Press Release: Shell to Sea Event in Dublin at Norwegian Parade Next Thursday MAY 17th

by D Tue May 15, 2007 15:57

Do we have to keep seeing this rubbish published? "Through ownership of Statoil, the Norwegian people will own 25% of Corrib gas. The people of Ireland will gain nothing."

The facts are that Statoil has a 36.5% interest in the Corrib Lease and the Norwegian Government owns about 70% of Statoil, so the Norwegian Government has about 25.5% net in the Corrib field. However, 25% of the profit is paid to Ireland in tax, so the Norwegain Government will get about 19.1% of the profit while the Irish Government will get 25%.

The big difference though is that the Irish Government has not had to bother about the high cost and very high risk in exploration which Statoil (and hence the Norwegian Government) has invested here. Other than Corrib, Statoil has been involved in a number of other exploration areas and has participated in drilling quite a few dry wells; the Norwegian Government will therefore have invested several hundred million euros in Ireland.

by S Tue May 15, 2007 19:50

D, I think you are very gullible if you believe any tax is ever going to be paid on the profits from the Corrib field.

by Facts Tue May 15, 2007 22:34

Al tax can be written off against exploration costs.
End.

by D Tue May 15, 2007 22:58

"Al tax can be written off against exploration costs."

This is incorrect - exploration costs can be written off against tax - which is completely different. The result is a reduction in tax payments equivalent to 25% of exploration costs. Interestingly, if the value of the gas at Corrib was anywhere near the stupid figures you see quoted here the resulting reduction in tax payments would be a tiny fraction of the tax payable; in reality, the before tax profit from Corrib is probably around €3 billion, so there would have to be around €12 billion in exploration costs to write off (spent by Shell, Statoil and Marathon) before tax payments would be eliminated. You can be certain that tax will be paid on Corrib profits.

by Jack Tue May 15, 2007 23:08

'D' wants us all to know our place and to be happy with the crumbs
that fall from the rich man's table.
Those days are over forever 'D'.
Gombeen politicians who betray their neighbours and their country are dinosaurs.
Get used to it!

by S Tue May 15, 2007 23:53

D,

Here is the relevant section from the 1992 Finance Act :

84.—(1) Subject to subsections (5) and (16), where a person carrying on a petroleum trade has incurred any exploration expenditure (not being expenditure which has been or is to be met directly or indirectly by any other person) there shall be made to him for the chargeable period related to the expenditure an allowance equal to the amount of the expenditure.

"equal to the amount of the expenditure" would imply to me that the full cost of the exploration is being offset against tax. Do you know different? If so please advise

by D Wed May 16, 2007 07:55

Thank you for going to the trouble of quoting the legislation which confirms what I have stated above (not the opposite as claimed by "Facts").

The legislation states "there shall be made to him for the chargeable period related to the expenditure an allowance equal to the amount of the expenditure". This means that the exploration expenditure is an allowable deduction in the tax calculation, for example:

If taxable profit = €200 million before deducting exploration expenditure, the tax payable on that would be 200 x 25% = €50 million.
If exploration expenditure is €80 million, then net taxable profit becomes 200 - 80 = €120 million and tax payable becomes 160 x 25% = €30 million.
Therefore tax payable has reduced by €20 million, which is 25% of the exploration expenditure as I said above.

by if true Wed May 16, 2007 08:49

if what you say is true, this puts a whole new slant on this project.
It means shell will pay hugh sums to the irish taxpayer!
OR DOES IT? what exploration costs can they write off, can they write off costs incurred in drilling "dry"wells close to the corrib find, or what if their costs are equal to the total profit from the corrib field.
then they wil not be liable to pay any tax.
they might consider any work ever done of the irish coast as an expense to be used against this find.

by D Wed May 16, 2007 09:07

Shell and the other Corrib partners can deduct exploration costs incurred in drilling dry wells. But, as I pointed out above, they would need to spend 4 times the total Corrib profit to reduce their tax liability to zero, so where's the point in that?

by S Wed May 16, 2007 11:41

What the finance act says is that you can deduct 100 per cent of the money that you've spent (or say you have, going back many years, and including expenses money claimed by companies you own).

You seem to be saying that this amounts to only 25 per cent.

You're going to have to be a bit clearer if you want people to believe this. I heard a member of the civil service saying that the money spent by Shell on legal costs, including the cost of the injunction against the Rossport Five, would be written off against tax ( a rather loose definition of the term "exploration costs"). It seems unlikely that the exchequer will ever see any money from Corrib.

It's funny, because Shell apologists are always telling us that Ireland couldn't afford to pay for exploration of our oil and gas, but then they tell us that we will actually be paying for it.

Anyway, can you explain why the 25 per cent of the profits that the people of Norway will get from Corrib will be significantly more than the people of Ireland?

by Squirrel Wed May 16, 2007 12:34

200million from sale of gas

Deduct all expenses including explorations costs = profits

200 - 80 = 120million

Then deduct separate allowance for exploration costs

120 - 80 = 40 million

25% of 40 = €10 million

by D Wed May 16, 2007 12:40

Because of the way the vast majority of taxes around the world are calculated, a 100% deduction of costs results in a reduction in tax payable which is equivalent to the rate of tax (as illustrated above). So, if the tax rate was 50%, the government would effectively be paying 50% of costs in the form of a reduction in tax payable and, if the rate was 12.5%, the government would be paying 12.5% of costs as a reduction in tax. As we all know, the tax rate for petroleum exploration and production offshore Ireland is 25%, hence the effective contribution to costs by the Government is 25%. I hope this clarifies things.

On your other point, as I have already explained, the Norwegian Government will receive about 19.1% of the profit from Corrib, but this cannot be viewed in isolation; through its ownereship of Statoil, the Norwegian Government has invested many millions of Euro in high risk exploration in Ireland with low expectation at the time of ever getting any return on that investment. For the 25% of Corrib profit going to Irish taxpayers, they have only needed to invest in administration costs, and much of those are recovered from rentals paid by exploration licenceholders.

by supporter Wed May 16, 2007 13:25

Maybe other people can follow this but I can't.

The rules say that Shell can spend anything they like on exploration, and write it ALL off against tax.

So if they make a 100 euro they are supposed to pay 25 euro in tax. But if they claim they spent 26 euro on exploration then they pay nothing.

by D Wed May 16, 2007 13:36

You have deducted the €80 million in exploration costs twice in your example!

Read my figures again, I have just noticed there was a typo in my previous post so I have corrected that below:

If taxable profit = €200 million before deducting exploration expenditure, the tax payable on that would be 200 x 25% = €50 million.
If exploration expenditure is €80 million, then net taxable profit becomes 200 - 80 = €120 million and tax payable becomes 120 x 25% = €30 million.
Therefore tax payable has reduced by €20 million, which is 25% of the exploration expenditure as I said above.

by estimate Wed May 16, 2007 14:13

anybody have a estamite of the costs incurred by shell in relation to this project, and the predcited value of the find?

is the cost of the refinery included in exploration?

an estimate of the amount (ballpark) Ireland might hope to recieve?

by D Wed May 16, 2007 14:48

Based on the data I have seen published, the value of the gas at Corrib is likely to be around €6 billion and the field development costs (which include the cost of the of the gas terminal) are about €1 billion. I would expect operating costs over the life of the field to be about another €1 billion, so after deducting these costs, before-tax profit from the field would be 6 - 1 -1 = €4 billion. It is more difficult to estimate Shell, Statoil and Marathon's deductible exploration costs (and I imagine Marathon will already have claimed a deduction for its share of exploration costs against income from the Kinsale field, so it will not be able to claim again), but lets say €0.4 billion (€400 million) in all. Total tax payable to Ireland would then be 4 - 0.4 = 3.6 x 25% = €0.9 billion (€900 million).

Only an estimate, but it will be much closer to the truth than most of the figures in relation to Corrib which have be written on this site.

by D- Wed May 16, 2007 15:25

So Shell, who as we all know are the most trustworthy company in the world (the reserves fraud was really just a series of typos wasn't it?) say they want to claim back their costs on the profits of the Corrib field, and the profits are x, what they pay tax on is x minus whatever they've spent on exploration, not just for Corrib, but for the whole area, going back years.

So by subtracting the exploration costs from the profits they significantly lower the tax take.

That's what you're saying.

Now most people think it's unlikely that Shell won't be able to configure these amounts so that they pay virtually no tax, and in effect the Irish government through lost revenue are paying a huge amount towards the exploration of the waters off the west coast.

Meanwhile, the people of Norway, pocket 25 per cent of the profit, because their government was farsighted enough to set up a state company to manage their resources.

Why could the Irish government not have set up a company (all you need is an office, a phone and a fax machine) to take the place of Statoil in this deal? Let's face it, all Statoil are contributing is capital towards costs, 100% of which can be claimed back as you've said.

Statoil are putting in very little and getting a lot out (one of their former executives is on record as stating that the deal on offer here is the best in the world).

We should have a state company managing our resources.

That way the people of Ireland would be getting something lasting from the oil and gas in the Atlantic. As it is, we may some paltry amount of tax in a few years, maybe even nothing.

by D Wed May 16, 2007 16:10

I am only interested in clarifying the facts, but I therefore need to correct some of the comments you have made in relation to my submissions:

1. "Now most people think it's unlikely that Shell won't be able to configure these amounts so that they pay virtually no tax" This is nonsense, I am sure the Irish Government has plenty of experience of auditing tax claims and, in the estimate I gave above, they would need to make €400 million exploration expenditure look like €4 billion to eliminate the tax liability!

2. "Meanwhile, the people of Norway, pocket 25 per cent of the profit, because their government was farsighted enough to set up a state company to manage their resources." No, the people of Norway pockets 19.1% of the profit, solely because their government invested large amounts in high risk exploration.

3. "Why could the Irish government not have set up a company (all you need is an office, a phone and a fax machine) to take the place of Statoil in this deal?" Do you really believe that is all it takes to set up an oil company? The levels of expertise and expenditure needed to explore for oil and gas are extremely high and,as I keep repeating, the chances of success are extremely low. I would expect that much more has been spent in exploration over the years offshore Ireland than has been earned through gas production (there has been no oil production) - if you think that would be a good way for the Government to invest the Irish taxpayers money, I think many would dissagree with you.

4. "Statoil are contributing is capital towards costs, 100% of which can be claimed back as you've said." I have not said that 100% can be claimed back, I have said that 100% can be allowed as a tax deduction, whichh means that 25% can effectively be claimed back.

by S Wed May 16, 2007 16:58

100 per cent of exploration costs are deducted from profits before tax is assessed.

An allowance equal to the amount.

It may take many years to build up expertise in oil and gas exploration, but before the 1960's Norway had none. It set up Statoil and got the oil majors to teach its staff. Why couldn't Ireland do this?

Statoil is a junior partner, they are not supplying anything to the project but capital (all of which they'll get back). They have no staff on the rig or at the refinery. If it makes sense for the Norwegian state company to get involved like this, and they expect to see a handsome profit from doing so, why can't an Irish company do the same?

by CL Wed May 16, 2007 18:20

It is encouraging to see a sensible discussion on indymedia (for a change), this type debate is what is needed in relation to this issue.
Of course shell or any other business will try to make as much profit as it can, and you cant blame them.
but if our government said it was setting up a company to explore for oil/gas off our coast, and spent billions of euro drilling dry holes,would some people not complain the billions spent on the exploration, should have been spent on health/roads/education/housing. ect. ect.
there is not one political party suggesting that the deal with shell will be torn up if they get elected, why is that?

by S Wed May 16, 2007 19:05

How can it make economic sense for a company like Statoil to get involved in a project like this, but not a similar Irish company?

Who cares about exploration costs when you get them all back plus your profits (which amount to many billions of dollars)?

The way things are arranged now, the state is going to be paying 25 per cent of exploration costs anyway in lost revenue. Why not get something for this money? jobs, expertise, infra-structure, experience etc? Look at where the Norwegians were in the 1960's- we are in the same position now.

As to the political parties- the next government is likely to include people from the Green Party or Sinn Fein and as far as I know both of these have committed themselves to an inquiry into the optimum development model of the Corrib field.

Deals can be torn up- there are get-out clauses in the legal position. Gerry Murray of Sinn Fein in Mayo has recently issued a press release as far as I know pointing to similar situations in the US.

It's pretty unlikely that the Corrib scheme as it stands will survive the election, unless FF and the PD's are returned with a sizable majority.

by CL Wed May 16, 2007 19:26

S you say "It's pretty unlikely that the Corrib scheme as it stands will survive the election, unless FF and the PD's are returned with a sizable majority"
why do you think that, the greens have said they would insist on a inquiry to discover the best method of producing this gas.
Is there reason to suggest that a offshore platform would be a better method?
they may have used the term community consent, but what does the term "community" mean, you can be sure when the greens made the statement they had consulted a dictionary.
Is rossport the "community" or Erris or maybe Mayo, or why not the Irish "community" or even the European "community".
people should realize politicians are con-artists, if they were truthful nobody would vote for them.

by S Wed May 16, 2007 20:32

"Is there reason to suggest that a offshore platform would be a better method?"

I think so. It's what happens at Kinsale, the Gulf of Mexico, the North Sea, etc etc.

Do you?

Does anyone think Shell's current scheme, that is, to build a refinery in the face of objections from the local people, get the police to put them in hospital or jail if needs be, then stand back and figure out a way to get the gas INTO the refinery, is better?

by CL Wed May 16, 2007 21:40

I was just pointing out that even if this project was to be "reviewed", it is not a given that it would be altered!
It may be decided that an onshore refinery is indeed the best method of processing the gas,
What then? would the farmers let the high pressure pipe through their land, would S2S agree.
Or would they cry conspiracy (again).
There is no guarantee that a review would alter the present design.

by D Wed May 16, 2007 22:43

"Who cares about exploration costs when you get them all back plus your profits (which amount to many billions of dollars)?" Thank goodness you are not running an oil company, because all of its shareholders would be bankrupt in months! The only way that you can get one cent back from exploration is if you make a discovery that is large enough to be developed commercially and, on average, the probability of making such a discovery is only about 5-10%. So the average oil company will only make a discovery from every 10 or 20 exploration wells it drills. But that is only a statistical average and drilling 20 wells in no way guarantees making a discovery - you could drill 100 wells each having a 10% probability of success and still make no commercial discoveries. Spending exploration costs wisely is the most important decision an oil company has to make.

"The way things are arranged now, the state is going to be paying 25 per cent of exploration costs anyway in lost revenue. Why not get something for this money? jobs, expertise, infra-structure, experience etc?" The 25% contribution to exploration costs from the Government in reduced taxes is only made in the event of success, as explained above, it is a huge risk to spend that money up front on exploration. I doubt that there are many taxpayers who would be happy with their money being gambled in that way.

by S Wed May 16, 2007 23:20

But shareholders in oil companies like Shell and Statoil should be comfortable with that level of risk?

Why?

by D Thu May 17, 2007 07:51

"But shareholders in oil companies like Shell and Statoil should be comfortable with that level of risk? " If they want to invest in the oil and gas exploration and production industry they have little choice, although different companies have different risk profiles. For a very large company like Shell or Statoil, the number of opportunities they are involved in means that it is unlikely that they will become bankrupt but it is also unlikely that the return to the investor will be very high. For smaller companies, a large find can result in a very high gain for investors, but shares in such companies can and do become virtually worthless if they are unsuccessful.

by Squirrel Thu May 17, 2007 10:42

If we are to believe this argument that no company would take on the risk of exploration without the lowest tax and royalty regime in the world this proposition must be examined.

We are in a situation in the world economy where oil and gas are becoming increasingly scarce. Therefore prices are continuing to rise. If the government hadn't abolished the royalties and taxes on gas or oil production prices would rise and at the same time exploration technology would improve to such levels as to make it viable for the oil companies to explore in our waters anyway. Believe me Shell et al would be just as interested in 50% of €3 billion as 75% of €3 billion

Instead in a rush to please them our government threw it all away for a short term gain in the most short sighted move ever.

Also D pointed out that I subtracted exploration costs twice in my earlier calculation - indeed I did and that is the point. ALL COSTS are deducted before profit is declared that INCLUDES exploration. The government has added an EXTRA allowance based on exploration costs which can be deducted AFTER profit has been calculated. Thus allowing the cost of exploration to be deducted twice...

I'm fed up with people saying we don't understand the implications of the economics of the situation. We are not stupid, this is not the only off shore gas field in the world. Even someone with no knowledge of economics (which I do) can see we have given the oil companies by far the best deal they've ever got in a time of increasing prices.

A senseless and stupid waste of our resources is all it is no matter how you look at it.

by CMC Thu May 17, 2007 10:54

The next govt. will more than likely include Labour.

http://historical-debates.oireachtas.ie/D/0466/D.0466.199605280195.html

Interesting Times?

by D Thu May 17, 2007 10:56

"Also D pointed out that I subtracted exploration costs twice in my earlier calculation - indeed I did and that is the point. ALL COSTS are deducted before profit is declared that INCLUDES exploration. The government has added an EXTRA allowance based on exploration costs which can be deducted AFTER profit has been calculated. Thus allowing the cost of exploration to be deducted twice..." That is total rubbish, where did you get that dumb idea from? Exploration costs, like development costs and operating costs can only be deducted ONCE in the tax calcualtion!

"Believe me Shell et al would be just as interested in 50% of €3 billion as 75% of €3 billion" That is just as stupid thinking and shows that you have no understanding of how oil companies evaluate economics; they must take into account both the risk-reward ratio (EMV) and time value of money (NPV & ROR) when making investment decisions, otherwise they would soon be victims of "gambler's ruin". A change in the tax rate could easily make the project a non-starter.

by wise Thu May 17, 2007 11:47

Don't be sucked into D's reasoning that he has all the answers.
The science of taxation/finance is far more complicated and convoluted that can be covered on this thread. Profits and expenses from one country are regularly shifted to another for more favourable taxing - just ask microsoft.

Two points for consideration -
1. Ray Burke signed this deal against the advice of his senior advisors and officials.
2. Dick Spring described this deal as 'economic treason'.

by D Thu May 17, 2007 11:54

"Profits and expenses from one country are regularly shifted to another for more favourable taxing - just ask microsoft." In Ireland, as in most other countries, tax calculations for oil and gas operations are ring-fenced so that such manipulation cannot happen (although, in some cases where there are no dual taxation treaties, companies may be subject to other taxes when they repatriate their after-tax profits to their home country).

by wise Thu May 17, 2007 13:16

"Shell Canada had the need to borrow US$100m. Rather than
borrowing US dollars they took out a Kiwi loan. They borrowed New Zealand
dollars, switched them into US dollars and then, when they had to repay the loan,
switched it back. At the time, the New Zealand rate of interest was almost twice
that on US dollars so they claimed almost twice as much interest deduction. When
they switched back the currency, they made a capital gain because the New
Zealand dollar had been deflating during the period of the loan. But the gain was
not fully taxed. The Supreme Court of Canada said that was not avoidance"

My point is that we are not dealing here with some self-employed bicycle salesman.
Bertie Ahern, the EPA and others have shown themselves willing to do whatever it takes
to accommodate Shell, even with private meetings denied to most Irish citizens.
Irish Revenue is unlikely now to come down hard on Shell or to be a position to accurately
assess Shell's figures. In these circumstances talk of ring-fencing is nonsense.

by Squirrel Thu May 17, 2007 14:38

These deals and tax rates have been changed in many other countries and oil companies had to grin and bear it. They didn't pull out they just had to be content with less money. They still make a profit.

D is just like all the oil companies and their money backed media tryin to confuse and bamboozle the public with facts and figures they think we can't understand. Well we are not stupid.

just one question for you D explain why its only Ireland that gives such a good deal. Why hasn't anywhere else been as generous?