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Oil and viability of our economy

THE announcement of the largest new offshore development in the UK in more than a decade will provide a boost to the argument that the outlook for North Sea oil and gas remains bright.

Statoil, whose main shareholder is the Norwegian Government, expects to create 700 jobs and produce oil from the Mariner field for 30 years, beginning in 2017. It closely follows the announcement of a £1 billion development of two oil fields east of Shetland by Dana Petroleum to come on stream in 2015. Whether this double boost can start to stem the long decline of North Sea oil and gas output will have a crucial role in determining Scotland's economic and political future.

Oil revenues are at the heart of the political debate in the run-up to the referendum on independence. The sharp division of opinion over tax revenues from oil and gas in an independent Scotland was highlighted this week with a gloomy prognosis from the Centre for Public Policy for Regions (CPPR).

It forecast that falling oil revenues would leave Scotland worse off than the rest of the UK by the time of the referendum in 2014. This was in line with the Office for Budget Responsibility which said earlier this month that by 2017-18 oil revenues would be 50% lower than what had been expected at the time of the 2011 Budget. Forecasting revenue in this area, however, is notoriously difficult. The market is volatile and production can be affected by technical difficulties or accidents.

Projections of declining revenues must be balanced against the reality of increased investment. That currently looks healthy with Scottish Enterprise expecting £44bn to be invested in the sector between 2012 and 2016. Developments in technology will enable fuller recovery of reserves in existing fields and the development of new ones. With fields west of Shetland estimated to contain up to 25% of the UK's remaining oil reserves, the remaining recoverable resources should ensure production for decades to come.

At a time when manufacturing, especially in Scotland, is increasingly close to vanishing point, the skilled jobs provided by North Sea oil and gas are vital to the economy in addition to the revenues they contribute (up to one fifth of Scotland's annual income in the last decade).

After more than a decade of devolution, the political debate has long evolved from the "It's Scotland's oil" slogan of the SNP in the early 1970s. But economic viability is the substantive issue and much of the SNP's social policy depends on an oil fund of £1 billion a year, or one-tenth of current tax revenues. All forecasts must be subject to amendment but there is little disagreement with the scenario outlined by the leading academic authority on North Sea economics, Professor Alex Kemp of Aberdeen University, of a rise in production (helped by tax changes) followed by decline "at a fairly brisk pace". Both sides in the independence debate should accept this as a starting point for a more constructive exchange of views.

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