North Sea Oil and the Scottish Independence Referendum

Abstract

Guest editorial 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.