August 25, 2008

Gas Firms Feel Lure of Ireland Tax Structure Makes Area More Attractive

By Jonathan Saul

Oil and natural gas companies are stepping up exploration efforts off Ireland's coast, lured by an attractive tax regime and higher energy prices.

Offshore projects in Ireland had been overlooked by many companies due to high costs and a lack of commercial finds since drilling first began in the 1970s.

But prospectors like the U.S. company Exxon Mobil and StatoilHydro of Norway now hope to strike it lucky in Ireland as it gets harder to access new fields elsewhere.

A study commissioned by the Irish government said early data showed potential reserves of 10 billion barrels of oil off Ireland's Atlantic coast.

Ireland remains vulnerable to global supply disruptions because it is at the end of pipelines in Europe. It has tried to woo oil companies with financial incentives and a recent series of offshore licensing rounds.

"The majors are looking for new places to explore and the favorable tax rate in Ireland" makes it worth a bet, Andrew Harwood, an energy analyst at Wood Mackenzie, said.

Exploration companies pay a 25 percent tax in Ireland, which rises to 40 percent for the most profitable finds - lower than the 50 percent rate in the United Kingdom, 78 percent in Norway and over 80 percent levied in other regions.

The growing momentum is expected to result in offshore investment in Ireland of at least $250 million this year, according to the industry body, the Irish Offshore Operators' Association. While small compared to elsewhere, it will be the highest level since 1978.

"High oil and gas prices, improved deepwater technology and a safe political environment means that we can expect higher drilling activity in the future," Job Langbroek, an analyst for Davy, wrote in an investor note.

Prospectors are taking a longer-term view.

"The short-term nature of the spiking is not something that you could plan your exploration strategy around," said John Conroy, license and operations manager with StatoilHydro's Irish unit, which has a number of offshore projects.

Exploration activity in Ireland has remained relatively slow with 177 wells drilled to date, compared with around 4,000 in Britain and around 1,200 in Norway.

While much of the drilling has centered around the Celtic Sea off southern Ireland, no oil has been produced yet. Gas production has totaled a modest 1.7 trillion cubic feet, or 48.1 billion cubic meters.

Gas from the area had supplied the bulk of Ireland's needs but fields are now nearly depleted.

Smaller Irish exploration companies like Providence Resources and Island Oil and Gas want to exploit firmer oil prices, better seismic surveying data and advances in drilling technology to develop older discoveries in the Celtic Sea and tie them to existing facilities.

The shallow water and existing infrastructure has made it easier to get production going much more quickly.

But the biggest potential returns are seen in the area known as the Atlantic margin on Ireland's west coast, characterized by harsh conditions and water deeper than 2,000 meters, or 6,600 feet.

Drilling there is much more expensive due to the need for support vessels, with an oil well estimated to cost $80 million to $100 million.

"There is huge potential reward off the west coast of Ireland, but obviously it is higher risk," said Tony O'Reilly Jr., chief executive of Providence Resources, which has joined with Exxon Mobil on projects in the area.

The only commercial discovery made in the area is the Corrib natural gas field, found in 1996 and expected to begin producing in 2009.

It is hoped Corrib, which is operated by Royal Dutch Shell with estimated reserves of around 1 trillion cubic feet of natural gas, will replace the Celtic Sea fields and help spur drilling in the Atlantic margin.

Patrick Shannon, a professor of geology at University College Dublin, said while no oil discoveries had yet been made around the Atlantic margin, tests showed it might lack sulfur, making it easy to refine and more valuable.

"Everybody wants a Brent crude or a West Texas type crude, and the Irish crude oil - certainly in the Atlantic margin - is of that quality," Shannon said. "We know there is a petroleum system, we don't know its extent."

This year Shell and StatoilHydro each drilled an exploration well in the Atlantic margin, and were awaiting results.

"It really does depend on near-term exploration success whether people remain interested in Ireland's Atlantic acreage," said Harwood of Wood Mackenzie. "There needs to be some kind of payback."

Originally published by Reuters.

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