JANUARY 2008

Race to find pot of black gold
http://www.independent.ie/business/irish/race-to-find-pot-of-black-gold-1203513.html

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