Energy of nation still untapped

Proven reserves of oil, estimated at eight billion barrels, are a North Sea red herring arguably theres a lot more than that. Picture: Getty

THE debate over the future prospects for North Sea oil and gas prior to the referendum was focused on the size of the economically viable reserves remaining in the North Sea. In their stance on the issue the soothsayers of doom, the UK government’s Office for Budgetary Responsibility and the Department of Energy and Climate Change (DECC) quoted these reserves to be the substantiated eight billion barrels of oil equivalent (boe) of “proved reserves”. Some oil experts such as Euan Mearns have echoed this view.

Whilst erring on the side of caution in making profit predictions may be an admirable trait of character for a chartered accountant, when oil analysts, consultants, experts and governmental department representatives adopt a similar approach do they really act in the best interests of the industry that has served the UK economy so well for over 40 years?

The definition of “proved reserves” is an accounting construct. It enables oil companies to calculate profits by allocating a share of the vast costs they incur to accounting periods based on the proportion of “proved reserves” actually produced. But proved reserves have never in the history of the North Sea oil industry reflected the totality of remaining production from the North Sea. If that had been the case then the North Sea industry would have shut up shop many years ago. Past production has exceeded past figures of proved reserves.

In terms of being a predictor of future output proved reserves are, bluntly, a North Sea red herring. Its introduction into the referendum debate arguably dampened expectations for the industry and may have held back the timing of investment in the North Sea. None of the experts, however, predicted the 25 per cent fall in the price of oil since June due to reduced demand from China, a moribund European economic environment and an increase in Saudi oil production.

Saudi Arabia is a key member of the organisation of petroleum exporting countries (Opec) which would prefer the US to buy oil from them rather than see the US produce tight oil from US shale deposits. Low oil prices may make tight oil production uneconomic but it is also bad news for the North Sea oil industry. That said, Opec is unlikely to win out in the oil turf war with the US. That implies oil prices will rise again and the future may still be bright for oil and the UK economy.

Credibility of UK energy policy

Scotland is in the happy position of generating excess electricity; it more than meets the needs of its domestic and commercial consumers. England on the other hand is in a parlous position. It has to buy-in electricity from Scotland and Europe to meet its needs. Palpably, the UK energy policy has failed. Investment in renewables such as wind (onshore and particularly offshore), wave, tidal and solar has not been sufficient to ensure that additional production from renewables will compensate for falls in production from the aging gas, coal and nuclear power plants. The energy policy also fails with respect to ensuring that the use of carbon-based fuels for energy generation is reduced to minimum levels. Deals struck for new nuclear build have more than an air of desperation about them and look decidedly expensive, even before taking into account the true cost of decommissioning those plants. In addition it can take up to ten years for new nuclear build plants to become operative. According to the National Grid, electricity peak period margins last year fell to 4.1 per cent. These are very tight margins and suggest that the small surplus of electricity available to meet peak demand may not be sufficient to avoid blackouts this winter.

Pre-referendum promises

One of the reasons for the No outcome in the referendum was the well publicised promise to transfer tax raising powers and economic decision-making powers to Holyrood. Scotland is oil and energy rich. Is there any reason why this devolution of power should not include full tax responsibility for all economic activity in Scottish territory and full responsibility for setting energy policy in Scotland? Should responsibility for the North Sea fiscal regime be transferred to Holyrood? If such powers are not transferred the next independence referendum might be much closer than David Cameron imagines.

l Alex Russell is Professor of Petroleum Accounting and Peter Strachan is Professor of Energy Policy at Robert Gordon University, www.rgu.ac.uk