Our Oil and Gas

K-9

Fussgangerzone wrote: »

Toffee! (I was going to try a glib counter-point to "sigh" but I do like toffee. Who doesn't?) Yes I know. You know why I didn't bother adjusting for that? Becuase only Ireland lets a company recoup 100% of the set-up cost before profits are taxed. Didn't think I had to spell it out but hey-ho.

General Accounting principal is that Profit equals Revenue less Expenses.

Certain capital expenses are allowed as tax deductible, normal procedure.

Sometimes countries allow tax breaks, they aren't necessarily bad just because they are called tax breaks!

Considering that area was unexplored the opportunity cost may well cover it.

Scofflaw

Fussgangerzone wrote: »

Based on what exactly? Show me your figures, Captain Expert. Don't come over like you have all the facts, if you can't present them.

I don't have facts for Shell's running costs, but they're not needed, because what I was giving was an example calculation to help you understand calculation of profit. The actual value of the gas being pumped out will vary over time, as will the running costs.

Fussgangerzone wrote: »

Toffee! (I was going to try a glib counter-point to "sigh" but I do like toffee. Who doesn't?) Yes I know. You know why I didn't bother adjusting for that? Becuase only Ireland lets a company recoup 100% of the set-up cost before profits are taxed. Didn't think I had to spell it out but hey-ho.

But you didn't "adjust" for anything. You just claimed the profit margin on the field would be the same as the profit margin on the company's total operations.

Let's try this again. An oil company operates oil and gas fields. Those are the revenue sources from which most of the company's income is derived, because fields in and of themselves are profitable as an operation.

So if we take an oil company with two fields - call them Corrib A and Corrib B, the we have the following rough structure for the company and its income over the ten-year lifespan of the fields:

Unit Type|Unit|Setup Costs|Running Costs|Income|Profit Net of Tax|Profit Tax Rate|Tax Payable|Profit After Tax
Revenue Generator|Corrib A|2.5|0.5|7|4|25.00%|1|3
Revenue Generator|Corrib B|1.5|0.3|8|6.2|25.00%|1.55|4.65
||||||||
Cost Centre|Company HQ|0|7|7.65*|2.65|||

So the two fields each generate a certain amount of income over and above their setup and running costs. Those are the profits of the fields, and those are taxable under the Irish petroleum tax regime at 25% (actually, now 25-40%, but 25% under Burke's regime).

So the fields yield after-tax profits of €7.65bn - which is income that accrues to the company. Since the company has operating costs of €7bn, it makes a profit on its total operations of €0.65bn, which is derived from the fields.

Yes, those are entirely made-up figures to illustrate how the taxation works.

What you claimed as being the tax payable on the fields is the profits of the company, but the fields are taxable ventures in themselves - they're not taxed as part of the company's overall profits, but directly, as fields. Only after that tax is paid do the profits from the fields accrue to the company.

Fussgangerzone wrote: »

Neither do you, pal-o-mine, based on what you've typed on this thread. And I'm not asking you to take my advice (unless you're secretly running the country). Just pointing out that there our governments out there overseeing functional economies, who we should seek to emulate, and not just in terms of their fossil fuel policy.

But hey, if you want to play the "you don't know what you're talking about I don't have to justify anything to you" card, stump up some figures. Any figures.

There are governments with entirely different petroleum tax regimes, because they have entirely different petroleum prospects. We have a particularly friendly regime, because there has been little interest in drilling offshore Ireland over most of the last 30 years, and what little there has been has resulted in relatively little in the way of finds. It's unrealistic to start talking about a Norway-style tax regime when we don't have a hundredth of Norway's proven reserves.

cordially,
Scofflaw

Fussgangerzone

I understand what you're saying, but where we reach an impasse is that we have opposing opinions of how much money is out there, and what the profits will be.

We don't know what the operating costs and profits will be. I haven't been able to find a definition of "profits on a field" that determines what it means. I don't know which of the following are considered operating costs, for example: staffing the well, transport costs, the processing plant, maintenance, security, hr, admin, pr, etc. It makes sense for the operators to factor all of those things into their cost for that operation, and haven't seen anything that says they can't do that.

Profits on a well doesn't appear to be exclude any national costs of selling the fuel as far as I've seen.

I hope you're right and we do get a good chunk of money back, but for Shell, etc it makes financial sense to localise every cost they can to maximise their profits, and that's what I'd expect them to do. On that basis, I think it's reasonable that their Irish operation would no greatly exceed their global operation in terms of profitability.

For example, their costs for environmental considerations and wages will be a lot higher in Ireland than they would in Nigeria for example. It's places like that where their profits are highest, not in a country like Ireland.

(Sorry about the delayed response, it's not my intention to make a zombie)

Scofflaw

Fussgangerzone wrote: »

I understand what you're saying, but where we reach an impasse is that we have opposing opinions of how much money is out there, and what the profits will be.

We don't know what the operating costs and profits will be. I haven't been able to find a definition of "profits on a field" that determines what it means. I don't know which of the following are considered operating costs, for example: staffing the well, transport costs, the processing plant, maintenance, security, hr, admin, pr, etc. It makes sense for the operators to factor all of those things into their cost for that operation, and haven't seen anything that says they can't do that.

Profits on a well doesn't appear to be exclude any national costs of selling the fuel as far as I've seen.

I hope you're right and we do get a good chunk of money back, but for Shell, etc it makes financial sense to localise every cost they can to maximise their profits, and that's what I'd expect them to do. On that basis, I think it's reasonable that their Irish operation would no greatly exceed their global operation in terms of profitability.

For example, their costs for environmental considerations and wages will be a lot higher in Ireland than they would in Nigeria for example. It's places like that where their profits are highest, not in a country like Ireland.

(Sorry about the delayed response, it's not my intention to make a zombie)

You could ask the Revenue, who unsurprisingly go into very boring detail on the subject. For example, in the very exciting Notes for Guidance – Taxes Consolidation Act 1997 – 2008 Edition Part 24, which goes into a lot of detail on the ring-fencing of petroleum activities:

A number of definitions are connected. These are “petroleum activities” which include “petroleum extraction activities” which, in turn, include “initial treatment and storage”. The purpose of these definitions is to define the scope of the activities embraced by the “ring-fence” provisions. Broadly, these activities are any activities related to the exploration for and exploitation of petroleum resources in the State or a designated area (other than in areas covered by a Marathon licence) up to the point where crude oil is available for supply to a refinery.

The purpose of the “ring-fence” is to segregate all receipts and expenditure (and, therefore, all profits and losses) of petroleum activities from receipts and expenditure (and profits and losses) of other activities, so that the tax on profits from petroleum activities is not diluted by losses from other activities and losses incurred in relation to petroleum activities are not available for offset against profits of other activities for tax purposes.

The “ring-fence” isolates trading profits, non-trading profits or income, chargeable gains and the corresponding losses.

And so on. The rules are, in fact, pretty detailed - those are just the guidance notes - and intended to stop exactly the kind of setting off of other losses that people here are worried about.

People really should not mistake the level of detail found in press releases for the reality of taxation rules.

cordially,
Scofflaw

dynamick

Chapter V1 of the Finance Act 1992 explains how profits from oil and gas fields are defined for the purposes of the 25% tax rate. (later amendments have been made to close loopholes)

2009 UK: 350 applications for oil/gas exploration licences. 145 issued
2009 Ireland: 2 applications for oil/gas exploration licences. 1 issued.

The combination of the tax rates and the likelihood of finding resources in Irish waters is too low to attract interest. 23 exploratory wells have been drilled in the past 19 years since the 0% royalty/ 25% profit rate was set and only one was worth extracting. Each well costs around $50-100m to drill.

Other countries with zero rated royalties for oil or gas finds include France & Spain.

Einhard

I think this thread proves conclusively that people will always believe what they want to believe, regardless of the facts and evidence to the contrary, and will selectively mine data to support their argument, whilst completely ignoring everything that militates against them. It'd nearly put one off trying to engage in debate.

meglome

Einhard wrote: »

I think this thread proves conclusively that people will always believe what they want to believe, regardless of the facts and evidence to the contrary, and will selectively mine data to support their argument, whilst completely ignoring everything that militates against them. It'd nearly put one off trying to engage in debate.

Hardly a week passes without 'our' fish or gas or oil coming up. Bad enough when the exaggerations were in the 100's of billions but now we're into trillions. The thing that annoys me is it's often the same people who have already been shown with figures they are mistaken.

Sulmac

Read this article in today's Irish Times, pretty much saying the same as what has been said in this thread:

Could oil and gas be Ireland's big dig-out?

Sat, Mar 19, 2011

Ireland’s oil and gas deposits could make us rich, but finding them is hard, extracting the stuff is tricky and as for making money . . . don’t hold your breath, writes RONAN McGREEVY

FOUR YEARS AGO the Department of Natural Resources published Atlantic Ireland: An Exciting Petroleum Province, a report about the potential for fossil fuels in Ireland’s territorial waters.

Oil and gas are found in sedimentary basins on the ocean floor where the detritus of plants and animals decomposes over millions of years. Ireland is surrounded by such basins with potential for gas and oil. There is the vast Rockall Basin, 200km off the west coast; the Porcupine Basin, off the southwest; the Celtic Sea Basin, off the southeast coast; the Slyne Basin, where the Corrib gas field is located; the Donegal Basin, off the north coast; and the Kish Basin, off Dublin.

The report concluded that these basins alone could contain 10 billion barrels of oil. At current market prices that amounts to €850 billion worth of oil, about 10 times the size of the EU-IMF bailout fund. There is also an unquantifiable amount of gas. With such riches Ireland is a bit like a man whose home is about to be repossessed who cannot find his winning lottery ticket down the back of the sofa.

Fergus Cahill, the chairman of the Irish Offshore Operators’ Association, wrote to economists and opinion formers this week urging them not to forget oil and gas as a potential source of revenue. He notes, though, that we do not have the natural advantages of some other countries. “Historically, about one well in 25 drilled in Ireland is commercial,” he says. “It is one in two off the coast of Angola, one in five in Norwegian waters and about one in seven in British waters. We are in a worldwide competition for exploration.”

Providence Resources is Ireland’s largest indigenous exploration and production company. Its chief executive, Tony O’Reilly jnr, was in the US this week for Ireland Day at the New York Stock Exchange. He says many in the audience were dumbfounded that Ireland had such potential in traditional hydrocarbons. On the other hand, he admits that in 30 years exploring off the coast of Ireland “we haven’t made a penny out of it as a company”.

But he cites the spike in oil prices and new technology as game-changers. Later this year Providence is going to drill an appraisal well, to see if oil already found is available in commercial quantities, in an area called Barryroe in the Celtic Sea, where it believes it can find 60 million barrels of recoverable oil. Oil was first found there in 1990 but was not commercially viable because the price then was only $35 a barrel. It is going to be comfortably above that for the foreseeable future. The company hopes to make a “declaration of commerciality” this year, which would make it Ireland’s first commercially successful oil field.

A similar appraisal well will be drilled in Hook Head. Bigger still is Spanish Point, 200km out to sea off the west coast, where gas was first discovered in 1981. O’Reilly says it is another example of a large field that has become potentially commercially viable. “When it was first discovered, you might as well have found gas on the moon,” he says. “The infrastructure wasn’t there, the price wasn’t right or there wasn’t the technology. All those things that worked against us in the past are working favourably for us now. The market has moved to us.”

But the experience of the Corrib field, where gas was discovered in 1996 but has still not started to flow, shows that, even when hydrocarbons are found, processing them is another matter. Though O’Reilly maintains Corrib has never been an issue for his investors, Fergus Cahill of the operators’ association says it caused many in the industry to ask questions about Ireland’s planning system. Investors need certainty and “Corrib has not been a help”, says Cahill.

Outside the industry, others say there is a more general problem: Ireland’s low taxes on exploration, and how little the State stands to make from natural resources. Campaigners say the 25 per cent corporation tax on profits from the Corrib gas field are too low, amounting to a giveaway to exploration companies and too little income to the public. Many on the left want a state exploration company to be set up and a rate of taxation applied that is more than 50 per cent of profits.

Fine Gael has held out the possibility of the State taking an equity share in new finds but acknowledges that this would mean the State meeting some of the investment costs. Its election manifesto did not suggest changing the licensing terms. Labour, on the other hand, made the revision of the terms granted to Shell for the Corrib gas field a manifesto commitment, as part of a general review of the taxation regime for oil and gas. There is no mention of oil or gas in the programme for government.

The previous minister for energy Eamon Ryan upped the State’s take from 25 per cent to 40 per cent for the most profitable fields. By contrast Norway has a tax take of 78 per cent of profits, but it has proven reserves. O’Reilly says Norway was able to set up a state oil company, Statoil, and a sovereign wealth fund only after it had found substantial reserves of oil and gas. “They got that after private companies went and invested and had success. Over years the tax revenue came in and allowed them to underpin their sovereign wealth fund.”

Irish licensing terms are “absolutely fair” and competitive, according to Pat Shannon, professor of geology at UCD. “If they were overgenerous we would have every big company in the world in here. The fact that we don’t have companies queuing up means that they don’t see Ireland as a giveaway. To me that is the bottom line.”

Last year the government announced a new round of Atlantic licences, which will be the most comprehensive round to date. They cover an area of 250,000sq km and, crucially, allow exploration firms a two-year licence for the first time, so they can assess if their blocks are worth further exploration. The uptake will be known later this summer.

Along with offshore developments, there are two significant onshore prospects. Last month the government gave onshore petroleum licences to two companies, Lough Allen Natural Gas Company (Langco) and the Australia-based firm Tamboran Resources, to look for gas reserves in Lough Allen, Co Leitrim, where previous studies have found the equivalent of 9.4 trillion cubic sq ft of gas worth the equivalent of €108bn at today’s prices.

Langco’s chief executive, Martin Keeley, says the two companies will spend millions investigating the site’s prospects with no guarantee of success. Previous studies found gas, but in rock formations that made it hard to extract commercially. The companies are hopeful new technologies will make the gas extractable. A similar licence was given to look for gas in the Clare Basin, an area comprising Co Clare, north Kerry and west Limerick.

Pat Shannon says, “There is a huge element of luck. If nobody drills any wells we won’t find any oil, but if we have a reasonable number of wells, say five to 10 wells drilled every year for four or five years, I would be very disappointed if we did not find anything.”

© 2011 The Irish Times

xclw

http://www.youtube.com/watch?v=76VOnzXQMsU

watched this video today, had no idea we had so much natural resources until I saw it, think thats the problem though, this should be all over the papers and everyone should know about it!

Scofflaw

xclw wrote: »

http://www.youtube.com/watch?v=76VOnzXQMsU

watched this video today, had no idea we had so much natural resources until I saw it, think thats the problem though, this should be all over the papers and everyone should know about it!

It's a work of fiction, I'm afraid. The figure of €540bn was dreamed up by a journalist by the name of Prendiville, and has no solid foundation in fact whatsoever.

Norway's first strike was the Ekofisk field in 1969, to this day one of the largest fields ever discovered - that discovery essentially created the Norwegian oil industry. It's important to know that Ekofisk was found after only three years, and three years later the Norwegian government instituted Statoil, and began to require 50% state ownership. They didn't do their own exploration, and the original terms under which Philips Petroleum exploited their Ekofisk licenses were not dissimilar to ours.

The Norwegian model, then, was based on building an oil industry when they knew they had oil - and a lot of it - three years after exploration started. By comparison, Ireland's known commercial oil reserves are non-existent, and our known gas reserves are trivial in world terms, nearly 30 years after exploration started.

However, the State owns the resources, and licenses are not perpetual. Nobody is ever sold Irish resources - they remain the property of the State. Instead, they are given the right to explore and exploit in a specified area, for a specified period under specified conditions, conditions which, at the moment, are as generous as they have to be to encourage companies to do so - and which may not be generous enough, given that in the most recent licensing round, no oil major bothered to bid for Irish licenses.

If we find something along the lines of Ekofisk, then the game will change, and because we own the resources, we can change the rules pretty much as we like. Until then, this kind of wishful thinking is the equivalent of expecting mining companies to bid millions to prospect in your back garden, and about the only thing sillier than dreaming about it is taking it seriously.

cordially,
Scofflaw

Waestrel

Scofflaw wrote: »

It's a work of fiction, I'm afraid. The figure of €540bn was dreamed up by a journalist by the name of Prendiville, and has no solid foundation in fact whatsoever.

Norway's first strike was the Ekofisk field in 1969, to this day one of the largest fields ever discovered - that discovery essentially created the Norwegian oil industry. It's important to know that Ekofisk was found after only three years, and three years later the Norwegian government instituted Statoil, and began to require 50% state ownership. They didn't do their own exploration, and the original terms under which Philips Petroleum exploited their Ekofisk licenses were not dissimilar to ours.

The Norwegian model, then, was based on building an oil industry when they knew they had oil - and a lot of it - three years after exploration started. By comparison, Ireland's known commercial oil reserves are non-existent, and our known gas reserves are trivial in world terms, nearly 30 years after exploration started.

However, the State owns the resources, and licenses are not perpetual. Nobody is ever sold Irish resources - they remain the property of the State. Instead, they are given the right to explore and exploit in a specified area, for a specified period under specified conditions, conditions which, at the moment, are as generous as they have to be to encourage companies to do so - and which may not be generous enough, given that in the most recent licensing round, no oil major bothered to bid for Irish licenses.

If we find something along the lines of Ekofisk, then the game will change, and because we own the resources, we can change the rules pretty much as we like. Until then, this kind of wishful thinking is the equivalent of expecting mining companies to bid millions to prospect in your back garden, and about the only thing sillier than dreaming about it is taking it seriously.

cordially,
Scofflaw

Scofflaw to the rescue of reason again.