North Sea forecasts hit by a £3 billion downgrade

North Sea forecasts hit by a �3 billion downgrade. Picture: Johnson Press
North Sea forecasts hit by a �3 billion downgrade. Picture: Johnson Press
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FORECASTS for tax receipts from North Sea oil and gas have been revised downwards by almost £3 billion over the next four years, the Chancellor said yesterday.

Delivering his Budget, George Osborne used figures published by the Office for Budget Responsibility (OBR) to predict Scotland would be left with a shortfall of £1,000 per head of population if it voted Yes to independence.

In the last UK government Budget before the referendum, Mr Osborne quoted OBR forecasts to illustrate his argument that an independent Scotland reliant on oil revenue would have a “precarious” budget.

The OBR’s analysis, published yesterday just before the Chancellor stood up in the House of Commons, said North Sea oil tax receipts would amount to £22.3bn in 2018-19 – a decrease of £2.9bn on the £25.2bn forecast in last year’s autumn statement. “The OBR has today revised down the forecast tax receipts by a further £3bn,” Mr Osborne told MPs.

“The Scottish economy is doing well and jobs are being created. But this is a reminder of how precarious the budget of an independent Scotland would be. These further downgrades in the tax receipts would leave independent Scots with a shortfall of £1,000 per person.”

Despite the downgraded forecast, Mr Osborne said he would implement all recommendations of the Wood Report – a major review of the oil and gas industry carried out by Sir Ian Wood, the entrepreneur who built the Wood Group into one of Scotland’s most successful multinationals.

Sir Ian’s report recommended a series of measures to maximise oil and gas extraction, which he said would add “at least” £200bn to the economy over the next 20 years.

The SNP finance secretary, John Swinney, took issue with the forecast, arguing that it was inconsistent with the UK government’s decision to accept the Wood Report’s recommendations. Mr Swinney said: “Westminster and those opposed to independence cannot simultaneously accept in full the Wood Report with its projections of higher production and at the same time cite the OBR forecasts of lower revenues.

“Increased investment in the North Sea will lead to increased production with a further 24 billion barrels of oil still to come from the North Sea.”

Speaking to The Scotsman last night, Sir Ian said he was “not surprised” by the OBR’s revised forecast, given falling production and exploration. But he said the Budget was good news for the offshore industry, claiming that it would help improve production by maximising recovery from the North Sea.

Mr Osborne promised to review the fiscal regime for the industry and said he would look at introducing a new allowance to stimulate the most sophisticated oil extraction techniques.

The “cluster allowance” would encourage groups of companies to extract oil and gas from reservoirs where high temperatures and pressures make drilling extremely challenging. According to the UK government, this would create and sustain 8,500 jobs and generate more than £6bn of capital investment.

Mr Osborne also commissioned a report in time for next year’s Budget on how the oil and gas industry can increase exploration and reduce commissioning costs.

When asked about the OBR’s downgraded forecast, Sir Ian said: “I’m not commenting on any political disagreements, but clearly the whole basis of the [Wood] report is that production is down, production efficiency is down, exploration is at a very low level. I am not surprised at the £3bn figure at all.”

Sir Ian said his report aimed to make people realise that there were “some serious problems out there”, but he added that, “most importantly, there are possible solutions and collaboration is one of the key solutions”.

He continued: “I think the government in the last year or 18 months have much more fully got themselves involved and appreciate the offshore oil and gas industry, and I think this Budget reflects that.

“The Chancellor is talking about significant fiscal review following my review. That’s great and is positive news. I think the general outlook is better and I think we are going to have much more positive interaction with the government in planning how we maximise the recovery from the North Sea.”

The UK government said that the Budget would release another £63 million to Scotland in Barnett consequentials – the money that flows north of the Border to match UK spending in departments like health and education, which are devolved to Holyrood.

The UK government claimed it had increased Scottish budgets by £2.2bn since the 2010 spending review. Scottish Secretary Alistair Carmichael said the Budget showed the benefits of remaining in the UK and being part of a fast-growing economy.

Mr Swinney disagreed, saying: “The £63m added to the Scottish budget today is small beer compared to the significant cuts Scotland has faced since 2010. The Chancellor is planning a further £37bn of cuts across the UK over the next two years and tens of billions to come afterwards. These cuts would be worse still if Scotland does not vote for independence and Westminster takes the knife to the Barnett Formula.”

ANALYSIS

John McLaren: Little new added to independence debate but Scotland’s place in Union firmly set out

THIS Budget was the last prior to the referendum on Scottish independence in September. So, what did it offer that might impact on the debate leading up to the vote? The answer would appear to be: not much that is new.

The Scottish Government has an extra £63 million in Barnett consequentials that it can spend as it sees fit. There was a freeze on whisky duty and some more aid to encourage regional airports to expand their routes. Beyond that, it was mainly UK-wide measures, including: a package to help business with energy costs and to encourage investment and exports; the well-trailed increases in the personal allowance on income tax and increase in tax-free childcare; and an attractive package for savers, especially pensioners.

Anyone expecting a Budget that included big bribes to encourage a No vote will have been disappointed. Nevertheless, the UK-wide industry investment and savings proposals could be seen as a challenge to the Scottish Government, which it may be pushed to match.

The one other area of interest concerned the North Sea. First the good news: the UK government intends to carry forward in full the proposals from the recent Wood Report to encourage future development. Then the bad news: North Sea oil and gas tax revenues have been revised down, yet again. This revision isn’t large, but it makes it harder still for the Scottish Government to portray the North Sea in a new boom phase, rather than in managed decline.

Overall, the Budget leaves the economic and fiscal argument essentially where it was. As such, the biggest choice remains as before. That choice rests between: staying within the UK, where Scotland is set to face a further five years or more of declining spending on public services, in real terms, ie after adjusting for inflation; and becoming independent, where its fiscal future is less clear.

Undoubtedly difficult choices will still need to be made under independence and the low level of future North Sea tax revenues means that this source cannot be looked at as an easy way to opt out of such difficult choices.

Indeed, at such levels as the Office for Budget Responsibility predicts for oil-related revenues, it could transpire that these funding difficulties could be compounded by independence.

No definitive answer will arise prior to the referendum: what we now have set in stone is the UK government’s view of its position and, by implication, Scotland’s within the Union.

• Professor John McLaren is an economist with the Centre for Public Policy for Regions