Scotland today (September 18) goes to the polls to decide on its possible future fate as an independent nation.
It is being hailed as a historic day for the country. But, for some, the mere existence of the referendum has already damaged investment in the UK North Sea, the revenues from which have been a key issue for a future independent Scotland, as firms play a “wait and see” game.
For the UK Continental Shelf’s (UKCS) upstream operators, the preferred outcome is stability. Stability gives operators confidence and allows for long term decision making.
Last week, the heads of BP and Shell both made their opinions clear about their preferred outcome of the referendum – a “no” vote. Read more: Scottish independence debate draws in CEOs.
Sir Ian Wood, author of a report into the industry, commissioned to help improve investment and maximum resource extraction, has also spoken out, saying he believes it will be more difficult to get the level of investment needed in the North Sea under a changed regime. Sir Ian has also disputed figures for remaining reserves in the UKCS touted by the Scottish National Party.
There is also concern that an independent Scotland would take some time to become established, giving a high level of uncertainty to oil firms at a crucial point in the industry’s history – fields are declining and the worry is infrastructure will be removed that will result in “stranded” resources.
The Scottish National Party has made assurances it will has no plans to increase the level of tax take. It has also pledged to honor existing licenses that relate to areas within the Scottish sector. The status of other license-related arrangements, including decommissioning obligations, would need to be clarified.
Westhouse analyst Jamal Orazbayeva, in a recent note, suggests an independent Scottish government would not be likely to make any radical changes. He said: "Implementing fiscal changes would not be an overnight process and given the dependency of Scotland on the oil industry, we think radical, unfavourable changes would be unlikely."
What could a yes vote mean? The immediate issues are the marine boundary, dictating which areas Scotland would gain control over. “Based on the Convention on the Continental Shelf median line, there are currently 192 producing fields in Scottish waters and 151 in UK waters. While the field distribution is broadly similar, production from Scottish waters accounts for 84% of the estimated total UK production,” says GlobalData analysts Gustavo Bianchotti and Matthew Ingham.
“Under this principle, the UK would retain its gas-prone interests in the Southern North Sea but possess little to no indigenous oil production. However, a direct extension of the UK median line would reduce Scotland’s share of production by an estimated 30%.” Taxes would then need to be agreed, including cross-juridical unitization issues, where fields cross boundaries.
Next would be the establishing a new regulatory body to control operations on the UKCS.
Would Scottish North Sea oil balance the books for an independent Scotland? An independent Scotland would become a net exporter of oil and gas, as Scottish demand only represented 11.5% of total UK demand in 2013, says GlobalData.
“Analysis of Government Expenditure & Revenue Scotland 2012–2013 figures suggests that total non-North Sea Scottish public sector revenue is estimated at £47.6 billion (US$76.2 billion), or 8.2% of total UK non-North Sea revenue. If Scotland’s geographical share of North Sea revenue is included, total Scottish public sector revenue is an estimated £53.1 billion (US$85 billion), or 9.1% of UK total public sector revenue, yet total Scottish public sector expenditure was £65.2 billion, or 9.3% of UK public sector expenditure, suggesting an independent Scottish government deficit of £17.6 billion (US$28.2 billion). This is nearly three times higher than the total 2012–2013 North Sea oil and gas tax revenue of £6.1 billion (US$9.8 billion),” say Bianchotti and Ingham.
Another consideration is decommissioning costs. On the UKCS, up to half the cost of decommissioning platforms will be born by the government through tax breaks to the industry. Exactly who will foot this bill is unclear.
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