On 18 September 2014, the Scottish public will vote on the question, “Should Scotland be an independent country?” With North Sea oil predicted to be the largest sector in an independent Scottish economy, the industry finds itself at the center of a political and economic debate.
First, some basics. The United Kingdom (UK) consists of England, Scotland, Wales, and Northern Ireland. In 1999, a new Scottish Parliament opened with limited devolved powers including health and education. Following its surprise 2011 election victory, the pro-independence Scottish National Party is now delivering on its referendum pledge. Scotland’s population of 5 million forms just 8% of the UK total, but is comparable to that of its prosperous Scandinavian neighbors, including Norway.
While well beyond its 2000 peak production, the North Sea oil and gas sector remains valuable; up to a further 24 billion BOE is recoverable. Although substantial in the Scottish context, this forms less than 1% of global reserves. Tax revenues amounted to GBP 11 billion in 2012 while the sector employs 500,000 workers. The resource meets more than 50% of UK hydrocarbon demand, sharply reducing import dependence.
The outlook for the North Sea is mixed. Investment sits at record levels (GBP 13 billion in 2013) as multinationals develop new opportunities in the Atlantic margin (e.g., Total’s Laggan-Tormore project) while smaller independents redevelop mature assets (e.g., Apache’s purchase of BP’s Forties field). Production, however, has tumbled to below 2 million BOEPD and exploration continues to fall.
Approximately 85% of reserves on the UK Continental Shelf (UKCS) lie in waters closest to Scotland. Upon independence, this would account for almost a fifth of Scotland’s national gross domestic product. While much debated publicly, the precise location of the UK-Scotland maritime boundary is less significant in terms of reserves than might be imagined. Arrangements for distinctive island communities in the far north (Orkney and Shetland) require resolution, however. More pertinent to the effect on the oil and gas industry would be new Scottish tax arrangements, treatment of cross-border pipelines, and unitization agreements. In terms of licensing, the Scottish government has pledged to honor existing agreements but provision of tax relief on the sector’s predicted GBP 35 billion of decommissioning liabilities is a source of industry uncertainty.
North Sea oil has historically been under the control of the UK Parliament, although many activities are executed in Scotland’s oil hub, Aberdeen. Regulation is done through the Department of Energy and Climate Change (licensing), the Health and Safety Executive, and the Maritime and Coastguard Agency (oil spill response). While the Scottish government proposes an all-new energy department, retaining expertise and maintaining continuity could prove challenging as existing bodies find themselves undermanned. Furthermore, the recent report chaired by former Wood Group chairman Sir Ian Wood calls for further government-industry interaction to deliver “maximum economic recovery”. Its recommendations are due to be implemented shortly by the UK government. The UK Department of Energy and Climate Change commissioned former Wood Group Chief Executive Sir Ian Wood to conduct a review of UK offshore oil and gas recovery and its regulation last year. Lawyers are currently dissecting Wood’s study about the ramifications of Scottish independence on the oil and gas sector, although the Scottish government has pledged to honor those granted by the UK government.
The future success of the North Sea largely rests on factors beyond governmental control. Economic modeling suggests that the North Sea, a traditionally high-cost operating environment, is particularly susceptible to an oil price downturn. Recent UKCS entrants include several national oil companies, including China National Offshore Oil Corporation and Sinopec and, while foreign investment has been encouraged by the UK government, its political impact upon an independent Scotland could be significant. With 50% of production from only 10 fields, lengthy field outages would significantly affect Scottish revenues as can dependence on aging hubs. Although UK government-imposed taxes of 62% to 81% have created shock waves, it has proven adept at stimulating investment in the region through a range of incentives. A key challenge for a smaller Scottish economy would be to attract long-term investment without sacrificing short-term revenue, a tricky balance.
North Sea oil and gas revenue have funded UK public spending and supported low levels of personal taxation. By contrast, Norway invested its revenues in an oil fund for long-term growth. Its revenues effectively make every Norwegian a millionaire although personal taxation and living costs are high (many an oil worker visiting Stavanger has a tale of a GBP 10 beer from the bar). The Scottish government proposes to create an oil fund although opponents counter that may not be workable.
Sadly, the topics of currency and Europe cannot be answered definitively ahead of the vote. The UK, a European Union (EU) member state, enjoys an exemption from joining the Euro single currency, allowing it to retain the pound sterling. The Scottish government proposes to continue to share use and control of the pound via a “sterling union” with the UK, an idea the UK government has rejected. The Scottish government also proposes that upon a “yes” vote, it would enter into negotiations with the EU to facilitate direct transition into a new member state. Legal opinion remains divided, however, as no precedent exists. Entering the EU could lead to complexities should common safety and licensing provisions come to fruition.
Opinion polls have consistently shown a preference for a “no” vote by the Scottish public, but the margin has been narrowing. And a close “no” vote could lead to calls for changes in how North Sea management and revenue are shared. No matter which side prevails, the referendum outcome could have significant impact on the North Sea oil and gas sector as it continues to move into a mature phase of production.
| Sanjoy Sen, SPE, is a chemical process engineer with 20 years of industry experience primarily in the UK North Sea, and is based in Aberdeen, Scotland. He holds a BEng degree in chemical engineering from the University of Sheffield and an MSc degree in petroleum engineering from Heriot-Watt University. He recently completed an LLM in oil and gas law at the University of Aberdeen where his dissertation considered the future of the UK North Sea following the 2014 Scottish independence referendum. He is a fellow of the UK’s Institution of Chemical Engineers. |