Favourable outlook for Irish oil and gas sector, says new PwC survey

The outlook for the Irish oil and gas industry is positive. PwC’s inaugural Oil and Gas Survey, launched today, reveals that, despite a number of challenges, confidence in the future potential of the Irish oil and gas industry is high. Based on the responses from the participants in our survey, the overall level of investment in the sector over the next three years is expected to be at least €1.5 billion. However, future exploration levels will be influenced by the level of commercial discoveries, a factor identified by over 80% of respondents. Costs of exploration, streamlining licensing opportunities and maintaining or enhancing the fiscal regime are key priorities for the industry.

Key findings in the survey include:
  • Reflecting the recent international interest in Irish waters, over half (54%) of survey participants rated the overall outlook for the Irish oil and gas sector to be favourable. However, 13% were unfavourable in their outlook for the sector
  • An overwhelming majority (80%) are optimistic about the level of petroleum yet to be discovered in Ireland, of which a quarter (28%) expressed a high level of optimism.
  • According to the survey, the top three factors that will determine the level of petroleum exploration in Ireland in the next few years are commercial discoveries in Irish waters (83%); the fiscal terms (63%) on offer in Ireland and an improved planning and regulatory regime (43%). Just under a quarter (23%) said that the availability of quality seismic data and coverage is also a key influencer. A key message to emerge was the strong desire of the industry for stability and certainty in the fiscal terms that emerge from the on-going review of fiscal terms for the Irish oil and gas industry.
  • Respondents felt that the events at Corrib have had a major impact on the development of the industry to date, with 90% of respondents saying that it has done serious or significant damage to the international reputation of the Irish oil and gas industry. However, the majority (82%) felt that the damage caused can ultimately be repaired with appropriate actions from government
  • A high degree of interest was expressed in the upcoming licensing round. Approximately 36% of respondents said that they will definitely be participating in this round, with a further 32% still undecided. Greatest interest shown in the North and South Porcupine Basins and the Rockall Basin.
  • Some respondents expressed concern at the length of time it was taking to launch the 2014 Round, with the original opening date already missed. The Government has indicated that the Round will remain open until approximately September 2015 (i.e. a 15 month window) but 44% of respondents felt that the Round should stay open for 6 months or less while approximately 18% felt that a 9 month window was appropriate. Concern was expressed at the length of time the process was taking to begin. It was commented that the Irish government needs to “strike while the iron is hot” and there was a sense that momentum in the industry could be lost if acreage is not opened up to new players while interest remains high. On a related matter, it was noted that the licensing regime could be more responsive to the needs of the industry and that the process for converting licensing options to frontier exploration licences was too slow and requires review.
  • In terms of plans to manage their assets over the next three years, half (50%) of respondents said that they would undertake farm-out arrangements, while over a third (39%) said they would undertake a drilling programme and over a fifth (22%) said they would undertake a seismic programme.
  • There was a general consensus amongst respondents that the Irish Government has a key role to play in promoting the industry to international companies and engaging with local communities (identified by 38% of foreign headquartered respondents). Maintaining or enhancing the existing fiscal terms was also noted as a very important area by both Irish headquartered and foreign headquartered companies.

Speaking at the survey launch, David Horgan, Director, Petrel Resources, said: “Exploration begins again every decade. Ireland has experienced 40 years of near-misses. We can do nothing about past mistakes. But we can market our strengths and manage our weaknesses. The targets are not world-class. They are risky. But with new thinking and vision they will work. We must seize the opportunity without delay!”

Commenting on the survey results, Ronan MacNioclais, Partner, PwC Oil and Gas Practice, said:

“The survey highlights the fact that, while the industry is generally optimistic about the overall outlook for oil and gas exploration and production in Ireland, we are still seen as a high risk location for investment. This is due to a combination of high exploration costs in often difficult areas offshore and the lack of a domestic supply base to the industry.”

Ronan MacNioclais continued:

“The potential investments indicated by respondents are very significant and will obviously deliver direct and indirect economic benefits to the Irish State. They also serve to give an insight into the level of economic benefits which could potentially be generated if some of those exploration efforts were successful and led to oil/gas-producing wells. There is a good level of interest at the moment in exploring Irish waters and we need to ensure that the proper environment is fostered to enable the State to seize this opportunity which is on its doorstep. For example, a strong appetite exists amongst Irish head-quartered and foreign head-quartered respondents for more acreage and licensing opportunities to be made available. A good degree of interest exists in the 2014 licensing round, although timely launch and an appropriate window period are critical for success.”

The survey highlighted a strong desire exists for long term stability and certainty to result from the current review of Ireland’s fiscal terms. As the initial investment can be significant, it is important that potential investors have enough information and a sufficient degree of certainty in evaluating potential opportunities. Ireland is in competition with many other locations and it is important that potential investment is not lost due to uncertainty or a perceived lack of stability.

Other key findings include:

Ireland as a location for investment

Nearly two-thirds (64%) of respondents said Ireland compared favourably in terms of prospectively to other emerging petroleum markets, such as Spain, Morocco, Portugal and Brazil. This demonstrates that Ireland is “at the races” in the hunt for exploration investment.

Respondents were also asked what are the key factors that will be important to maintain or increase Ireland’s attractiveness as a location for oil and gas exploration. For the Irish head-quartered respondents, the key factors noted (in order of priority) were the maintenance or enhancement of existing fiscal terms, the reform of the regulatory and planning processes, the availability of licensing opportunities and the availability of finance. For foreign head-quartered respondents, the key factors noted (in order of priority) were the maintenance or enhancement of existing fiscal terms, the availability of licensing opportunities, the reform of the regulatory and planning processes and the availability of finance.

Respondents also felt that the government has a key role to play in attracting investment to the industry. The importance of the outcome of the review of fiscal terms is highlighted by the fact that 88% of foreign headquartered respondents and 83% of Irish headquartered respondents identified the need to maintain or enhance the current fiscal terms as being critical to making Ireland attractive for investment. Other key roles identified for government include making available all possible seismic data, promoting the industry to international players and to local communities, making available further acreage and licensing opportunities, and streamlining the regulatory and planning processes.

The lack of commercial discoveries was identified by 72% of respondents as one of the main hurdles going forward to the development of the Irish oil and gas industry. More attractive opportunities in other countries (identified by 54% of respondents) and the costs of exploring in Irish waters (identified by 39% of respondents) will also be important factors. Addressing the reputational damage arising from the events at Corrib (referred to below) will also be critical.

Historic Impediments to the development of the industry

Based on the results of this survey, there can be no doubt that the events at Corrib have caused considerable damage to Ireland’s reputation as a location for investment. The manner in which the issues there arose and were handled has created a perception internationally that Ireland is a riskier place to do business, with approximately 74% of respondents saying that the events at Corrib have been a significant hurdle to the development of a successful industry in Ireland over the past 10 years. Approximately 90% of respondents noted that it has caused either serious damage or significant damage to the Irish oil and gas industry. The main lessons noted by respondents which should be learnt include from the events at Corrib include early communication with all stakeholders, engaging with local communities, reform of the planning and regulatory processes and greater government involvement and political leadership in the promotion of the potential benefits.

The other main hurdles to the historic development of the Irish oil and gas industry identified by respondents included petroleum prices, more attractive and lower risk opportunities in other countries and the high cost of exploring in Irish waters.

Priorities from on-going fiscal review

The top three preferred outcomes from the current review of fiscal terms, according to the survey, are maintaining the current fiscal regime (66%), establishing long term stability and certainty (66%) and the consideration of tax incentives for exploration (60%). This is a very important area as the recommendations arising from the current review of Ireland’s fiscal terms, and the policy decisions arising, may impact on the commercial viability of some Irish exploration projects and therefore the future development of the industry.

While Ireland’s perceived low tax rates on oil and gas finds has come in for significant criticism, the rates need to reflect the risk involved and the low likelihood of making a significant find. In this regard, it should be noted that approximately 14% of respondents expressed a desire for an enhancement of the current fiscal regime and lowering current tax rates.

The likelihood of Ireland introducing tax incentives for exploration would seem low but a suggestion was made in relation to the provision of tax incentives for group seismic shoots and, accordingly, this may be an area that merits some consideration going forward.


Note to editors:

About the survey

The survey was carried out in April 2014 having 56 participants in the Irish oil and gas industry including foreign and Irish headquartered organisations carrying out petroleum production, exploration and services activities.

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