Scott Macnab: SNP faces a '˜post-oil' financial dilemma

Scottish Government needs to come up with an economic case for independence which looks beyond fossil fuels, says Scott Macnab
The cost of scrapping redundant oil rigs could wipe out future North Sea tax revenues.The cost of scrapping redundant oil rigs could wipe out future North Sea tax revenues.
The cost of scrapping redundant oil rigs could wipe out future North Sea tax revenues.

‘It’s Scotland oil.” It was the slogan which drove the rise of the modern-day nationalist movement in Scotland. The bountiful supplies of black gold nestling under the seabed of Scottish waters was hailed as the natural resource which could see the country not just survive as an independent nation free from London’s apron strings – but flourish.

It has been a powerful message in recent decades as tens of billions of barrels of oil and gas flowed into Shetland and Peterhead, keeping the London Treasury coffers stuffed with lucrative tax revenues. It helped establish the SNP as a serious parliamentary presence and, with devolution, saw the Nationalists emerge initially as the main opposition in Scotland and now as the natural party of government. And more than 30 years after the industry took off in the UK, future oil and gas wealth was still at the heart of the Scottish independence referendum battle in 2014. Nationalists insisted, including Scottish Government energy minister Fergus Ewing, that it could be around until 2050, providing a vital source of tax revenue for a newly independent state.

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A Norway-style oil fund was even planned to ensure future generations would share in the success. But the final few months of the independence campaign saw a marked slide in the global price of oil. It was barely noticed by commentators at the time, but marked the start of a prolonged slide which would see the price fall from $110 a barrel to less than $40 two years later.

And despite a recent recovery to about $55, a chilling report published this week warns of a new bombshell looming for the industry. The cost of scrapping rigs and pipelines could prove so high that it wipes out all future tax revenues the Treasury can expect to raise from the increasingly mature fields.

The Wood Mackenzie analysis warns that taxpayers will be forced to pick up about £24 billion in decommissioning costs – about 45 per cent of the total bill – because of the subsidies oil giants like Shell can claw back in tax rebates. It’s not clear to what extent these costs would fall to a Scottish exchequer after independence, but there would certainly be some liability with most of the UK’s continental shelf lying in Scottish waters. It’s bleak news both for the industry and Scotland’s struggling economy. Even before the price crash, the concern over falling production levels prompted major concern over how much of the 20 billion or so barrels of oil left in the North Sea could be extracted. Sir Ian Wood, the oil and gas services tycoon, even produced a report setting out action to stimulate production.

There was a welcome increase last year after years of decline. But it remains worryingly low at 72.7 million tonnes – down from 100 million five years previously. Nicola Sturgeon says the impact of the oil crash has left Scotland’s economy in a state of “shock”.

Apart from the 120,000 jobs which have been lost as oil firms cut back on costs, GDP has taken a major hit and stands at about a third of the overall UK rate. Unemployment rates are also higher north of the Border, with those in work now significantly below the UK-wide average.

The impact on Treasury coffers has been so significant that revenues effectively fell into the red two years ago as subsidies outweighed revenue levels. Last year saw a marginal improvement, but the outlook remains bleak for the sector.

The Wood Mackenzie analysis this week warns that firms may seek to delay decommissioning to avoid the high costs, but dwindling oil and gas reserves in the North Sea are “working against them”.

Entire areas, including larger platforms and smaller tie fields, are under threat as a result, with the danger of a “domino effect” as they begin to shut down. Firms are legally obliged to decommission the ageing infrastructure in the North Sea, to bring rigs and pipelines ashore to be disposed of. Oil giants signed up to this when they secured deals to drill Scotland’s seabed and reap multi-billion dollar profits for decades.

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And decommissioning could also be a lucrative industry in the decades to come with the national economic development agency Scottish Enterprise having drawn up plans to capitalise on the opportunities.

It is estimated that this could be worth £11bn by the mid-2020s and support about 23,000 jobs at its peak. More than 300 oil and gas installations require to be scrapped, along with almost 400 subsea installations and 16,000km of pipelines and over 5,000 wells.

Globally, the oil industry has yet to really get to grips with the demands of scrapping such ageing infrastructure. Only in the Gulf of Mexico has it been happening for any length of time.

Even setting tax revenues aside, the oil and gas industry remains a hugely important driver of economic activity in Scotland. The industry still supports more than 300,000 jobs and the knock-on activity this generates, especially in Aberdeen and the North-east, cannot be underestimated.

But it is also clear that the Scottish Government needs a new economic strategy to focus on life after the North Sea. Nicola Sturgeon knows this and has already launched a growth commission, under the SNP’s auspices, which will seek to map out the key economic arguments for the next independence referendum battle.

This is likely to focus on building Scotland’s key strengths at the moment such as the life sciences industry, food and drink and financial and business services.

Renewables is another area where Scotland remains strong, while tourism and the creative industries are also sectors where ministers have previously talked of focusing support.

But as small business leaders today warn that confidence among firms has been falling consistently for more than a year, while the rest of the UK in contrast has rebounded after a series of strong economic indicators UK-wide, the situation facing Scotland’s economy is acute.

Perhaps the economic case for that second independence vote should start right now with action to revive Scotland’s flatlining growth.