Scottish independence: oil and gas takes center-stage
Scotland goes to the polls on September 18 2014 in a referendum over its independence and the latest surveys show the result is too close to call. Oil and gas has taken the center-stage and the question is whether oil production, which has plummeted about 40 percent in four years be enough to finance a newly created state.
While Scotland’s economy has strengths in tourism, finance and even whiskey, oil will remain vital. An independent Scotland would benefit from most of the new revenues from North Sea oil output – worth $50 billion a year – but it will nevertheless ask Britain to co-finance some $60 billion of decommissioning to remove old platforms and pipelines.
Scotland nationalists claim UK oil
Nothing will be more important to the economic future of Scotland than the oil industry should the country vote to end the 307-year union with the rest of the UK.
Reserves of oil and gas would be split, possibly along the so-called median line, already used to allocate fishing rights. The division would hand the Scots about 96 percent of annual oil production and 47 percent of the gas, according to estimates cited by the Scottish government.
With public spending about $2,100 per person higher in Scotland than the UK as a whole, “the Scottish government will have to rely on oil revenues from the North Sea to make up the difference,” Bell said.
North Sea production has long since peaked. The Office of Budget Responsibility, an independent body set up to report on public finances, forecast UK oil and gas receipts falling to 3.5 billion pounds by 2018-19 from 4.7 billion pounds in 2013-14. It assumes a slide in oil prices to $99/bbl and steady production over the period.
The figures contrast with those set out by the Scottish administration, which sees, in its central scenario, revenue for Scotland alone reaching 5.8 billion pounds in 2014-15 and 8.3 billion the next year. It expects prices of $110/bbl, while using an estimate from industry lobby Oil & Gas UK for output to rise about 14 percent from 2013 to 2018.
While the Scottish government, in its May 2014 Oil and Gas Analytical Bulletin, doesn’t provide longer-term projections, the OBR shows UK oil and gas revenue declining to as low as an annual 1.3 billion pounds in 2029-30 as reserves deplete.
Dispute over old oil rigs
Scotland will ask Britain to help finance the cost of removing old North Sea rigs and pipelines even if it votes for independence and gains most of the oil revenues, a move that bankers and lawyers say may result in years of legal battles.
There are about 300 rigs in the UK North Sea and the cost of decommissioning is expected to exceed 40 billion pounds ($65 billion) until 2040, with expenditure peaking at 1.7 billion pounds as early as 2016, according to industry estimates.
The British government has allowed operators to offset between a half and three quarters of this spending via tax relief, which means that over 20 billion pounds will not be paid to state coffers.
But alongside the uncertainty around decommissioning costs, the industry is worried that future investment in the North Sea could be jeopardised by a dispute over maritime boundaries if Scotland becomes independent.
The biggest operators in the North Sea such as oil majors BP and Royal Dutch/ Shell see the decommissioning process as a litmus test for other regions which will one day have to go through the same challenges as the North Sea.
Companies declined to comment specifically on challenges to the decommissioning process arising from the potential Scottish split from Britain.
BP, Shell urges Scotland to vote against Independence
BP plc and Royal Dutch Shell plc have both come out in support of comments by Scottish oil tycoon Sir Ian Wood that Scotland’s voters are being misled by the pro-independence campaign’s unrealistic predictions of future oil revenues.
Wood had warned that a slowdown in production means that North Sea revenues will not exist in 30 years. Wood was also highly critical of figures recently produced by N-56 – a Scottish business organization with connections to the Yes Scotland campaign – that stated an additional 21 billion barrels of oil equivalent is potentially recoverable from the North Sea from unconventional shale resources.
BP and Shell both issued separate statements supporting Wood. BP Group Chief Executive Bob Dudley commented: “BP has been in the UK North Sea for 50 years and we hope to operate here for many years to come. However, the province is now mature and I believe Sir Ian Wood correctly assesses its future potential.
“The opportunities today are smaller and more challenging to develop than in the past. We also face the challenges of extending the productive life of existing assets and managing the future costs of decommissioning. Much of this activity requires fiscal support to be economic, and future long-term investments require fiscal stability and certainty.
“Our business invests for decades into the future. It is important our plans are based on a realistic view of the North Sea’s future potential and the challenges the industry faces in continuing to operate here.
“As a major investor in Scotland – now and into the future – BP believes that the future prospects for the North Sea are best served by maintaining the existing capacity and integrity of the United Kingdom.”
Shell CEO Ben van Beurden added: “Sir Ian Wood is right in his technical assessment that the amount of remaining oil and gas that can be profitably extracted from the UK North Sea is a function of price and cost. As existing infrastructure gets older and output falls, costs will go up and tax receipts will come down. Furthermore, much of the UK North Sea’s remaining oil and gas – which is yet to be discovered and developed – is in isolated or hard-to-reach areas, which are potentially uneconomic without sharing of existing infrastructure and improved tax incentives.”
FRANK UZUEGBUNAM