Scottish oil independence

Professor Alex Kemp

January 3, 2014

North Sea oil and the constitutional debate in Scotland and the UK

Professor Alex KempThe possibility of Scotland becoming an independent country is currently attracting much interest, and not just locally, but in the rest of the UK and elsewhere as a referendum on the issue, due in September 2014, draws closer.

Although the ramifications of such a major political change would extend throughout the economy, the position of the North Sea oil and gas sector has received particular attention. This reflects the importance of the industry to the Scottish economy, and to the prospective budgetary position of an independent Scottish government in particular.

Image Caption: Professor Alex Kemp, University of Aberdeen

Much less attention has been given to the implications of independence for the industry itself. All current oil company investors will be interested in the consequences for the status of their existing licenses, their tax position, and the myriad of regulations, which currently affect their operations. The assumption is generally made that the continental shelf in the North Sea would be divided between Scotland and the rest of the UK, on the basis of the median line currently used for fisheries management purposes. Adoption of this dividing line would result in well over 90% of oil production, and over 50% of gas production, being allocated to the Scottish sector.

The Scottish government has indicated it would honor existing licenses that relate to areas within the Scottish sector. The status of other license-related arrangements between industry and the UK government, dealing with issues such as third-party access to infrastructure, the fallow block initiative, the stewardship initiative on mature fields, and decommissioning obligations, would require clarification. These are all very live issues, and significantly affect industry operations and plans.

Efficient licensing and regulation of the sector, in areas such as assessing and monitoring field development plans, and the issue of new licenses, require considerable specialist expertise, backed up with the availability of large amounts of information on seismic and well data, existing field development plans, thirdparty infrastructure use agreements, and decommissioning plans. All the relevant information would have to be transferred from the UK government to the Scottish one, to facilitate effective stewardship of the industry.

The taxation of North Sea oil has been the subject of lively debate and controversy ever since oil exploitation commenced in the 1970s. The last major tax hike, in 2011, was followed by increases in the complex field allowances for the Supplementary Charge, which have helped to fuel the current investment boom. A Scottish government would have to acquire the expertise and voluminous historic data to effectively operate this very complex system.

There have been recent assurances by the Scottish government that it has no plans to increase the level of tax take. Its priorities would be to incentivize production, exploration, and the maximization of economic recovery. The certainty regarding decommissioning tax relief, recently provided for by the UK government, would be continued by a Scottish government.

The substantial revenues generated by the North Sea oil sector would be critically important to the budget of a Scottish government. But their volatility, and expected long term decline, pose problems. The Scottish government plans to have a stabilization fund to iron out the consequences of volatility for its budgets, and in due course to establish a fund to ensure that future generations also benefit. Whether the revenues will be large enough to satisfy both the budgetary needs of the government, and make worthwhile contributions to a fund, depends on the interaction of production, oil prices, and the various tax allowances. There are many possibilities which ensure that the political debate continues without agreement.

The industry has generally stayed neutral in this debate. It is primarily interested in the removal of uncertainty regarding the investment environment and provision of evidence that a Scottish government understands the policy requirements of a mature petroleum province. OE

Alex Kemp is Professor of Petroleum Economics and Director of Aberdeen Centre for Research in Energy Economics and Finance at the University of Aberdeen. He has published more than 200 papers on petroleum economics. He was a specialist adviser to the UK House of Commons Select Committee on Energy in 1980-1992, and in 2004, and 2009. From 1993-2003, he was a member of the UK Government Energy Advisory Panel. He was awarded the OBE in 2006, for services to the oil and gas industries. He wrote The Official History of North Sea Oil and Gas, published in 2011, in two volumes.