field to a gas-processing terminal in Co Mayo
Richard Curran

Richard Curran

The State could be a big loser from Shell's heavy financial hit on the Corrib gas field. If tax losses racked up by Shell are carried over to the new owners, it will reduce the corporation tax receipts on what will be a profitable venture for some shareholders in the years ahead.

So how did Shell manage to lose nearly $1bn (€870m) on the enormous commercial gas find off the west coast? One easy but rather simplistic explanation is that the protests not only delayed the project but ended up costing Shell a fortune. But $1bn? Hardly.

The real reason is somewhat more nuanced. There is no doubt that the delays added massively to the overall cost of the project, but there have been different estimates of the true value of the field for a very long time.

Back in 2008, Eamon Ryan, the then Minister for Communications, Energy and Natural Resources, answered a Dail question on the value of the field to the exchequer.

At the time, it was believed that Corrib would deliver its first gas in 2010. In fact, it took a further five years. But Ryan said that based on development and production costs of €3bn, the tax revenue would be in the order of €1.7bn. The estimate put a value on the field of around €9.5bn at that time.

In 2001, the field was estimated to have been worth €2bn, based on a price of its 800m to 900m cubic feet of gas. But it was sold to Shell in 2002 for €7bn.

Now, as Shell tidies up its international gas assets following a major global acquisition, the balance sheet on Corrib isn't looking so good. In 2010, it wrote down the value of the field by €200m.

In this new deal, in which it is selling its stake to a Canadian pension fund, Shell is taking an impairment charge of around $350m and a write-off of $400m because of currency movements, particularly in relation to the dollar and the euro.

The field is delivering revenues of around $589m per year. It may well deliver a substantial profit for its new owners, which should in turn mean corporate profits tax revenue for the exchequer.

However, with all of those losses racked up by Shell, the deal may be quite legitimately structured in a way whereby tax losses are inherited by the new owners, which would substantially reduce the amount of money ending up with the State.

There are clear messages in this story for other operators, who might actually find something by way of oil or gas out there.

It will probably take longer than you think to realise it. It may well be a battle a day to get the project finally up and running. Don't make the mistakes that Shell made in the early days in term of how it approached the concerns of the local community.

And even finding a gusher off the west coast of Ireland is no guarantee of big profits.

Donohoe may renege on Noonan's pledge to the self-employed

This year's Budget is pretty much over before it begins. After lots of discussion this week about higher infrastructural spending and rainy day funds, there is just €300m to play around with for 2018. That is less than half the tax cuts that were introduced by Michael Noonan in Budget 2016.

In a way, Noonan had already maxed out on the fiscal space before new Finance Minister Paschal Donohoe got a look in. All the new minister can seriously talk about is plans for what he may do after 2019 on things like infrastructure.

Of course, the €300m is the amount available for tax cuts or spending increases that hasn't already been pledged. The minister can decide to generate some new revenue with higher taxes on the old favourites like cigarettes and alcohol.

He could even hit the banks with a higher levy, especially given their rediscovered profitability and their likely improved efficiencies from closing down more branches around the country.

Without some new revenue-generating measures, he may struggle to complete multi-year plans set down by Noonan.

One was the target set in the Budget of October 2015, when he introduced a tax credit for the self-employed. Up to then, the self-employed did not receive a tax credit at all. The PAYE equivalent is €1,650.

That October, he set the self-employed credit at €550, at a cost of €61m. It was then increased last year to €950 - still well short of the PAYE equivalent. When he embarked on this measure, Noonan clearly signalled that he wanted to have an equal tax credit for both over time. He said: "Further steps will be taken in future budgets, as resources permit." Given the new Taoiseach's interest in entrepreneurship and all those enterprising self-employed people who get up early in the morning, will Donohoe see it through?

Betting tax changes beginning to look like a racing certainty

Another area where the minister might look to bring in some more money is the betting tax. At just 1pc of turnover, the tax is among the lowest in the world. In fact, despite the explosion in gambling in Ireland (mainly due to online), the tax take from betting last year was still lower than in 2001.

Sixteen years ago, we spent about €1.3bn on betting and the State collected betting taxes of €68.1m (rate of 5pc).

Last year, after incorporating online betting into the tax net, we spent over €5bn punting on horses, greyhounds, football, etc and the betting tax collected was €50.7m (rate of 1pc).

A recent report by economist Colm McCarthy for the Alliance for Racing and Breeding, which was submitted to the Tax Strategy Group, highlighted the potential revenue available for the exchequer. Last year, the Horse & Greyhound Fund was allocated €74m, made up of €50.7m from the betting tax and an exchequer top-up of a further €23.3m.

McCarthy pointed out that doubling the tax to 2pc, for example, would yield around €100m, thereby doing away with the need for the additional exchequer top-up.

It would even leave another €25m for other things, if the funding to racing stayed at the same level. A 3pc betting tax could yield €147m, which would give Donohoe an extra €73m per year to spend on other things.

Big bookmakers like Paddy Power pay higher betting taxes in other jurisdictions but manage nicely.

In New South Wales, where Paddy Power has a growing business, it pays 10pc GST (Vat) on gross margin, a further 10.91pc on gross margin as a betting duty, a race fields fee of between 1.5pc and 3.5pc on horse racing, plus corporation tax of 30pc. Yet there is plenty of momentum in the market.

The real problem here is smaller independent bookmakers around Ireland. Running on modest margins, doubling or tripling what they pay in betting tax would seriously hurt them. But why not revert back to the pre-2006 situation and let the punter pay? It is a small additional contribution to make on a leisure pastime. Bear in mind that betting is Vat-free. Buy a coffee and a bun and the State gets nearly 10pc.

After all, only necessities like children's shoes were supposed to be Vat-free.

There are various options available to the minister. He could double the tax to 2pc and make the bookie pay 1pc and the punter pay 1pc. Alternatively, he could simply switch back to the punter pays model.

It isn't so much about transferring additional funds to bloodstock owners as creating additional tax revenue for the exchequer to do other things. Ex-finance minister Noonan was reluctant to put up the tax from 1pc until he had at least brought online gambling into the tax net. Now that has been done - and without any massive drop-off in activity or jobs and with high compliance rates.

Given the budgetary constraints this year, I would say some change to the betting tax regime is a racing certainty.

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