Related Articles
Forward article link
Share PDF with colleagues

High hopes for an independent Scotland's oil wealth

The Scottish are due to vote in 18 months on whether to leave the UK - taking with them the majority of the UK's oil and gas production

After more than 300 years of often-uneasy union with England, Scotland is approaching a referendum which could lead to its independence. The Scottish government, dominated by the Scottish National Party, argues that the possible new state will own 78% of the UK's hydrocarbons production and 94% of its oil and gas tax revenue - a wonderful start to independent life for a country with a population of just 5.3 million.

Although support for Scottish nationalism has grown strongly since the Scottish parliament was established in 1999, full independence might be a step too far for some voters - so nationalists have an interest in talking-up an independent Scotland's economic prospects. With the largest hydrocarbons production in the EU and a small population, they present a vision of Norwegian-style per capita wealth.

Hints from London present a different picture. How oil and gas tax revenues are to be shared, it is indicated, will form part of the political settlement following a vote for independence. Regardless of title to the offshore fields, there will have to be a programme of economic adjustment to take account of wider issues - such as sharing the UK's vast public debt, the future for UK defence bases in Scotland, and other public spending commitments. Do not expect all the revenue straight away, is the message from London.

How the fields are to be shared is also a matter for negotiation. According to Professor Alexander Kemp of Aberdeen University, who has carried out studies on the likely revenue distribution, "there is some presumption that the line of equidistance should be employed to determine the boundary" - although he notes that other arguments could apply. In 1999, the equidistance principle was used to create a boundary between the two countries for fishery purposes.

If this border is adopted, Scotland will win the overwhelming majority of the UK's oil and gas fields. The central and northern North Sea areas and the important frontier areas west of the Shetland Islands and out to the Atlantic margin would all be Scottish, while the UK will be left with, mostly, elderly gasfields in the southern North Sea and Irish Sea.

According to a study carried out by Kemp for the Scottish government, this division would have given Scotland 96% of the UK's offshore oil production in 2011, and 52% of its gas production - or 78% of the year's combined hydrocarbons production. Because the division gives Scotland the majority of the oil production - more valuable than gas - Scotland's share of total oil and gas tax revenues in the fiscal year 2011-12 would have been 94%.

According to the Scottish government, UK tax revenues from oil and gas production from Scottish waters amounted to £10.6bn ($16.0bn) in 2011-12. That sum, if transferred in its entirety to Scotland, would represent a 23% increase in Scotland's tax revenues from all sources (of £45.2bn in 2010-11, the most recent year available).

Based on forecasts by the UK's Office for Budget Responsibility - an independent reviewer of public finances - the Scottish government says Scotland's oil and gas tax revenues will amount to a cumulative £31.3bn over the six years to fiscal 2017-18. But it also produces a range of more optimistic revenue forecasts, which extend to £57.1bn for the six years.

Company attitudes

While so much is undecided, the North Sea producers see no point in making position- statements on Scotland's future. However, privately the majors do not express great concern that independence could lead to sudden tax rises or onerous conditions. In view of the importance of oil-related activity to the Scottish economy - the Scottish government estimates there are 2,000 companies in the supply-chain, supporting 200,000 jobs - an independent Scotland could be expected to view the health of the offshore business as a top priority.

But there is concern about an independent Scotland's dealings with the EU. Companies say the new country could be less robust than the UK in fending-off the EU's aspirations for control over North Sea oil. The EU has already tried to take control over the North Sea safety regime, following the Gulf of Mexico disaster in 2010, and its proposals for an EU-wide safety regime continue to be resisted by the UK government and Oil & Gas UK (OGUK), the producers' and suppliers' organisation. An independent Scotland would be a small, new-entrant member of the EU, without much weight, and it might have to be compliant.

The other big concern for the producers is tax relief for decommissioning expenditures. The tax rules accept that decommissioning costs can be claimed against taxes already paid - to the UK - so an independent Scotland would want the UK to cover the tax-reliefs. Although the Scottish government's energy minister, Fergus Ewing, gave an assurance in June 2012 that companies would continue to receive the same decommissioning reliefs as at present, the cost of providing them will inevitably form part of the economic settlement between the two countries. Accordingly, uncertainties continue.

Regardless of Scottish independence, uncertainties about the future availability of tax relief for decommissioning are leading to the premature shut-down of assets, according to OGUK. An initiative by the organisation is due to lead to the introduction by the government of a "decommissioning relief deed" this year, to provide a guarantee that tax relief will still be available at the time an asset is decommissioned. The guarantees should help to keep fields in production by facilitating late-life investments and asset trading, OGUK says.

However, as well as being a cost, decommissioning is a business opportunity. According to OGUK, decommissioning expenditures are likely to rise from £800m this year to more than £1.0bn in 2014 and then to £1.2bn in 2015, staying above £1.0bn in each of the following two years. Decommissioning in waters likely to be Scottish will account for up to £1.0bn of the annual totals.

On the day-to-day management of offshore activities, the UK government's regulatory staff are already based in Aberdeen so there should be a smooth transfer of responsibility. Most operators already have offices in Aberdeen.

Also in this section
Saudi Arabia's Vision 2030 looks blurry in Khashoggi aftermath
18 October 2018
International reaction to the disappearance of prominent Saudi journalist Jamal Khashoggi will lead, at very least, to delays to the kingdom’s ambitious reform programme
South Africa urgently seeking gas as energy transition stalls
18 October 2018
South Africa’s power sector plans envisage a big role for gas, but first the country needs to find the feedstock
Senegal and Guinea-Bissau deal faces domestic pressures
17 October 2018
Guinea-Bissau is eager to kick start exploration in acreage shared with oil-rich Senegal, but it’s slow going