Scottish first minister Alex Salmond's announcement in early January that he plans a referendum on full independence from Britain has not only rattled the U.K. parliament in London, but also raised questions about the future of North Sea oil and gas assets.
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Independence is a long-cherished ambition for Salmond's Scottish Nationalist Party (SNP) and its landslide victory in elections last May gave the SNP new impetus to challenge a union that has existed for over 300 years.
The day after Salmond's announcement, British government Scottish minister Michael Moore stated the Scottish government currently doesn't have the legal power to hold a referendum. Advocate general Lord Wallace, the U.K. parliament's senior advisor on Scots law, further warned that the Scottish parliament risks flouting the rule of law if it runs its own independence referendum.
However, eager to avoid the Supreme Court becoming embroiled in a confrontation over national and constitutional rights, British Prime Minister David Cameron has declared himself keen to start a debate to devolve the necessary legal powers to Scotland and start the referendum process. "I passionately believe we are stronger together rather than breaking apart, but we have to respect the fact that Scotland voted for a separatist party at Scottish parliamentary elections," he noted.
A second debate is raging over how much better off — if at all — the Scots would be post-independence.
For example, the U.K. government Expenditure and Revenues Report in 2011 casts doubts on the economic case for Scottish independence — even after including North Sea oil and gas revenues.
The report found that for 2009–2010 Scotland had a £14.9 billion ($22.9 billion) current spending deficit without taxes from North Sea oil and gas. If it were to get its full geographical share of the revenues, this deficit would still be £9 billion ($13.8 billion).
However, the SNP says Scotland owns 90% of North Sea oil and gas income — which would have given the country a budget surplus of £1.9 billion ($2.9 billion) in 2010.
The Centre for Public Policy for Regions (CPPR) at Glasgow University points out that the SNP's figures exclude capital spending. Even allowing for oil and gas tax receipts, when capital spending is included, an independent Scotland would have run continual deficits from 2005 to 2010 of between 1.7% and 10% — roughly in line with U.K. overall. This, say politicians who are opposed to independence, makes a compelling case for Scotland to remain within the U.K.
Scottish Finance Secretary John Swinney disagrees, saying that when the oil and gas revenues are included, Scotland has in fact been in a much better state than the U.K. as a whole over the same five-year period.
The issue came into sharper focus on January 16th when the Financial Times newspaper interviewed Alex Kemp, professor of petroleum economics at Aberdeen University's business school.
"Splitting the North Sea into English and Scottish sectors using a median line extending out from the land border north of Berwick-upon-Tweed would leave Scotland with 96% of the area's oil production and 58% of its natural gas," he said.
"There's a risk of investment uncertainty, especially about the taxation and licensing regime. A Scottish government would be proportionately more dependent on oil revenues than a U.K. one, possibly increasing the incentive to tax the sector more during a budget squeeze. If the Scottish government has any sense, it will want to nurture the industry and not just treat it like a cash cow," Kemp added.
A fair point, given that an independent Scotland could enjoy £5–10 billion/yr ($7.6–15.3 billion/yr) of income from oil and gas.
Of course this whole debate depends crucially on the price of crude and levels of production from the North Sea. While the operating companies in the North Sea have yet to make any official response to the independence debate, they have long complained that a harsh U.K. tax regime has made investment in other regions such the Norwegian North Sea much more appealing. So any extra uncertainty will make them look much more carefully at future capital expenditure, especially in a region that's already considered mature.
On the other hand, at $100/bbl, the Scottish share of remaining reserves in the North Sea is currently worth £21 trillion ($32 trillion).
SEÁN OTTEWELL is Chemical Processing's Editor at Large. You can e-mail him at [email protected].
