A rigged result: Oil, independence and the future

Scotland on Sunday’s Political Editor, Eddie Barnes, considers how the revelation of new oil reserves may influence a future referendum on independence

THERE are many names associated with the cause for Scottish independence – Alex, Winnie, Margo. As of last week, however, the Nationalists feel they may have found another. Meet Clair.

Measuring 220 square kilometres wide, roughly the size of Malta, and buried beneath some 150 metres of open Atlantic, the Clair field is the largest reservoir of oil and gas in UK waters. The site, in the wild seas between the Shetlands and the Faroes, was first discovered in 1977, since when only the one fixed platform has been put in place to extract the black gold underneath. That went up in 2001, and has produced an estimated 80 million barrels. But it is thought that as much as seven billion barrels of oil lies underneath the raging North Atlantic.

Last week, David Cameron met with BP chiefs in Aberdeen to announce that the government had given its backing for a new phase in oil extraction on the site to commence.

It is more than ten years since North Sea oil production reached its peak in 1999. Thursday’s announcement, however, offered hope that the gradual decline of the industry since then might be reversed. Clair would continue to offer up oil until 2050, BP suggested. There was talk of a new oil bonanza.

For more than 40 years, the politics of oil has played a central part in Scotland’s story. For the SNP in particular, the emergence of the black liquid off the shore of the north-east has been the petrol in its tank. Now, just as the nation gears up for the big day when it must decide whether to become independent or not, the riches of Scotland’s oil windfall has suddenly returned into view. The possibility of harnessing those riches boosted the Nationalist cause once before. Might Clair do so again?

The scale of BP’s announcement on Thursday made headlines last week. The development at Clair is the centrepiece of a £10 billion investment programme by BP and three other oil companies to push forward work off the UK coast. The Clair project alone accounts for some £4.5bn of that. In total, BP reckons some 3,000 jobs will be created by the projects – although not all of them in Scotland. As we report today, the rigs themselves will be built in South Korea. When completed in 2016, the plan is for the two new rigs at Clair to churn out around 640 million barrels of oil.

BP chief executive Bob Dudley said his firm had produced some five billion barrels of oil from UK waters. “We believe we have the potential for three billion more,” he added.

Mark Higginson, a partner at PwC in Aberdeen, noted: “The death of the North Sea industry has often been predicted. The industry has managed to extend its life over and again.”

The excitement around Clair should be a little tempered, say some. The reason the Clair field hasn’t been tapped up until now, like other smaller fields in the North Sea, is because it lies under deep water and in just about the most inhospitable part of the UK’s territory.

One expert, who prefers not to be named, said: “I don’t think this is signalling some great renaissance in a second wave of North Sea oil. Clair is not insignificant but it has been hyped up a bit.”

More widely, it is noted the low-hanging fruit in UK waters has already been picked. Going to places like Clair means oil firms face a lot more in extraction costs, making more accessible oil fields around the world much more attractive.

Others, however, are more optimistic. Professor Alex Kemp, Scotland’s leading oil economist who is based at the University of Aberdeen, agrees there are problems: the oil at Clair is “heavy” and the reservoir fractured, preventing an easy flow to the surface. But, he added, what BP’s announcement shows is that there is enough technical progress to justify further big investment there. “Peak production of oil was in 1999,” he said. “We won’t go back to that, but if everything goes well then it is possible that the decline we have seen since then could be stopped.”

Enough of the oil, what of the politics? The key point being made by SNP figures this weekend is that BP’s announcement kills any claim that the North Sea can no longer be relied upon to provide the kind of income that a newly independent country might require.

SNP economy spokesman Stewart Hosie, said: “This confirms that there is at least £1 trillion of oil and gas sitting there. It confirms much of what we have known and it runs against the scare stories that the oil and gas is about to run out and that Scotland is too poor to look after itself. It confirms that is not the case.”

More than that, is the evidence from the 1970s that confidence about tax revenue from the North Sea increases support for both the SNP and independence.

Professor of politics at Strathclyde University John Curtice noted: “The more oil there is for the foreseeable time, the easier it is going to be for the SNP to argue that it can pay its way.”

He added: “The economy is a very important factor in deciding on the strength of independence. It doesn’t top national identity – whereby people will back independence no matter what is happening in the economy – but the economy is very important.”

If the SNP can argue that a new country would still be bolstered by oil, then it may sway crucial swing voters, for whom financial issues are most relevant.

Those Nationalists who went through round one of the great oil debate in the 1970s, have an uncompromising attitude this time round, if indeed there is a chance to make political capital out Scotland’s natural windfall once again. It was then that the SNP famously penned its most famous slogan: “It’s Scotland’s Oil.” But, said Margo MacDonald, then an SNP MP and now an independent MSP, the party didn’t quite win over the wider population. “People felt a bit ashamed that somehow it [oil] had landed in their lap and we hadn’t done anything to earn it. There was a feeling that we shouldn’t run off with all that money from England,” she said.

There wasn’t the same appreciation of oil and its significance politically. Experience has changed things, she added. She pointed to the McCrone paper, the analysis by the Scottish economist Gavin McCrone, written in 1975, which remained secret until five years ago and which declared that, if it was independent, an oil-rich Scotland would have a budget surplus and one of the strongest currencies in Europe. MacDonald said: “Now, the feeling is there to make sure we use the money to make investments in housing and education and to make sure we stay ahead of the race in education, and spend money on infrastructure.”

Her husband, former SNP MP Jim Sillars, added: “I think the day it dawns upon the Scots that there is no difference between the fish that swim around the North Sea, and are landed in Scotland as Scotland’s fish, and the oil that comes through those fishing waters, and lands, similarly, in Scotland, and is, therefore, a huge wealth source, the day is up for the Union.”

Naturally, this is disputed by the other side. A paper issued by the former Labour government in 2009 claimed that, even if all North Sea oil revenues had been allocated to Scotland, there would only have been nine years out of the past 27 when Scotland’s finances would have been in surplus. The point the pro-Union parties make is that, if all the oil money were to stay north of the Border, the block grant which comes to Scotland would also end. That funding is more stable than oil money, which has proven to be incredibly volatile – having been as low in value as £1bn a year and as high as £12bn.

Chief Secretary to the Treasury Danny Alexander claims the UK government’s backing for Clair shows it is behind further development in the North Sea. “This investment shows that the UK government’s economic and energy policies are working for Scotland and continuing to attract major investment,” he said. “It underlines the economic security that being part of the UK helps bring to Scotland.”

The Nationalist-Unionist argument over the money will never end. But a further issue is whether the SNP will want to re-heat the old debate about oil. Salmond’s focus these days is on renewable energy and developing wind, wave and tidal power. This, the First Minister argues, will power Scotland forward. Suddenly reverting to what is seen as an old, declining and dirty fossil fuel to bolster the case for independence may not be the image he wants to portray (a view backed by leading nationalist Pat Kane, who tweeted on Friday: “Oil in North Sea till 2050. So freedom comes on a tide of toxic particulates? Scottish autonomy/prosperity needs a better story than this.”

Curtice added: “ The SNP image has been to move to wind and wave power. We are supposed to be moving off a carbon economy and to a more sustainable economy.”

Senior SNP figures acknowledge that, while announcements like those last week definitely help the cause, they can’t pretend that the tap will stay on in perpetuity. “We all know the oil can’t last forever. That’s why the renewables stuff is really important,” said one.

In the short term, SNP ministers are looking for Messrs Cameron and Osborne to reverse a tax hike in the so-called Supplementary Charge, which oil producers pay in the North Sea. This would help boost investment in the numerous sites still dotted around the North Sea where further millions of barrels of oil is still untapped, but which require expensive engineering work to be exploited. Some form of tax relief is expected, perhaps as early as the Pre-Budget report next month.

Even if he does so, however, it is clear that Salmond and Co will not let the issue drop. Speaking after the announcement at Clair on Thursday, he accused the Treasury of “using the North Sea as a cash cow”. Were it not for Treasury taxes, he added, the area would be going through a boom.

With oil prices set to remain high, Osborne is expecting to rake in £61bn in tax revenue between now and 2016 from the North Sea. By then, Scotland will have had its referendum on independence. The reality of the pound signs that float in from northern waters struck home with a vengeance once again last week. Sooner rather than later, we will find out whether the lure of those riches is once again a factor in Scotland’s political destiny.