First find the oil, and then raise the taxes
THE success of Providence Resources in finally finding oil in commercial quantities in Irish waters has inevitably renewed the long-running debate on our system of oil and gas royalties.
While the Irish terms are certainly generous by international standards, it might be a good idea to actually find the oil and start pumping it ashore first before we start changing the rules.
The latest contribution to the debate on the issue was from Dublin Shell to Sea, which on Monday published Liquid Assets, a 44-page document arguing that Irish oil and gas royalties were too low and should be raised.
At present, Ireland levies a 25 per cent tax rate on oil and gas profits and an additional profit resource rent tax of up to 15 per cent. In theory, this means that the total tax rate could be up to 40 per cent.
However, critics of the system argue that the terms are so loosely drawn that very few, if any, companies will pay anything like 25 per cent, let alone 40 per cent. However, even applying these headline rates, it is clear that companies producing oil and gas in Irish waters will be taxed at far lower rates than in almost any other countries.
So should Ireland be increasing the tax rates on oil and gas profits? To paraphrase St Augustine, yes but not yet. Exploring offshore for oil and gas is a seriously expensive business with an exploration well costing $100m (€76m) or more. Somehow I can't imagine our creditors being ecstatic at the prospect of the Government literally pouring money down speculative holes.
Far better to let our low tax rates and high energy prices encourage as many companies as possible to explore in Irish waters. If this exploration leads to large oil and gas discoveries, we can then change the rules later.
Sunday Indo Business