Oil and gas
Oil and gas
By Michael Settle, UK Political Editor.
The UK’s oil and gas sector provides almost half of the country’s energy needs and is by far the largest single industrial investor. Directly and indirectly, it supports around 450,000 jobs in the UK, 45% of which are in Scotland. The industry accounts for 25% of UK corporation tax. In the last financial year, the Treasury took in £11.3 billion in revenue from oil and gas.
In 2011, output plunged by 19% to 656 million barrels of oil, half the rate of production in 2005. This was put down to a combination of platform shutdowns to address safety and maintenance issues with ageing infrastructure and a slowdown in bringing new fields on stream.
It is estimated up to 24 billion barrels of oil and gas equivalent remain to be extracted. Leading accountants PwC believes the UK offshore oil and gas industry could still generate more than £376 billion in revenues.
In May, the latest licensing round for oil and gas drilling broke all previous records for the number of applications received by the UK Government.
The Treasury has begun a consultation on introducing tax changes on decommissioning old rigs, which, it is hoped, could lead to another £40 billion of investment in the North Sea industry.
Below, we outline the contrasting arguments for Scotland becoming independent, or remaining in the UK.
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The SNP Government stresses Scotland’s geographical share of North Sea oil and gas - using the median line principle to the UK’s continental shelf - is 90% of the total although its per capita share is currently just 8.4%.
Over four decades, 40 billion barrels of oil have been recovered from the North Sea, delivering £300 billion in revenues to the Exchequer. The wholesale value of reserves remaining to be extracted is estimated to be up to £1.5 trillion.
In May, Alex Salmond unveiled the Scottish Government’s oil & gas industry strategy, targeting higher long-term recovery rates, greater exports and £30 billion annual sales by 2020. The First Minister insisted the industry had “a bright future”.
In June, one of Britain’s top economists, Robert Rowthorn, Emeritus Professor of Economics at Cambridge University, told a House of Lords inquiry that a best-case scenario for an independent Scotland - based on a future Scottish Government taking no responsibility for Scotland’s share of UK national debt (currently around £1 trillion), buoyant North Sea revenues and having modest Nordic-style armed forces with no Trident submarines - would lead to an annual fiscal surplus of £1.1 billion or 0.7% of Scotland’s GDP.
Scotland’s fiscal deficit, he suggested, would be “manageable and the country would not require external support” and the newly-independent nation would prove to be a valuable trading partner for the rest of the UK.
Mr Salmond has revealed plans for an independent Scotland to establish a Nordic-style “oil fund’’, that could, over a generation, grow to £30 billion to help fund future investment.
An independent Scotland would be “over-reliant” on oil, which is a price-volatile commodity.
In April, The Economist magazine said it would be a “small vulnerable barque” on a stormy economic ocean. An independent Scotland would depend on oil for 18% of its wealth yet North Sea production has been falling six per cent a year for the past decade and the oil will, eventually, run out.
In his presentation to peers, Prof Rowthorn pointed out how oil price uncertainty was “one of the strongest arguments against independence”.
He noted how in the past 25 years oil prices had shown a great deal of volatility - up to the early 2000s a barrel was $25, then it jumped to $150, dropped to $50, rose back up to $150 and was now around $100. Over the next 25 to 30s years, perspective oil revenues were going to decline almost whatever happens to the price of oil, he said.
In his worst-case scenario - where Scotland takes its per capita share of UK national debt, Orkney and Shetland (with a 30% slice of North Sea revenue) remains in the UK and oil and gas prices are lower than expected - Scotland would have a deficit of £9.4bn or 5.9% of GDP.
In these circumstances, argued Prof Rowthorn, Scotland might be “compelled to implement another round of austerity” and, “in extremis, the UK might have to step in to help bail out Scotland just as it is currently helping to bail out Ireland”.
In February, Glasgow University-based Centre for Public Policy for Regions said Mr Salmond’s proposed £1 billion a year oil fund would add to the Scottish Government’s budget challenges as with North Sea production declining such a level of investment would put “current service levels at risk or will require adding to Scotland’s debt levels”.