Would Scotland get rich?

With state ownership long-divested in the 1980s, national revenue comes solely from profits on UKCS production, currently taxed at 62% (30% from ring-fenced Corporation Tax, 32% from the Supplementary Charge)[i]. Older fields (pre-1993) pay 81% tax as they are also liable for Petroleum Revenue Tax (PRT). Whilst the UK Treasury has been criticised for creating fiscal uncertainty (including a surprise 12% Supplementary Charge increase in 2011), it has also proven responsive. In addition to tax cuts when oil prices have fallen, it has provided stimulus via a range of tax allowances (e.g. small fields, large deepwater fields, shallow gas fields and brownfield developments).[ii] By contrast, the Dutch system fixes tax rates over the licence duration to give industry stability. As a consequence, government cannot readily respond to price fluctuations; it cannot provide a stimulus when prices fall nor take a ‘windfall’ profit when prices rise.

The Scottish Government has pledged not to increase the overall tax burden but a tricky balance remains; how to stimulate long-term investment without sacrificing short-term tax-take.[iii] Recognising the importance of smaller operators, it has also identified current anomalies which see only larger players able to offset or carry forward any exploration losses.[iv]

To answer the question above, oil revenue is of vital importance (and potential benefit) to Scotland. Whether is a guarantee of great riches is another matter, see below.

UPDATE (December 2014): Refer to ‘1. Basics’: the post-referendum Smith Commission resulted in an agreement to transfer further powers and taxation to Holyrood; oil and gas remained largely reserved to Westminster, however. During the 2014 Autumn Statement, UK Chancellor of the Exchequer, George Osborne, announced a 2% reduction in the Supplementary Charge in addition to a new ‘cluster area’ allowance.[v]

What is meant by an ‘oil fund’?

UKCS revenues (£300 billion) have been spent (i.e. not saved) UK-wide as they were earned. The Scottish Government considers such sums could have made an independent Scotland as rich as Switzerland, citing the £450 billion accumulated in Norway’s ‘oil fund’, known officially as the Government Pension Fund Global (GPFG).[vi] It proposes a Scottish fund upon independence[vii] although others consider this incompatible with spending commitments (e.g. pensions, healthcare) and Scotland’s inherited share of UK debt.[viii] Such a fund could instead form a ‘stabilisation pot’ buffering against revenue volatility driven by factors outside Scotland’s control (e.g. global oil prices, exchange rates, supply and demand).

Incidentally, Norway’s GPFG isn’t unique although it is the largest and most successful of its kind. Sovereign wealth funds exist globally, mainly built on oil revenues;[ix] the largest are found in the Middle East (e.g. Abu Dhabi, Qatar) whilst various US states (e.g. Alaska, Texas) have accumulated smaller funds. Strategic management is essential; whilst Norway successfully targeted long-term growth from the start, in the Canadian province of Alberta, the Heritage Fund started by making loans, then invested in infrastructure, later suffered from lack of investment (and withdrawals) and only now targets long-term growth.

The (infamous) currency debate

This website discusses matters primarily relating to oil & gas only but here follows a brief summary of the currency debate upon independence. The Scottish Government intends an independent Scotland to enter into a ‘currency union’ with rUK by sharing the existing UK currency, pound sterling. The UK Chancellor of the Exchequer, George Osborne, however, referring to Treasury advice considered “If Scotland walks away from the UK, it walks away from the UK pound.”[x] (His Labour and Liberal Democrat counterparts supported this stance.) Alex Salmond rebuffed dismissed such claims as “bluff, bluster and bullying”.[xi] The question of over currency is unlikely to be answered definitively any time soon and looks set to play a key part of the referendum debate with its pros and cons contested keenly.[xii]

 

[i] https://www.gov.uk/oil-and-gas-taxation

[ii] http://www.oilandgasuk.co.uk/cmsfiles/modules/publications/pdfs/EC033.pdf

[iii] http://www.scotland.gov.uk/Resource/0042/00428074.pdf

[iv] http://www.scotland.gov.uk/Resource/0042/00428074.pdf

[v] http://www.bbc.co.uk/news/uk-scotland-scotland-business-30313108

[vi] http://www.regjeringen.no/en/dep/fin/Selected-topics/the-government-pension-fund/government-pension-fund-global-gpfg.html?id=697027

[vii] http://www.scotland.gov.uk/Resource/Doc/280368/0084457.pdf

[viii] http://www.bbc.co.uk/news/uk-scotland-24469684

[ix] http://www.swfinstitute.org/fund-rankings/

[x] http://www.bbc.co.uk/news/uk-scotland-scotland-politics-26166794

[xi] http://www.bbc.co.uk/news/uk-scotland-scotland-politics-26183687

[xii] http://www.bbc.co.uk/news/uk-scotland-scotland-politics-26225894