Simple and transparent system
Fiscal and licensing terms
Principle of unitisation
Strategic policy document
International best practice
An Irish parliamentary committee has published a significant report on offshore oil and gas finds in Irish coastal waters, with recommendations including a substantial increase in the tax take from any future licences.
The report, issued by the Joint Oireachtas (Parliament) Committee on Communications, Natural Resources and Agriculture, makes several significant proposals for the oil and gas exploration sector. In particular, the report calls for a more transparent system regarding licensing and public consultation, while also recommending regular reviews of fiscal and licensing terms.
The most noteworthy recommendation relates to the level of tax taken by the Irish state from oil and gas finds, including the introduction of a minimum rate of tax on all future licences. This, if implemented, would mean that the government would double its resource tax take from large finds.
Significantly, however, this would apply only to new finds, with the joint committee recommending against any retrospective changes to existing agreements.
Although reports from the joint Oireachtas committees can only make recommendations or proposals – as opposed to dictating or determining how legislation is formed – they are nevertheless significant in terms of shaping future policy decisions.
Furthermore, given that the joint committees are multi-party in structure, they echo the views of a wider stakeholder base rather than just the views of the current government.
As such, it is worthwhile to assess each of the report's recommendations with a view to how they may impact on future policy and/or affect the various stakeholders in the offshore exploration sector.
The report recommends that a "simple and transparent system" should be implemented through a review of the Petroleum and Other Minerals Act, 1960.
The first of the report's recommendations states that "good basic law" should underpin policy principles relating to Ireland's petroleum resources. As part of this, the report recommends that the Petroleum and Other Minerals Act, 1960, be reviewed. In particular, the report notes that policy "should be developed in such a way that it maximises the take for the State and its citizens at the same time as being sensitive to local needs in the host community".
Retrospective changes to fiscal and licensing terms can risk long-term reputational damage. Existing agreements should be adhered to irrespective of changing circumstances. This is a significant aspect of the report's findings, in that existing agreements will not be affected. Furthermore, the report advocates that future agreements be made in the context of the circumstances at the time, such as "a large increase in the number of commercially viable finds or the size of fields".
Recognising that fields may be subject to corporation tax and profit resource rent tax, the state should seek to maximise tax revenues from petroleum exploration and production without deterring petroleum investment.
The joint committee's recommendations in this regard are that for all future finds, the overall tax take (for the Irish state) should be a minimum of 40%. This should take place across a sliding scale, whereby:
- a 40% rate would apply to small commercial discoveries;
- a 60% rate would apply to medium commercial discoveries; and
- an 80% rate would apply to large commercial discoveries.
The joint committee also notes that "any future changes to the fiscal terms should be clarified before subsequent licensing rounds to ensure certainty around the regime for the investing companies".
The joint committee strongly believes that the state should keep fiscal and licensing terms under constant review. Specifically, the joint committee recommends that there be reviews of the fiscal and licensing terms before each licensing round takes place.
This recommendation is in keeping with Recommendation 3, with specific regard to ensuring clarity for investing companies.
The obtaining of geological data from all licensees is of paramount importance. For this reason, the joint committee believes that the state should consider applying the principle of unitisation to future exploration activities.
This recommendation would, in effect, entail mandatory unified operations for a field extending over different contractual zones by different operators. The joint committee also recommends that the "benefits of having at least two participants in a license area should be fully explored and considered".
The state could explore and consider ways of controlling production volumes as part of its resource management.
In making this recommendation, the joint committee refers to Norwegian policy, whereby production permits are used to ensure a flat production rate. This, the joint committee says, has been shown to be effective in managing fields which turn out to be larger than expected, and help to maximise production over the field's lifecycle.
The joint committee recommends that consideration be given to the prohibition on the flaring of gas. Again, the joint committee's report cites the Norwegian example, where flaring is prohibited.
There should be a clear and comprehensive public consultation process, beginning at the first substantive stage in offshore oil and gas exploitation.
With consultation and engagement forming a key aspect of the joint committee's report, this recommendation advocates greater transparency regarding selection (of the relevant development option), along with providing all relevant stakeholders with "a comprehensive and technical outline of the project and how it would operate". The report suggests that local communities directly affected by offshore exploration "would benefit directly from any rewards generated from the oil and gas resources", including infrastructural and social development.
The joint committee recommends that the minister for communications, energy and natural resources draw up a strategic policy document for petroleum exploration. This could dovetail with, or feed into – where appropriate – other strategic policy documents and consultations.
The joint committee recommends that the minister for communications, energy and natural resources consider whether his department should have ongoing contact with other countries, such as Norway and Portugal, with a view to establishing a forum to exchange ideas on best practice on various aspects of petroleum exploration and production.
In the report, the joint committee presents case studies on both of these countries. In particular, the report notes that Norway "set out a basic law at the beginning and has avoided making significant changes since then".
The joint committee recommends that the minister for communications, energy and natural resources establish a forum, comprising key stakeholders, to improve communications between stakeholders and maximise the potential for Ireland's hydrocarbon resources for the benefit of all Irish people.
In keeping with the other recommendations within the report, the joint committee suggests that this forum, in consultation with the government, would help "to ensure that employment opportunities are maximised within the State".
As mentioned above, reports published by the various joint committees, while important in informing and shaping policy, do not necessarily constitute a concrete indication of future regulation and legislation.
However, in the context of current economic conditions in Ireland, recommendations regarding increased government revenue or tax takes are generally receiving a positive response, and media coverage about the report has focused on this particular aspect. However, the Irish Offshore Operators' Association has expressed concern at the joint committee's recommendation that large oil or gas finds could be taxed at 80% of profits (Irish Times, May 10 2012).
The joint committee's report acknowledges that there has been a "relatively modest level of development of the petroleum industry" in Ireland. Against this background, it is difficult to see how making the licensing terms significantly less attractive will encourage not only investment, but the right kind of investment in the sector. The recommendations are clearly made with regard to the potential for an increased tax take, along with improving the level of engagement between industry, government and the community. However, there is little, if anything, in this report which would provide encouragement to investors.
In particular, given the fragmented and multi-layered nature of the foreshore and onshore permitting process in Ireland, some recommendations aimed at addressing the significant development costs and delays which arise from these processes would no doubt have been welcomed by the industry.
Equally, recommendations of this nature would have been welcomed at a government level, as the cost and time implications caused by the complexities of the system can significantly reduce and/or defer the tax take for the state.
For further information please contact Michael O'Connor at Matheson Ormsby Prentice by telephone (+353 1 232 2000), fax (+353 1 232 3333) or email ([email protected]).