3. Scotland's Asset
- Oil and gas is the largest industrial sector in Scotland, contributing around £22 billion to Scottish GDP in 2012.
- Oil and gas production has contributed approximately £300 billion in tax receipts (2012/13 prices) to the UK Exchequer.
- Scottish GDP per head is around 118% of the UK average when Scotland's geographical share of North Sea output is included.
- The sector is currently undertaking record levels of field investment, with total future investment in companies' plans worth at least £100 billion.
- 200,000 people are employed directly or indirectly in the sector across Scotland and significant growth is expected in the next couple of years.
Contribution of Oil and Gas to the Scottish Economy
3.1. The oil and gas industry has been a vital element of the Scottish economy for over forty years, and will remain so for decades to come.
3.2. Since production began in the 1970s, the industry has contributed approximately £300 billion in tax receipts (2012/13 prices) to the UK Exchequer, around 90% of which has been generated by production in Scottish waters. In 2011-12 alone, oil and gas production in Scottish waters generated £10.6 billion in tax revenues, the second highest nominal level of tax revenue in the past 25 years. The annual tax revenues from oil and gas production in Scotland's portion of the UKCS have averaged over £1,500 per person in Scotland since 1980.
3.3. In 2012, oil and gas production is estimated to have contributed around £22 billion to Scottish GDP - making it the largest industrial sector in Scotland by a large margin. Oil and gas production also boosted the UK balance of payments by some £40 billion in 2011.
3.4. The sector generates enormous wealth for Scotland. Including a geographical share of North Sea output, Scottish GDP per head is around 118% of the UK average. Indeed, when Scotland is assigned a geographic share of oil and gas production, it would have been ranked 8th in the OECD in terms of GDP per head in 2011, whilst the UK was ranked 17th.
3.5. In 2013 oil and gas was the largest single sector in the FTSE 100 Index of leading companies, and a sector where Scottish firms are leading global players.
3.6. In light of the substantial opportunities in the sector that continue to emerge, field investment is expected to increase to £13 billion in 2013, whilst total future investment in companies' plans is estimated to now be worth at least £100 billion.
3.7. The industry's contribution to the wider economy is reflected in the level of employment it supports. The industry provides employment for around 200,000 people across Scotland both directly in the industry and by supporting jobs in other sectors of the economy. This is almost half of the UK employment supported by the sector. Chart 1 illustrates the significance of the oil and gas industry in Scotland. The jobs supported by the sector are equivalent to 8% of total employment in Scotland.
Chart 1: Employment Supported by Oil and Gas Activity
3.8. Recent evidence also points to optimism for employment prospects in Scotland. Lloyds Banking Group forecast in March 2013 that future growth in the sector will create 34,000 jobs in the industry and related businesses across the UK over the next two years, with all areas of Scotland expected to benefit. The study also found that Scottish oil and gas firms are more likely to expect growth than those south of the Border - with 83% expecting to see more business.
3.9. The presence of the oil and gas industry in Scotland has led to the creation of a sophisticated supply chain to service the offshore industry. There is now a cluster of world class companies headquartered in Scotland with strengths in many areas including project management, subsea, well-management and training services.
3.10. There are around 2,000 companies in the oil and gas supply chain operating in Scotland. The majority of these companies are based around Aberdeen and the North East of Scotland but there are significant pockets of expertise throughout Scotland. The presence of this world class cluster means that Scotland is now a major player in the global oil and gas supply chain, with Scottish companies now operating in over 100 countries (Chart 2). In 2011, the Scottish supply chain achieved international sales of over £8.2 billion. Nearly half of the Scottish supply chain's total sales (£17.2 billion) were from international activity, up from a third in 2002.
Chart 2: International Activity By Geographic Region (2011)
3.11. Remaining oil and gas reserves on the UKCS are substantial, suggesting that activity in the sector will continue for a significant period. Oil and Gas UK estimate that up to 24 billion barrels of oil and gas equivalent can still be recovered from the UKCS as a whole. This encompasses proven, probable, and possible reserves from existing fields and new developments, plus a contribution from additional resources arising from marginal or tertiary developments, using improved or enhanced oil recovery techniques as well as further exploration. Identifying reserves from remaining resources will be driven by the extent of exploration activity that is undertaken in the UKCS. The full range of forecasts published by Oil and Gas UK are summarised in Chart 3 below.
Chart 3: UKCS Reserves by Category
3.12. It is possible that ultimate recovery could exceed the estimates presented above. For example, Mark Higginson, a senior partner of accountants PWC, has stated that "it's likely that there is probably between 24 and 30 billion barrels of oil equivalent still to gather from the North Sea." Many industry experts also agree that the 24 billion boe could be a significant underestimate. The estimates of remaining reserves published by the UK Department of Energy and Climate Change (DECC), whilst reflecting a wide range of potential scenarios, suggest that up to 33 billion boe could still remain.
3.13. Analysis by the Scottish Government suggests that the 24 billion boe of reserves have a potential wholesale value of up to £1.5 trillion - ten times the size of the Scottish economy. This indicates that more than half of the oil and gas reserves in the UKCS, by value, have still to be extracted.
3.14. Drawing on internationally comparable data, Scotland is estimated to have the largest conventional oil reserves in the EU. Chart 4 shows that Scotland is estimated to account for nearly 60% of total EU oil reserves. The major investments announced in recent months could have the potential to increase overall oil recovery rates. This could increase Scotland's share of recoverable EU oil reserves further.
3.15. Equivalent estimates of remaining gas reserves are not available due in part to the range of different methods used to quantify potential unconventional gas reserves. However, separate analysis estimates that Scotland could have the second largest volume of proven gas reserves, a sub-set of total reserves, in the EU after the Netherlands.
Chart 4: Share of EU Oil reserves by country (2010)
3.16. Scotland's oil and gas reserves represent a significant resource for the people of Scotland. Analysis by Professor Alex Kemp and Linda Stephens, at the University of Aberdeen, has estimated Scotland's geographical share of oil and gas production based on the median line principle. This is the likely position given that it has been used to determine other North Sea jurisdictions. It is also consistent with the approach taken in 1999 to determine the boundary between Scotland and the rest of the UK for fishery demarcation purposes.
3.17. Other alternative methods of demarcation, such as the Civil Jurisdiction Order 1987, could result in a more favourable allocation for Scotland. However, the amount of hydrocarbon reserves that would belong to Scotland remain broadly consistent regardless of which of these boundaries is applied. Analysis by Wood Mackenzie concluded "that the bulk of UK oil and gas reserves (circa 85%) lie in Scottish waters, and an independent Scotland would control the vast majority of production as well as the most prospective acreage" .
3.18. Kemp and Stephen's latest estimates are for 2011, where they estimate that Scotland's share of total UK oil and gas production was 96% and 52% respectively. This means that Scotland's share of total hydrocarbon production was approximately 78% in 2011. In terms of future production, Kemp and Stephen estimate that 98.8% of total oil production and 60% of total gas production over the next thirty years from 2011 will come from Scotland's geographical share of the UKCS.
3.19. Since the 1970s, over 40 billion boe have been extracted from the North Sea.
Chart 5: Oil and Gas Production in Scottish Waters (% of UKCS Total)
3.20. Production levels peaked in 1999, but have declined in subsequent years. This reflects a number of factors including subdued investment and production efficiency between 2002 and 2008 - due, in large part, to poor investor confidence following numerous changes to the fiscal regime by successive UK governments during the previous decade. As noted within the Oil and Gas UK 2013 Activity report, "Taking into account the two to three year average time lag between investment decisions and first production, the lack of new fields coming on-stream can be attributed to the damage done to investors' confidence by the numerous adverse tax changes in the early and mid-2000s." 
3.21. The most recent example of this fiscal instability was the 2011 UK Budget where changes to the North Sea fiscal regime were announced with no prior consultation with the industry. The key change announced was an increase in the Supplementary Charge which was increased from 20% to 32%. Tax relief for decommissioning expenditure for Supplementary Charge was also capped at 20%.
3.22. These changes had a substantial impact on the industry by making North Sea projects less competitive than in other areas of the world, and increasing the sense of fiscal instability in the North Sea resulting in an uncertainty in investment decisions. These issues are discussed in more detail in Chapter 5.
3.23. Despite these challenges, the North Sea still produces 1.5 million boe a day, with Scotland remaining the largest producer of hydrocarbons in the EU. In 2011, Scotland accounted for 60% of EU oil production and approximately a third of EU total hydrocarbon production (Chart 6).
3.24. As an illustrative example, current production from the Scottish portion of the North Sea alone is enough to meet current Scottish domestic oil demand six times over, and current Scottish gas demand three times over. This demonstrates the huge export potential of Scottish oil and gas production.
Chart 6: Share of EU Combined Oil and Gas Production by Country (2011)
3.25. With the correct incentives, the North Sea will remain a significant source of oil and gas production for years to come. For example, Oil and Gas UK's chief executive, Malcolm Webb, states that through further changes in the fiscal and regulatory regime we will be able to: "…make the most of this valuable national asset, the products of which are essential to our daily lives and can underpin our prosperity for many decades yet to come." 
3.26. New fields continue to be found, and there remains significant interest in North Sea licensing rounds. Recent technological advances and high oil prices also mean that many fields are now more commercially viable than in the past.
3.27. This is reflected in recent developments in the industry which point towards a strong recovery in investment. The latest Oil and Gas UK Activity Survey reports that field investment in the North Sea in 2012 was £11.4 billion, the highest level for thirty years. This is a significant increase from 2009, where field investment was around £5 billion. This is expected to increase to at least £13 billion in 2013 and future investment in companies' plans is now estimated to be worth at least £100 billion.
3.28. This investment is expected to boost North Sea production in the coming years. Oil and Gas UK estimates that production could reach 2 million boe a day by 2017. As illustrated by Chart 7, this would represent a 30% increase on current production levels. In comparison, even with the recent recovery in investment in the North Sea, the OBR assume that production broadly remains flat until 2017-18.
Chart 7: UKCS Production Forecasts (mboepd)
3.29. The North Sea is also experiencing a revival in exploration activity which will help to increase recoverable reserves and prolong production into the future. The 27th licensing round attracted 224 applications, covering 418 blocks - the largest number since such rounds began in 1964.
Chart 8: Application and License for North Sea Exploration
3.30. Exploration activity has also increased with operators drilling 26 exploration and 25 appraisal wells in 2012 which led to the discovery of over 200 million boe. Oil and Gas UK forecasts a further increase in exploration activity in future years, with over 130 wells forecast to be drilled between 2013 and 2015. This would make the next three years the most active for exploration in the past fifteen years.
Oil Price Outlook
3.31. There is variation between forecasters on future oil prices. Some, such as the Office for Budgetary Responsibility (OBR), expect prices to fall gradually in the coming years to approximately $93 a barrel in 2017-18. Over the last two years there has only been one month when prices have fallen below $100 a barrel. The OBR assumption is based upon a methodology which uses the prices implied by futures markets. Others, such as the US Energy Information Administration and the International Energy Agency, predict that oil prices will rise in future years., Finally, some organisations predict that prices could rise sharply in future years. For example, analysis published by the OECD in March 2013 suggests that rising demand in East Asia and continued tight supply could result in oil prices rising above $150 by 2020.
3.32. In recent years, oil prices have exceeded many initial forecasts. For example, in 2010, futures markets implied an oil price of around $85 a barrel in 2011 and 2012. Actual prices over this period averaged more than $110 a barrel. Some forecasters expect this trend to continue. For example, the IMF's October 2012 World Economic Outlook stated that the risks to oil prices are "tilted to the upside" and "cannot be easily dismissed".
3.33. The Scottish Government Oil and Gas Analytical Bulletin, published on
11 March 2013, provides a detailed outlook for the oil and gas sector, including an assessment of future oil prices. The analysis in the Bulletin assumed that oil prices remained at $113 in cash terms over the forecast period, this was based on the average price over the 24 months prior to publication.