The outcome of the referendum on Scottish independence in
2014 will be critical in determining how the future of energy and particularly
oil and gas pans out. In my personal opinion
it will be the difference between actually being able to achieve some long term
benefits from oil and gas or just exploiting it to help Westminster fund its
current account expenditure for as long as it can with no financial or
industrial legacy.
Let’s get the recently contentious stuff over with first.
The idiotically named Office of Budget Responsibility said recently it expects
the total taxation from oil and gas between 2018 and 2041 would now be £56bn,
down £11bn from the £67bn it forecast only a year or so ago.
Unfortunately their case is somewhat undermined by the
fact that two years ago the OBR said that the oil and gas industry’s share of
GDP would be more than three times higher than it is now at 0.1%. As the
independence referendum became a reality they then cut it in half to 0.05% last
year, before this year's further cut to 0.03%.
Bizarre.
On the other hand, Prof Alex Kemp – whose opinion is one
I do trust – suggests that compared to his models the OBR is actually underestimating
potential production up to 2040 by around 6bn barrels.
Alex has no political axe to grind. The OBR do. I know who I trust.
Now let’s get to the real substance of the debate. I have
long been of the view that the UK Government has failed miserably in its duty
to support the energy industry properly and doesn’t deserve the benefits it
gets in terms of taxation, jobs and so on and so forth. It has
treated the industry as a cash cow, used the tax receipts to fund expenditure
rather than invest it, and failed to save any of it for a rainy day.
Remember, Norway started putting money into an oil fund
in 1996 and it’s now worth £450 billion, equivalent to £90,000 for every
Norwegian, and is the largest Sovereign Wealth Fund on the planet.
There is also the issue of Westminster’s laissez faire
attitude to company ownership which has been most unhelpful in the attempt to
build an indigenous service and manufacturing sector.
We all recognise this industry is probably one of the
most international on the planet but by now we should be a much larger player
in it than we are. That of course is in
no small part also due to the attitude of the UK financial sector which happily
followed Westminster’s approach to the industry.
Westminster also has a lousy record in its handling of N
Sea taxation issues. Its unannounced
windfall tax in 2011 was politically naïve and strategically inept. Its partial reversal in 2012 and the albeit
welcome Brown Field Allowance still hasn’t fully repaired industry trust in the
Treasury and its overall tax structure is still tilted in favour of the
Government rather than the industry.
The industry is also still waiting for a Norwegian type
exploration drilling allowance. Improving exploration levels is key to extending
the life of the industry. Tax mechanisms
and of course new technologies can help achieve that.
So what might change if Scotland became an independent
country? Well my view is that having an
Energy Department in Edinburgh or preferably Aberdeen should certainly facilitate
better communication between government and industry and avoid hiccups such as
Osborne’s tax hike. It provides an
opportunity for government and industry to work much more closely together for
the overall benefit of the country. I envisage
a much more stable and open and essentially “grown up” relationship.
Stability is also important not just in terms of the tax
regime but who the industry has to deal with. Westminster has changed its
Energy Minister more times than I’ve got pairs of socks! No
sooner has the industry got used to one than he or she is either fired or given
another job. This is contemptuous and
creates the impression that the industry isn’t important enough to warrant
stable government management.
In terms of the all-important safety regime I don’t see
much change is needed other than perhaps tidying up and streamlining the
processes such as inspection and reporting.
The same applies to some extent to decommissioning
although I have to say I would really like to see a reappraisal of the decision
not to allow the use of redundant jackets and other inert elements of offshore
platforms for the creation of artificial reefs.
From an environmental standpoint this would cause few problems and it
could have an extremely positive impact on fish stocks whilst not interfering
with fishing itself. A win-win situation?
One piece of misinformation being used about
decommissioning can be cleared up and that is that tax relief associated with
decommissioning costs could never be afforded by an independent Scottish
Government. Given it amounts to only somewhere around 2.5 per cent of the wholesale
value of future reserves then this should be more than affordable but of course
the UK Treasury has already accrued £300 billion in tax receipts from the oil
and gas sector and it doesn’t seem unreasonable for the Scottish Government to
expect a contribution to this cost from the UK Government.
The UK Government failed to develop a coherent strategy
for developing, commercialising and deploying new technologies and has invested
less in energy R&D than our main competitors. Improving this situation is
essential and should be high up on the list of an independent Scotland’s
priorities.
In other words in terms of R&D we need to adopt an
approach that our indigenous industry can benefit from as well as improving
discovery and recovery rates and costs. Let’s have no more of Westminster’s laissez
faire attitude where they don’t care who benefits providing the tax revenues
keep flowing!
What else? A
national energy company? Why not -
although maybe that should be for renewables and other non-oil and gas
areas. So let’s look at that later in
the year.
(First published in the Press & Journal "Energy" supplement Aug 2013)
