Written answers

Thursday, 26 June 2014

Department of Communications, Energy and Natural Resources

Oil and Gas Exploration

Photo of Michael ColreavyMichael Colreavy (Sligo-North Leitrim, Sinn Fein)
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125. To ask the Minister for Communications, Energy and Natural Resources the potential tax returns to the State if the proposed changes to future oil and gas contracts were applied to existing contracts; and if he will make a statement on the matter. [27631/14]

Photo of Pat RabbittePat Rabbitte (Minister, Department of Communications, Energy and Natural Resources; Dublin South West, Labour)
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Firstly I should make clear that other than in the case of the 1959 agreement relating to the Kinsale Head gas field, the fiscal regime applying to oil and gas production in Ireland is set down in the Finance Acts and is not a matter of individual contracts. In March 2014 international sectoral experts Wood Mackenzie were engaged to provide independent expert advice on the “fitness-for-purpose” of Ireland’s fiscal terms, such advice to focus on what level of fiscal gain is achievable for the State and its citizens and, equally important, on the mechanisms best suited to produce such a gain.

Having received and considered Wood Mackenzie’s comprehensive and detailed report I sought agreement of the Government that Ireland’s oil and gas fiscal terms should be revised along the lines recommended. The Wood Mackenzie report was published on my Department’s website on 18 June 2014. The principal recommendations made by Wood Mackenzie are as follows:

- For now Ireland should maintain a concession system, with industry rather than the State bearing the risk associated with investing in exploration;

- Going forward a form of production profit tax should continue to apply in Ireland, but for discoveries made under future licences the form of this tax should be revised;

- The tax should be charged on a field-by-field basis with the rate varying according to the profitability of the field and charged on each field’s net profits;

- That the revised tax should include a minimum payment at a rate of 5% which would function like a royalty and would result in the State receiving a share of revenue in every year that a field is selling production;

- That the revised tax rates should be higher than the Profit Resource Rent Tax currently in place, thereby ensuring a higher share for the State from the most profitable fields. This would result in a maximum rate of 55% applying in the case of new licences, compared with a maximum rate of 40% under the current fiscal regime;

- That the corporation tax rate applying to petroleum production should remain at 25%; and

- there should be no retroactive change to the fiscal terms applying to existing exploration authorisations.

These recommendations flow from a comparative analysis between Ireland and nine other comparable hydrocarbon producing nations such as Newfoundland and Labrador, New Zealand, Spain and South Africa amongst others.

In setting out Government policy on this issue, it is my intention to communicate a clear message in relation to the stability of Ireland’s fiscal regime for the oil and gas exploration sector. For existing licences no changes are proposed and this is also consistent with the recommendation of the Joint Oireachtas Committee. For future prospective licence holders a clear regime is being set out and the rationale for that regime has been explained. This should further engender industry confidence in the stability and predictability of Ireland’s oil and gas fiscal terms and allow the industry to focus on effective and timely exploration effort.

Ireland has three producing gas fields namely the Kinsale, Ballycotton and Seven Heads fields off the coast of Cork. There is no commercial production of oil in the Irish offshore. The revenue generated for the State from the production from these gas fields is received in the form of rental fees, royalty payments (with the exception of the Seven Heads Gas field) and corporation tax. Profits from these three gas fields are taxed at a corporation rate of 25%. The direct financial return to the State from the Corrib gas field, which is expected to come into production in 2015, will be through the 25% corporation tax on profits.

The amount paid in taxation in respect of Ireland's producing gas fields is a matter between the companies concerned and the Revenue Commissioners and not one in respect of which I have a function. I can observe, however, that as one of the principal factors impacting on the level of taxable profits from a producing gas field is the wholesale price of gas, which is subject to significant movement over time, that attempting to accurately estimate future profitability over the life of any gas field, would be a challenging exercise.

In relation to the decision to revise the fiscal regime that will apply in the case of future exploration authorisations, the decision to revise the fiscal regime should be understood as a decision taken in the circumstances that currently prevail and should not be construed as suggesting that the regime now being introduced would have been appropriate at any particular juncture in the past. This in turn would suggest that a hypothetical comparison would be of no value


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