Economics of Independence Oil and Gas

Scotland on the verge of a new North Sea oil boom

Written by Michael Gray

Scotland's oil invested in the future?A recent report by Sir Ian Wood concluded that North Sea oil can deliver a £200 billion injection into the Scottish economy over the next 20 years. The report – described as “the biggest independent review of the North Sea oil and gas industry in its history” – argued that reforms to exploration and production would vastly increase output. An independent Scotland, which mobilised such resources, would be well placed to generate far greater prosperity for people and business.

Yesterday the group outlined a plan to use unmanned buoys to produce oil and gas from the North Sea. Supporters state that this will bring more oil fields into production and reduce current costs.

In a wider context, there are three key factors which will influence the potential of North Sea oil resources: price, reserves and investment. All three areas suggest vast, untapped economic opportunities.

Price

Oil Projections OBR and othersCurrent projections from a wide range of organisations are largely upward. The ITEM Club forecast price rises over $130 a barrel; as does the Department for Energy in the UK. NIESR, the Economist Intelligence Unit and the US Energy Information Administration all forecast rises above $110 a barrel. The UK Government’s newly formed OBR – which Alistair Darling accused of being a front for the Conservative Party – is isolated in predicting a price fall.

An outlying figure from the OECD paper ‘The Price of Oil’ suggests a surge in oil prices towards $190 dollars a barrel due to rising demand for energy, especially in developing nations. Were such a surge to occur, the overall value of North Sea oil would hit an astounding wholesale value of $4.5 trillion.

Reserves

The second crucial issue in the potential of North Sea oil over future decades is the level of reserves. According to the UK Oil & Gas 2013 Economic Report, there are substantial volumes of North Sea oil and gas remaining. (page 7) Current programs have already identified 11.4 billion barrels. With future exploration, the UK regulator estimates the levels to range between 15-24 billion barrels.

Ministry of Defence blocked oil exploration on the West coast

It recently came to light that the Ministry of Defence blocked a potential oil boom in the Firth of Clyde during the 1980s. BP undertook seismic surveys south of Arran and east of Kintyre in early 1981. However, the MoD were “very strongly opposed to any drilling” according to a briefing for Scottish Secretary George Younger. Any Firth of Clyde drilling program would potentially have interfered with MoD operations, including the operation of the nuclear weapons submarine fleet at Faslane. Since then, no known investigation of oil reserves on the West coast has taken place.  After a Yes vote the removal of nuclear weapons would open up this massive area for oil and gas exploration.

Investment

Current investment in the North Sea is at an all time high. Over £11 billion was invested in 2012, with the figure expected to exceed £13 billion this year. BP, for instance, have made it clear that they aim to continue their investments in North Sea oil business. The new Clair Ridge project involves $4.5 billion with of investment. The Kraken field, off Shetland, is majority-owned by Aberdeen based EnQuest and contains 120 million barrels of oil.

In February Statoil – the Norwegian national firm – confirmed investment of $7 billion in the Mariener oilfield, which was the largest new offshore development in the North Sea in over a decade.

Conclusion

Only two countries within the world’s top oil producing nations failed to establish national oil funds: Iraq under Saddam Hussein and the United Kingdom. As a result one of Scotland’s vital assets was squandered. If Scotland stands on the brink of a new North Sea and West Coast  oil boom, will we allow the same mistakes to be made again or will an independent Scotland seize the chance to do things differently?

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About the author

Michael Gray

Michael is Head of Research with Business for Scotland.

A graduate from the University of Glasgow, he has carried out a series of interviews with academics, politicians and the public in Denmark, Iceland and Ireland. Michael's on twitter @GrayInGlasgow.

18 Comments

  • The removal of submarines from the Clyde would bring an opportunity to develop marine energy generation, once the technology exists to operate at the lower tidal flow speeds that occur in the Firth of Clyde. Talk of opening up the Clyde for oil exploration is totally irresponsible in the context of tackling climate change. Scottish independence has to work in a world that is dealing with climate change. The oil has to stay where it is….if it is there.

  • The article implies that everybody is forecasting a substantial rise in oil prices. Can the author explain why Brent Crude for delivery as far away as Dec. 2019 is trading at only $88.65 per barrel on the futures markets?

    Anybody who seriously believes that the oil price will reach $190 can buy these futures and make a huge profit. Why is this not happening to a significant scale?

    • The article does not imply, it states very clearly that everyone (in the list of key forecasters, not prepared by us) other than the OBR are predicting rises. We also do not agree with the $190 price suggested by the OECD, as explained in a previous article; both the OBR and OECD predictions are outliers – outwith the standard deviation from the mean and should be ignored. Normally when projecting economic data based on market prices you would not use an outlier but a mean figure or one more representative of the whole sample.

      The OBR have been criticised for a lack of neutrality in the past by none other than Alistair Darling, Leader of the No Campaign, who said recently: “Right from the start the Tories used the OBR not just as part of the government but as part of the Conservative Party.”

      In plain language, if you use the lowest projection and ignore far higher ones it leaves you open to the accusation that you are deliberately painting a worse case scenario. But a worse case scenario can only be fairly compared with a best case scenario and ideally at least some of those in between.

      As for investment prices I would suggest the time value of money is high right now due to the performance of stocks and shares and investors don’t wan’t to tie too high a % of their cash up in longer term buys – personally though I would say $88.65 is a good price. With the caveat that I am not a qualified investment advisor:-)

      • I suggest that you read researched publications from CPPR at Glasgow Uni. They have shown that there are organisations such as the Norwegian Central Bank, the International Energy Agency and the US IEA which forecast oil prices below those forecast by the OBR.

        Your assertion that the OBR’s forecast is the “lowest projection” appears to be false.

        Meanwhile why does the article only include forecasts which are above those of the OBR and ignore those as mentioned by CPPR which are below those of the OBR?

        • Correction

          The US IEA shows prices below those of OBR at times and above OBR at others as is seen in the article. The other situations still apply.

          • Production levels – efficiency – new investment and the mean predictions of oil prices all point to medium term gains in revenue from the north sea.

            The opening up of the West Coast also present major opportunities – there are the facts.

            Oil prices may vary but remember that the industry is predicting 40-60 years of string commercial activity – enough time for a scottish government to reinvest and get our economy ready for the decline – or – enough time for the Westminster Government to continue to fail to invest in Scotland.

            Every year for 30 years Scottish government revenues per head have been higher than the UK’s if oil price volatility was such a problem then why did not even once Scottish revenues dip below that of the UK?

        • There are multiple outliers as i have stated we suggest forecasting with a figure that is closest to the mean – the graph is of the main oil price forecasting organisations and not produced by us. As for Norway there are a range of scenarios in use in Norway for planning purposes and people like to quote the lower ones in this debate.

          In an article in the Herald last year, Ian Taylor the largest donor of the No Campaign poured scorn on the Scottish Government’s oil revenue forecasts; he writes that in his opinion the Scottish Government’s 2014 oil price projection of $113 per barrel (Brent Crude) is over optimistic – (not an opinion shared by most experts).

          But he then writes:“Norway, so often held up as an example, are planning on an oil price of $77 a barrel in 2014”.

          From previous research I knew this wasn’t right, but I like to be 100% sure that the data I reference when discussing the economics of Scotland is rock solid. So I picked up the phone and asked a representative of the Norwegian Ministry of Petroleum and Energy to confirm the actual figures.

          The Real Norwegian Government Forecasts

          In the short term the Norwegian Government is forecasting an oil price of NOK 650.00 this year which (at actual rate of exchange on day) would amount to $113.55 dollars per barrel and NOK 635.00 or $111 per barrel in 2014. Those numbers match very closely the Scottish Governments forecast and is $36 and $34.00 a barrel higher than the rate suggested by Mr Taylor.

          The article is very clear in saying that we disagree with the OBR but it does not say that we are suggesting any higher than the Scottish Government figure.

          • According to information from UK oil and gas there are between 15 and 24 billion barrel of oil and gas which may be extracted from UKCS. A central estimate would be 19.5.

            However over 41bn barrel have already been extracted. This suggests that the hydrocarbon resources are approaching 70% depletion. How can 30% over the future 40 years match the 70% of the past 40 years?

            Also UK oil and gas have stated that each pound of investment only yields 20% of the oil compared to that achieved a decade ago and many of the new fields require tax allowances to make them viable thus impacting on revenues.

          • I am sorry you find it so hard to figure out but the answer is really simple.

            In 1999 Brent crude oil was sitting at $10 a barrel last year the average was $111. even if you did believe the OBR outlier forecast then that is still massively higher per barrel, hence the remaining is worth far more! PWC estimated last year that £350bn of Gov revenues have come from the North Sea and that £450bn had still to come.

            Add to that the fact that depletion is not calculated on total oil present but total reserves extractable at current technologies at commercial rates on average in the North Sea a well is consider depleted with 40% of its oil still in the ground. As technology advances then the commercial life of the both Sea will extend and its value increase. Scottish firms lead the world in marginal field extraction; Oil and Gas UK director told me 40% of corporation tax from North Sea is due to exporting marginal field expertise and services not actually from North Sea extraction!)

            Are you actually suggesting that this massive bonus to Scotland’s economy is a millstone around our neck? Are you suggesting that we should pass £450bn revenue to be spent in the UK rather than investing in Scotland to get our economy ready from when North Sea revenues do start to dwindle?

            That money is needed here to invest in growing our renewables, our expertise in life sciences and biotech industries, amongst others so that we don’t become the basket case economy that so many in the no camp seem to be planning for. The Union has no answers to Scotland’s Future and no plan for our economic future beyond facile nitpicking and scare mongering.

  • Good article and it is encouraging to see some focus on the significance that the Oil & Gas sector has in this debate. Something that shouldn’t be missed though is how much of a boom the UK government are currently experiencing! The fact that this goes largely unnoticed means that the shocking lack of effort to diversify our economy goes largely unnoticed also. An oil fund could be used as a mechanism to help the growth and diversification of our economy, but there other ways that this could be done also. The key point is that there is actually a strategic intent from the Yes campaign to use this wealth for the greater good of society rather than the current Westminster agenda of pretending that the oil is on the verge of running out anyway so please don’t pay any attention.

    I work in the Oil & Gas sector and wrote a blog post on the opportunities that the industry presents for Scotland. The full text is here – http://darlingblogs.wordpress.com/2013/04/15/oil-gas-an-inside-view-of-scotlands-opportunities/ but here are a couple of salient paragraphs to add to the article above:

    2012 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.”

    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.

  • There has been no development of downstream oil industry. UK should be, for example, self-sufficient in and exporting fertiliser, tires and thousands of plastic products.

  • YES should be shouting a lot louder on the positive things which an oil fund could be used for, for example investment in education. It should be linked to the overall social democratic vision much more strongly. This is a key argument for independence as it shows people how we can use our current resources differently than at present.

    I am tired of hearing of OBR figures, which are little more than propaganda. Why anyone can take them seriously given their laughable predictions in terms of UK growth etc, and the way in which these predictions have been politically adjusted, defiles all logic to me.

  • Latest price/productivity forecasts from OBR published last week, show that their doom and gloom economic forecasts for North Sea revenues and thus their forecasts for the viability of independence for Scotland from now until 2018-19 are based on oil price falling from $108.3/barrel to $97.4/barrel in 2016-17 then flatlining and production flatlining over the whole period. At odds with the industry body response:

    “The Autumn Statement’s cautious outlook on UK offshore oil and gas production suggests flat line figures from 2013 -18. While still compiling the data for our survey of members’ investment and production intentions due for publication early next year, Oil & Gas UK takes a less pessimistic view (according to our most recent figures from February this year) and foresee an upturn in production beginning in 2015 which should last for the remainder of the period. Both industry and regulator will need to work collaboratively towards that end.”

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