Indigenous supply essential for security

Ireland needs to wake up to the vulnerability of its energy supply, IOOA Chairman Pat Shannon states. The UCD geologist talks to Energy Ireland about the oil and gas sector’s prospects.

If Europe’s lights start to go out “they’ll go out first here,” Pat Shannon says in a stark warning of the risks to Ireland’s energy security. The Chairman of the Irish Offshore Operators’ Association – and Professor of Geology at University College Dublin – thinks that Ireland’s energy vulnerability is not adequately understood by society.

“We’re in a really vulnerable situation,” he comments. “Every drop of oil that we use, we import. Ninety-five plus per cent of our gas, we import.” It is therefore “really important” that Ireland has an indigenous source of oil and gas. From next year, the Corrib field should reduce Irish gas dependency to 55-60 per cent but as the economy recovers – and Corrib’s gas reduces over time – Ireland will return to its present situation unless further fields are discovered and brought on stream.

Our import vulnerability is higher than that for the overall EU, which imports 88 per cent of its oil and 66 per cent of its gas. The insecurity of oil and gas supplies is increased by the crises in Eastern Europe and the Middle East. Iraq is the world’s sixth largest oil producer and 39 per cent of the EU’s gas comes from Russia – with half of that passing through the Ukraine.

Shannon sees positives and negatives in the revised leasing terms, announced by the Government in June.

“On the positive side, there is stability so we know what the lie of the land is,” he remarks. He also welcomes the absence of retrospection. “Had there been a retrospective element and the new terms applied to existing licences, a lot of companies would then say: ‘We came in under certain conditions. Those conditions have been changed.’” This would cause “a significant amount of damage to Ireland’s reputation.”

Shannon acknowledges that the terms are very detailed and will require further study but his general impression is that to an extent Ireland is “less competitive and it is less profitable for the industry.” Under the new terms a 5 per cent royalty on revenue applies when “the first drop of oil is brought ashore or the first gas goes through the pipeline.” Companies will now have to pay a higher rate of tax on larger discoveries.

“Overall, when we’re competing with other countries, we’re a little bit less competitive now as a result,” he affirms. New companies which are considering Ireland as an investment location may look again and look at areas such as Nova Scotia instead.

The Joint Oireachtas Committee on Transport and Communication had called for higher taxation bands for oil and gas development. “I think had those been accepted, it would really have destroyed the industry here,” he comments.

Direction

Shannon notes that it is difficult to tell how the industry will develop. With the new licensing round just announced, it will be “interesting to see which of the existing companies stay and bid” and also whether any new companies come into the market. He cautions: “Ireland hasn’t really got significant traction in comparison with some of our competitor countries – and certainly in comparison to the UK and Norway. We’re still seen as a very expensive area to drill.”

To a large extent, this is due to geology and risk with the latter factor being the main one in the minds of developers. Expected monetary values and rates of return are a function of the fiscal regime and the perceived geological uncertainty.

“In areas where there’s geological uncertainty and high risk,” he concludes, “the profits need to be higher to match that [risk].”

Speaking at Energy Ireland, Shannon described how collapsing mountains and opening oceans – over millions of years – have created a subsurface “geological warzone” around Ireland. Its structure has some similarities to the North Sea and Eastern Canada with a variety of sedimentary basins of different sizes and it has some interesting and potentially promising exploration prospects.

In the Celtic Sea, an intra-continental basin which includes the Kinsale gas field, the crust has slightly thinned.

The Rockall and Porcupine basins have thinner crust and the warmer crustal temperatures can turn some oil into gas. There has been more exploration interest in these basins over the last four years than in the Slyne basin – the area which includes Corrib.

Exploration drilling off Ireland began in 1970 with the discovery of Kinsale gas in 1971. However, for some years after that, E&P companies focussed exploration on similar structures to that of the Kinsale Head field.

The exploration of other basins resulted in “moderate success” but no commercial fields as yet. Development can also involve lengthy timescales; the Corrib field was discovered in 1996 but will only go on stream in 2015.

With fewer than 160 wells drilled, Ireland is “lightly explored” compared to other jurisdictions. One well was drilled in 2013 but none in 2012 or 2014. By comparison, between five and eight wells were drilled in an average year in the 1970s. To increase our chances of discovering new fields, the rate of exploration drilling needs to increase.