Scottish Independence – Implications for the energy sector – Part 1.

(first published in June 2012 in the Press & Journal "Energy" supplement)

I take it pretty much for granted that if you’re an “Energy” reader then you’re someone that’s curious about what goes on in the world.

That means you’re probably keen on learning about new ideas and new “stuff” and you’ll have more than a passing interest in both local and global politics and economics because the industry you’re in is one of the most global you can get.

So I think I can also be fairly sure you will have noticed that the “Yes” campaign in support of Scottish independence has now officially kicked off and therefore I’ve taken some time out and had a think about what might be the consequences for the oil and gas industry, renewables and the energy sector generally and had a crack at coming up with some ideas for possible high level policies if indeed Scotland does become independent.

Top of the list for most people will be taxation and regulation.

The stability of the petroleum tax regime remains an issue given the changes made by both the existing Tory / LibDem Coalition government and the New Labour government before that.

I’ve often wondered why the UK government has generally treated the oil and gas industry so carelessly over tax. But of course, given that in a UK context oil/gas only represents something in the order of 2-3% of GDP (gross domestic product), then its importance may not be as large as it would be in an independent Scotland where it would make up over 15% of GDP.

This of course would put it on a par with the industry in Norway where it’s treated as an immensely valuable business with huge global potential.

However, it seems reasonable to assume that, given the huge importance of the oil and gas sector to an independent Scotland that no Scottish government regardless of its political makeup would be likely to jeopardise its future by creating an unstable tax regime or indeed one that doesn’t encourage appropriate levels of exploration and production and a healthy supply sector.

It would seem sensible then to assume it would receive Norwegian style treatment.

In terms of regulation the same approach would apply and I think it unlikely much would or should change although perhaps greater emphasis might be put on maximising recovery rates, developing better mechanisms to encourage companies to give up so called fallow fields and encourage the development of new technologies.

The overall policy aim though should also be to encourage exploration and development and ensure there are no major obstacles – regulatory or otherwise – to prevent that.

Of course, safety regulation is currently the subject of a potential takeover grab by the European Union.

Whilst the UK and Norwegian governments plus trade unions in both camps are opposed to the idea, as indeed is the current Scottish government, there is no guarantee as yet that it will be dumped.

One policy that the proponents of independence might like to consider then is the repatriation of offshore safety controls if the EU succeeds in its power grab before 2014 or 2015.

This would help put operators and contractor’s minds at rest that there won’t be any further increase in bureaucracy that could stifle industry progress in an independent Scotland.  

The other fiscal element that will need to be considered carefully is the taxation of personnel.

Many offshore workers in particular live outside Scotland travelling offshore as and when required. In effect, in an independent Scotland they then become “foreign” workers.

Because of their importance to the industry there should be a cross border agreement with the remaining members of the UK that they will be taxed once only and only in their country of residence.   

I’ve always said that one of the things that helped Norway considerably was the Not only was it right that the Norwegian state benefit properly from its natural resources but setting up Statoil was a strategically smart move from the point of view of having a champion for Norwegian industry.

I would pretty much guarantee that, had Statoil not existed, then many of the major Norwegian high tech companies wouldn’t either. 

The question then is whether an independent Scotland should establish a state owned or state majority owned company and if so what should it do?

Although it couldn’t retrospectively takes shares in existing fields unless it bought into them should – let’s call it ScotEnergy for fun - take a majority share in all future fields on behalf of the Scottish nation with private sector companies coming in as partners?

Difficult to answer isn’t it? 

Certainly though ScotEnergy could act as a national champion and help support our indigenous industry in terms of R&D support, help in setting up trials for new equipment and so on and so forth.  

There is also the thorny issue of decommissioning and who pays. 

I’d like to take a different approach which involves dramatically reducing the costs of decommissioning by changing the policy. 

For example and notwithstanding the Ospar anti-dumping protocol covering European waters, I’ve never understood why jackets should be removed when we’re trying to rebuild fish stocks and old jackets make great reefs. They would add to the more than 6,000 known, charted wrecks in UK waters. Are there other simpler solutions as well?

This is just Part I of my thoughts on the independence issue. I’d like to cover this subject in more detail and to include all the other elements of the energy sector in Scotland.

So more to come on this over the next couple of years and I’d encourage readers to let me know what they think and what policy ideas they may have.