Hugh Fraser: Oil sector can boom with independence

The independence Referendum on 18 September has once again projected the North Sea Oil and Gas industry into a familiar spotlight. The No camp has, as anticipated, fired off the usual assertions that Scotland’s petroleum is running out, that prices are unpredictable and that the industry is better administered by Westminster than the Scottish Government.

A North Sea oil platform, around 100 miles off the Aberdeen coast. Picture: PA

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Firstly, the oil is not running out any time soon. There are estimated to be 12-24 billion barrels of oil equivalent left to produce and vast tracts of frontier areas including West of Shetland and West of the Hebrides remain untested by seismic surveys and appraisal drilling. The true figure could be much higher, and oilfield technologies are continuing to improve our ability to find and exploit reserves in remote, harsh and deep water locations. The recent Johan Sverdrup “elephant” discovery in the Norwegian sector of the North Sea reminds us there may be jewels to be found even in the well picked-over areas.

Likewise, whereas petroleum prices will fluctuate, the forward horizon of a global population growing to 9 billion in the next generation and the economic growth aspirations of Asian, African and South American emerging economies are fully anticipated by key industry players such as Exxon Mobil and BP in their energy outlooks to underpin the price of petroleum even allowing for increased shale gas and LNG availability. Andrew Neil must no doubt regret his “drowning in oil” assertions in 1999 in the context of the first Scottish Parliamentary election, claiming that demand for oil was “anaemic”, and the oil price would not rise above US$18 a barrel. The oil price has been consistently around or above US$100 a barrel for the last 10 years (excluding the months immediately following the 2008 financial crisis).

Failings in ‘stewardship’

A detailed analysis of the Wood Report – Maximising Economic Recovery of the UKCS – issued earlier this year highlights substantial shortfalls in “stewardship” of the industry and its assets. Specific issues raised are absence of fiscal stability, the acute under-manning of the current regulator (50 compared with 200 in the Norwegian Petroleum Directorate) and a failure to properly address the increasing fragmentation of the industry into more independent operators and multiple but smaller fields. Production has decreased by 38% since the current Westminster Government took office in 2010 and lack of exploration investment is a huge current concern – these have been addressed successfully in Norway through good fiscal and regulatory stewardship.

Brian Wilson, the former UK Energy Minister asserts that this track record is justification for Scotland to vote No in September. Wilson has had his opportunity to shine, as have Gordon Brown and George Osborne, and the results are clear for all to see and read in the Wood Report. It speaks volumes that the UK Government only thought “the time was right” to commission this Report after the SNP’s victory in the 2011 Scottish Election and the announcement of the Independence referendum.

However, the single most glaring deficiency is the UK Government’s failure to establish and grow a petroleum reserve fund despite US$310 billion of taxation revenues having already accrued to the Treasury, a feat they share only with Saddam Hussein’s Iraq regime among nations with substantial petroleum production.

Norway and Abu Dhabi both have harvested over US$800 billion in sovereign wealth funds from the accumulation and investment of their oil wealth, enough for both to acquire and operate 100 Queen Elizabeth aircraft carriers should they wish to project Norwegian or Emirati power internationally – the UK cannot afford two. This bonanza was anticipated in 1974 by the UK Government’s then Chief Economist at the Scottish Office, Gavin McCrone, but his paper was deliberately concealed by the then Labour Government - no doubt in fear of the potential impact on the scale of the SNP vote at that time - only to emerge under a Freedom of Information Act disclosure in 2005. This demonstrates the trust-worthiness of the political DNA of Brown, Darling, Wilson and Galloway at a time when the Scottish electorate should be given the opportunity to base their decision in the referendum, not on statistical facts and assertions, but on track record and prospects.

A committed and focussed Scottish Government will surely do much better, with much to follow from international practice such as Norway and little to follow from London. Brian Wilson could have referred to the huge success of recent UK licensing rounds spurred on by fiscal reforms induced by the Norwegian experience, or the shining example of Oman’s turn-around which has left the state, thought to be in terminal decline 10 years ago, producing more oil than the UK.

What could Holyrood do better?

But it is not enough to simply criticise Westminster – how could a Scottish Government do better? There are a number of key focal points to consider. Fiscal stability and focus is a key priority – oil companies need to plan 20 to 25 years forwards when formulating field development programmes, and long term taxation policies must underpin these plans. The fiscal regime must be tailored to address the lack of exploration activity and declining production, as well as field development.

Skills shortages and training must be addressed by the right immigration policies within an overall skills, training and recruiting framework. The Scottish Government would be well placed to apply an approach highly differentiated from the prevailing UKIP-fuelled political view south of the Border, where there is growing demand for a referendum which may pull the UK out the EU. The N56 think tank believes that Scotland’s population should be increased to 6 million to maximise the potential for economic growth and this will need the optimum immigration policies for Scotland and its energy sector specifically.

The onshore transport infrastructure servicing the Scottish petroleum industry remains challenging, although it is encouraging to see Aberdeen’s western peripheral route now being constructed. Much remains to develop the Inverness to Aberdeen, Peterhead to Aberdeen and Dundee to Aberdeen corridors and to secure operational capability of Aberdeen International Airport to host direct flights to key energy centres. Why should Scotland not aspire to host a major transatlantic hub airport in competition with London, Amsterdam and Paris? The examples of Dubai, Abu Dhabi and Qatar are great examples of how world class transport infrastructure assets and airlines can literally be built out of the sand with the right strategy, investment and mindset.

A Scottish Government could also promote the use of Scots Law in North Sea oil and gas contacts and implement the recommendations of the Wood Report in relation to streamlining the contracting and dispute resolution processes. This could play a significant role in reducing costs and delays. Existing and future industry players should hold no fears of compulsory nationalization plans, but the Scottish Government should closely consider the major advantages which would accrue from a state-owned Scottish Petroleum Corporation which played a key role in redressing the ownership/operatorship fragmentation of smaller and higher risk assets, providing access to offshore infrastructure, investing in a major programme of seismic data ingathering and driving the development of new technologies. Scotland does not have a Statoil equivalent, but why should it not have the ambition to create one?

In the final analysis, the economic wealth which could be generated by and for Scotland in the next 30 years from the petroleum industry should not be understated. This is an excellent opportunity for Scotland. But this will only happen, not under the auspices of a Government focussed on short term cash cow-ism but one which takes a visionary strategic approach in full partnership with the industry. The No campaign has focussed on pessimism and risks and the Yes campaign is quite rightly focussing on vision and opportunity for the industry. Risk and uncertainty are one side of a coin, which has opportunity and reward on the other side.

• Hugh Fraser is a Scottish oil and gas lawyer based in the Middle East with 25 years’ experience in the international oil and gas industry. He is currently Managing Partner of the Middle East office of a US specialist energy law firm. This article was supplied by Yes Scotland.