Professor Alexander Kemp and Linda Stephen are arguably the most authoritative academic experts on the North Sea oil and gas industry, with a hefty series of research papers to their credit.
Professor Kemp, who directs the Centre for Research in Energy, Economic and Finance at the University of Aberdeen, has just published in the Press & Journal newspaper, a new set of projections for the performance of the North Sea oil and gas sector.
The nub of what he has to say is that future tax relief ‘could incentivise further field developments resulting in a total plausible range of 15 -16.5 billion barrels of oil equivalent [boe] over the period to 2050′.
Beyond that date, he says that if politicians developed a fiscal strategy to recover what the oil and gas industry itself estimates as 24 Billion boe – ‘It is quite conceivable that the industry can be prolonged well beyond 2050 at activity levels which, while small by today’s standards, contribute significantly to the national economy.’
He contextualised this last remark by saying: ‘No-one can say with any assurance whether or not the long-run upper potential of 24 billion boe foreseen by Oil & Gas UK will be achieved, but policies consistent with this should be put in place.’
The two responses
The ‘Yes’ campaign, through an SNP spokesperson and also by Energy Minister Fergus Ewing, has taken Professor Kemp’s remarks as encouraging in his suggestion that: ‘Scotland’s oil and gas industry will make a significant contribution well beyond 2050′.
The ‘No’ campaign welcomed his projections in pointing to the fact that his estimate of ‘total plausible range of 15-16.5 billion barrels of oil equivalent’ coming out of the North Sea by 2050 – which is, as they say, in line with senior oil industry insider, Sir Ian Wood’s recent estimate; and a third less than the 24 billion barrels that the SNP insist is recoverable.
The specifics
When Professor Kemp says, as he had today, that future tax relief ‘could incentivise further field developments resulting in a total plausible range of 15 -16.5 billion barrels of oil equivalent [boe] over the period to 2050′, he is saying:
- that the ‘total plausible range of 15 – 16.5 Billion boe’ is just that – the total plausible range;
- that the current tax regime will not be adequate to incentivise the recovery of ‘the total plausible range of 15-16.5 billion boe over the period to 2050′ – but that a future and even more industry-favourable tax regime might achieve this;
- that the ‘total plausible range of 15 – 16.5 Billion boe’ will only be achievable if tax relief is adequate to ‘incentivise further field developments’;
- that, with enhanced tax incentives to produce this ‘total plausible range of 15 -16.5 Billion boe’ these will run to 2050 and not beyond.
What he says about the period after 2050 is that the UKCS ‘can be prolonged well beyond 2050 at activity levels which, while small by today’s standards, contribute significantly to the national economy.’ – only if another fiscal strategy is developed to enable this. That means even more tax concessions to produce what Professor Kemp estimates as modest but positively contributing results.
The real issue: the tax receipts and their impact on the state budget
The oil and gas industry is incentivised and supported to invest, explore, produce and decommission in the United Kingdom Continental Shelf [UKCS] through tax concessions.
Tax concessions to the North Sea industry mean a lower tax take for the Treasury, to contribute to covering the costs of public spending.
At the moment it is the entire United Kingdom that takes the hit of the lower tax receipts from the North Sea that incentivise its continuing operations.
After independence, it would be Scotland alone, with its population of 5.3 Million, that would take this hit – and all of the tax receipts to balance against public spending.
Fergus Ewing has accepted and trumpeted the Kemp projections as validating the SNP’s claim that a wealthy Scotland will flush out on oil for decades.
However Professor Kemp’s picture is actually one where an independent Scotland would have to choose between retaining modest revenues from the North Sea at the cost of substantially reduced tax receipts and, as a result, cutting public spending hard to match; or letting the last small harvest from the depleted UKCS go by default.
A PriceWaterhouse Coopers [PwC] review commissioned by industry body Oil and Gas UK and published in February 2012, showed that the industry’s estimates of what it had paid in ‘Taxes Borne’ [mainly Corporation Tax, Supplementary Charge to Corporation Tax and Petroleum Revenue Tax] in 2010-11 amounted to £7.7 Billion. The gap between this total and HMRC;s official figure of tax receipts from the industry for the same year of £8.3 Billion was the amount paid in respect of Employers’ NICs – a remaining tax borne.
When Chancellor George Osborne suddenly hiked the tax regime for the industry in his first budget of March 2011, the 2011-12 tax take went up to £10.9 Billion as a result of the higher tax take. In 2010-11 receipts for these taxes had already risen by 40% on the back of the higher prices that had caused public anger at the time.
It was this popular outrage tat perceived profiteering that had led [in part] the newly appointed Osborne to hike the industry’s taxes – a move he had to reverse in his budget a year later, because of its calamitous impact.
As a result of that higher tax take which reversed the incentive for the industry to explore and produce – tax receipts fro the sector fell by a whopping 45% to £6.1 Billion in the following year, 2012-13; and fell again to £4.7 Billion in 2013-14 as the result of the lower production and higher production costs which will be a continuing feature of the natural decline of the UKCS.
Scotland’s budget estimates
Scottish Government budget estimates are based on an assumed average tax take from the North Sea sector of £7 Billion per annum. That figure, part of the government’s own ‘most favourable’ estimate of the balance of future accounts, already results in a £1 Billion per annum deficit.
The most recent tax receipts from the industry – those quoted above from HMRC figures for 2013-14 - were £4.7 Billion. Assuming that all other figures in the income side of this ‘most favourable’ budget estimate delivered on their anticipated performance, this would see an annual deficit – at best – of £3.3 Billion.
That is utterly unsustainable for a populalation of Scotland’s size.
A situation where the government of an independent Scotland had to offer more and more tax incentives to keep the North Sea oil and gas sector contributing to GDP, if not to a Scottish Treasury, could only increase that level of unsustainability.
Public spending would have to be cut in an independent Scotland – even alongside the sort of rises in personal and non-North Sea business tax hikes that would see the country depleted of a substantial portion of its inward investment and of the high value and skilled members of its working population.
Finance Secretary John Swinney’s declared intention to borrow what adds up to at least £7 billion over the first three years of an independent Scotland would, as intended, disguise the unaffordability of proposed public sector spending. We have called this strategy ‘the creation of an immediate feel good bubble’, to prevent social unrest as reality made its presence felt.
After those three years, when spending cuts had to be imposed, there would be a few more years when this pain would still be raucously blamed on the then absent Westminster – no doubt because of its stinginess in post ‘Yes’ negotiations.
The basic issue for Scotland
This is all about the balancing of the national budget.
Every pound that comes in annually in tax receipts from the oil and gas sector that is less than £7 billion is added to the basic £1 billion best estimate annual deficit the Finance secretary expects.
So every additional tax relief the Scottish Government has to give to the North Sea sector is a direct hit on Scotland’s ability to sustain the promised generous public spending programme.
How long could a small country of 5.3 Million people sustain a substantial annual deficit not calibrated in the White Paper on Scotland’s Future – for which the First Minister has asked for a mandate in a vote for independence 16 days from today?
If Scotland gives him that mandate, the responsibility devolves upon those who vote ‘Yes’ on that day, not upon Mr Salmond. He has only asked. A people generally blind to consequences – but nevertheless responsible for them – would have said ‘Yes’.
