Government Expenditure and Revenue in Scotland (GERS): 2018 to 2019

Chapter 2: North Sea Revenue

North Sea Revenue: 1998-99 to 2018-19

Introduction

In GERS, the term North Sea is used to refer to all offshore oil and gas activity. North Sea revenue in GERS comes from three sources: petroleum revenue tax, corporation tax, and licence fees.

Table 2.1 shows the revenue raised from each component of North Sea revenue since 2014‑15. UK North Sea revenue was £1.7 billion in 2014-15, but declined in 2015-16 and 2016-17 due to changes to the tax regime, lower production, rising expenditure, and lower oil prices. However, UK North Sea revenue increased in 2017-18, and was £1.2 billion in 2018‑19.

Table 2.1: Composition of North Sea Revenue: UK 2014-15 to 2018-19

	£ million
	2014-15	2015-16	2016-17	2017-18	2018-19
Licence fees	70	67	67	72	72
North Sea corporation tax	1,544	410	622	1,793	1,909
Petroleum revenue tax	77	-562	-653	-568	-744
Total	1,691	-85	36	1,297	1,237

North Sea revenue is subject to annual fluctuations and is driven by a number of factors, including the oil price, the sterling dollar exchange rate, production, operating expenditure, capital investment, and the prevailing fiscal regime.

During 2018-19, the oil price averaged $70.1 per barrel. This represents a 22% increase from $57.4 in the previous year, but is still significantly lower than its level in 2013-14 ($107.6). Prices in 2018-19 were relatively volatility, with the daily price ranging between $86.1 and $50.1.^[19]

Overall North Sea production increased in 2018-19, with crude oil and natural gas liquid production increasing by 10.3%,^[20] although annual gas production fell 3.6%.^[21] The period noted strong production from established fields as well as new production from Clair Ridge, which commenced production in late 2018.

In 2018, total expenditure on the UK Continental Shelf remained broadly stable, falling 1.4% in real terms compared to 2017, to stand at £14.25 billion. The slight fall was primarily due to lower investment, which fell by 12% in real terms, and a decrease in exploration and appraisal expenditure, down 10.6%. In contrast, decommissioning expenditure and operating costs increased by 9% and 6.4% respectively in real terms.^[22]

The fiscal regime has been unchanged since in the March 2015 and 2016 Budgets, when the Supplementary Charge was halved to 10%, and Petroleum Revenue Tax (PRT) progressively reduced from 50% to 0%.

As shown in Table 2.1, PRT receipts are now negative. This reflects the fact that, although companies no longer pay PRT, they can still claim refunds on PRT paid in previous years against current trading losses and decommissioning spending. As a result, PRT receipts will only be negative in the future under the current tax regime.

Scotland's Share of North Sea Revenue

In the ONS Regional Accounts, the UK continental shelf is not allocated to specific geographic regions, but is considered a separate region of the UK (the extra-regio territory). As such, an assumption as to Scotland's share of the North Sea needs to be made in GERS.

Two estimates of Scotland's share of North Sea revenue are shown in GERS:

1. A population share

2. An illustrative geographical share

The discussion below focuses on population and geographical shares.

Population Share

One interpretation of North Sea revenue is to view it as a non-identifiable UK revenue, in which case a population share may be apportioned to Scotland. Table 2.2 provides an estimate of Scotland's share of North Sea revenue under this approach.

Table 2.2: Population Share of North Sea Revenue: Scotland 2014-15 to 2018-19

	£ million
	2014-15	2015-16	2016-17	2017-18	2018-19
Total North Sea revenue	1,691	-85	36	1,297	1,237
Scotland's population share	140	-7	3	107	102
Scotland's share of North Sea revenue (%)	8.3%	8.2%	8.2%	8.2%	8.2%

An Illustrative Geographical Share

An alternative approach is to apportion a geographical share of North Sea revenue to Scotland. In order to estimate this share, GERS uses the share reported in the ONS Country and Regional Public Sector Finances publication. The estimate is based 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. Production, costs and revenue are allocated on a field by field basis to either the rest of the UK or Scotland using this boundary.

Table 2.3 shows Scotland's illustrative geographical share of UK North Sea revenue, broken down by licence fees, corporation tax, and petroleum revenue tax. Since 2015-16, Scotland's illustrative geographical share of North Sea revenues is estimated to be above 100% or negative. This reflects the fact that the Scotland's share of petroleum revenue tax, which is currently negative, is lower than its share of corporation tax.

Table 2.3: Geographical Share of North Sea Revenue: Scotland 2014-15 to 2018-19

	£ million
	2014-15	2015-16	2016-17	2017-18	2018-19
UK revenue	1,691	-85	36	1,297	1,237
Licence fees	70	67	67	72	72
North Sea corporation tax	1,544	410	622	1,793	1,909
Petroleum revenue tax	77	-562	-653	-568	-744
Scottish geographical revenue	1,377	50	266	1,426	1,430
Licence fees	58	55	63	68	68
North Sea corporation tax	1,272	334	595	1,699	1,809
Petroleum revenue tax	47	-338	-392	-341	-447
Scottish share of UK	81.4%	-59.2%	739.7%	109.9%	115.6%
Licence fees	82.2%	81.6%	94.6%	94.8%	94.8%
North Sea corporation tax	82.4%	81.4%	95.7%	94.8%	94.7%
Petroleum revenue tax	61.3%	60.1%	60.1%	60.1%	60.1%

Scotland's estimated geographical share of the North Sea sector, used in this report, is highlighted in the figure below.

UK Continental Shelf and Scottish Boundary

Source: Marine Scotland