Oiling the wheels of investment

Providence's massive oil find off the coast of Cork is good for investors, but will also have wider implications for the industry in Ireland, writes Fearghal O'Connor.

Since Providence Resources announced last week that its Barryroe appraisal well in the Celtic Sea had achieved the best ever flow of oil for an offshore Ireland well, the company's phones have not stopped ringing.

"Its the usual suspects interested in getting involved in the project now that we have demonstrated the proof of concept and the drilling," said John O'Sullivan, technical director of Providence Resources.

"We have taken the early stage risk. We don't really see ourselves as a field development company, so we would potentially bring in a third party who will come alongside us, reduce our capital exposure and take the role of running the field operation."

Either way, Barryroe is a big deal, as shown by Providence's booming share price last week. An independent analysis that predicted 60 million barrels of recoverable oil from the well is looking decidedly conservative, as is a predicted net present value for the well of $1.1 billion.

All of this translates into a major windfall for the company's major shareholders. As of last November, Tony O'Reilly senior owned 20 per cent of the company, JP Morgan Asset Management UK 9.18 per cent, Henderson Global Investment 5.01 per cent and BlackRock Investment Management (UK) 4.23 per cent.

But if and when the Barryroe oil is brought ashore, it is likely to have benefits far beyond the share register.

"Look at Aberdeen to see what the oil industry in action really means," said O'Sullivan, referring to a region with an estimated 500,000 energy jobs, albeit located on the edge of the oil-rich North Sea. "A development will involve people working the offshore platform, onshore support, the vessels and a range of spin-offs.

"For the current appraisal drilling operation alone, we are injecting about $5 million into the local economy in Cork in terms of catering, services and hotels. It is not a huge amount of money, but it is a nice extra for the area based just on a temporary drilling operation. If you had multiple wells being drilled out there, and all of the spin-offs that would bring, I think it would be quite substantial."

One possible major spin-off from the Barryroe oil is that it could be refined at Whitegate. That is far from definite because the Cork refinery would need an upgrade, but O'Sullivan said Providence would "have a conversation" with its owners to see if it was feasible.

However, the government coffers will certainly benefit if the development goes ahead and oil begins to flow, regardless of where it is refined. The basic tax level is set at 25 per cent on the profits from the field. If the field goes above a certain threshold in terms of profitability, a 40 per cent tax rate is charged.

There has been controversy in the past, not least around the Corrib gas discovery, that irreplaceable national resources are being given away too cheaply.

O'Sullivan strongly disagrees. He believes that because Ireland has no existing oil industry, it is important to incentivise exploration.

Some 150 wells have been drilled around the Irish coast, yielding just three commercial discoveries, giving a strike rate of about 2 per cent.

"You have a 98 per cent chance of losing your money when you invest in Ireland," O'Sullivan said. "Not only that, but the state gives no subsidy or supports. Given this environment, I think the state has a pretty good deal.

"I pay tax in this country, and I don't want to see the industry running away with ridiculous profitability, but there has to be give and take in terms of the risk and reward. You have to reward the early movers who are taking all the risk and who are going to be the pathfinders into these basins. In subsequent licences, you can heighten the tax, because it has then been derisked."

Providence, of course, sees itself as just such a pathfinder, and it is hard to argue. Oil was first found at the Barryroe site in the 1970s, but only a new approach using technological advances has yielded real success.

Apart from the use of modern 3D seismic data and the likelihood of horizontal drilling greatly increasing recovery rates, Providence used vacuum insulation tubes to keep Barryroe's waxy oil warm on its journey to the surface. This allows the oil to flow better.

Crucially, that has allowed Providence to disprove a myth that Celtic Sea oil is too waxy to be commercial. This is important not just in the context of Barryroe. Providence has discovered similarly waxy oil off Hook Head.

According to O'Sullivan, this innovative use of technology will be crucial to the success of the entire €500 million drilling programme that Providence is planning around the Irish coast, taking in (among others) Rathlin in the north, Dunquin and Spanish Point in the west, and Dalkey in the east.

The programme takes in previous discoveries and new plays alike, but what each location has in common is that a huge queue had not formed to begin drilling before Providence got there.

"Our investors have bought into the concept of us drilling pathfinder wells in each basin," O'Sullivan said. "We have selected what we think is the best well location to open up a play. With Barryroe, what we are trying to do is to get the first, and maybe the first of many, developments going off the Irish coast.

"The area is completely underexplored. There are a lot of myths and rumours in all the basins, in the Porcupine, the Celtic Sea, in the St Georges Channel basin.

"That is why we have picked these wells. Now we are debunking the myths."