The Sunday Times (UK): Business Focus: Is the tide turning?: "In somewhat of an understatement Andy Pyle, the managing director of Shell Ireland, the operator with a 45% share of the field, described it as “a very difficult process”.: “The government is to advertise further licences for the Rockall basin — the so-called Dooish field — off the Donegal coast. Shell is already prospecting there and has declared some initial success.” (ShellNews.net)
October 31, 2004
In the feelgood film Local Hero the inhabitants of a picturesque fishing village can scarcely conceal their glee at the prospect of a giant oil refinery on their doorstep. A small boat is festooned with dollar signs and the phone box is given a new coat of paint for those important calls to Texas.
Their hoped-for windfall lasts only as long as it takes Burt Lancaster to see the error of his ways. Once he discovers the natural beauty of the Scottish Highlands he decides to indulge his passion for astronomy by opting instead for a planetarium. Pure Hollywood.
In Erris, Co Mayo, one publican has already turned a barn beside his bar-cum-B&B into self-catering apartments and locals are nailing up “to let” signs in anticipation of the expected influx of 250 workers who will complete the development of a gas terminal in the area over the next two years. The €800m project, which was initially due for completion in 2003, is now expected to come on stream in mid-2007. An estimated €200m has already been spent in the exploration and planning stages.
After eight years of bitter wrangling with some local residents, fishermen and environmentalists, it appears the longest-running planning saga in the history of the state has been settled in favour of Shell, Statoil and Marathon, the co-venturers of the Corrib gas field, 50 miles off the Mullet peninsula. In somewhat of an understatement Andy Pyle, the managing director of Shell Ireland, the operator with a 45% share of the field, described it as “a very difficult process”.
The government hopes what it regards as the belatedly positive outcome will help to kickstart a moribund offshore exploration industry, arguing that it should become a blueprint for future applications.
“I think people found it difficult to understand why the planning process took so long. Given that gas terminals have been around for a long time, why should An Bord Pleanala have such a problem with the concept?” said Michael Daly, the principal officer in the petroleum and mining division of the Department of Communications, Marine and Natural Resources. “Our problem in Ireland is that we have had little discovery; An Bord Pleanala hadn’t dealt with such an application before so there has been no learning curve.”
The question now is whether exploration companies in the future will walk away in the face of such protracted planning procedures or whether the infrastructure put in place for the development of natural resources in the Corrib field will act as a catalyst for others.
CORRIB, which has been estimated to contain up to €21 billion worth of gas at current prices, represents the first commercial find off the Irish coast since Kinsale in 1973. The field is expected to yield about 70% of the Kinsale volume over 15 to 20 years. At present, Ireland imports 82% of its gas and in the absence of Corrib this figure was likely to rise as Kinsale became increasingly depleted.
The gas will be piped from the offshore field to a refinery terminal at Bellanaboy, eight miles inland. This will involve the removal of 16m cubic feet of peat, which will be spread on a bog 11 miles away. Shell ruled out an offshore terminal on the basis of cost and logistics and this proved the biggest stumbling block to the planning process.
To date, Ireland can hardly be considered gold rush territory. Seasonality, water depths and the cost of drilling are all hindrances but the biggest deterrent has undoubtedly been the lack of finds. About 150 unsuccessful exploration wells have been drilled since 1973, according to Fergus Cahill, the chairman of the Irish Offshore Operators’ Association.
“When a company gets a licence it has to make a commitment to spend a certain amount of money to drill some seismic wells and when you consider it costs about €50m to do this you get an idea of what is involved,” said Cahill. “People who criticise licensing terms don’t suggest exploration companies should get their money back if it all goes wrong.”
Industry figures say there are encouraging signs that Corrib has whetted the appetite of smaller operators in particular because they can now expect to piggyback on the infrastructure developed by the Shell-led consortium to bring the gas ashore.
“The UK and Norway are experiencing a revival because of the number of smaller companies targeting small pockets of reserves that would not have been viable before,” said Malcolm Ricketts, a research analyst at Wood McKenzie, an Edinburgh-based resources consultancy. “Ireland may not be as mature in exploration terms but the potential is there.”
Paul Griffin, a director of Ireland Assets, an oil and gas operator that holds licences in the Celtic Sea and in the Porcupine field off Connemara, said that while the Corrib decision was important, the recent surge in oil and gas prices had already provided an impetus for renewed interest in Ireland.
“Although current oil prices won’t be maintained at record highs, the rise seen in the last six to nine months shows that demand is outstripping supply as economies such as China and India industrialise: it’s a diminishing resource and this makes offshore Ireland more attractive again,” he said.
Griffin acknowledges there is something of the frontier mentality about exploration.
“It is a risk-reward industry — if you take the risk maybe one out of seven wells could come in and it could be a company maker,” he said.
Or a potential company breaker. The latest high-profile disappointment occurred in January at Seven Heads, near the Kinsale field, when Ramco Energy, an Aberdeen-based company, discovered that its flagship project had flattered to deceive. The company has been forced to negotiate an extension to a £60m (€86m) bank repayment and its shares have nosedived since the disappointing results were announced.
“We all went home for Christmas and put our feet up after a hard year, never dreaming what would happen the following month,” said Steven Bertram, Ramco’s group financial director. Less than a month after Seven Heads came on stream, output began to fall. Bertram said the setback was even harder to take as Seven Heads was not considered a pure exploration play as it was so near to Kinsale and its proven reserves. He estimated the venture had cost the company €185m.
With oil prices reaching record highs, gas reserves depleting and new technology making prospecting more economically feasible, what critics have decried as Ireland’s fiscal munificence towards exploration companies could have a similar effect to the corporate tax regime that has delivered so much foreign direct investment.
“Despite the lull in exploration I think the regime is generous in the extreme,” said Michael Wymes, the founder and former head of Bula Resources.
Exploration companies in Ireland pay 25% tax on oil finds (in Britain they pay 40%) and can write much of this off against costs. Proponents of exploration point out that the benefits to the economy derive from direct and indirect job creation along with a reduction in imports.
“It is a fantastically attractive tax regime, so in that sense there is nothing at all wrong with Ireland,” said Ricketts. “Corrib and Kinsale are significant finds in anyone’s book and you have to assume there are more of them out there.”
But where? The government is to advertise further licences for the Rockall basin — the so-called Dooish field — off the Donegal coast. Shell is already prospecting there and has declared some initial success. There are also high hopes for the Porcupine field off Connemara, particularly as any gas find may be able to tie into the infrastructure developed for Corrib, driving down costs in the process.
THE would-be developers of such prospects will likely view the Erris experience with some alarm. After all, the protesters are arguing that every application should be judged on a case-by-case basis because of local circumstances. They also insist the operators haven’t heard the last of them.
“Suffice to say I wasn’t thrown off course by the capitulation of the authorities,” said Maura Harrington, a local schoolteacher and outspoken critic of the onshore terminal. “It simplifies matters because it’s now Shell and us — there isn’t a statutory body with vertebra enough to act.”
Harrington is coy about what action, if any, the protesters are planning to take next but insist their battle is far from over. Another vocal critic, Micheal O Seighin, disputes claims the group is somehow acting against the national interest.
“The entire state apparatus has been thrown against this small community but tell me what exactly the economy is getting out of this: these haven’t been our resources since Ray Burke (the disgraced former minister) gave them away in 1987 and Bertie Ahern introduced frontier licences that allow companies to sit on likely reserves for up to 20 years.”
Such sentiments make it likely exploration companies will continue to find countries with less organised opposition and more likely prospects for success far more attractive than Ireland for the foreseeable future.
Ricketts said: “In a nutshell, it’s all about getting the biggest bang for your buck and companies will always go where they think their dollars will stretch further.”