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Government Expenditure & Revenue Scotland 2011-12

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4 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: petroleum revenue tax, corporation tax and license fees.

For the period 2007-08 and 2011-12, the taxation or charging regime for each of these three elements was as follows:

1. 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 100% first year basis with an uplift of 35% for field investment costs prior to field payback. There were also volume and safeguard allowances.

2. Corporation tax (CT): Ring-fenced corporation tax was charged at a rate of 30% on profits net of any PRT payments. A Supplementary Charge (SC) is levied on top of CT. Between 2007-08 and 2010-11 this made the effective corporation tax rate (CT + SC) 50%. The supplementary charge was increased to 32% in March 2011 resulting in an overall corporation tax rate of 62%.

3. License Fees: The UK Government grants licenses for operators to "search and bore for and get"17 petroleum in specified areas for a set period of time. Operators pay an annual fee for holding these licenses. License fees are charged at an escalating rate on each square kilometre that the licence covers. However, licence fees were gradually phased out over the period and, by 2008-09, no revenue was raised from this source.

North Sea revenue has fluctuated over the last two decades. Table 4.1 shows the North Sea revenue collected by the UK Exchequer since 1980-81.

Table 4.1: Total North Sea Revenue: UK 1980-81 to 2011-12 1, 2

Year

£ million

Year

£ million

Year

£ million

Year

£ million

1980-81

3,861

1988-89

3,301

1996-97

3,351

2004-05

5,183

1981-82

6,395

1989-90

2,502

1997-98

3,330

2005-06

9,384

1982-83

7,867

1990-91

2,342

1998-99

2,511

2006-07

8,924

1983-84

8,788

1991-92

1,017

1999-00

2,564

2007-08

7,464

1984-85

12,326

1992-93

1,338

2000-01

4,455

2008-09

12,925

1985-86

11,217

1993-94

1,266

2001-02

5,426

2009-10

6,491

1986-87

4,701

1994-95

1,673

2002-03

5,097

2010-11

8,786

1987-88

4,736

1995-96

2,341

2003-04

4,284

2011-12

11,250

1. Source: ONS Public Finance Statistics and HMRC

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 4.2 shows the levels of revenue raised from the three key components of North Sea revenue since 2007-08.

Total North Sea revenue increased by 73.2% in nominal terms between 2007-08 and 2008-09, reflecting the increase in wholesale oil and gas prices over this period. However, between 2008-09 and 2009-10, North Sea revenue fell from £12.9 billion to £6.5 billion (49.8%), as wholesale oil and gas prices fell as a result of the global economic downturn. Revenue then rose again in 2010-11 and 2011-12, increasing by 73.3% in nominal terms between 2009-10 and 2011-12, as wholesale oil and gas prices recovered.

Table 4.2: Composition of North Sea Revenue: UK 2007-08 to 2011-12

(£ million)

2007-08

2008-09

2009-10

2010-11

2011-12

Licence fees

56

0

0

0

0

North Sea corporation tax

5,728

10,358

5,568

7,328

9,218

Petroleum revenue tax

1,680

2,567

923

1,458

2,032

Total

7,464

12,925

6,491

8,786

11,250

Scotland's Share of North Sea Revenue

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 to 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.

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 2 and 3.

As the situation under option 1 is the same as 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 4.3 provides an estimate of Scotland's share of North Sea revenue under this approach.

Table 4.3: Per Capita Share of North Sea Revenue: Scotland 2007-08 to 2011-12

(£ million)

2007-08

2008-09

2009-10

2010-11

2011-12

Total North Sea revenue

7,464

12,925

6,491

8,786

11,250

Scotland's per capita share

630

1,088

546

737

942

Scotland's percentage share of North Sea revenue

8.4%

8.4%

8.4%

8.4%

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 estimate 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 researchers 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. 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 4.1. All oil and gas fields located in this region were apportioned to Scotland under the assumption of an illustrative geographical share.

Figure 4.1 UK Continental Shelf and Scottish Boundary

Figure 4.1 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 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. The authors' most recent estimates show that Scotland's geographical share of oil production stood at 96.0% in 2011, while its geographical share of gas production remained at 52.4%. Scotland's share of total hydrocarbon production was 78.4% in 2011, down from 81.0% in 2010. The authors estimate that Scotland's illustrative geographical share of North Sea tax revenue was 94.0% in 2011. This is higher than Scotland's estimated share of production, reflecting differences in the relative profitability of oil fields which are more prevalent in Scottish waters.

Details of the methodology used by Kemp and Stephen are provided in the paper Kemp and Stephen (2008), 'The Hypothetical Scottish Shares of Revenues and Expenditures from the UK Continental Shelf 2000-2013' which is available from the weblink below.18 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 Finances Statistical Bulletin to Scotland. Table 4.4 provides estimates of Scotland's share of North Sea revenue using this methodology.19

Table 4.4: Geographical Share of North Sea Revenue: Scotland 2007-08 to 2011-12

(£ million)

2007-08

2008-09

2009-10

2010-11

2011-12

Total North Sea revenue

7,464

12,925

6,491

8,786

11,250

Scotland's geographical share

7,112

11,752

5,909

8,043

10,573

Scotland's percentage share of North Sea revenue

95.3%

90.9%

91.0%

91.5%

94.0%

Contribution to Current Revenue

Tables 4.5 and 4.6 show the estimated contribution to total Scottish current fiscal revenue from the North Sea in 2011-12, using a per capita and geographical share respectively.

Table 4.5: Current Revenue (Per Capita Share of North Sea Revenue): Scotland 2011-12

Scotland

UK

Scotland as % of UK revenue

£ million

% of total revenue

£ million

Total current revenue (excluding North Sea revenue)

46,297

98.0%

561,386

8.2%

North Sea revenue

942

2.0%

11,250

8.4%

Total current revenue

47,239

100.0%

572,636

8.2%

Table 4.6: Current Revenue (Geographical Share of North Sea Revenue): Scotland 2011-12

Scotland

UK

Scotland as % of UK revenue

£ million

% of total revenue

£ million

Total current revenue (excluding North Sea revenue)

46,297

81.4%

561,386

8.2%

North Sea revenue

10,573

18.6%

11,250

94.0%

Total current revenue

56,871

100.0%

572,636

9.9%

As Tables 4.5 and 4.6 highlight, the estimated size of current revenue in Scotland alters significantly depending on whether a per capita or an illustrative geographical share of North Sea revenue is apportioned to Scotland.

Assuming a per capita share, Scotland's estimated share of total UK current revenue remains at the same level as the share assuming the exclusion of North Sea revenue, that is, 8.2% in 2011-12. In contrast, under an illustrative geographical share, Scotland's estimated share of total UK current revenue increased to 9.9% in the same year.