Saturday 20 January 2018

Drilling is the key to unlocking the treasure off our shore

The potential value to the economy of our developing oil and gas industry could rival that of the IFSC, writes Tony O'Reilly

Investment: Providence CEO Tony O'Reilly, with a vial of oil from Barryroe, believes an 'enabling' environment is essential to drive industry development
Investment: Providence CEO Tony O'Reilly, with a vial of oil from Barryroe, believes an 'enabling' environment is essential to drive industry development

Tony O'Reilly

'Proactive Government support and endorsement for the development of the sector could have a real impact'

THE offshore oil and gas sector is undergoing something of a renaissance, with renewed international interest. Providence's Barryroe oil discovery off the coast of Cork and the arrival of new industry players, coupled with promotional efforts of the Government, means that, for the first time in a generation, we can genuinely talk of the possibility of developing a meaningful oil and gas industry. It could not come at a more important time for Ireland.

Ireland already derives economic benefits from the industry, with production from the Kinsale gas field and construction-related activities at Corrib, and a more developed oil and gas industry could deliver enormous benefits for the economy in terms of jobs, significant Exchequer receipts, balance of payments and security of energy supply. This last point is key – today, Ireland imports 100 per cent of oil requirements and some 85 per cent of gas requirements.

Of course, the emergence of a meaningful oil and gas industry won't just happen on its own. It needs significant investment, wells drilled and proactive government policies. Over the past 45 years, fewer than 170 wells have been drilled offshore Ireland, compared to over 10,000 wells drilled in the North Sea. Whilst the number of Irish wells is low by international standards, there have been many hydrocarbon discoveries made. However, due to a number of factors, including the fiscal regime of the time, commodity prices, lack of infrastructure and planning and technical factors, many of these discoveries were never successfully commercialised.

The uncomfortable truth is that, despite many companies investing billions of dollars – the most notable being the Corrib development in Mayo, which has been subjected to major delays – we have yet to produce a single drop of Irish oil and we have only one producing gas field.

The good news is that today, many of these factors have been mitigated against and the last licensing round in 2011 was the most successful in terms of new acreage applied for. But much more still needs to be done. To have a successful oil and gas industry, more wells need to be drilled to assess the hydrocarbon potential. Simply put, it is a numbers game – the more exploration wells, the higher the probability for success and so drilling is key.

In 2011, Providence (along with international partners) launched a $500m drilling programme over six different offshore basins, representing Ireland's biggest drilling campaign ever. Its importance should not be understated – without this programme, there would have been no new wells drilled off Ireland last year, this year or indeed, next year.

A recent PwC report, Making the most from our natural resources – oil and gas exploration in Ireland, which Providence commissioned, provided an overview of the Irish offshore industry and its potential. For the first time, it gave a factual basis for an understanding of the benefits that could accrue to Ireland with the successful exploitation of offshore potential.

To put this in some context, consider Providence's Barryroe oil field in the Celtic Sea. This field is now the subject of a farm-out process to bring in an appropriate international partner to help develop the field to bring it to production. The PwC report estimates that a single producing field the size of the anticipated scale of Barryroe could generate over €4.5bn in taxation for the State over its full life. As a reference point, €4.5bn is equivalent to our entire annual corporate tax take in 2011.

And whilst there is significant potential from such a find as things stand, the potential is far greater with a critical mass and the right supporting conditions. For example, if Ireland were to have 10 commercial fields of this scale operating at any given time, and there was an established supply base, there would be a potential to generate an average of 13,500 jobs a year during the development phase (10 years) and 11,500 jobs a year during production (25 years).

So we can see that the oil and gas industry has the potential to transform local and national economies, but a critical mass of activity is needed before a substantial indigenous supply base can develop. This critical mass does not currently exist in Ireland, nor will it exist until exploration demand is unlocked and success rates improve. So the question is, how can we achieve this exploration demand?

For Ireland to successfully exploit its hydrocarbon potential, continued and significant foreign direct investment is required. Oil and gas exploration is a risk/reward business; huge amounts of money are invested by companies in drilling, often with little more than a one in 10 chance of success, and even then, capital expenditure required to commercialise a discovery is extremely high (for example, analysts estimate that the capital cost to fully exploit the Barryroe discovery could amount to $5bn over its projected 30-year life).

This means that the right balance has to be struck to encourage international players to our offshore, who bring not only the technical capabilities but the necessary financial resources. This doesn't just mean attractive fiscal terms, it also means that we need to streamline the manner by which the sector operates to remain internationally competitive.

As the PwC report shows, Ireland's current proposition is less attractive than other locations in a number of key aspects, including the historically low incidence of making a commercial discovery, the planning and regulatory regime as it stands today, high exploration and development costs and lack of any State-underwritten risk (as is present in Norway, for example). And whilst Ireland's fiscal regime is relatively favourable, (when compared to high production jurisdictions), Ireland's performance in terms of commercial discoveries is weak relative to Europe's leading performers, so the subsequent demand for exploration licences has historically been modest (the improvement in the recent round notwithstanding).

Although this underperformance is partially attributable to factors beyond the control of policy makers, they are important policy contributors. The policy experience of Scotland suggests that huge State investment is not always required; however an "enabling" environment is essential to drive industry development.

Given the potential for the Irish economy of further hydrocarbon finds, a window of opportunity exists between now and the next licensing round to ensure that the issues and constraints identified, that are within the gift of policy makers, are addressed in order for Ireland to fully pursue the opportunities available, and to ensure Ireland is in an optimum position to unlock the economic potential of the oil and gas industry.

Proactive government support and endorsement for the development of the sector could have a real impact. To this end, the major seismic acquisition programme being undertaken by the State is welcome as this data should provide significant information for the industry to enable future investment decisions. Furthermore, moves by the Department of the Environment, Community and Local Government for a more transparent, streamlined and timely regulatory and planning process would be welcomed by the industry. Minister Rabbitte has recently sought tenders for the provision of expert advice on the "fitness-for-purpose" of the current oil and gas fiscal terms. We hope that this will result in a predictable and stable fiscal regime to end industry uncertainty in what the future holds in this regard.

What the PwC report calls for in order to maximise the opportunity is the pulling of all this together into the production of a Government-led long-term vision and strategy, addressing the development of the offshore industry. The prize is well worth it – if carefully nurtured, and with a bit help from mother nature, the oil and gas sector has the potential to rival other industries such as IFSC, agri-business and technology in terms of its impact on the Irish economy. Ireland has demonstrated remarkable skill in telling the world that it is "open for business" in these sectors ... let's do likewise for the oil and gas sector.

Tony O'Reilly is chief executive of Providence Resources

Sunday Independent

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