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Maximising the Return from Oil and Gas in an Independent Scotland

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2. Introduction

Chapter Summary

  • This paper sets out the high level principles which the Scottish Government believes should underpin the oil and gas fiscal regime and broader policy framework post-independence.
  • This paper presents:
    • a comprehensive overview of the importance of the North Sea oil and gas sector and the contribution it makes to Scotland's economy;
    • the key challenges and opportunities that the sector faces; and
    • the key components of the current UKCS fiscal regime and the key considerations and principles for the policy framework in an independent Scotland.
  • Given the industry's importance to Scotland's economy, Scottish Ministers will shortly be announcing the creation of an Expert Commission to develop the proposals outlined in this paper.

2.1. The Scottish Government's strategy for the long term development and sustainable growth of Scotland's offshore sector is contained in the Scottish Oil and Gas Strategy.

2.2. Its central objectives are to maintain our world leading safety standards while simultaneously maximising economic recovery of oil and gas from the North Sea. Independence for Scotland is the opportunity to gain greater control over the achievement of these objectives - ensuring that Scotland's vast oil and gas reserves are efficiently extracted and the revenues and economic benefit are maximised for the benefit of the Scottish people.

2.3. The oil and gas industry has made a longstanding and important contribution to our economy and society, driving forward innovation and pioneering the development and deployment of new technologies. The industry is a key driver of sustainable economic growth in Scotland and the sector achieves this in a way that is consistent with the Scottish Government's desired characteristics of growth - Solidarity, Cohesion, and Sustainability.[2]

2.4. The industry has also played an important role in developing the nation's human capital. The industry works in partnership with local communities; supporting education, arts and culture, and other initiatives related to local environments. It continues to drive forward standards in education, linking with primary and secondary schools across the country to encourage an interest in science, technology, engineering, and maths. The industry has left, and continues to leave, a lasting impact.

2.5. As a result, Scotland's oil and gas industry has made an enormous contribution to the Scottish economy over the last four decades. It is the largest industrial sector of the economy in terms of its contribution to GDP. It acts as a major source of employment and investment, and provides the equivalent of six times Scotland's oil needs.

2.6. The sector has also represented a very important source of tax revenue to successive UK governments, indeed it pays more in corporation tax than any other industry, and it continues to make a significant contribution to the UK's balance of payments.

2.7. This contribution to society, the economy, the workforce and the public finances has not been at the expense of health and safety standards. On the contrary, health and safety in the offshore industry is of paramount importance, and the North Sea oil and gas industry has the highest safety standards in the world. In an industry which is currently facing the challenges of ageing infrastructure, we are committed to ensuring that the offshore safety standards continue to improve and set the standard which other countries aim to replicate.

Historical Context

2.8. The oil and gas sector has had a major impact on Scotland since oil was first discovered more than 40 years ago.

2.9. The Forties field, discovered by BP in 1970, contained an estimated 4.2 to 5.0 billion barrels of oil, with production peaking at over 500,000 barrels per day (bopd). When Apache purchased the field in 2003, it was estimated to have 144 million barrels of oil equivalent (boe) of proven reserves and production was expected to cease in 2012. However, as a result of the transfer of ownership and the adoption of new techniques and technologies, the field has now produced nearly 200 million boe, with 114 million boe of proven reserves remaining[3]. This indicates that the innovative approaches adopted by new owners of established fields can greatly increase economic recovery rates in mature fields.

2.10. Shortly after, the discovery of the Brent oil and gas field occurred in the northern North Sea east of Shetland, with production beginning in 1975. The Brent field has been in service for the UK for more than 35 years and it has produced around 2 billion barrels of oil and 5.7 trillion cubic feet of gas (2008), a total of some 4 billion boe.

2.11. Despite numerous predictions from Westminster that the oil was running out in the eighties, nineties and the 2000's, we still see today an industry which continues to thrive and expand. The McCrone report, presented to the UK Cabinet in 1975, has shown how Scotland, by having access and control over its North Sea oil and gas reserves could have made an independent Scotland as prosperous as Switzerland. Key quotes from this report, include:

"the discovery of North Sea oil will come to be seen as something of a watershed in Scotland's economic and political life".

"large revenues and balance of payments gains would indeed accrue to a Scottish Government in the event of independence provided that steps were taken either by carried interest or by taxation to secure the Government 'take'. Undoubtedly this would banish any anxieties the Government might have had about its budgetary position or its balance of payments".

2.12. The McCrone report is not the only source of evidence that Scotland's vast resources have been underplayed. Recently the former Chancellor Denis Healey revealed that[4]:

"I think we did underplay the value of the oil to the country because of the threat of nationalism but that was mainly down to Thatcher."

"It's true that we should have invested the money in things we needed in Britain and I had thought about an oil fund, like in Norway but it wasn't my responsibility by then."

2.13. If Scotland had access to this resource we could have invested in an oil fund so that all of the people of Scotland would have benefited. We could have used the vast tax reserves to make Scotland a fairer society. With more than half the value of reserves still to be extracted from the North Sea,[5] this is a mistake that we cannot let happen again.

2.14. With access to all the policy levers that independence will bring, we can do even more to enhance the conditions in which the industry is operating. We will be able to create the fiscal environment which will not only allow the industry to realise its potential but which will also allow all of Scotland's people to benefit.