The debate around Oil & Gas is one of the most peculiar aspects of Scottish life. Throughout my life the sector has been mentioned with various billions of £££ associated with it. Occasionally it will be reported that a field will have ‘£x billion’ invested in it and regularly there is discussion on how many ‘£yyy billion’ the industry is worth to the government. The impression has always been that sums of money flow out to sea and then more comes back in with the tide; the UK political parties and media have made sure the Scottish psyche is such that Oil & Gas might tick along for a while but the tide won’t flow much longer, and thinking anything else is a high risk strategy.
This hasn’t passed without consequence. Inexplicably the Oil & Gas sector was not mentioned once as a possible career at any point during my High School education or during my 4 years studying Maths and Physics at Glasgow University. And so the story goes for thousands of Scots, particularly in the Central Belt, home to one of the world’s most technologically advanced industries and yet oblivious to the potential opportunities that this brings directly to them.
The reality is that there are many phases and skillsets required to realise the large scale investment to develop or enhance production from a reservoir. Indeed it is estimated that ~400,000 people work in the UK Oil & Gas sector and this number is set to grow by 15,000 over the next 5 years (as noted by Vince Cable on the BBC alongside the good news of BP’s recent West of Shetland investment: BP and partners announce $500m Clair field appraisal). There are few skill sets that aren’t required to make this growth possible, and wouldn’t it be good to imagine that we have a workforce in Scotland ready to step in to meet this demand (HeraldScotland – Skills Shortage Fear for North Sea Firms). Training will be required but this should be possible. Last November I was in the US and there was an advert on the TV about how the Oil & Gas sector was helping the economic recovery with an overview of the thousands of new jobs being created. Such high profile promotion of the sector is almost unthinkable in the UK, for some reason the positive impact of the industry is kept on a ‘need to know’ basis.
My own involvement has been in the offshore Seismic Survey business, I’ve predominantly worked supporting the business from onshore but have also spent more than 500days offshore on either 3D exploration surveys looking for new development opportunities or time-lapse (4D) surveys to enhance the recovery from producing fields. The Seismic business is global but a significant percentage of the fleet has descended on the North Sea every summer for my 11 years in the business. Interestingly, there were more vessels in the North Sea during 2012 than ever before with 23 vessels, or ~20% of the global fleet, in the area. New techniques are giving a better image quality of the subsurface, identifying potential development opportunities with increased accuracy at shallow and deep targets.
2012 wasn’t only a busy year for Seismic Surveys; it also saw the UK’s largest ever response to a licensing round – with 167 of 224 applications accepted. So there are more companies looking to drill in more blocks than ever before. The spotlight of the independence debate missed the Energy Minister John Hayes when he gushed: “Fortune has favoured the UK. Oil and gas from our waters provides around half the energy we need to heat our homes, fuel our cars and power our industry. It is the single largest industrial UK investor, supporting 440,000 jobs, and benefits the UK’s trade balance to the tune of £40 billion.” (DECC announces awards for United Kingdom 27th Licensing Round (the map in there is worth a look as well)). Not only is Oil & Gas the UK’s single largest industrial investor but one third of all UK industrial investment is in Oil & Gas! This is fundamental and very significant, but the media have neglected to provide this context in the regular reports on Scotland’s potential in the event of a Yes vote in next September’s referendum. The UK economy isn’t as diverse as the anti-independence campaign claim, but that’s part of the problem with our big central UK government – it is so massive that very few people know what’s what and the result is that our politicians have become unaccountable and therefore perpetual failure from Westminster is tolerated.
As the entire Scottish economy is brought into focus to provide the context for the referendum, an understanding of Scotland’s Oil & Gas is very important. Indeed Alastair Darling was asked a couple of questions on this during an online Q&A session (As it happened: Alistair Darling’s webchat). They were:
- In the event of separation (sic), do you think the UK will gladly hand over 90% of the oil like the SNP assert? Wouldn’t the UK argue that since it invested in Oil and Gas, it should have a larger share?
- The SNP claim 90% of North Sea oil and gas revenues by virtue of geography but there is no Westminster / Holyrood agreement to back up the claim. As a UK asset that would need to be negotiated over in the event of Independence, then on a population basis Scotland may only be entitled to 10%. What is your view on the share of North Sea oil and gas revenues that an Independent Scotland would legally expect?
Alastair Darling’s response was as follows: ‘Both of these questions are difficult to answer in that it would have to be subject to negotiations between Scotland and the rest of the UK. That’s not the only question. Who would meet the massive decommissioning costs in the North Sea, for example. This is an example of one of the many issues that could take some years to negotiate.’
In summary Alastair Darling implies that there is uncertainty over Scotland getting anything from 10-90% of Oil & Gas revenues and then deflects the questions onto ‘massive decommissioning costs’, with the intended affect being to leave uncertainty on whether an independent Scotland could handle the responsibilities that come with big business. These points characterise the entire anti-independence campaign: suppress the realities of Scotland’s wealth where possible and create ‘unanswered questions’ where questions don’t exist; they are as subtle as this Ian Brown – F.E.A.R. . This tactic has traction because the UK is gripped with fear just now thanks to successive mistakes from UK governments plundering us into recession. The ‘problems’ that Norway has just now are worth considering, after all this is a nation of 5million people with an equivalent amount of offshore infrastructure to manage: Norway – The Problems of Too Much Money . These ‘problems’ seem like a fantasy from the UK viewpoint where we work long hours for salaries that lag behind commodity price increases (Iain MacWhirter with some stats and excellent comment). It seems clear to me that a better alternative is available and there is no need to fear independence.
The questions posed to Alastair Darling do deserve an answer and unlike him I’m not afraid to do so. In the event of independence for Scotland, the Oil & Gas revenues will be determined by the same UN international law that the rest of the world plays by – United Nations Convention on the Law of the Sea (the Convention) – it turns out that the virtue of geography is indeed the determining factor when it comes to the ownership of natural resource. In this sense Scotland has the good fortune of having an abundance of Oil & Gas, with 90% of the current production in Scottish waters. Claiming that the offshore Oil & Gas revenues would be distributed on the basis of population share is equivalent to saying that only 9% of our golf courses would stay with Scotland after independence (noting that this is just an analogy, we’ll get to keep all 100% of our golf courses).
The UK clearly won’t ‘gladly’ hand over the Oil & Gas revenues – that’s just one reason why they are trying their hardest to prevent a Yes vote – however I think it is safe to assume UN law will be abided by in this instance. The point of ‘UK investment’ and Alastair Darling’s point about ‘massive decommissioning costs’ are related by the fact that private business operates the Oil & Gas sector in the UK. Chances are Alistair Darling is fully aware of UK regulatory documents such as www.gov.uk – Decommissioning Offshore (oil and Gas) Installations and Pipelines, which stipulate that the operator has the financial responsibility for ensuring satisfactory decommissioning:
2.5 It is a fundamental principle of the decommissioning regime that a person who is responsible for developing or operating an offshore installation/pipeline should also be responsible for decommissioning at the end of its useful life. The Department will therefore charge Industry a fee for approving and revising offshore (oil and gas) decommissioning programmes rather than passing the costs onto the taxpayer which is in line with the ‘polluter pays’ principle of environmental law.
It is worth pointing out here that unlike many other oil rich countries, the UK has thus far decided not to have a National Oil Company. I imagine the primary reason for this is the concern of outlaying the massive upfront investment costs required to get production going; it has been considered easier to let oil companies take the risks and to tax a % of their rewards (aka profits). The oil companies do compete against each other but one thing I was surprised to discover when I first got into the industry was how integrated they all are as well. They effectively work together to share the risks and profits from most of their activities. You’ll notice that for the BP investment in the West of Shetland, their partners in the appraisal drilling programme are Shell, ConocoPhillips and Chevron. Such partnership would be a relatively easy route in for a new National Oil Company, ‘ScotOil’ perhaps, if we were to choose this option.
With anything in Oil & Gas, there has to be context as the costs involved are so large. Even if the government was responsible for the decommissioning costs as pointed out here, they should be more than capable of making it still a significant net gain: Oil and Gas UK – The Voice of the Offshore Industry – Economic Report 2011 – Decommissioning
Decommissioning incurs very significant costs, but these should be set in context with the total sums involved in the industry, for example being only about 10% of the £300 billion of capital invested in exploration and appraisal drilling and field developments up to the end of 2010. They are similarly dwarfed by the £293 billion paid in corporate taxes to the Exchequer over the past 40 years (both numbers in 2010 money).
Despite the various headlines, the potential that the Oil & Gas sector brings to the independence argument has yet to really feature in the mainstream debate. Rather than meaningful debate on the substance behind the opportunities and options here, we have simply had sensationalist headlines on the fine detail of exactly how rich we’ll be and whether that wealth will last 40 or 100 years! That in itself is of course significant and such timeframes are surely enough to invest in Scotland’s future economies. However this debate has been framed on forecasts assuming ‘business as normal’ with the only suggested change being from the troubled Greens who appear to see Oil & Gas as their kryptonite, but it needn’t be so. The ‘ScotOil’ option is just one option for fundamental change in the business, but even enhancing the link between education and the sector would be a big step forward, with perhaps government led initiatives to establish offshore apprenticeships as a core requirement for producing in our waters. The environmental campaign groups continually misjudge their role in the Oil & Gas industry in my opinion. They appear to play a blanket anarchist role, feeling the need to oppose the very existence of the sector and thus refusing to engage in any constructive contribution on how to optimally manage the process and proceeds. In terms of process, they could monitor best practice in the industry and help ensure the UK / Scottish sector is performing to the highest possible standards. In terms of proceeds, they could campaign for a tax on any operator saying that a certain % of their profits have to be used to invest in renewable energy resources. This could either be directly driven towards their own internal Research & Development (noting auditing of this would obviously be required) or in a ring-fenced taxation pot.
It is also worth noting that Scotland and Norway are the 2 key providers of oil to the EU – surely it is in the interest of the area that we maximise the recovery locally, rather than rely on essential resources to be imported from other regions (supporting local produce being a key Green principle that I fully support!). In terms of maximising recovery, I was shocked when I initially learned that the target for many reservoirs was to get 30-40% of the oil and then leave it, the thinking being that the investment required to get the additional oil would not return sufficient profits. That said, the industry has invested heavily on maximising the recovery from some existing fields; with the necessary infrastructure in place it makes both economic and environmental sense. This is only happening in select cases though, most notably with the major oil companies, and it is hard for smaller independent operators to invest in the same way. There is the opportunity to improve this – for example it could be defined in the licensing process that a company won’t be allowed to start a development program without detailing a strategy for maximising the recovery from the field and a National Oil Company could be used to ensure the financial backing is present to help the independent operators maximise the potential recovery (with the profits apportioned accordingly). I believe such a requirement exists in the Norwegian licensing process and it is no coincidence that their National Oil Company, Statoil, are considered to be one of the world’s leading companies in enhanced recovery techniques.
It certainly isn’t too late for Scotland with the Oil & Gas sector, however if we leave things in the hands of the UK government then there is a high danger that we’ll fail to use these years of financial wealth to diversify our economy sufficiently. Scotland’s society suffered badly when our heavy industries were dismantled under the UK government – only a Yes vote in the independence referendum will ensure that we can enhance our economy to enable a smooth transition on the day that the oil does run out.
Some additional notes:
- It was just over 20 years ago that the Norwegian government established an Oil Fund, ring-fencing profits from the sector to be used to provide security on pensions for the Norwegian people. A worthy cause. I particularly like this comment piece by Ian Bell on this and the relevance of it to the Scottish independence debate: heraldscotland.com/dirty-sexy-money (Norway’s oil fund was worth $683.7 billion at the end of last year. Its value is expected to reach $1 trillion by 2019. It is the biggest pension fund on the planet and owns, among other things, 1.78% of all the stocks and shares in Europe.)
- As it happens I was offshore in the North Sea when the McCrone Report was made publicly available during 2005. I was dumbfounded by the low-key coverage of this, with this article being on the BBC Scotland site for a few hours: http://news.bbc.co.uk/1/hi/scotland/4238744.stm. I’d recommend reading this blog which covers key points on the topic, from the report and other sources: McCone Jappy and the Big Fat Better Together Deception
- The Government Expenditure & Revenue Scotland (GERS) report gives a good overview of the nation’s finances as things stand – html: Government Expenditure & Revenue Scotland 2011-12 or PDF: Government Expenditure & Revenue Scotland 2011-12.pdf.
- Stephen Noon wrote a good blog recently capturing how the UK parties attempts to downplay the significance of the Oil & Gas sector in the Scottish independence debate: Stephen Noon – We’ve Heard It All Before , with the links helpfully provided on Wings Over Scotland: The Oil Debate For Busy People