Getting The Deal Through - Gas Regulation 2013 (Ireland Chapter)

Author:Mr Alex McLean, Patrick McGovern and Claire Madden
Profession:Arthur Cox


1 Describe the domestic natural gas sector, including the natural gas production, liquefied natural gas (LNG) storage, pipeline transportation, distribution, commodity sales and trading segments and retail sales and usage.

Natural gas accounts for approximately 29 per cent of primary energy demand in Ireland. While gas demand is forecast to contract in the medium term in light of factors such as lower electricity demand forecasts, increased renewables penetration, increasing electricity interconnection with Great Britain and rising gas prices, power sector gas demand is expected to recover from 2014/15. Historically, indigenous gas production in Ireland has been limited, with only the Kinsale Head gas field (including South West Kinsale and Ballycotton) and the adjacent Seven Heads gas field having reached commercial production. Production in Kinsale Head and the Seven Heads is expected to decline over the next few years. A petroleum lease has been granted in respect of the Corrib gas field off County Mayo. While the offshore development programme for Corrib was completed in September 2009, production has been delayed by ongoing issues with onshore routing.

The transportation (transmission and distribution) system remains owned by the vertically integrated state-owned Bord Gáis Éireann (BGÉ). Pursuant to the European Communities (Internal Market in Natural Gas) (BGÉ) Regulations 2005, as amended, Gaslink, an independent subsidiary of BGÉ, was established as the independent system operator (ISO) for the BGÉ transportation system (transmission and distribution system) in furtherance of the requirements of Directive 2003/55/EC concerning common rules for the internal market in natural gas (the Directive). However, the Gaslink structure is not adequate to discharge the unbundling requirements of the Third Energy Package. The European Communities (Internal Market in Electricity and Gas) Regulations 2011 (2011 Third Package Regulations), provide for the establishment of a subsidiary of BGÉ (to be independent from its parent and affiliates) to act as independent transmission operator (ITO), with responsibility for ownership and operation of the transmission and distribution networks. The 2011 Third Package Regulations also provide for the owner of a transmission system (including BGÉ and the ITO) to act as a transmission system operator and to be certified as such. The functions of Gaslink, together with those functions of BGÉ Networks that relate to the ownership or operation of the gas network will transfer to the ITO with effect from a (future) transfer date to be fixed by the minister for communications, energy and natural resources (the minister).

Further, implications of the third energy package and in particular of Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC remain to be seen.

However, it is anticipated that decisions in relation to further unbundling will be made in the context of the proposed creation of a single market for natural gas on the island of Ireland through the so-called Common Arrangement for Gas (CAG) project, which is the stated policy objective of the Commission for Energy Regulation (CER) and its Northern Ireland counterpart, the Northern Ireland Authority for Utility Regulation (NIAUR) (collectively the Regulatory Authorities).

Ireland's transportation system is connected to the transportation system in Great Britain via two sub-sea interconnectors from Moffat in Scotland, as well as through the North-South pipeline to Northern Ireland, which is in turn linked to Great Britain through a sub-sea interconnector. Ireland is a net importer of gas and is expected to remain so for the foreseeable future.

Competition in the retail gas market for industrial and commercial customers has been in place since 2004, with full market opening of the Irish retail gas market taking place in July 2007. The power sector share of total gas demand is currently approximately 63 per cent.

2 What percentage of the country's energy needs are met directly or indirectly with natural gas and LNG? What percentages of the country's natural gas needs are met through domestic production and imported production?

Approximately 29 per cent of Ireland's total energy needs are met by natural gas. There is currently no operational LNG facility in Ireland. However, there is an operational gas storage facility in Kinsale and an import terminal for LNG is being proposed by Shannon LNG. Imports from Scotland via the Moffat pipelines accounted for approximately 90 per cent per cent of the annual gas supply in Ireland. Increases in domestic production are expected from the Corrib gas field, which is expected to supply up to 60 per cent of Ireland's annual demand requirements.

3 What is the government's policy for the domestic natural gas sector and which bodies set it?

Government policy for the gas sector is driven by the requirements of European market liberalisation packages, as well as a desire for greater fuel security by promotion of indigenous fuel sources. Government policy to date can be broadly summarised as the phased introduction of competition in gas supply, promotion of significant investment in new infrastructure and promotion of investment in exploitation of indigenous gas reserves. The current policy focus of the Regulatory Authorities is the CAG project.

Policy is set by the Department of Communications, Energy and Natural Resources (DCENR), which has overall policy responsibility for the gas sector. The gas policy division is responsible for development of policy on security of gas supply, on infrastructure development in the context of the government's objectives of promoting economic and regional development and enhancing social inclusion, and on north-south gas market developments in the context of promoting an all-island energy market.

Liberalisation of the gas sector has seen the CER vested with powers as independent regulator for the downstream elements of the gas sector. Regulatory responsibility for the upstream elements of the sector remains the responsibility of the Petroleum Affairs Division of the DCENR.

Finally, the Irish legislature (the Oireachtas) has passed the Petroleum (Exploration and Extraction) Safety Act 2010, the purpose of which is to confer statutory responsibility for the safety of oil and gas exploration and production on the CER. The Act has not yet been commenced in its entirety.


4 What is the ownership and organisational structure for production of natural gas (other than LNG)? How does the government derive value from natural gas production?

Private companies can participate in exploration for and production of natural gas pursuant to a licensing regime established by the Petroleum and Other Minerals Development Act 1960 (as amended; the POMD Act). The first indigenous natural gas produced in Ireland was from the Kinsale Head gas field and subsequently from the adjacent, South West Kinsale and Ballycotton gas fields off the south coast of County Cork. A petroleum lease in respect of the Kinsale Head gas field was granted on 7 May 1970 and the full output of the field was sold to BGÉ.

The only other development to have achieved commercial production in Ireland is the Seven Heads gas field. The petroleum lease in respect of this field was granted on 13 November 2002 and it began production in late 2003. The Seven Heads gas field is also located off the south coast of County Cork adjacent to the Kinsale Head gas field and makes use of the Kinsale Head processing facilities.

Ireland's only other petroleum lease was granted on 15 November 2001 in relation to the Corrib gas field off the west coast of County Mayo. Production at Corrib was delayed owing to opposition to onshore elements of the development. Production has not yet commenced.

The Irish government has sought to promote actively investment in indigenous fuel sources by creating favourable fiscal treatment of exploration and production. Ireland has abolished production-related royalties and has replaced them with a statutory regime for petroleum taxation, involving corporation tax at a rate of 25 per cent and, since 2008, a profit resource rent tax based on the profit ratio of the petroleum field. Holders of petroleum leases are required to remain tax-resident in Ireland for the duration of the lease.

5 Describe the statutory and regulatory framework and any relevant authorisations applicable to natural gas exploration and production.

Natural gas exploration and production activities are subject to a strict regulatory and licensing regime overseen by the DCENR, with the principal legislative framework for the regime set out in the POMD Act (and given practical effect by the Licensing Terms for Offshore Oil and Gas Exploration, Development and Production (2007) (the Licensing Terms)). No person may explore or prospect for petroleum in any area in Ireland unless he or she holds an appropriate prospecting or exploration licence or is a lessee under a petroleum lease. All licences and petroleum leases incorporate licensing terms and conditions, including environmental provisions, stipulated by the DCENR. When a commercial discovery has been established under an exploration licence, the licence holder must notify the minister and apply for a petroleum lease with a view to its development. Pursuant to the standard-form petroleum lease, a developer is required to obtain the minister's approval of a plan of development prior to the commencement of commercial production operations and must comply with the plan of development for the duration of the lease. Among other things, the plan of development must contain a production profile...

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