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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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This European Nation Is Planning A Complete Offshore Oil Ban

Just as most of the public attention of the past weeks was turned to the US-China trade war and the possibility of an OPEC+ deal extension, the European nation of Ireland was going through a period of reassessing its energy priorities. Perhaps surprisingly for many, oil was at the epicenter of the deliberation – namely, the pressure from environmentalists and green-leaning parties to ban all offshore oil production. Having several tricks to stop the legislation on the issue, by October 2019 it became clear that the offshore oil ban is unavoidable, as attested by Prime Minister Leo Varadkar’s pledge not to award any further licenses at the UN Climate Action Summit this Autumn. But why would anyone ban offshore oil production?

First and foremost, Ireland could ban offshore oil because it (as of today) produces no oil whatsoever and is 100 percent dependent on oil imports. Ireland has only one refinery, the 75kbpd Whitegate Refinery located outside Cork, which provides for some 40 percent of the country’s fuel needs; the rest is imported, primarily from the United Kingdom. It needs to be pointed out that onshore Ireland sees no activity whatsoever, all the oil and gas-relevant projects take place to the west of the island. Its main source of domestic gas, the 1TCf Corrib gas field is located some 50 miles from the northwestern Donegal coast, whilst most of the wildcats have been spudded to the southwest of the country,

The Irish government sought to placate investors by stating that the ban would only be applicable to future licenses and that all existing licenses and application would remain valid and active.
As one might have noticed, offshore gas will not be banned as it remains “integral to Ireland’s energy security” for the upcoming decades. Essentially, gas will be the base for Ireland’s planned transition towards a renewables-based energy matrix, a backstop for any adverse trend in the renewables segment. Renewables current account for some 11-12 percent of gross final energy consumption as the Government seeks to fulfill its commitment vis-à-vis the EU Energy Directive which set the 2020 target at 16 percent. Related: Oil Majors Go On $27 Billion Selling Spree

Source: Total.

If one is to look at Ireland’s drilling record, they would be fully entitled to think that banning offshore oil and gas drilling would make little to no difference as there are barely any exploration and development wells being spudded in the country. 2018 witnessed neither exploration nor development wells, whilst this year’s much-anticipated Iolar exploration well (drilled by the Chinese CNOOC) turned out to be dry and was subsequently abandoned. This was certainly most unwelcome news for ExxonMobil that farmed in September 2018, buying a 50 percent stake in the FEL 3/18 license block. Difficulties were to be expected as the adjacent Druid/Drombeg fields that were drilled in 2017, only to discover that both were water-bearing.

Yet some of the damage might be simply irreparable. The French oil and gas major Total relinquished its Atlantic Ocean license FEL 2/14 (comprising the Diablo undrilled prospect) just one week after the Prime Minister’s announcement – a noteworthy development given that the Atlantic Margin is perceived to be Ireland’s most attractive drilling segment. Oil majors might follow Total’s lead, despite having worked in the country for less than four years – the major inflow of majors into Ireland’s offshore dates back to 2015 when the Atlantic Margin Licensing Round saw Equinor, CNOOC, Total and others took positions in the country. They were attracted in no small part by the prospect of Ireland’s offshore containing some 10 billion barrels of oil. Related: Aramco Reveals Its Valuation

Let’s look into some scenarios that the offshore oil ban could do to gas exploration. First, an exodus of oil majors unwilling to deal with the government’s lack of backing seems highly probable – leaving all the travails of bringing gas fields onstream to smaller companies that oftentimes lack the know-how to do so efficiently. Second, the future of oil fields that contain both oil and gas volumes seems highly murky – take for instance the Barryroe, which according to Providence Resources contains 0.3 BBbls of oil and 207 BCf of gas. Any fields with similar characteristics would probably face an uphill battle in the future that would nip its commercial viability in the bud. Yet Ireland would need as much of these new projects emerging as possible not to become a 100% gas importer by the early 2030s.

Ireland’s key asset, the Corrib gas field, is expected to peak in 2019 and then embark on a path of terminal decline. Corrib currently feeds roughly 40-45 percent of Ireland’s gas needs. Thus, Ireland needs new additions to keep its gas segment alive – it was believed that the Inishkea prospect, expected to contain up to 1.5 TCf of natural gas, should supplement Corrib with a 2021-2022 startup date. Inishkea is located next to Corrib, making infrastructure issues less of a problem than usually for Ireland’s offshore. Despite all the above, the license operator Europa Oil and Gas has been seeking farm-in partners to the project for some time already (the FEL 4/19 block is fully held by the company) and it might happen that against a worsening internal environment no major would agree to a participation scheme.

Ireland’s main hydrocarbon dilemma from now on will revolve around a potential future offshore gas ban. This dispute will turn out to be much more heated than the one about offshore oil which was always a potentiality that is lurking somewhere in the future – offshore gas is real, in the present and saves millions of euros for Dublin, by not making Ireland fully dependent on gas imports. Environmentalist groups deem the Prime Minister’s ban on future offshore oil development merely a first step towards banning hydrocarbon-related activities in Ireland altogether, whilst oil and gas companies reckon the oil ban already brought down Ireland’s investment attractiveness and will result in the exodus of oil majors.

By Viktor Katona for Oilprice.com

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