July 3, 2011 by William Hederman
The tax write-offs under Ireland’s licensing terms for oil and gas are so generous, oil companies could end up paying the exchequer as little as 7% of the revenue from Irish gas fields. This shocking figure is extrapolated from information provided by Brian O’Cathain, former head of the Corrib Gas project. He also predicted Corrib would not now pay any tax. By William Hederman
[ The information presented in this article formed the basis for part of the Think Tank column I wrote for the Sunday Times, July 3rd, 2011 ]
“The State stands to gain at least 25% of profits from Corrib and the sooner the gas is brought ashore, the sooner that money can be used to fund essential services.” Comments such as this one by Fine Gael’s Leo Varadkar [1] last March (2011) perpetuate one of the great misconceptions about oil and gas exploration in Ireland: namely, that the Irish exchequer will earn a healthy share of the revenue from gas or oil fields without having to share in the cost of finding or extracting the resource.
Sadly, the reality is very different.
An embarrassment of tax write-offs
It is crucial to note that the 25% figure is a tax rate applied to the profits a company makes from the sale of Irish oil or gas (see also footnote [2] below). Or rather, it applies to the profits the company declares to the Irish government. Oil companies are entitled to a 100% tax write-off of all exploration and developments costs extending back to 25 years before the field goes into production [3]. These include the costs of all the other unsuccessful wells the company has drilled in Irish waters; the cost of dismantling the project; and costs incurred in other countries. They can even include the legal costs associated with having stubborn farmers committed to prison.
Many readers will already know that Ireland’s 25% tax rate for oil and gas extraction languishes at the bottom of the international league table, as shown in this graph, from a study by international petroleum expert Daniel Johnston [4].
However, the trouble doesn’t end there. The tax write-offs mentioned above mean that our effective rate is much lower than 25%. But how much lower? In other words, after the oil company’s accountants have finished with the books for a gas or oil project, how much profit will there be left to tax?
To date, no oil or gas has been extracted from Irish waters under the 1992 or 2007 licensing terms, so we have no concrete example. However, projections for the Corrib Gas project give us an insight into what this tax take might be. Let’s start by looking at the Government’s prediction. In 2008, Mayo TD Michael Ring (Fine Gael) asked the minister then in charge of the project, Eamon Ryan, about the value of Corrib. In a written reply on 24th September 2008 [5], the minister said the 800-900 billion cubic feet of gas estimated to be in the field was worth €9.5 billion and that the tax revenue from the field “would be in the order of €1.7 billion”. That represents a State ‘take’ of just under 18%.
Private study for Shell
However, it is fair to assume that the civil servants at the Department of Energy and Natural Resources who wrote that parliamentary answer would be inclined to make the most optimistic prediction possible about tax take, considering the controversy around Ireland’s management of its resources. On the other hand, a projection for Corrib made by Shell or by consultants on its behalf would likely be much closer to the truth, especially if it was confidential. A private review by industry experts would factor in all the costs, write-offs, loopholes and tricks that Shell’s skilled accountants could avail of.
As it happens, just such a confidential study of the Corrib project was carried out for Shell by globally respected energy consultants Wood Mackenzie in February 2003. The study is not publicly available, but figures from the study have been emailed to me by the man who was in charge of the Corrib project until 2002. Brian O’Cathain was Managing Director of Enterprise Energy Ireland before the company was bought by Shell in April 2002.
O’Cathain was speaking at a public debate at the IFI cinema in Dublin on December 4th, 2010, which I attended (the debate was held to coincide with the documentary film, The Pipe, which was showing at the cinema). During the debate, at which O’Cathain was on the panel, he launched an unusual attack on those campaigning against the proposed inland refinery and high pressure pipeline in north Mayo, accusing them of depriving the exchequer of millions of euro in tax.
He said: “I have in my pack here a calculation by Wood Mackenzie of what Corrib would have paid if it had gone ahead [when it was supposed to] and I’m telling you … it would have paid €50 or €60 million per annum … The overall tax bill that Corrib would have paid if it had gone ahead when it was supposed to go ahead would be about €500 million.”
This figure sounded very low – less than a third of the Government figure from 2008. I emailed O’Cathain a few days later, asking him for a copy of the study. He refused, but he emailed me the following information. Astonishingly, it turned out the tax bill was even lower than what he had cited at the debate:
“Woodmac of Feb 2003 show Corrib coming on stream in 2005 at 270 million standard cubic feet per day (“mmscf/d”) (annual average for part year) rising to 310 mmscf/d in 2006. Tax is first paid in 2008, and is about €40mm per annum for the 1st five years, declining with production thereafter. Over the full field life it pays €340 million in tax.” [6]
The elusive ‘Woodmac’ study
That tax figure of €340 million is roughly one-fifth the size of the Government estimate made five years later. Of course, the price of gas increased during those five years between 2003 and 2008, so the value of the field – or gross revenue – in Wood Mackenzie’s projections would have been lower than €9.5 billion. But how much lower?
I asked O’Cathain several times what the 2003 study’s estimate was for gross revenue from Corrib. He refused to tell me. In other words, he would not reveal how much Wood Mackenzie had predicted in 2003 that Shell would sell the gas to Bord Gais for. I needed this figure in order to determine what share of the revenue would return to the exchequer. [7]
Despite contacting numerous sources, it was not possible to get hold of a copy of the study. Wood Mackenzie confirmed the existence of the report, but would not give me any figures from it. [8]
The only alternative was to make a rough calculation, based on the price of gas in 2003. I asked Bord Gais about price changes during that period and was told that the price at which Shell would have sold gas from Corrib approximately doubled between 2003 and 2008.[9] This suggests the Corrib field was worth around €5 billion at the time of the Wood Mackenzie study [10]. On this basis, the figures indicate that, had Corrib Gas come on stream on schedule in 2005, roughly 7% of the revenue from the sale of the gas would have returned to the exchequer in tax. [11]
Remember that what we’re talking about here is the state’s percentage share in the earnings from the sale of gas from an Irish gas field (and that Irish consumers would be paying for that gas at the full international market price).
‘Corrib will never pay tax’
Finally, during the debate referred to above, Brian O’Cathain predicted that Corrib would not now pay any tax at all. His reasoning for this was that the long delays in bringing the gas on stream had resulted in yet more costs that Shell could write off against tax, meaning they would never declare a profit. His analysis was that protesters – and not Ireland’s bizarre licensing terms – were to blame for this. (Audio file: Brian O’Cathain: ‘Corrib will never pay tax’). [12]
So, depending on who you believe, the State’s “take” from a gas field in Irish waters, licensed under the 1992 terms, would be either 18% or 7% of the field’s value. The 18% figure comes from the Department of Energy and Natural Resources. The 7% figure is a rough estimate, extrapolated from figures in Wood Mackenzie’s unpublished 2003 study of the Corrib Gas project.
POSTSCRIPT
I acknowledge that the method used above to arrive at the 7% figure for projected tax take is not precise. However, I am confident that it identifies Wood Mackenzie’s projection for tax take as a percentage of gross revenue to within a couple of percentage points. Information relating to the oil and gas industry is difficult to obtain. My hope is that publishing this article will prompt others to investigate this further or to pass on information. I would be grateful to anyone who can provide more clarity. In particular, it would be very helpful to obtain a copy of Wood Mackenzie’s 2003 study or the relevant figures from it. Leave a comment below (comments are moderated before being published, so if you want to leave a private comment for me, just mention that you don’t want it published) or email: william AT irishoilandgas DOT com
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FOOTNOTES
1. This comment by Fine Gael’s Leo Varadkar was made on March 1st, 2011. This was after the 2011 general election but before the formation of the new Fine Gael/Labour government. It had just emerged that then acting Minister for Energy, Pat Carey (Fianna Fáil), had signed, on the day of the general election, key consents for the last section of the Corrib gas pipeline. Carey’s move drew much criticism from campaigners and politicians. At the time, Varadkar was regarded as a likely candidate to become the new Minister for Communications, Energy and Natural Resources (the post ultimately went to Pat Rabbitte). Varadkar defended Pat Carey’s move and made the comment quoted at the start of this article.
2. Following changes introduced in 2007 by minister Eamon Ryan, some oil and gas fields may be subject to an additional Profit Resource Rent Tax (PRRT) of between 5% and 15%, levied on post-tax profits. This only applies to licences issued after 2007. Even if the gas or oil is found in 2015 or 2020, PRRT will not apply if the original exploration licence was granted prior to 2007. PRRT is subject to a profit ratio which is “defined as the cumulative after tax profits on the specific field divided by the cumulative level of capital investment on the specific field” (‘Global Oil and Gas Tax Guide 2009′, Ernst and Young, p. 124).
3. This is something economist and journalist Colm Rapple has been highlighting for years. See the articles in this section of his blog: Offshore, the great oil and gas giveaway.
4. Table is from: Johnston, D. (2008). ‘Changing fiscal landscape’, Journal of World Energy Law and Business, 1(1), pp.31-54. As can be seen from the table, in 38 of the 45 fiscal systems surveyed, government take was greater than 50%, nearly twice that of Ireland, while more than half of the fiscal systems (28) resulted in government take greater than 60% – more than twice the rate of Ireland.
5. Parliamentary Question No 152, by Michael Ring TD to Minister for Communications, Energy and Natural Resources, Eamon Ryan. For WRITTEN answer on Wednesday, 24th September, 2008.
6. “Woodmac” is a common abbreviation for Wood Mackenzie.
7. O’Cathain did not give a reason for refusing to tell me the figure for gross revenue. I assume it was because, having revealed the projected tax figure of €340 million as part of his argument about protesters delaying the project, he did not want to reveal how big the gross revenue figure was, as that would have exposed just how little tax Corrib would have paid as a proportion of that gross revenue.
8. Wood Mackenzie even asked me to refrain from making any reference to figures from the 2003 study, on the basis that it was a private study and was now out of date.
9. The price of gas, it transpires, is difficult to quantify. There are many variables. I asked Bord Gais what the increase was between 2003 and 2008 in the price of the gas that would have come from the Corrib field. I was told that it roughly doubled. I would be delighted to hear from anyone who can offer more clarification. Leave a comment below or email: william AT irishoilandgas DOT com
(It may be that Brian O’Cathain or Shell will respond to this article by providing the real figure from the Wood Mackenzie report and that the figure will show that the tax take is not 7%, but is 10% or 12%. If that happens, it is still a shockingly low figure, considering the gas comes from gas fields in Irish waters. However, I suspect that the actual figure in the report is even lower than 7%.)
10. If and when Corrib Gas comes on stream, Bord Gais will be buying the gas at the international market rate, as it now buys gas from the North Sea. See also this post.
11. Remember that this very low projection for tax take from Corrib is not a symptom of the delays to the project caused by protests and planning objections. This was a projection issued at the start of 2003, based on an assumption that the gas would start flowing in 2005. As O’Cathain put it at the debate, this is “the overall tax bill that Corrib would have paid if it had gone ahead when it was supposed to go ahead”.
12. This is what Brian O’Cathain said about Corrib never paying tax: “The problem with Corrib is that, because of the very long delay… the original budget for the project was $650 million, I think it was. Now Shell and their partners have spent over $2 billion. What that means is that … the project will never go into profit. The impact of that is that Corrib will never pay tax.”
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