Despite falling reserves, oil takes centre stage in Scottish independence debate
North Sea riches will remain attractive to exploration industry, regardless of whether political authority lies in London or Edinburgh
British prime minister David Cameron (left) talks with employees during a tour of the BP ETAP (Eastern Trough Area Project) oil platform in the North Sea, 100 miles east of Aberdeen, in February. The fate of North Sea oil revenues is a key issue ahead of the September 18th referendum to decide whether Scotland will end its 300-year-old union with England. Photograph: Andy Buchanan/Getty
Aberdeen in the northeast of Scotland, in the words of one oil executive who has experienced some of the toughest regions on earth, may not be the nicest part of the world, but it is the nicest part of the world that has oil.
In truth, the humour is a little hard on the location, which was ranked by the Lonely Planet two years ago as one of 10 cities in the world that never get the credit it deserves – though other visitors have often found it grim, soulless and obsessed about oil.
The humour reveals an important truth: the riches in the North Sea, even if they are past their peak, will remain attractive to the oil giants, regardless of whether political authority lies in London or Edinburgh.
Production in the North Sea peaked in 1999 when 4.57 million barrels of oil were extracted, compared with just 1.43 million barrels last year – though the oil and gas that is now being extracted is harder to find, and vastly more expensive to get out.
Significantly, tax revenues on North Sea production – a crucial element of the economic figures put forward by those advocating independence – have fallen dramatically: £6.6 billion last year, compared with £11.2 billion the year before.
Just as significantly, many of the platforms that have faced the North Sea’s often brutal conditions are ageing, requiring ever more work to keep them going, and often are only able to operate two-thirds of the time.
“There is more corrosion, more leaks. Production has had to be curtailed to deal with that,” says Alexander Kemp, professor of petroleum economics and the director of the Aberdeen Centre for Research in Energy, Economics and Finance.
Back in the 1970s, life was different. “I worked in Forties Bravo. You drilled, oil came out,” says councillor Barney Crockett, the former Labour leader of Aberdeen City Council. “I remember calculating that two days production covered all of the costs.”
Everybody accepts that North Sea production is falling, but there are disagreements about how much is still left out there. The British Department of Energy estimates that the reserves number between 11 and 21 billion barrels with “some potential” that they could be higher.
Oil and Gas UK, which represents the industry, officially puts the figure at between 14 and 24 billion barrels, but its chief executive, Malcolm Webb, believes it could be higher.
“Here is a personal view. Every forecast of the recoverable reserves of the North Sea to date has turned out to be a gross under-estimation. Nobody knows what is out there. People have got various models.
“Our number is up to 24 billion. The only certainty is that we know what we have produced to date, 42 billion barrels and we think there are still decades of activity to come,” the 40-year veteran of the industry told The Irish Times.
The visible links between Aberdeen and the North Sea fields, however, hide a number of important contradictions: the majority of people working in the “the North Sea” do not live in Aberdeen.
Indeed, the majority of revenues earned by oil and gas companies based in Aberdeen last year did not come from the North Sea at all, but from other oil-rich parts of the world.
“This is the only place in the world where if you say the letters EG, most people will know that you mean Equatorial Guinea, ” Crockett says over coffee.
“Most companies have their African headquarters here. We have Angolans living here in serviced apartments, who have come to learn and are running Angolan oil from here,” says the Labour politician.
Companies running the older established fields pay a marginal tax rate of 81 per cent, while other fields are taxed at 61 per cent. “For anyone running one of those, it has not been so good over the last few years,” says Webb.
Three times since 2002 British chancellors of the exchequer – Gordon Brown in 2002 and 2006 and George Osborne in 2011 – have challenged the industry with unexpected tax increases, one of which was decided upon with just hours to go before Brown’s budget day speech.
Last year, £14 billion was spent in the North Sea by the older established oil giants, along with the slew of State-controlled companies that have come more recently: Norway’s Statoil, the Korean National Oil Corporation and the Chinese.
This year, investment has been just shy of the £14 billion figure – the highest-ever recorded – but the spending partly explains the fall in tax revenues since 100 per cent of the capital can be written off against profits.
Such tax write-offs will fade away, though Kemp is not alone in believing that the steady decline in production that has been recorded since 1999 can be halted, if not reversed, over the next five with the arrival into production of the Clair Ridge field west of Shetland and others.
However, the tax-take that will flow to London, or to Edinburgh if voters say yes on September 18th, is more difficult to predict. “The Office of Budget Responsibility [in London] uses future contract prices which are going downwards for its figures,” says Kemp.
“But futures have not been good predictors in the past. Some people think that the OBR is taking the worst of both worlds: falling production, plus falling prices.”
The Scottish Government disagrees, arguing that energy taxes will raise nearly £7 billion in 2016/17 – the year Scotland will separate if there is a yes vote – or more than double the OBR’s prediction.
With that money and the sums to follow, authorities have promised that the mistakes made with oil wealth – including in some people’s views by successive British governments – will not be repeated.
A stabilisation fund will be set up in times when prices are high, to be used in fallow years, while a Norwegian-style investment fund would put aside billions for the future.
“That’s all fine,” says Kemp, “but it requires astute management, particularly when there is pressure to spend money on other things.”
Black gold: Fifty years of bountiful harvest in the North Sea
The North Sea has produced a bountiful harvest for decades since the first licence was granted 50 years ago next month, but challenges lie ahead.
The industry has paid more corporation tax than any other. Exploration – hit by tax changes brought in by the British government – stands at a 50-year low, though the sums being spent to develop already-discovered fields are at record highs.
Wages in the industry have gone up by between 35 per cent and 40 per cent since 2006. The number of people needed to produce a barrel of oil has risen from 18 in 2006 to 45 two years ago.
Nearly 500,000 people work in the oil industry throughout the United Kingdom – half of them in Scotland. However, more people work for the industry in London than do in Aberdeen.
The supply chain to the oil and gas industry is worth £14 billion a year, says Oil and Gas UK.
Production is falling, but it provided 67 per cent of the UK’s oil needs and 53 per cent of its gas in 2012. In 2030, it will still provide 70 per cent of both needs.
New technology has given extra life to old fields. The Forties field was first discovered by BP in 1970, producing 500,000 barrels a day at its height. It was sold to Apache in 2003 when it was estimated that 144 million barrels were left. It was expected to close in 2012. Since 2003 nearly 200 million barrels have been harvested. Now 114 million barrels are known to be left.