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Scotland's no vote ushers in UK Continental Shelf overhaul

The referendum may have kept Scotland in the UK, however there are many issues still to be resolved

Scotland's decision to remain part of the UK has provided a degree of certainty for North Sea operators. But, in the aftermath of the 18 September vote, a number of issues must now be resolved, not least the further devolution of power to Edinburgh, and the potential impact this will have on the UK Continental Shelf (UKCS).

The independence referendum was hailed as the most important decision Scotland's voters would make for a generation. The vote was not as close as late opinion polls suggested it would be - in the event, 55% of the 3.6 million people registered to vote rejected independence. Some poll-watchers suggested that a number of issues, including Scotland's membership of the EU, which currency an independent Scotland would use and, crucially, the future of North Sea oil and gas combined to help swing the vote for the No camp.

Scotland's oil industry was a key battleground throughout the 18-month referendum campaign. To independence campaigners, the energy sector - particularly revenues from the North Sea - would help provide the economic foundation for an independent Scotland. Yes campaigners talked of modelling the sector on the Norwegian industry, arguing that establishing a sovereign wealth fund would provide a solid financial foundation for the fledgling nation.

If Scotland had voted to end of the 307-year union with England, large-scale changes, with direct impact on the UKCS, would have been needed. The new country would have had needed a new fiscal regime and regulatory framework. Operators deemed to be working within the Scottish Continental Shelf (SCS) would have faced uncertainty over whether their assets were still within the EU, or even which currency they would have used in trading their oil.

Law firm Bond Dickenson tells Petroleum Economist that the biggest uncertainty which current UKCS operators would have faced was the potential delineation of the SCS. This could have involved a lengthy negotiating process over boundaries and governance of the SCS, as around 90% of the UK's producing fields lie in the central and northern North Sea, offshore east of Scotland.

While the referendum result put paid to some of these concerns, the promise to further devolve power to Scotland has thrown up new issues, most notably regarding regulation, governance and, with further devolution of power from Westminster likely, possible changes to the fiscal regime governing the energy sector.

Lord Smith of Kelvin, a life peer in the House of Lords and chairman of energy firm Scottish and Southern Energy, will oversee the devolution process, which could include transferring powers of governance on issues such as tax, spending and welfare. Draft legislation on which powers are to be devolved is expected by January 2015.

The Scottish government's powers are derived from the 1998 Scotland Act and its successor legislation. At present, the Scottish government has no regulatory authority over the UK's upstream oil and gas sector. Corporation tax and energy sector-specific taxes, such as the petroleum revenue tax (PRT) and the supplementary charge, are set by Westminster. The question of whether corporation tax or the PRT will be devolved to Edinburgh has not yet been settled.

Analysts said having a clear and stable fiscal regime is crucial for the long-term future of North Sea exploration and production as the province matures further. Wood Mackenzie, a consultancy, said poor production and disappointing UKCS exploration has resulted in less than 330m barrels of oil equivalent of reserves being discovered since 2011. UKCS production has been falling steadily since 1999 due, in part, to project delays and lower-than-expected recovery rates from mature fields. The consultancy said if these issues are not tackled "the longer-term outlook for the UK is worrying".

The UKCS' high operating costs have added to the challenges of declining production and a coordinated effort from both the UK government and the industry is needed to boost the sector, said Wood Mackenzie.

In February this year, UK industry stalwart Ian Wood, founder of the Aberdeen-based oil services firm Wood Group, released a report outlining plans to maximise oil and gas output from the UKCS over the next two decades. His report, published as The Wood Review, claimed a further 12bn-24bn barrels of oil could be extracted from the UKCS over the next 20 years, provided a combination of tax incentives; a move towards sharing existing infrastructure; and greater collaboration between government and industry could be achieved. The Wood Review also recommended a new regulatory body be created to oversee the changes. 

In response, the UK government said it would review the UK's North Sea tax regime to spur investment as the basin matures. The government said a new tax allowance for ultra high-pressure, high-temperature field developments would be introduced. Moves are already under way to create a new regulator -- the Oil and Gas Authority - which is expected to take a more active role in the stewardship of the UKCS. The government has also signed decommissioning relief deeds, worth more than £20bn ($32.5bn) to industry, to try to provide certainty over the tax relief available for dismantling and disposing of North Sea infrastructure.

During the referendum campaign, a number of major North Sea players, including BP, Shell and GDF Suez, warned that fiscal uncertainty would threaten future investment in the province. Some analysts said uncertainty leading up to the referendum had already caused some companies to shy away from North Sea investment. 

Ewan Neilson, head of energy at Aberdeen-based law firm Stronachs, tells Petroleum Economist the UKCS's full potential will only be realised if the right fiscal and political framework is put in place. "What really counts is getting international capital to invest in the province. Unless operators see certainty, fiscal stability and strong regulation we won't be able to attract international investment and those reserves won't be developed," Neilson said. "So that whole political debate which politicians took up (during the referendum campaign), lost sight of the fact that international oil and gas investors are crucial here. And it's about what they want to put their money into at the end of the day."

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