An Oil Fund for Scotland: Taking forward our National Conversation
Recent Trends in the North Sea
- North Sea production started in 1967 and to date approximately 40 billion barrels of oil equivalent (boe) of oil and gas have been extracted. Since 1976-77 oil and gas production has generated over £269 billion (2008 prices) in direct tax receipts to the UK Exchequer.
- The volume of oil and gas reserves remaining in the North Sea is estimated at between 15.5 billion and 25.0 billion boe and could ultimately be as much as 37 billion boe. With the correct incentives and appropriate environmental management, the sector will thus remain an important part of the Scottish economy over the coming decades.
- Since 2001, oil and gas prices have followed an upward trend, reflecting rising demand and tight market conditions. Although prices fell sharply in the second half of 2008, they have subsequently recovered and remain well above their long-term average. Leading industry forecasts suggest prices will continue to follow an upward trend over the medium to long-term. Therefore, while North Sea production may have peaked, the value of future production is likely to increase with the possibility that the full economic benefit to Scotland has yet to peak.
The Purpose of an Oil Fund
- A significant number of countries with major oil and gas reserves have created 'wealth funds', also known as 'oil funds', into which they have invested a share of the returns from their oil and gas reserves.
- Oil funds operate in both advanced and emerging economies. This study examines the international evidence on oil funds and draws lessons for the potential operation of a similar fund for Scotland. The experiences of Norway, Alaska and Alberta appear the most relevant for Scotland.
- The basic function of an oil fund is to enable sustainable financial resource management, allowing returns from non-renewable oil and gas revenues to be converted into a pool of renewable assets. These assets can then be used to generate wealth long after a country's oil and gas reserves have been exhausted.
- An oil fund can enable some of the wealth generated from a country's oil production to facilitate the development of low carbon energy sources. Using a proportion of an oil fund's income to assist in the advancement of new techniques and technologies in alternative sources of energy creation can provide benefits, not only in terms of economic sustainability, but also in the sustainability of a country's energy supply.
- Oil funds can also act as a short-term stabilisation mechanism to provide a fiscal stimulus when economic growth slows or to offset temporary falls in tax receipts. This can be especially important in economies where oil and gas production contributes a significant amount to the Exchequer.
Establishing an Oil Fund for Scotland
- Under the current devolution settlement, responsibility for the oil and gas sector, including the taxation and regulatory framework, is generally reserved to the UK Government. The UK is relatively unusual among major oil and gas producers in not having created an oil fund.
- Had the UK Government invested just 10 per cent of the nominal revenues received from the North Sea from 1980 onwards into an oil fund, it could now be worth between £24 and £47 billion depending on the returns generated by the investments.
- A significant proportion of oil and gas reserves on the UK Continental Shelf are located in waters close to Scotland. It is estimated that thus far, approximately 90 per cent of the UK's oil and gas revenues have been extracted from an area that could be classified as comprising Scotland's geographical share of the UK Continental Shelf.
- The Commission on Scottish Devolution has rejected calls for control over oil and gas revenues to be devolved, preventing the establishment of a Scottish oil fund, although the Commission's Expert Group on natural resource taxation argued that, in principle, the Scottish Government could have devolved control over the proportion of the UK Continental Shelf deemed to be within its jurisdiction.
- Based on current projections for future North Sea oil and gas revenue, if Scotland were to establish an oil fund and commit to investing a significant proportion of projected future North Sea tax returns, the value of an oil fund for Scotland could be substantial.
- The Scottish Government believes that the creation of an oil fund for Scotland would be in the economic interests of this country. It could be established for Scotland as part of the UK, or as the separate fund of an independent or fiscally autonomous Scotland.
- This report forms part of the Scottish Government's National Conversation and views on the issues raised within this report are welcome.
Page updated: Tuesday, July 28, 2009