Scotland: Cooking on (Oil and) Gas?

24 January 2008 (Last Updated January 24th, 2008 18:30)

Scotland's oil and gas reserves are the envy of Europe but are they really enough to sustain an independent Scotland? Paul French investigates.

Scotland: Cooking on (Oil and) Gas?
An estimated 116,000 people, 6% of the total Scottish workforce, are employed by around 2,000 oil and gas companies which include the world’s biggest players: BP, Shell, Exxon Mobil and Total.

Scotland's wealth of oil and gas is at the centre of a storm that could determine whether the country's 300-year union with England is preserved or torn to shreds.

The Scottish National Party (SNP), who won control of the Scottish assembly in May 2007, is using oil and gas as a key driver in its battle for independence. At their annual conference in October, party leader and first minister for Scotland, Alex Salmond announced that, if Scotland had access to its oil revenues, it would be the third richest country in Europe and the sixth richest in the world.

There's little doubt that the nation that is home to the oil capital of Europe is a major player in the global energy market. But just how successful is the Scottish oil and gas industry? Would it be enough to sustain an independent Scotland? And what happens when the well runs dry?

THE OIL AND GAS INDUSTRY

Oil was first discovered in the North Sea in 1965 and since then Scotland has developed into a major power in the oil and gas industry. An estimated 116,000 people, 6% of the total Scottish workforce, are employed by around 2,000 oil and gas companies which include the world's biggest players: BP, Shell, Exxon Mobil and Total.

According to the Scottish government, the great majority of the UK's oil production and around half of its gas production comes from fields based in the continental shelf around Scotland. In 2006 production from North Sea fields averaged 2.9 million barrels a day and generated £9bn in tax revenue for the UK government.

ABERDEEN: A SIGN

However, despite churning out impressive production and revenue figures and Alex Salmond's vision of an oil-based assault on world domination, all is not calm in the cold, murky waters of the North Sea. If ever a sign were needed as to the problems facing Scottish oil and gas and, ergo, the SNP's quest for independence, it comes in the form of Aberdeen.

"In 2006 production from North Sea fields averaged 2.9 million barrels a day."

It's not hard to see why Aberdeen has been dubbed the oil capital of Europe. Since the 1980s, oil companies have invested over £200bn in Aberdeen, transforming a previously dour fishing outpost into a high-octane modern city. Around 75,000 people are employed in the oil and gas industry in Aberdeen and the surrounding Grampian region, making it the most prosperous area of the UK outside south-east England.

Yet any of the 35,000 delegates who descended on the city in September for the Offshore Europe oil and gas conference may have spotted a sign of things to come. Until about five years ago, roundabouts in Aberdeen were decorated with signs telling you that you were driving through 'the oil capital of Europe'. These days they say 'energy capital of Europe'. It might be a subtle change of wording but it points to a gargantuan problem.

OIL MONEY

The SNP uses Scottish oil and gas as the foundation of its economic policy for an independent Scotland. They claim that Scotland would receive 95% of the UK's oil revenue, a figure that in 2006 they put at £65bn 'over the next few years', which they could use to fund Scotland's public services. But is the industry as lucrative as they make out?

When he was Chancellor of the Exchequer in 2005, Gordon Brown doubled the supplementary tax charges on North Sea companies to 20% in a bid to use oil money to swell the UK's coffers. Oil prices were high but some analysts suggested it was a gamble and the following year they were proved right: a pre-budget report in 2006 revealed that oil revenues had come in £4bn short of Gordon Brown's prediction.

SUSTAINABILITY

How had Britain's current prime minister got it so wrong? By ignoring the signs of Aberdeen and the evidence of the figures: North Sea output fell by 38% between 2000 and 2006 and is expected to drop by 3% a year until 2011.

"It's not hard to see why Aberdeen has been dubbed the oil capital of Europe."

Output is falling because reserves are running out and extraction costs are increasing as what oil is left is much harder to extract. In 2006 the North Sea produced 2.9 million barrels of oil a day compared to 4.5 million in 1999 whilst capital investment was £5.6bn, the highest since 1998. Average developing and operating costs per barrel rose by 45% to $22 a barrel and are expected to rise to $25 a barrel in the next few years.

Britain became a net importer of gas in 2004 and a net importer of oil in 2005. That is because, as the good folk of Aberdeen knew five years ago when they changed their roundabout signs, Scotland's oil is running out.

"North sea production is in decline," says Peter Hitchens, oil and gas analyst at Seymour Pierce. "The peak of production has gone. The clearest indicator of that is that all the majors are pulling out of the North Sea. I don't think oil and gas will ever entirely run out in the North Sea, but you will see smaller companies using the infrastructure in the fields to look for smaller deposits."

OTHER PROBLEMS

Diminishing reserves are not the only problem affecting the Scottish oil and gas industry. In November 2007 the government's Health and Safety Executive (HSE) published a report following a three-year investigation into 100 North Sea oil rigs and mobile platforms. They found that nearly two-thirds were in a poor state of repair or guilty of non-compliance with safety regulations.

"It is absolutely frightening when you see the figures," says Graeme Tran, regional spokesman for the Amicus union. "It is an unacceptable position to have in the North Sea. There are companies still risking the lives of our members for the price of a barrel of oil."

"The SNP believes that Scotland should invest a portion of the annual oil revenue into a futures fund."

A separate report published by the Aberdeen and Grampian chamber of commerce in 2007 revealed that activity levels in the oil and gas industry in the region are below average due to a chronic shortage of skilled workers. Although measures such as Opita's recruitment scheme have lowered the average age of workers in the sector from 50 in 2001 to 41 in 2007, the chamber's report said shortages were just as severe now as a year ago and called for the government to reinvest in oil and gas.

FUND SCHEME

That's Scottish independence shot to pieces then, right? Not necessarily. Peter Hitchens says that taxes raised from the Scottish oil and gas industry would give a 'helpful boost' to an independent Scottish economy. And the SNP has a cunning plan to make oil money last longer than the life of the fields.

They say Scotland should invest a portion of the annual oil revenue into a futures fund, a policy that has been spectacularly successful in Norway. In 1990, Norway established a government pension fund. Each year they've added to oil money to the pot, which in June 2007 had grown to £174bn.

"The last 30 years represent a sad story of missed opportunities and squandered resources," says SNP treasury spokesman Stewart Hosie MP. "By seizing the initiative and establishing a fund for future generations, instead of repeating the failures of successive UK governments over the past 30 years, Scotland can begin to mirror the successes of our neighbour across the North Sea."

"The Norwegian government has been forward-looking," says Peter Hitchens. "They've recognised that oil is a finite resource and decided to hold onto some of the revenue which they can then invest in the country as and when required. It is definitely something Scotland could do, rather than the UK approach, which was to use the oil boom as a way of lowering taxes."

"Scotland hosts the world's largest operating wind farm and a well-established hydropower industry.”

RENEWABLE ENERGY

If revenues from the oil and gas industry were not enough to sustain an independent Scotland, the energy sector as a whole may prove more of a viable crutch for cessation from England. With its regular exposure to strong winds and tides, buckets of rain and huge swathes of forest, it should come as no surprise that Scotland has potentially one of the largest renewable energy resources in Europe.

In 2007 the Scottish renewable energy sector, which includes the world's largest operating wind farm and a well-established hydropower industry, produced 20% of Scotland's energy. Will it one day be able to sustain an independent Scotland?

"I don't know about that," says Peter Hitchens. "But the world is faced with high oil prices and fears over greenhouse gas emissions, so renewable energy is definitely the way forward. And with its rugged coastline and good location, the renewables sector is becoming an increasing supplier of Scottish energy."