Bill Jamieson: Oil on SNP’s untroubled waters

The North Sea has earned billions but is unlikely to be a secure financial basis for an independent Scotland. Picture: PA

BY ALMOST every reckoning the plunge in the price of oil and the mounting cutbacks in revenues, jobs and investment should by now have done for the SNP.

For 40 years North Sea oil and its gushing fortunes fuelled the renaissance of Scottish confidence and aspiration. But all that stood to be dealt a killer blow this time last year – not with the independence referendum defeat but with the onset of a steep decline in the price of oil.

The price of Brent crude has plunged from $115 a barrel last spring, to just $49, having grazed $42 ten days ago, defying expert opinion of a “stabilisation” at $80, then a “floor” at $60.

The repercussions are already inflicting pain. Oil & Gas UK, the industry lobby group, reports this week that the decline has already cost more than 5,500 jobs directly and stripped out 65,000 jobs across the wider services and supply sector.

Yet to this collapse in fortunes Scottish voters have reacted with insouciance. Support for the SNP is stronger than ever. Polls consistently point to another stunning advance for the party in the Holyrood election next May.

Yesterday brought a new poll, hailed by the SNP as “sensational”, showing the party’s support standing at 58 per cent after eight years in government – and showing a majority support for independence when Don’t Knows are removed.

The TNS poll shows SNP support on the constituency ballot for next year’s Scottish Parliament election stands at 58 per cent – 35 points ahead of Labour. On the regional ballot, SNP support stands at 51 per cent – with Labour 27 points behind.

For a political movement that drew support from the battle cry “It’s Oor Oil”, this dramatic collapse in North Sea fortunes seems to have made no difference whatever to its electoral appeal or the confidence of Scots in their economic future.

The grisly figures of retrenchment and decline pass unnoticed. Output has halved since 2007. This year is set to see an estimated £800 million (8 per cent) of cost slashing, with a further £1.3 billion planned for 2016.

Capital expenditure, which peaked at £14.8bn in 2014, is expected to fall to £11bn this year, much of that large projects which had already begun. After that, it could fall by between £2bn and £4bn in the next three years, with a stark warning that spending on fixed assets could fall to almost nothing by the end of 2017.

The report said cost-cutting will remain the focus of industry activity and that capacity may have to be reduced still further in order for the business to weather the downturn.

As for tax revenues, these are collapsing fast. Tax receipts from North Sea oil are set to plunge to their lowest level in 40 years. The Office for Budget Responsibility reckons that this financial year’s North Sea oil tax receipts would fall to just £700m – less than 0.05 per cent of UK GDP – and then fall further to £600m in 2016-17. The plunge will see North Sea oil and gas taxes worth £9.6bn less over the next five years than the OBR previously predicted.

Yet politically there is not a flicker on the SNP dial. In some respects this can be seen as a compliment to its leadership. Throughout the referendum campaign it was careful to downplay the importance of oil revenues in the economic argument for independence, stressing that they should be viewed as a valuable reserve rather than a means of funding current government spending. Much emphasis was also placed on the creation of a Norway-style oil fund for future generations.

Yet nonetheless, the reality of those oilfields slurping black gold into millions of barrels provided a colossal psychological boost to the SNP and its supporters. If oil revenues were to be treated only an insurance policy, this was insurance that virtually every country in Europe, never mind the rest of the UK, would deeply envy. And we were constantly reminded of the potency of those revenues, like an OBR-style Braveheart being played on continuous loop. The Scottish government fiscal projections consistently showed the country’s oil revenue-boosted fiscal balance alongside the figures ex oil and gas. Look how much lower our borrowing would be! See how our international credibility would be sustained!

These projections may have had the veneer of even-handed, objective portrayal of our fiscal state. But, like pension savers being sold policies with a range of growth assumptions – 3 per cent, 5 per cent, even 9 per cent as stock markets soared and plunged – we were always apt to be swayed by the higher numbers in the illustration and to ignore the downsides: confident projections untroubled by market turbulence as if the financial plunges of 1972-73, 1976, 1980-81, 1987, 1991-92, 2002-3, and above all 2008-9, never happened.

Now a turbulence of more lasting consequence is upon us. And unlike those financial market setbacks, there is little likelihood of a recovery any time soon.

North Sea oil has been a fantastic asset for the UK. It has provided more than a third of the UK’s energy and contributes an estimated £39bn in revenue taking into account the full extent of the offshore supply chain.

But Deirdre Michie, chief executive of Oil & Gas UK, warns that “this great industry of ours is facing very challenging times. Last year, more was spent than was earned from production, a situation exacerbated by the continued fall in commodity prices. This is not sustainable and investors are hard-pressed to commit investment here because of cash constraints.

“Difficult decisions have had to be made across the industry. It is likely that capacity may have to be reduced still further in order for the business to weather the downturn.”

Every week brings news of more cutbacks.

EnQuest, an independent producer, is working on only two of the 12 discovered but undeveloped fields it owns. Many of the oil majors have opted to sell off sizeable parts of their portfolios. Total of France last month offloaded $900m of North Sea assets, while Shell has said it also wants to reduce its footprint. Last week it was oil services business Expro shedding jobs. This week ConocoPhillips warned of more bad news ahead.

It is by no means all negative. Costs are slowly being brought down. And the oil price tumble has brought cheaper petrol on the forecourts and lowered heating bills for millions of households. But this diffuse benefit has neither seen off a slowdown in our growth rate nor softened the critique of government spending constraint.

And the stark truth remains: this is no temporary blip. The economic landscape of the North Sea has changed. Visions of oil revenue-fuelled welfare spending stretching to the far horizon have shrunk. And the SNP has still to come to terms with the biggest challenge yet to its economic credibility and those confident assertions of sunny spending times ahead.