It may be a risky business but, with
oil prices soaring, there are plenty of companies willing
to take a chance on hitting the big Irish offshore
jackpot. As the pace of exploration speeds up, it is only
a matter of time before somebody strikes it lucky. Pat
Boyle looks at the three big players currently dominating
the search for oil and gas off our coastline.
By Pat Boyle
Thursday October 25 2007
The hunt for offshore resources of oil or gas has been
underway now for almost 40 years and in that time we have
produced just two viable gas fields, the Marathon-owned
Kinsale Head field, which lies off the Cork coast, and
the Shell operated Corrib field to the west of Mayo.
It is not a very encouraging record and, from an oil
industry perspective, it verges on the disastrous. In
all, some 170 wells have been drilled at a cost of around
2.5bn. For Irish explorers, however, it seems that
hope springs eternal. Despite the numerous fortunes which
have been wasted on this fruitless search, there seems to
be no shortage of willing participants. Looking at the
current crop of hopefuls involved in the Irish offshore,
it is obvious that the lure of black gold is as strong as
ever, as the poor record of previous exploration work has
failed to dissuade those who believe that an oil or gas
bounty lies beneath our seas.
It is a risky business. Since the turn of the decade
three small exploration companies have led the
rejuvenation of drilling in the Irish offshore, one of
them paying a very heavy price in the process.
Steve Remp's company, Ramco, made a killing back in
2000 when he sold Ramco's interest in a giant oil field
it had discovered in the Caspian Sea, offshore
Azerbaijan.
With 150m burning a hole in his denims, Remp
cast around for likely projects, settling on what was
supposed to be the relatively safe bet of Seven Heads, a
small gas field lying close to the Kinsale Head field.
Esso had already spent $100m appraising the discovery,
before relinquishing it as a lost cause in the late
1980s. To put that figure in perspective, if $100m had
been invested in Irish property instead, it would now be
worth close on 3bn.
Demand
The hard-headed decision by Esso did not put Ramco
off. The US multinational giant had walked away from
Seven Heads at a time when gas prices were on the floor
and when there was little demand for additional supplies
in Ireland. By 2000, this picture had changed
dramatically and, as demand had soared, Ramco set about
developing the field, drilling fresh appraisal wells and
signing contracts to deliver gas from the field. As
things turned out, Seven Heads failed to live up to the
targets set by Ramco and the company was almost
bankrupted by the experience.
The strange thing is that even this bitter experience
was not enough to put Ramco off for good and it still has
licence interests in the Irish offshore.
Of the other two leading the fresh charge, Providence
has the longest pedigree, tracing its ancestry back to
the old Atlantic Resources, the company which famously
hit oil on block 49/9 back in 1983, saw its share price
soar from pennies to £10 and then all the way back when
initial results proved illusory.
Providence is hopeful that its own drilling results
will not prove as illusory. While its recent Hook Head
exploration well, which hit a 75ft oil column, was not
flow tested, it still ranks as a significant discovery.
Advances in oil field technology mean an operator can
gauge more information during drilling today than a
couple of decades ago and as things stand, the 10,000
barrels a day which the 49/9 well flowed in 1983, is
still a record for the Irish offshore.
Even without testing its well, there is considerable
confidence that Hook Head will prove commercial and
current estimates put recoverable reserves at about 63
million barrels, a medium-sized find by North Sea
standards, but huge in an Irish context.
This is only the thin edge of the Providence wedge.
Its real hopes for an El Dorado lie a few hundreds miles
away, off the west coast. Here Providence has assembled
an impressive package which includes the giant Dunquin
prospect. Standing out like a sore thumb on seismic
charts, this giant structure could rival the huge
Forties' field in the North Sea, a structure that even
managed to stand out in the primitive seismic surveys
shot back in the late 1960s.
Dunquin attracted the interest of Exxon-Mobil, who
will carry out an exploration programme, including
drilling, in return for an 80pc stake in the block.
Wildcat
While Dunquin offers unlimited potential, it is very
much a wildcat and a world away from the Spanish Point
prospect to the north. Discovered by a Phillips
Petroleum-led consortium in 1981, it is reckoned to
contain at least 1.4 trillion cubic ft of gas and over
100 million barrels of oil. At the time of its discovery,
Spanish Point was deemed too small to be commercially
viable -- there was no demand for the gas and on top of
that, a lack of infrastructure meant the cost of
developing the find would have been prohibitive. Today,
however, the economics are much more attractive and
another well will be sunk on the field in 2008, with the
objective of proving up more reserves and getting the
ball rolling on a development.
Providence has other strings to its bow, including
three discoveries in the Celtic Sea, the Dunmore and
Helvick oil fields and the Ardmore gas find. It also
controls another old Phillips oil discovery called
Burren, located in the Porcupine Basin off the west
coast.
Put together, these represent an impressive package of
assets and it seems only a matter of time before one or
more are actually producing oil or gas.
The third major player in the reborn Irish offshore is
Island Oil & Gas, a company which has just completed
a very successful drilling season. Under the leadership
of Paul Griffiths, an old oil industry warrior, Island
has amassed a portfolio of assets which have produced
quick results and look like having a reasonable chance of
delivering on his stated ambition of building a gas
business in the Irish sector of the Celtic Sea.
Its two-well drilling programme this year culminated
in the company awarding a contract to Pegasus
International UK Ltd, for front-end engineering work
ahead of the joint development of the Old Head of Kinsale
and Schull gas fields in the Celtic Sea, offshore
Ireland. The studies will commence immediately ahead of
plans to bring the fields on stream during 2009.
Griffiths is driving things forward rapidly and by the
end of this year he will start talks with suppliers and
offshore service contractors on field development plans.
These plans will form the basis for a declaration of
commerciality and a development plan will then be
submitted for government approval.
According to drilling results from the two wells
drilled this summer, the Old Head of Kinsale and Schull
fields potentially contain in the range of 80 to 120 bcf
of recoverable gas.
In addition to plans for the joint development of the
two fields, Island is investigating gas storage
opportunities, an element of the project which offers
long term security, both in terms of a business for
Island and gas supplies to the country -- Ireland
currently has no strategic gas reserve.
One thing which all of these companies share is that
their various projects fall under the generous licensing
terms put in place over a decade ago by then minister Ray
Burke. Under this regime, all royalty payments were
scrapped and the only guaranteed revenue to the State
comes in the shape of 25pc corporation tax on profits --
after the massive costs of finding and developing the
fields have been recovered.
But it is not those generous terms which have sparked
the fresh interest in drilling offshore Ireland. The
Burke terms in themselves failed to generate much in the
way of exploration -- Corrib being the notable exception
-- and instead, it has taken a huge rise in the value of
oil and gas reserves to spark the interest of the oil
industry.
The question now is will the tougher terms introduced
by Eamon Ryan have a dampening effect on activity
offshore. Fergus Cahill of the Irish Offshore Operators
Association (IOOA) believes that while any increase in
taxation lowers the value of acreage to the industry,
most companies would be prefer to have a hugely
profitable field and pay the higher rate of 40pc tax,
rather than scratching around with small uncommercial
fields.
So, while the tax-take to the State is higher, the
overall terms remain generous, although they still lack
some of the incentives offered by Norway, one of our
biggest rivals in the race to secure exploration
investment. Not only is Norwegian territory proven to be
more prospective than the Irish offshore, the Norwegians
also refund 75pc of the cost of a failed exploration
well.
It is the bounty from its offshore resources which
allows the Norwegians to be so generous and, regardless
of the outcome of this latest exploration round, it will
be some time before the Irish energy minister can afford
such largesse.
Exchequer to get larger slice of oil and gas cash
from new license deals
Earlier this month, Energy Minister Eamon Ryan
announced the terms for a new oil & gas exploration
licensing round in the Porcupine Basin.
Mr Ryan said that over the last decade our dependence
on imported oil and gas has grown to over 85pc.
"This reliance on imported fuels from areas of
the world that are geopolitically volatile, contributes
to price instability and vulnerability in Ireland. New
domestic sources of oil and gas would ease this
pressure.''
As we approach a peak in oil finds, Ireland has become
much more attractive to oil and gas companies.
The change in the tax regime will apply to new finds
and any profitable fields will pay up to a maximum of
40pc in taxation to the Exchequer, a top rate increase of
15pc for the oil and gas companies involved.
"Ireland's oil and gas is a resource of the
people. I want to ensure that our waters are fully
explored and that the State gets a proper return,"
he said.
In advance of decisions on the award of licenses, a
comprehensive Strategic Environmental Assessment (SEA) of
the region is being undertaken by external environmental
experts ERT and Aqua Fact, and the post-consultation
report will be available shortly.
Inform
The SEA will inform the industry of the environmental
characteristics and sensitivities of the Basin, and will
make recommendations as to how these should be addressed.
Applications for Frontier Exploration Licenses
covering blocks in the round may be submitted up to noon
on 18 December 2007.
The round will provide that applications may be made
for a maximum of three blocks in the north of the
Porcupine Basin and for a maximum of six blocks in the
south of the basin.
The next exploration licensing round will take place
in early 2009 in the Rockall Basin.
New licensing terms, including a profit resource rent
tax, will apply to any finds made under this exploration
round.
This new tax will be in addition to the 25pc corporate
tax rate currently employed. It will operate on a graded
basis of profitability as follows:
- An additional 15pc tax in respect of fields where
the profit ratio exceeds 4.5
- An additional 10pc where the profit ratio is between
3.0 and 4.5
- An additional 5pc where the profit ratio is between
1.5 and 3.0
- No change where the profit ratio is less than 1.5
On our most profitable fields, therefore, the return
to the State will increase from 25pc to 40pc.
- Pat Boyle
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