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Government Expenditure and Revenue Scotland 2006-2007

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5 NORTH SEA REVENUE

Introduction

This chapter provides a discussion of North Sea revenue and sets out the methodologies adopted in this publication.

The North Sea Fiscal Regime

North Sea revenue stems from three key sources: royalties, petroleum revenue tax and corporation tax.

For the period 2002-03 to 2006-07, the position on each of these three elements was as follows -

1. Royalties: A Royalty charge was payable at a rate of 12.5% on gross revenue from fields given development approval prior to April 1982. All royalties were abolished from January 2003.

2. Petroleum revenue tax ( PRT): PRT was charged at a rate of 50% on field-based profits from oil and gas extraction on fields given development approval prior to March 1993 at which time it was abolished for all new fields. There were deductions for all exploration, appraisal, and development costs on a 100% first year basis with an uplift of 35% for field investment costs prior to field payback. There were also volume and safeguard allowances.

3. Corporation tax ( CT): Ring-fenced corporation tax was charged at the rate of 30%. There were deductions for exploration, appraisal and development costs on 100% first year basis. In 2002, a Supplementary Charge ( SC) of 10% was introduced. This made the effective corporation tax rate ( CT + SC) 40%. From January 2006, the SC was increased to 20% making the overall tax rate 50%.

North Sea revenue has been relatively volatile over the last two decades. Table 5.1 shows the North Sea revenue collected by the UK Exchequer since 1980-81.

Table 5.1: Total North Sea Revenue: UK 1980-81 to 2006-07 1, 2

Year

£ million

Year

£ million

Year

£ million

Year

£ million

1980-81

3,861

1987-88

4,736

1994-95

1,673

2001-02

5,426

1981-82

6,395

1988-89

3,301

1995-96

2,341

2002-03

5,097

1982-83

7,867

1989-90

2,502

1996-97

3,351

2003-04

4,284

1983-84

8,788

1990-91

2,342

1997-98

3,330

2004-05

5,183

1984-85

12,326

1991-92

1,017

1998-99

2,511

2005-06

9,702

1985-86

11,217

1992-93

1,338

1999-00

2,564

2006-07

9,075

1986-87

4,701

1993-94

1,266

2000-01

4,455

1. Source ONS Public Finance Statistics
2. Note: gas levies are not included in total public sector revenue from the UK continental shelf because it is categorised as a tax on expenditure rather than an income from oil and gas production. Gas levies were abolished from 1 April 1998.

Table 5.2 shows the levels of revenue raised from the three key components of North Sea revenue since 2002-03.

Total North Sea revenue increased by 78.0 per cent in nominal terms since 2002-03. This reflected the increase in wholesale oil and gas prices over this period and the higher supplementary corporation tax introduced in January 2006.

Table 5.2: Composition of North Sea Revenue: UK 2002-03 to 2006-07

(£ million)

2002-03

2003-04

2004-05

2005-06

2006-07

Oil royalties and licence fees

477

48

68

61

60

North Sea corporation tax

3,662

3,057

3,831

7,625

6,860

Petroleum revenue tax

958

1,179

1,284

2,016

2,155

Total

5,097

4,284

5,183

9,702

9,075

In the ONS Regional Accounts, the convention is for the UK Continental Shelf ( UKCS) to be included as a (notional) separate region of the UK (the extra-regio territory) and not allocate this to specific geographic regions within the UK mainland.

A number of different approaches can be used to allocate a share of North Sea revenue to Scotland. Previous editions of GERS assigned a range of hypothetical shares of North Sea revenue to Scotland to illustrate the effect on Scotland's fiscal position.

The following section presents a range of estimates of North Sea revenue that could be allocated to Scotland under various assumptions about the apportionment of the oil and gas industry.

Scotland's Share of North Sea Revenue

For many years, there has been considerable debate on how the delineation of North Sea oil and gas output might be determined.

Three key estimates of Scotland's share of North Sea revenue are adopted in the GERS report -

1. Zero share

2. Per capita share

3. An illustrative geographical share

These are the figures which are used in the headline estimates of total public sector revenue in Chapters 3 and 4.

As the situation under option 1 is dealt with in the revenue estimates for all non-North Sea revenues, the discussion below focuses on per capita and geographical shares.

Per capita share

One interpretation of North Sea revenue is to view it as a non-identifiable UK revenue, in which case a per capita share may be apportioned to Scotland.

Table 5.3 provides an estimate of Scotland's share of North Sea revenue under this approach.

Table 5.3: Per Capita Share of North Sea Revenue: Scotland 2002-03 to 2006-07

(£ million)

2002-03

2003-04

2004-05

2005-06

2006-07

Total North Sea revenue5,0974,2845,1839,7029,075

Scotland's per capita share

434

364

440

821

766

Scotland's percentage share of North Sea revenue

8.5%

8.5%

8.5%

8.5%

8.4%

An Illustrative Geographical Share

An alternative approach is to apportion a geographic share of North Sea revenue to Scotland. In order to estimate this share, GERS draws upon academic research carried out by Professor Alex Kemp and Linda Stephen from the University of Aberdeen. Kemp and Stephen (2008), 'The Hypothetical Scottish Shares of Revenues and Expenditures from the UK Continental Shelf 2000-2013', estimates Scotland's share of North Sea revenue based on a detailed financial model of the North Sea oil and gas industry and an assessment of Scotland's geographical share of the North Sea.

In their analysis, the authors base the Scottish boundary of the UKCS on the median line principle as employed in 1999 to determine the boundary between Scotland and the rest of the UK for fishery demarcation purposes. Other alternatives are possible.

Further details of the analysis are provided using the weblink below. 16

Scotland's estimated geographical share of the North Sea sector, used in this report, is highlighted in the following diagram. Demarcation by the median line is highlighted by the dark shaded area in Figure 5.1. All oil and gas fields located in this region were apportioned to Scotland under the assumption of 'geographical share'.

Figure 5.1 UK Continental Shelf and Scottish Boundary

Figure 5.1 UK Continental Shelf and Scottish Boundary

Source: Scottish Government Marine Directorate

Based on a detailed database of North Sea oil and gas fields, Kemp and Stephen (2008) estimated the tax revenue raised in each field. Their detailed modelling took account of production levels and a range of costs including research and development, and decommissioning. Taking the median line as the line of demarcation, the authors assigned revenue from each field to Scotland and the rest of the UK. Over the period studied in the paper, 2000 to 2006 with forecasts to 2013, the authors estimated that Scotland's geographical share of total hydrocarbon output increased from just under 75 per cent in 2001 to just over 78 per cent in 2006. As most oil fields are located in northern sectors, they estimated that Scotland's share of UKCS oil production remained relatively constant at 94-95 per cent over the same period.

Using estimates of Scotland's geographical share of total North Sea revenue, it is possible to apportion the total UK revenue figure from the ONS Public Sector Finance statistics to Scotland accordingly.

Table 5.4 provides estimates of Scotland's share of North Sea revenue using this methodology. It should be noted that the figures provided in Kemp and Stephen (2008) are on a calendar year basis. This estimated revenue is therefore apportioned on a nine month and three month basis to yield estimates for given financial years.

Table 5.4: Geographical Share of North Sea Revenue: Scotland 2002-03 to 2006-07

(£ million)

2002-03

2003-04

2004-05

2005-06

2006-07

Total North Sea revenue

5,097

4,284

5,183

9,702

9,075

Scotland's geographical share

4,232

3,522

4,328

8,130

7,563

Scotland's percentage share of North Sea revenue

83.0%

82.2%

83.5%

83.8%

83.3%

Contribution to current revenue

Table 5.5 and 5.6 show the estimated contribution to total Scottish current fiscal revenue from the North Sea in 2006-07, using a per capita and geographical share respectively.

Table 5.5: Current Revenue (Per Capita Share of North Sea Revenue): Scotland 2006-07

Scotland

UK

Scotland as % of UK revenue

£ million

% of total revenue

£ million

Total current revenue (excluding North Sea revenue)

42,353

98.2%

510,615

8.3%

North Sea revenue

766

1.8%

9,075

8.4%

Total current revenue

43,119

100.0%

519,690

8.3%

Table 5.6: Current Revenue (Geographical Share of North Sea Revenue): Scotland 2006-07

Scotland

UK

Scotland as % of UK revenue

£ million

% of total revenue

£ million

Total current revenue (excluding North Sea revenue)

42,353

84.8%

510,615

8.3%

North Sea revenue

7,563

15.2%

9,075

83.3%

Total current revenue

49,915

100.0%

519,690

9.6%

As tables 5.5 and 5.6 highlight, the size of current revenue in Scotland alters significantly depending upon whether a per capita or geographical share of North Sea revenue is apportioned to Scotland.

Assuming a per capita share, Scotland's share of UK current revenue remains unchanged at 8.3 per cent in 2006-07. In contrast, under an illustrative geographical share, Scotland's share of UK current revenue increases to 9.6 per cent in the same year.

Sensitivity analysis

In previous GERS reports, illustrative figures were presented to show North Sea revenue allocated to Scotland under various assumptions. For consistency, Table 5.7 shows estimated North Sea revenue under these various percentage allocations.

Table 5.7: Hypothetical Shares of North Sea Revenue: Scotland 2002-03 to 2006-07

(£ million)

2002-03

2003-04

2004-05

2005-06

2006-07

Total North Sea Revenue

5,097

4,284

5,183

9,702

9,075

Hypothetical shares

66%

3,398

2,856

3,455

6,468

6,050

75%

3,823

3,213

3,887

7,277

6,806

90%

4,587

3,856

4,665

8,732

8,168