As the UK Cabinet arrived in Aberdeen this week, it was a good time to reflect on the relative merits of having our substantial oil and gas resources managed from London or from Scotland.
From those Westminster politicians who were around in the early days of oil and gas development, we have had a number of regrets expressed. Not setting up an oil fund was a “massive lost opportunity” according to Neil Kinnock. His colleague Dennis Healey admitted that Westminster “underplayed the value of oil” because of the upcoming 1979 referendum.
In recent weeks, too, Alistair Darling also expressed his opinion that the UK should have set up an oil fund.
Behind all of these statements there is the 1974 report on oil and gas resources by Professor Gavin McCrone and his conclusion on an independent Scottish Government’s position: “The country would tend to be in chronic surplus to a quite embarrassing degree and its currency would become the hardest in Europe with the exception perhaps of the Norwegian Kroner”.
In considering our referendum, a major question for us all should be: “Will Scotland’s remaining oil resources be better managed by a government in Westminster or Holyrood?”
Sir Ian Wood has made a number of recommendations for improving the longevity of the oil and gas industry, regardless of where governance lies. One aspect is the improvement of infrastructure; historically government and oil companies have not regarded infrastructure as an opportunity to improve resource management. Taking just one historical example, in the early days of the North Sea, there was no provision made for the export of the gas associated with oil. Offshore installations were allowed to flare most of the gas produced a situation that continued over a good many years during the 70s and 80s, purely so that oil could be recovered.
In recent years, by implementing the PILOT Project, industry and government have seen the benefits of working more closely to reduce development and operating costs and to improve the supply chain. According to Sir Ian Wood’s Maximising Recovery Review, much more can be done to increase oil and gas recovery over the remaining life of North Sea oil and gas fields.
In the White Paper Scotland’s Future, the Scottish Government has signalled its intention to improve stewardship of oil and gas reserves by having a regulator based in Aberdeen, as recommended by Sir Ian Wood.
For many years during the 1970s and 80s, the story was whether any government oil jobs in the Department of Energy would be located in Aberdeen, by then the acknowledged oil capital of Europe. Eventually, Whitehall did move certain functions of its oil and gas division to Aberdeen, though many crucial functions remained in London.
New energy department
The announcement that the Scottish Government plan a new energy department with the oil
and gas department headquartered in Aberdeen will be welcome news for Aberdeen and for its
academic institutes, Aberdeen University and Robert Gordon University, as well as those in other cities. Universities can gain from closer links to government, including supplying the demand for graduates and providing the research capability.
Oil and gas is a reserved matter of the Scotland Act 1998. All of the revenues from oil and gas flow to the Treasury. The Westminster Government is arguing that oil and gas is too big for Scotland to manage; it must be carried on broader shoulders; the revenues have to be “pooled and shared” across the UK. Westminster points to the volatility of oil prices (practically every natural resource has a degree of price volatility).
Companies assess future projects on the basis of, say, 20 to 30 years of production. Oil price volatility is one of the normal business considerations, thus new field economics will consider low, mid and high oil price scenarios before making an investment decision.
The Scottish Government highlights the frequent changes to the fiscal regime for oil and gas which lead to uncertainty in the business community.
Both Labour and Conservative government have employed “tax raids” on oil and gas when the
situation demanded; opportunities for creating an oil fund to take advantage of periods of high oil price have been consistently ignored. Reviewing the effects of 2011 budget decisions, Professor Alex Kemp’s Report points out that the “policy of maximising economic recovery from the UKCS has been impeded by the tax increases”.
The industry association estimates up to 24 billion barrels of oil still to be recovered, while DECC’s estimate is up to 35 billion barrels; these reserves will be recovered over the next 40 to 50 years generating significant revenues. How do we want to see revenues from Scotland’s oil and gas spent, on Westminster’s priorities or on Scotland’s priorities?
Clearly there can be a healthy, long term future for Scotland’s oil and gas. Surely logic tells us that it is better for Scotland to manage its remaining reserves, to have the benefit of jobs and to choose how we spend the revenues. The Scottish Government’s promised oil fund can provide a much-needed mechanism for smoothing the ups and downs of oil price.
• Dr James Parker holds degrees in Biology (BSc) and Public Health Engineering (MSc) from Strathclyde University, and a PhD in Marine Biology from Leeds University. In his earlier career, James worked in coastal environmental research in a government fisheries laboratory. Later he worked as environmental adviser in an international oil company, then as health, safety and environmental adviser to major new business development projects in oil and gas worldwide.
• This comment piece was supplied by Yes Scotland