These are difficult times for Scotland??s North Sea industry and the thousands of people who work in it.
These are difficult times for Scotland??s North Sea industry and the thousands of people who work in it. Yesterday??s report from the Office of Budget Responsibility (OBR) confirmed an environment of rising costs, stagnating production and falling revenues.
Much attention in recent weeks has focused on the sudden drop in the oil price, down by one third in just six months. This is dramatic, but it is not without precedent. We saw big price drops in the early 1990s, 2003 and 2008. Whilst the recent fluctuation has made the economic climate more challenging in the North Sea, it should not divert attention from the deep and long-term trend of decline in both production and revenues.
The North Sea is one of the most mature basins in the world. Some 40 billion barrels of oil have been extracted since 1964, with Sir Ian Wood estimating that there are around 15-16.5bn barrels to go. Developers are increasingly forced into harder and more costly fields in search of oil, meaning that capital expenditure in 2014 is around 40 per cent higher than in 2011.
The efficiency with which operators can extract a barrel of oil is down by 60 per cent. Costs are up but the price is down. It is little surprise that production has fallen dramatically in the last three years, down to levels last seen in the 1970s.
All of this means we have to be realistic about the future of the North Sea and cautious about the potential revenues. Unfortunately, this is not a message that has reached the Scottish Government in Holyrood.
Whilst the OBR yesterday forecast that revenues will fall by £0.6bn between 2015 and 2016, the SNP are predicting a £2.1bn increase. Whilst the OBR predict flat levels of production, the SNP predict an increase of 80,000 barrels a day. With the price of a barrel of oil edging towards $70, the SNP continue to base their forecasts on $100 a barrel.
Saying what you want without recourse to robust evidence is irresponsible. The black hole in 2015/16 - between what the SNP predict they would take in revenues and what the OBR have forecast - is almost £5bn. To put that in perspective, the Scottish Government plans to spend £2.5bn on justice, £2.9bn on education and £4.4bn on finance, employment and growth in the same period. By getting their sums so catastrophically wrong, over-reliance on oil revenues would put the budgets of whole policy areas at risk.
This is much more than just a case of the SNP playing fast and loose with the figures. It is indicative of their attitudes to the North Sea. Refusing to acknowledge that this is a declining basin does not make it not so. Just last month, an statement heralded ??a renaissance?? in the North Sea. There??s no sign of that in yesterday??s OBR forecasts or the activity of companies.
The Smith Commission has delivered on the promise of greater fiscal responsibility for the Scottish Parliament. But yesterday??s report from the OBR highlights why there is a benefit in spreading the volatility of resources. A Government cannot do its accounting on the basis of wish-fulfilment. No doubt they will find the OBR report a frustrating reality - somewhere out there, an SNP councillor may be considering setting fire to it.
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