Some 50 per cent of the world’s energy needs are met by oil and gas. Despite the significant investments in renewable energies being undertaken by both the public and private sectors, oil and gas are forecast to continue to play a significant role in both the global and domestic energy mix in the coming decades. In 2011, the global traded value of fuels was approximately three trillion US dollars. A share, even a small share, of this trade has the potential to have significant economic benefits for Ireland. [login type="readmore"] Minister of State at the Department of Energy Communications and Natural Resources, Fergus O’Dowd, said recently that the Government’s underlying objective was to ensure that the State’s natural resources were exploited in a manner that maximised the benefits accruing to the people of Ireland. He was speaking at the ‘Oil and Gas Seminar: Prospects and Market Outlook’, which was hosted by Energy Ireland earlier this month. Such benefits can take a number of forms including:

• Increased economic activity;
• Additional revenue to the State; and
• The strengthening of the State’s energy security of supply.

“The most significant way in which Ireland stands to benefit from successful exploration is through tax revenue,” O’Dowd told delegates at the seminar. “However, we shouldn’t underestimate the boost to economic activity, and particularly employment, that can result from exploration and development activities. For example, over 1,000 people were employed at the height of the construction phase of the Corrib gas terminal. Even today, the project continues to provide both considerable direct and indirect local employment opportunities in Mayo.” It is a core element of the State’s strategy for this sector that private industry, rather than the Exchequer, is best placed to assume the cost and financial risks associated with offshore exploration, he added. “This shouldn’t surprise anyone, given that a single exploration well in the Atlantic can cost in excess of €100 million and, going on the odds to date, has a low probability of making a commercial discovery. “The Government recognises the fact that Ireland competes for mobile exploration investment in the same way it competes for foreign direct investment in already established onshore sectors. The Government’s strategy for the exploitation of the State’s natural hydrocarbon resources aims to maximise the level of exploration activity and increase the level of production activity, while ensuring a fair return to the State from these activities.” O’Dowd said it was important that the State provided suitable opportunities for international investors and the right environment to encourage private industry to take the risk associated with investing in exploration. This could be done in a number of ways, including:

• Providing a fit-for-purpose, transparent and robust regulatory regime;
• Deepening knowledge of Ireland’s offshore petroleum potential, in particular through data acquisition and supporting key research projects;
• Actively promoting the opportunity to invest in exploration in the Irish offshore, in particular to companies not currently active here; and
• Offering attractive and innovative licensing opportunities, such as the 2011 Atlantic Margin licensing round.

EXPLORATION ACTIVITY [caption id="attachment_8985" align="alignright" width="750"] Minister of State, Fergus O'Dowd[/caption] Exploration activity levels in the Irish offshore have ebbed and flowed over the past four decades. While the principal measure of success in any country will be the level of that country’s proven oil and gas reserves, it is not the only measure. The business cycle in the upstream petroleum sector is a very lengthy cycle. The timeline from the initial decision to invest, to seeing a return on investment, is a very long timeline. Indeed, the reality is that in most instances, there will be no return on that investment. “Because of the very long timelines involved, indicators of success are of particular importance,” said O’Dowd. “There’s a range of indicators right the way through the business cycle, such as: the number of active exploration licences; the area over which the exploration focus is concentrated; the technical and financial strength of the companies involved in those licences; the level of new data and in particular of new seismic data being acquired; the level of drilling activity; and critically, the number of new discoveries and new commercial discoveries being made. “If the only measure of success was proven reserves, then Ireland’s recent experience would be marked poorly, as there has been no new commercial discovery since the discovery of the Corrib gas field in 1996. But there are other indicators that clearly demonstrate we’re moving forward. The existence of these indicators doesn’t guarantee that new commercial discoveries will be made, but they point towards such discoveries becoming more likely.” Both the number of licences in existence and the technical and financial strength of the companies involved in those licences are key indicators. Today, Ireland has the highest number of exploration authorisations in place since exploration began in our offshore four decades ago. With new company entrants this year including companies such as Cairn, Kosmos and Woodside, together with existing companies such as Eni, ExxonMobil, Petronas, RPS and Shell, it is evident that that there is significant capacity in the sector. “The true success of the 2011 Atlantic Margin Licensing Round is now being witnessed. The 2011 Round represented a new approach and was designed to take account of lessons learned from earlier rounds where the response had been less positive,” the Minister of State continued. “It resulted in the award of 13 new authorisations, with a two-year life. LICENSING OPTIONS  “Some commentators were dismissive of the success of the Licensing Round, remarking in particular at the general absence of medium- to large-size exploration companies from the awards. Close to 90 per cent of the Licensing Options awarded are now set to convert to Frontier Exploration Licences and any analysis of the make-up of the partnership in those new licences will conclude the existence of strong technical and financial capacity. The Round has delivered on its objectives and the challenge for us now is to build on that achievement.” The level of new seismic acquisition is another indicator of success, he added. Last year there was one seismic survey in the Irish offshore; this year, there was one 2D seismic survey and three 3D seisimic surveys, along with the first phase of the largest-ever 2D long-offset regional survey, which is sponsored by the Department of Energy, Communications and Natural Resources. Along with the new entrants to licences in the Atlantic, there has also been a renewed interest in exploration in the Celtic Sea. A number of those new entrants have hit the ground running with companies such as Fastnet Oil and Gas and PGS on behalf of Charge Oil both shooting new seismic surveys of a significant scale this year. “Another indicator of success is drilling activity levels,” said O’Dowd. “Drilling levels have been stubbornly low over the past decade, but that’s set to change over the next two to five years, as drilling commitments now in place are delivered and as new drilling commitments are entered into following on from decisions made by companies currently investing in seismic acquisition. “All of this demonstrates that the exploration in the Irish offshore is moving in the right direction. It’s important, however, to keep things in perspective. While growth in exploration activity increases the chance of commercial discoveries being made, it brings no guarantees.” While the number of active exploration licences in our offshore is this year at its highest ever, the total number of licences is still less than that awarded by Norway in its last licensing round, warned O’Dowd. It is about a quarter of the number awarded by the UK in its last major licensing round. REVIEW OF FISCAL TERMS Turning to the issue of fiscal terms for offshore exploration, O’Dowd said there was considerable variation in the models used by countries that have petroleum production to obtain a financial return from their natural resources. These models vary both in terms of the instruments used and in terms of the level of take that the State seeks to obtain. “Some countries use a combination of instruments, such as State participation in licences, production royalties and taxation, while other countries take an approach that’s principally based on taxing profits. In determining the appropriate approach at a national level, a range of factors must be considered, with the principal factor being the relative prospectivity of the area.” Directly replicating the fiscal regime of another country is unlikely to provide the optimum outcome, however. Regard must also be had to the approach adopted by countries with whom Ireland is directly competing for a share of international exploration investment. Ireland does not have proven resources equivalent to those of major oil producing countries such as Norway or the UK. As a consequence, Ireland’s tax terms for oil and gas production are deliberately aimed at attracting new investment. These terms are set at a level comparable to countries such as France and Portugal, with more limited petroleum production and more limited proven resources. “Following a review, the fiscal terms were last revised in 2007. The 2007 terms sought to strike a balance between attracting those willing to invest in high-risk exploration while at the same time ensuring that the State would receive a fair share of profits where a commercial discovery is made,” O’Dowd explained. “The revised terms provided for a new profit resource rent tax of up to 15 per cent in addition to the 25 per cent corporate tax rate previously applying. The revised terms apply to all exploration licences issued since the beginning of 2007.” In the context of general public and parliamentary debate regarding the current fiscal terms, and having regard to the fact that it is almost seven years since the last review, the Department of Communications, Energy and Natural Resources is seeking further independent expert advice on the ‘fitness for purpose’ of Ireland’s fiscal terms. According to O’Dowd, advice will focus on “what level of fiscal gain is achievable for the State and its citizens and also on the mechanisms best suited to produce such a gain and it’s intended to bring consideration of this matter to a conclusion in the very near future”. ONSHORE UNCONVENTIONAL GAS EXPLORATION There has been an upsurge in interest recently in the potential of unconventional hydrocarbon exploration and extraction worldwide. In 2011, onshore licensing options were issued, which allowed companies to examine the potential for such unconventional hydrocarbons in Ireland. In January 2013, in the context of public concern regarding unconventional hydrocarbon exploration and extraction, the Environmental Protection Agency (EPA) initiated a public consultation process on the terms of reference for a comprehensive study on the environmental impacts of ‘unconventional gas exploration and extraction’ in Ireland, including fracking technology. “The study will take up to two years and will commence later this year,” said O’Dowd. “This study follows on from the preliminary research into the environmental aspects of shale gas extraction, conducted by the University of Aberdeen, published by the Environmental Protection Agency in May 2012. “No decision will be made on applications that would propose the use of hydraulic fracturing in unconventional gas exploration until the results of the current EPA research have been considered. This is an essential step in ensuring public trust in our regulatory systems as regards oil and gas exploration,” the Minister of State concluded.