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Looking to strike it rich for oil in offshore Ireland

After the Government granted 12 firms permission to look for oil and gas around Ireland this week, Peter Flanagan and Donal O’Donovan ask if the next big oil field is really on our doorstep

Thursday October 20 2011

IRELAND has watched for years as neighbours in the UK and Norway reaped the benefits of staggering oil strikes in the North Sea.

This week, efforts to emulate that success here stepped up a gear when the Government granted licences to 12 companies from four countries to search for hydrocarbons off the west coast.

Five of the winning companies — Ireland‘s Providence Resources and San Leon Energy, and the UK’s Chrysaor, Serica Energy and Sosina Exploration — already have a presence in Ireland; while the other seven licence winners — Canadian firm Antrim Energy, Bluestack Energy and Petrel Resources from Ireland, the UK’s Europa Oil & Gas, Two Seas Oil & Gas and First Oil Expro, as well as Spanish firm Repsol Exploration — are new to Irish waters, although another arm of Repsol recently announced it was entering into another licence off Ireland with Providence.

In all, 13 new licences were granted as companies search far and wide for new reserves.

Oil prices

High oil prices look to be here to stay as the fear that we may be reaching “peak oil” seems to get worse every year.

Russia has already staked its claim to the Arctic’s natural resources, while the mantra of “drill baby, drill” — usually in the Alaskan wilderness, a protected nature reserve — has been taken up by right-wing politicians in the United States as a solution to the country’s dependence on “foreign oil”.

Given this sort of geopolitical climate, it is no surprise there was a record number of applications for licences to explore off Ireland this year.

If the exploration works, and it is commercially viable to produce oil off Ireland, the rewards could be enormous. But how viable is Ireland as a centre for oil production, and how will the country benefit if private companies are going to take most of the profits?

The history of exploration around Ireland is a chequered one, to say the least. In nearly half a century, almost 200 wells have been drilled around Ireland but only one field — Kinsale — has been a commercial success while Corrib’s problems have been well documented.

In truth, a variety of factors have played against sustained development around the island. Most of the areas of interest for explorers — and the focus of the licences issued this week — are about 200km off the west coast in what is known as the “Atlantic Margin”.

Phillips Petroleum struck oil there as long ago as 1978 but the low oil price for most of the ’80s and ’90s, as well as logistical difficulties — the nearest hub for exploration is Aberdeen — have counted against developing the area. Many of those negative factors have now been overcome, however.

Energy Minister Pat Rabbitte said there could be up to 50 billion barrels of oil equivalent (BOE) around Ireland, but while one report estimated there were 10 billion BOEPD “yet to be found”, we really have no idea how much oil there is and, until exploring is done, we won’t know.

Most of the Atlantic Margin play involves drilling in deep water — up to 2,000 metres — in the middle of the Atlantic. These are not hospitable conditions at the best of times and present unique, and costly, challenges to drilling.

Market sources estimate the cost of exploring a single licence could run to $175m (€126m), with no guarantee oil will be found. When oil was between $7 and $10 in the early ’80s, it was simply not worthwhile to pursue it.

Viable drilling

With an oil price of close to $100 now the norm, however, drilling has become economically viable. As well as that, North Sea oil appears to have peaked and instability in the Middle East makes a country with a stable political environment like Ireland more attractive for prospecting.

“[The record number of applications for licences this year] probably reflects in part the flexible nature of the options but also the worldwide trawl that is under way by the industry for new oil and gas basins that can be developed,” says Davy Stockbrokers‘ Job Langbroek.

The other big change has come in technology. Advances in surveying equipment allow prospectors to estimate underwater reserves with much greater accuracy than before, and at lower cost.

These changes have attracted the likes of Providence Resources, which is the biggest player in the offshore Ireland space. As well as out and out prospecting, the company is going back over old discoveries and prospects, with new technology and modern geological techniques.

Apart from the economic and technology developments, the confidence in Ireland as an oil producer also comes from good results elsewhere in the Atlantic.

In the south, Tullow Oil has struck black gold with the massive Jubilee Oil Field off the west coast of Africa, and only last month the Irish-led company announced it had discovered oil off the coast of French Guiana on the east coast of South America.

That discovery helped re-inforce the “Atlantic Mirror” theory, which suggests large reserves of hydrocarbons are available on both sides of the Atlantic.

Reserves

In the North Atlantic, the Labrador Coast off Canada has huge proven oil fields. Therefore, the Mirror theory suggests, there should be large reserves on the eastern side of the ocean — right where Ireland is.

Another attraction of the Atlantic Margin is the quality of oil available. The international standard is Brent Crude.

When reporters say oil rose to, say, $105 a barrel yesterday, they are referring to the price of pure Brent. If a field produces oil with a lot of impurities, such as waxiness or high sulphur content, then the producer will get less for it.

Atlantic Margin oil, in particular that from the massive Porcupine basin — an area about three times the size of Ireland — is believed to be very close to Brent, with an especially low sulphur content making it very attractive to prospectors.

If that is the case, however, why weren’t the “supermajors”, as the biggest oil companies in the world are known, involved in this year’s round of Atlantic licences?

The lack of applications from an Exxon or a Chevron-Texaco has been taken in some quarters as evidence of a lack of credibility in Ireland as a drilling site, but the well documented problems at Corrib may well have made high-profile companies think twice before moving into Ireland, says Mr Langbroek.

In any case, Repsol is a top-tier firm with interests around the world. Exxon, while not involved in this round, bought into Providence’s Dunquin Prospect off the Kerry coast in 2006 and drilling will take place there by 2013 at the latest. Mr Langbroek believed the licensing round was “a solid success and compares very well with previous rounds”.

“It is quite usual in the industry for smaller companies to act as pathfinders and idea generators for the larger companies. If these companies can generate targets, the larger companies will ultimately follow,” he added.

If explorers do start producing large quantities of oil here over the next few years, how would Ireland benefit?

There have been calls from Socialist TD Joe Higgins and others for the Government to create a national exploration company so we can keep the profits from natural resources ourselves, but could the Government afford to put up to $175m (€126m) into a hole in the ground? Mr Rabbitte is adamant it can’t.

“We don’t have the investment capacity to do it ourselves but the tax-take is very significant,” he said when he made this week’s announcement.

Ireland’s tax regime for oil exploration is far more favourable to companies, compared with our closest neighbours. The lower tax has been controversial over the years but the Government insists it reflects the realities for the industry here.

Tax rates

If firms do succeed in getting oil ashore, they will pay a standard 25pc tax, with a maximum 40pc tax rate on the most profitable wells, a rate set in 2007. The rules are being reviewed by an all-party Oireachtas Committee.

In any case, it will be some time before companies, and Ireland, start to reap the benefits from the licences granted on Monday. Tullow struck oil off Africa in 2007 in conditions similar to here. From that point, it took four years before the field was producing oil commercially.

Monday’s announcement was the latest significant move in a calculated gamble that has been decades in the making. The next moves will happen far from the eyes of the public, in the boardrooms of The City and Wall Street as the winners raise capital to finance exploration, and in the murky and bitterly cold waters of the North Atlantic.

It will be some time before Ireland can report a staggering oil strike to match its near neighbours.

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