Oil & Energy

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Is Scotland’s economy dependent on oil? What else does Scotland have?

Even without oil and gas, Scotland’s wealth per head of population is 99% of that of the UK’s, and ranks behind only London and the South East of England on this measure.

We have many other strong industries on which Scotland can build. We have:

“By international standards Scotland is a wealthy and productive country. There is no doubt that Scotland has the potential to be a successful independent nation”.

The Scottish Government’s Fiscal Commission Working Group (which includes two Nobel Prize winning economists)

How important will North Sea oil revenues be to an independent Scotland?

The tax revenues from Scotland’s oil and gas reserves, which currently go to the UK Treasury, would remain in Scotland.

Scotland’s oil revenues contribute to government expenditure across the entire UK. All the oil income goes to Westminster, along with all the other tax revenues, and Westminster decides how much money is allocated to the Scottish Parliament.

Oil and Gas UK estimate that there are up to 24 billion barrels of oil still to be extracted from the North Sea with a wholesale value of up to £1.5 trillion. That’s more than ten times our likely share of national debt.

I keep hearing that the oil is running out – is this true?

“According to Oil & Gas UK’s Activity Survey, the reality is that the UK will continue to supply oil and gas well beyond 2055.”(p24).

UK Government – Oil and Gas Industrial Strategy (published in March 2013)

There are estimated to be up to 24 billion barrels of oil remaining in the North Sea – worth up to £1.5 trillion (£1,500 billion or £1,500,000,000). More than half of the value of North Sea oil and gas is still to be extracted. Most projections say that it will continue to generate a significant income for Scotland for possibly 50 years or more.

In addition to these reserves there are significant reserves opening up off the Northern Isles worth some £45 billion in oil duty revenue.

There are also reported to be large oil fields off the west coast. The Ministry of Defence has barred exploration because it is too close to the nuclear submarine base at Faslane.

The former Defence Secretary, Michael Heseltine, has admitted blocking a potential oil boom off the West coast of Scotland in the 1980s.

Oil and gas exploration could begin off the west coast of Scotland after independence when the Trident nuclear submarines are removed from the Clyde.

Finally, the oil industry invested £13 billion in 2013 and are on target to invest £14 billion this year. It’s fair to say they would not do this if they thought they would not get a good return on that investment.

Update – 14 August

Economist delivers damning verdict on Treasury oil forecasts

One of Scotland’s most respected economists has delivered a damning verdict on Treasury oil forecasts, arguing tax revenues over the next four years could nearly double those predicted

Professor Sir Donald Mackay described the figures from the Office for Budget Responsibility (OBR) – which recently downgraded its outlook for the North Sea – as “precisely wrong”. He adds that would yield Scottish Government tax revenues from 2014-15 to 2018-19, close to twice those of the OBR.

The former advisor to the Secretary of State for Scotland – including the last four Conservatives to hold the post – backs the position taken by industry body Oil and Gas UK. The industry expects a major increase in production in the next two to three years as new fields such as BP Clair and Statoil’s Mariner come onstream.

The former Scottish Enterprise chairman argues Westminster has been downplaying the potential impact of oil and gas revenues on an independent Scotland, which he believes will be “much greater” than suggested.

He describes the OBR as being “hopelessly at sea” in its predictions of future oil prices, which he says are based on a flawed system that is not used by oil companies themselves.

Detailed figures and discussion can be found in a letter from Professor Mackay to Alex Salmond 

Update – 15th August

North Sea find could produce more than 700million barrels

An oil field due to begin production east of Shetland could produce oil until 2050, it has emerged.

Xcite Energy said yesterday that its Bentley find – one of the North Sea’s largest untapped resources – could produce more than 700million barrels of oil over 35 years. The firm plans to use enhanced oil recover techniques right from the start to maximise recovery.

Can an independent Scotland manage the costs associated with the Oil & Gas sector?

The view from Darling Blogs:

The No campaign claims that the UK is somehow better placed to handle the ‘costs’ of the Oil and Gas sector – particularly emphasising decommissioning – but the reality is that all of these costs, exploration and decommissioning are the responsibility of the private sector so an independent Scotland would be every bit as able as the UK to manage this.

Private business operates the Oil & Gas sector in the UK. Costs of decommissioning is covered in the document ‘Decommissioning Offshore Installations’ which stipulates that the operator has the financial responsibility for ensuring satisfactory decommissioning:

“2.5 It is a fundamental principle of the decommissioning regime that a person who is responsible for developing or operating an offshore installation/pipeline should also be responsible for decommissioning at the end of its useful life. The Department will therefore charge Industry a fee for approving and revising offshore (oil and gas) decommissioning programmes rather than passing the costs onto the taxpayer which is in line with the ‘polluter pays’ principle of environmental law.”

It is worth pointing out here that unlike many other oil rich countries, the UK has thus far decided not to have a National Oil Company. I imagine the primary reason for this is the upfront investment costs; it’s easier to let oil companies take the risks and be happy with the tax revenues.

However, they work together to share the risks and profits from most of their activities. For example, the BP investment in the West of Shetland, their partners in the appraisal drilling programme are Shell, ConocoPhillips and Chevron.

Such partnership would be a relatively easy route in for a new National Oil Company, ‘ScotOil’ perhaps, if we were to choose this option.

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How has the UK spent the oil money since it’s discovery in the North Sea?

John Jappy, a retired civil servant formerly involved in budget preparation, examines what happened to the billions of pounds of Scottish oil revenue:

Read John’s blog here.

What is the backup once the oil runs out?

The Scottish Government want to channel funds from the oil into a sovereign wealth fund (as has every other oil extracting country on Earth).

It’s not too late for us to start our oil fund. For 15 years Norway used oil revenue for running the economy. It was only in 1996 that they started an investment fund. That fund is now worth over £500 billion (£100,000 per person).

In comparison, the UK Government has raised around £300 billion (in today’s prices) in direct taxes from oil and gas production – and the people of Scotland have almost nothing to show for it.

Gavin McCrone, in his second secret report to Westminster in 1976 was scathing of their dismissal then (and now) of the possibility of setting up an oil fund:

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How important is renewable energy in Scotland?

Scotland is already a net exporter of electricity, with huge recent growth in the deployment of renewable generation.

About 4% of the yearly power consumption of England and Wales is met from Scotland. This figure is tending to rise as Scottish renewable power continues to grow faster than in England and as English nuclear plants are closed.

A leading think tank, Reform Scotland says “Even using conservative assumptions on prices, Scotland could earn £2 billion a year exporting electricity and become a world leader in new-energy technology”

Facts About Renewable Energy in Scotland:

  • Currently supports over 11,000 jobs
  • Powers the equivalent of every house hold in Scotland
  • 25% of Europe’s tidal potential and 10% of its wave potential
  • 25% of Europe’s offshore wind resources
  • More wave and tidal power devices are being tested in the waters off Scotland than in any other country in the world
  • On target to meet all of Scotland’s electricity needs, and 11% of its heat requirements by 2020

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Cheap energy from an independent Scotland will continue to be attractive to the UK. Compared to the rest of the UK, Scottish renewables are cheaper, the 2020 subsidy for a megawatt hour is £43 in Scotland compared to £93 in England.

A report by Welsh, English and Scottish Universities reported that with a focus on renewables – instead of the expensive nuclear power advocated by Westminster – consumers in an independent Scotland could see lower energy prices in an independent Scotland.

SmartestEnergy’s Energy Entrepreneurs Report 2014 found that Independent renewable generation in Scotland now powers more than one million homes, and that:

  • 169 new renewable projects started in Scotland in 2013 – up 50 per cent on the number of new starts in 2012
  • More than £66m invested in independent, commercial-scale renewable electricity schemes in 2013, generating around £234 million worth of electricity, – up from £191m in 2012
  • More than 500 independent projects of over 50kW capacity were operating across Scotland at the end of 2013, with a combined capacity of 1.7 GW – up by 25 per cent on 2012

The report concluded: “Faced with steep rises in energy bills and concerns over security of supply, investing in renewable energy projects is a highly cost-effective way to reduce costs and develop new income streams.”

FURTHER READING

What is the future of the North Sea?

There is still significant investment and exploration in the North Sea for oil and Gas. A few examples over recent months:

  • In April 2013 Premier Oil discovered an estimated 30 million barrels worth of oil in the North Sea
  • In April 2014 BP created 100 new jobs at the Sullom Voe oil terminal which will secure the terminal for at least another 30 years
  • Also in April 2014: An extensive survey of companies in the North Sea oil and gas sector found that they expected to create up to 39,000 jobs over the next two years. 69% of executives in the companies were optimistic about their growth prospects in 2014/2015.
  • Enquest (the biggest UK independent oil producer in the North Sea) expects to invest around £600 million in 2014
  • On August 1st Shell vowed to invest billions of dollars in the North Sea in the coming years, and signalled that is has no major concerns about the prospect of Scottish independence
  • Gas: In May this year Maersk Oil revealed the first glimpse of it’s Culzean project. The Maersk Oil UK-operated Culzean project is one of the largest gas discoveries of recent years in the UK North Sea, and has taken a significant step forward. The total investment for the project is expected to be in excess of £3 billion. If successfully developed, it could provide around 5% of the UK’s total gas consumption by 2020/21. First gas from the project is expected in 2019.

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Why will Scotland be better than Westminster at supporting North Sea industries?

Hugh Fraser, an oil and gas industry executive claims independence would be the best way to provide a legacy from North Sea oil for future generations:

“It strikes me that Scotland is more incentivised than the UK to support its leading industry. Oil and gas represents a bigger proportion of the Scottish economy than is the case for the UK as a whole, which would mean that its interests were given proper attention – in stark contrast to the disgraceful and destabilising treatment of the industry by successive Westminster governments”

“In 2010 UK Chancellor George Osborne unexpectedly increased tax on North Sea companies. The measure stifled investment and jobs before it was ultimately reversed. Since then, Westminster has tried desperately to rebuild bridges, to limited affect.”

The UK Oil & Gas Report 2013 was very critical of the UK government, saying that numerous adverse tax changes in the mid-2000s damaged investment in the North Sea for a number of years.