"Scotland's Future": The Oil & Gas Bit According To The SNP

Tim Haïdar
Posted: 11/26/2013

EDITOR'S NOTE: On Thursday September 18th 2014, all Scots of the age 16 and over will be asked a simple question: "Should Scotland be an independent country?" The answer to that question could either bolster or break the 307-year old Union between Alba and its neighbour to the south, leaving one of the parties with 6.9 billion barrels of oil and a maximum of 2,661 billion m³ of natural gas., and the other with precious little to nothing.

In the build up to the Independence referendum, The Scottish National Party (SNP) has published its whitepaper Scotland’s Future, outlining its vision for an independent nation. Excerpted below is the section of the document specifically pertaining to oil and gas.

Why we need a new approach

Successive Westminster Governments have failed to provide effective stewardship of Scotland's oil and gas resources. Operators place a premium on operating under a stable and predictable tax regime so that the post-tax returns from investments can be appropriately evaluated. In recent years, the UK North Sea fiscal regime has not provided this certainty, and investment in the oil and gas sector has suffered. Over the past decade there have been 16 substantive changes to the fiscal regime. These frequent changes, often without prior consultation, have earned the UK a reputation for fiscal instability, inhibiting new investment, decreasing the life-span of some fields and damaging the Scottish economy.

Sir Ian Wood commented on the issue of fiscal instability within the interim report to his UKCS Maximising Recovery Review, saying that "clear views were expressed that fiscal instability has been a significant factor in basin under-performance". We welcome this report, which also makes clear that the current structure of having the regulatory body situated within the Department for Energy and Climate Change, is "no longer adequate to meet the challenges of managing an increasingly complex basin". The evidence gathered by Sir Ian showed unanimously that the existing regulator is "significantly under-resourced and under-powered"[331].

The Westminster Government has also cut funding and staffing for the Coastguard, an essential public service which helps to protect those who work offshore.

Westminster governments have also failed to re-invest the proceeds of the North Sea to provide a long-term benefit to future generations. Stabilisation funds and sovereign wealth funds are common among oil and gas producing countries, with the UK being a notable exception[332]. Norway's oil fund, for example, was established in 1990 and is now worth around £470 billion, equivalent to £90,000 per head in Norway, making it the largest sovereign wealth fund in the world. In contrast, successive Westminster governments have accumulated debts which are now worth in excess of £1 trillion.

Infographic showing Scotland's oil production

The Scotland we can create

The oil and gas sector has been a major part of the economy of Scotland since the 1970s. Oil and gas production is estimated to have contributed around £22 billion to Scottish GDP in 2012[333]. Through the success of the last five decades, Aberdeen has become an international oil and gas centre of excellence, home to an industry that is leading the world in many areas, supported by strong academic research in Scotland's universities. In 2013, oil and gas was the largest single sector in the FTSE 100 Index of leading companies[334], and a sector in which Scottish firms are leading global players.

Scotland now has a second opportunity to steward our oil and gas assets for the benefit of the nation, as well as supporting the growth of an industry that in many areas is the best in the world.

Overall, Scotland has the vast bulk of the UK's offshore oil and gas reserves, which are estimated to have a wholesale value of £1.5 trillion. Record investment in 2013 points to a bright and lengthy future for oil and gas production in Scotland. As well as the substantial reserves in the North Sea, there are now major developments taking place to the west of Scotland, especially west of Shetland[335]. Scotland is estimated to have the largest conventional oil reserves in the EU - around 60 per cent of the EU total. Scotland is also estimated to have the second largest volume of proven gas reserves in the EU after the Netherlands[336].

For the sake of future generations living and bringing up their families in Scotland, we must not lose out on the opportunity that these remaining reserves provide.

The choices open to us

With independence, Scotland will have full responsibility for our oil and gas reserves. An independent Scotland will aim to maximise the safe production of oil and gas from the fields off Scotland's shores, with a stable and predictable fiscal regime.

With independence, we can ensure that the huge wealth generated by Scotland's natural resources benefits all of our people. An independent Scotland could also use our position as a major hydrocarbon producer to drive the most ambitious low carbon economic transformation of any country.

Scotland also has many natural competitive advantages for the development of carbon capture and storage (CCS). The North Sea is a natural storage hub for vast volumes of carbon dioxide. There is also the potential to make use of the existing infrastructure from the oil and gas industry, and there are a range of commercial opportunities to capture carbon in the central belt of Scotland. Only independence provides Scotland with the autonomy to make the necessary strategic investments that will support the growth of CCS.

Our priorities for action

An Expert Commission has been established to consider an appropriate fiscal and regulatory regime for oil and gas in an independent Scotland. The Expert Commission is considering options for the implementation of the key principles set out in the Scottish Government's paper Maximising the return from Oil and Gas in an Independent Scotland[337]. The Expert Commission will publish its report in spring 2014.

The Scottish Government welcomes the contribution that Sir Ian Wood's interim report makes to the debate. Particularly welcome is the proposal to create a new regulator. This will provide the necessary skills, knowledge and authority to ensure that we maximise the potential of the wealth of resources remaining. The Scottish Government's Expert Commission will consider Sir Ian Wood's report in full.

Health and safety

Safety in the oil and gas industry is of paramount importance. The Scottish Government will work with all interested parties to ensure safety is further enhanced, building on the existing health and safety regime to develop a modern, rigorous and well-funded Scottish regime. This will include working with all agencies to ensure that safety remains the first priority for those who service the oil and gas industry. Increasingly, the spread of best practice on safety is itself an area of commercial growth. Scottish businesses lead in many aspects of safe practices worldwide - the Scottish approach to health and safety will enhance this export strength.

There will be a presumption in favour of adopting all existing aspects of current health and safety standards. Scotland will also have a well-resourced coastguard to protect and save lives.

Fiscal and regulatory certainty

The taxation regime for oil and gas extraction is an important factor in maximising investment and production. It is in Scotland's interests to develop an oil and gas tax regime that balances revenues, environmental objectives, and incentives for continued development and exploration.

With independence, this Government will develop a tax regime with three overarching aims:

  • to support and incentivise production

  • to provide long-term stability and certainty, including a commitment to formal consultation on future reforms

  • to provide efficient fiscal incentives that encourage exploration and help maximise economic recovery rates

The Scottish fiscal regime will recognise factors central to offshore operations, including:

  • exploration periods with long time-lags and significant up-front costs

  • highly capital-intensive development requirements

  • significant geological, technical and economic risks

  • sophisticated business structures and specialised technology

  • costs of decommissioning

Encouraging exploration activity will be a key objective. In Norway, for example, measures to reimburse the tax value of exploration costs for companies not in a tax-paying position have contributed to a substantial increase in the number of exploration licences awarded in Norwegian waters.

We have no plans to increase the overall tax burden on the industry on independence, and are clear that no changes will be made to the fiscal regime without consultation.

The current licensing and regulatory regimes in operation will continue, and existing energy licences will continue to be in force in an independent Scotland. This will provide operators and investors with certainty about the fiscal and regulatory regime on independence, whilst ensuring that the industry continues to make a fair and proper contribution to Scotland's public finances.

Decommissioning

The Scottish Government is committed to providing certainty and stability on the long-term treatment of decommissioning tax relief. It will continue to engage with the industry on future reforms.

Post-independence decommissioning relief will be provided in the manner and at the rate currently provided through the current fiscal regime.

Responsibility for decommissioning tax relief will be the subject of a negotiation between the Westminster and Scottish Governments. Successive Westminster governments have accrued around £300 billion in tax receipts (2012/13 prices) from oil and gas production. The Scottish Government will seek a commensurate contribution to meeting the costs of decommissioning from Westminster.

However, the outcome of these negotiations will have no impact on the value of relief received by operators. The Scottish Government will also seek to maximise the economic benefits to Scotland of the decommissioning process, including maximising the substantial opportunities for our supply chain overseas.

Scottish Energy Fund

This Government will make the creation of a Scottish Energy Fund an early priority. If we form the government of an independent Scotland we will invest revenues from oil and gas production for two purposes:

  • to provide investment for future generations from a natural resource that can only be extracted once

  • to provide income that can smooth receipts from oil revenues, recognising that these vary from year to year (as all tax receipts do)

Stabilisation funds and sovereign wealth funds are common among oil and gas producing countries, with the UK being a notable exception. The Fiscal Commission's report on savings and stabilisation funds for Scotland[338] concluded that there is clear merit in Scotland establishing both a short-term stabilisation fund and a long-term savings fund on independence.

Immediately following independence, we will establish a stabilisation fund to manage year on year changes in oil and gas tax revenue. To embed the fund into the management of the public finances of an independent Scotland, we will plan Scotland's public finances and borrowing requirement on the basis of a cautious forecast for oil and gas revenue, transferring any surplus to the stabilisation fund, and withdrawing resources should out-turn oil and gas receipts come in below forecasts. The mechanisms for forecasting oil and gas revenue, and the role of the fund in managing public finances, will be transparent and credible and subject to independent scrutiny.

A long-term savings fund will invest a proportion of the wealth from Scottish oil and gas production in financial assets. The fund's operation will be a key factor in the management of Scottish public finances, helping to lock in a strategy of prudent financial management, and strengthening Scotland's credibility in international financial markets.

Investments into the savings fund will not require Scotland to be in budget surplus, but will be started once Scotland's overall budget deficit is reduced to below the level of long-run economic growth and when debt is on a downward trajectory. The Scottish Government proposes to start making modest investments into the savings fund when the Scottish economy has achieved this position. The Office of Budget Responsibility has forecast that the UK will reach this point around 2017/18.

Tim Haðdar is the Editor In Chief at Oil & Gas IQ. Reach Him At Twitter Or OGIQ


Tim Haïdar
Posted: 11/26/2013

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