Prime Meridians: A Look Inside Oil’s Hottest New Play, The Porcupine

This week in Pierce Points:

India officially launched gold monetization. Bullion deposits will receive up to 2.75% interest, and the plan might just work.

Argentina pulled ahead in the global shale race. State energy firm YPF says its unconventional output jumped 7% in Q3.

The world’s top LNG market swooned. Spot market purchases by Japan’s leading utility fell 90% so far this year.

Philippines warned on rising coal demand. An industry group says the country may see 75% growth in imports over the coming decades.  

Offshore E&Ps fled one play, to another. Two majors pulled out of the Gulf of Mexico; but Ireland had a record bid round.

A Look Inside Oil’s New Hottest Play, The Porcupine

Last week it was the fighting peacock, this week it’s the porcupine. 

The peacock turned out to be a winner — with Aung San Suu Kyi’s National League For Democracy party appearing to have won an overwhelming election victory in the Southeast Asian nation of Myanmar. 

More importantly, the country’s military has said it will recognize the win — which could pave the way for Myanmar’s first true democratic government in over half a century. We’ll see in March when the actual handover of power takes place. 

More freedom in Myanmar could mean big opportunities in mining. But it’s more important for another part of the resource sector: offshore oil and gas. With Myanmar’s recent offshore bid round having attracted big names like Shell and Chevron. 

And, further to the last item above, it looks like we could be seeing those majors in another part of the planet soon. The land of the porcupine. 

The Porcupine Basin is an offshore oil and gas play located off the western coast of Ireland. It’s not a place we think a lot about when it comes to E&P activity — but the news this past week suggests it may be about to leap into petro-headlines. 

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Map of some of the licenses on offer for offshore Ireland, in blue, yellow and red (Department of Communications, Energy and Natural Resources)

The Irish Department of Communications, Energy and Natural Resources said that it has received a massive number of bids for acreage in its most recent offshore licensing round. Of 291 offshore blocks offered, more than half received multiple bids. 

That’s a lot of interest. By contrast, the last bid round in the U.S. Gulf of Mexico (where both ConocoPhillips and Marathon Oil announced exits this week) attracted 33 bids. 

Most of the activity in the Irish offshore is focused on the Porcupine Basin — with this play reportedly attracting 78% of new bids. So what’s so attractive about this place that E&Ps are lining up, at a time when they’re pulling out of other offshore destinations?

The biggest thing is the economics of the Irish offshore. With the country offering some of the best fiscal terms going anywhere on the planet for drillers.

Ireland introduced a new fiscal regime in mid-2014 — where petroleum projects are taxed based on profitability of individual fields. Under this system, oil and gas projects are taxed at a minimum rate of 5% — with the most profitable projects being taxed at up to 30%. 

Add this profits tax to a relatively low 25% corporate tax in Ireland, and the total “government take” from petro-projects ranges between 30% and 55%. 

That puts Ireland in a very competitive position relative to other nations around the globe. As the chart below from oil and gas experts Wood Mackenzie shows, under the current Irish terms (represented by the bar “Ireland Proposed” — this chart was done before the country revised its terms upward from the previous, even lower fiscal regime) the government take is about half that of Norway, and a third less than the U.K. 


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Ireland has one of the lowest “government takes” for offshore oil and gas development

This chart was actually done assuming a $100/bbl oil price (in mid-2014, when $50 oil seemed downright impossible). At today’s prices, profitability for offshore developments has fallen to a point where Ireland’s profits tax would be further reduced — meaning that developers might be giving as little as 30% to the government. 

That’s a lot more attractive than the U.S. Gulf of Mexico — where government take for shallow-water development is a minimum 45%, and even deepwater fields have a minimum of 35% take. 

When it comes to offshore mega-projects, keeping an extra 5%, 10% or even 20% of profits can make a huge difference for developers. Which is likely why E&Ps are still gravitating toward Ireland even at lower oil prices. 

Lower tax paid means that finds in Irish waters don’t have to be as big in order to be economic. Finds of a couple hundred million barrels here might be exploitable — where similar-sized finds in higher-tax destinations like the U.K. have been left undeveloped. 

And work to date suggests that targets in the Porcupine Basin could be at least that size. And possibly much larger. 

There was a lot of excitement around the basin back in 2013, when ExxonMobil drilled a target called Dunquin. At the time, the major estimated that the structure here could hold over a billion barrels. 

That well however, came back with only minor hydrocarbon shows, and Exxon subsequently pulled out of the play. But the basin is far from being comprehensively tested — in fact, only 16 wells have drilled here since 2003. 

The fact that expert technical staff at Exxon saw billion-barrel potential is very encouraging. And that sort of big target size is further supported by Ireland’s sole new field development to come online during the past decade: Shell’s Corrib natural gas project. 

Corrib contains an estimated 870 billion cubic feet of recoverable natural gas — which should be a very profitable size under Irish tax rules. The project is very close to producing first gas, another development which may have attracted interest to exploration in Ireland, after years of delays for Shell in permitting the project had cast some doubt over the ability of E&Ps to develop offshore projects in the country. 

Existing license holders in the Porcupine such as junior E&P Europa Oil and Gas have found similar-sized targets. With the company’s FEL 3/13 prospect having been assessed at a 1.5 billion barrel target size. 

That was enough to attract offshore specialist Kosmos Energy into a farm-in on FEL 3/13 in 2013. Which is an interesting development, given that Kosmos has been working the eastern Atlantic margin in Africa — with big discoveries like the 600 million-barrel Jubilee oil field in Ghana. 

Workers in the African offshore have been pushing further toward the north end of the continent recently. And it’s no stretch to think that the geology in the European part of the east Atlantic could offer similar potential — which may be why Africa hands like Kosmos are getting into Ireland. 

That combination of high-impact geology and world-leading fiscal terms may make Ireland a go-to play for today’s E&P sector. We’ll see who gets license awards here in Q1 2016, when final announcements are expected from the government. 

Here’s to spikes in drilling,

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Dave Forest

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