Meme-busting: Scotland’s share of oil revenues

For the second meme-busting article, we’ll go with this:

CG-fsJcWQAAjlPZ

The meme is trying to argue that, even with oil price volatility, an independent Scotland would receive more in oil and gas revenues than we currently do within the UK.

Let’s look at it line-by-line:

Oil Price per barrel: ok, they’ve chosen two arbitrary figures for comparison purposes, no problem here.

Tax at 70%: I’m not sure where this figure is drawn from as Petroleum Revenue Tax (PRT) is currently charged at 50% and will be reduced to 35% from 1st January 2016.  I suspect this may be an attempt to include Corporation Tax in an overall percentage of tax accrued per barrel.  For the purposes of this article, though, it isn’t important so I’ll stick with the creator’s 70% figure for illustrative purposes.

It does, however, miss out a crucial factor – that the taxes are charged against profits, not the entire value of each barrel.

Operating costs are very high in the North Sea, meaning that many fields are currently operating sub-economically, i.e. at a loss.  It’s difficult to attribute a cost for production of each barrel, let’s call it Unit Operating Cost, that would apply across the sector as different fields and different operators will have different overheads.

For the sake of argument, though, let’s settle on a median figure of $45 per barrel Unit Operating Cost**.  This fits in well with most reports, my own experience in the sector and this article quoting Sir Ian Wood where he advises that “$45 oil just doesn’t work in the North Sea”.

Subtracting the Unit Operating Cost from the wholesale value of each barrel, the tax revenue from the resulting profits is obviously going to much lower than the original meme suggests – particularly at $50 a barrel.

Scotland’s Share 8.9%: and this is where the really stupendous “errors” begin.

For a start, when the Scottish Government assigns Scotland a per capita, i.e. population, share of any revenue or expenditure, they use 8.3% rather than 8.9%.  This would, of course, strengthen the meme-creator’s point – if only they had one.

The problem is that GERS, the Scottish Government mandated balance sheet for Scotland’s finances, doesn’t just work out the oil revenues on a population share.  The preferred method of reporting Scotland’s budget balance is, understandably, to include a geographical share of oil and gas revenues.  For 2013-14, this was worked out to be 83.8% of the total UK Continental Shelf (UKCS) revenues and includes Licence Fees, Corporation Tax, PRT and Emissions Trading Scheme Revenues.  And it is this geographical share which puts Scotland’s deficit for 2013-14, before the oil price crash, at 8.1% of GDP, compared to the UK’s 5.6%GDP deficit.  Link.

deficit

The Scottish Government work out this share based on DECC production reports for each field within each of the UK’s constituent countries. (as an aside, there is also no basis in the popular meme about Scotland’s oil fields being “stolen” in the 1999 Scottish Adjacent Water Boundaries Order – to be the subject of a future meme-busting article)

Of course, should Scotland be independent at some point in the future, we would not be entitled to claim revenue for oil and gas fields in rUK waters and so we would still be accruing revenue on that same geographical share – so 83.8%, subject to negotiations of the hypothetical independence deal.

So rather than the nonsense in the original meme, what the table should really look like is this:

real oil

But there’s not much grievance to be stoked from the truth, is there?

 

 

** EDIT – on reflection, my choice of wording here is poor. “Unit Operating Cost” insinuates the cost per barrel for production only, which would average around $17 boe (slightly higher for just North North Sea and Central North Sea, slightly higher again for just oil not dry gas).  The guestimate figure I quote here refers to total costs including overheads.  In essence, whatever figure you wish to choose here it is immaterial – the point is that the value attributed to Scotland’s revenues doesn’t change.  However, thought I should point that out and apologies for any confusion caused.

 

 

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15 thoughts on “Meme-busting: Scotland’s share of oil revenues

  1. Hang on, this is nuts. An independent Scotland gets 100% of the revenue from each barrel produced in Scottish waters, not 83.8%.

    If you were measuring on the ENTIRE NORTH SEA REVENUE (and if you were including gas, of which the Scottish proportion is much lower, even though your graphic just says oil) it’d be 83.8% . But if you’re measuring PER BARREL, which is the stated criterion of the graphic, then it’s 100%.

    The number of barrels, and how much of the total North Sea production is in Scottish waters, is an entirely different thing.

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  2. Glad you’ve fixed the madder bit, but the problem with this article is still the assumption that all the money “allocated” to Scotland in GERS is actually delivered. The complaint of Yes supporters is that Scotland has over decades sent tens of billions of pounds more money south – largely thanks to oil revenue – than it got back. In other words, while that money might have been *attributed* to Scotland in GERS, that’s only a notional accounting document and doesn’t actually reflect real money.

    The argument, then, is that *in reality* the percentage Scotland gets is less than 83.8%, and that 100% of revenue from 83.8% of oil would still be more than we actually get from the UK. Of course, that’s not currently the case with the price as low as it is, but on a longer view it will be.

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    1. If you took year zero as 1975 and looked purely at oil revenues from then until now, I honestly don’t know if we’d have got 100% of the revenue spent here but I suspect that you’re right and, if you took into account interest accrued from a probable oil fund, then we haven’t received 100% of “our oil”.

      But that’s not what the point of the original meme is – it’s trying to say that we’d *currently* receive more oil revenues simply by virtue of being independent and that simply isn’t the case *now*.

      You can’t argue that Scotland doesn’t “get” all of the tax that we raise right now because we were a net contributor to the UK for a handful of oil boom years. You absolutely can say that all the *current* revenue attributed to Scotland in GERS is actually delivered because our spending is higher, significantly, than what we raise. Whether that would have been the case if we’d gone independent in the 70s and retained the early 80s surplus to ourselves is really just an academic hypothetical at this point. It doesn’t change the reality of the current situation.

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  3. “You absolutely can say that all the *current* revenue attributed to Scotland in GERS is actually delivered because our spending is higher, significantly, than what we raise.”

    That’s a false comparison, though. Pretty much every country on Earth spends more than it raises, and it’s not the issue being raised.

    If my (imaginary) wife earns £100,000 a year and I earn £20,000 and we’ve got an overdraft at the bank because we get through a lot of heroin and jewellery, the fact that we have a deficit/debt doesn’t alter the fact that she’s contributing more to our finances than I am.

    The claim being made is that regardless of whether Scotland/the UK has a deficit or not, Scotland is paying more than its fair share into the pot. You can argue whether that’s the case, but you can’t argue that it’s not the argument.

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    1. We pay more in per head, yes, and primarily because of oil and gas with our onshore revenue being ~98% of rUK, as you know.

      But that’s fine. We’re a high-performing area of the UK but we also have high spending. Extending your metaphor, if your wife was importing some premium high-grade heroin and spending £120,000 while you were only buying Elizabeth Duke cockrings and spending £21,000 with an equal share of the shared utilities like rent, electricity and council tax then is she still contributing more to the finances that you are?

      Of course, you might not care as you love your imaginary wife despite the crack habit and the spiralling debts and are happy to see out the tough times knowing that there will be other times when she was contributing to your shared income and that it will even out over time, providing both of you with more security in the long run. Or something like that.

      And you can’t just write it off as “every country has a deficit”. While this is true, with the obvious exceptions, the level of the deficit is important. Although I fear we’re beginning to stray quite significantly from the original point which, it would appear, we both agree on.

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    1. Didn’t see that this was posted last night.

      If that’s your argument then your post above is entirely self-contradictory:

      “The claim being made is that regardless of whether Scotland/the UK has a deficit or not, Scotland is paying more than its fair share into the pot. You can argue whether that’s the case, but you can’t argue that it’s not the argument.”

      Because your “fair share” is not regardless of the deficit. It is, quite evidently, specifically about the deficit; or rather the relative deficit.

      And as Scotland is *currently* running a higher per capita and %GDP deficit than rUK, it is simply the case that we are not *currently* “paying more than our fair share into the pot”.

      So either it includes “a calculation of our relative expenditures” and therefore IS about the deficit(s) or it excludes expenditure in which case it’s an utterly irrelevant exercise.

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  4. I entirely agree with you that CURRENTLY that’s the case. I already said so above.

    But the size of Scotland’s deficit can’t just be separated from history. It’s spent tens of billions of pounds over the last 30 years paying back debt that simply wasn’t Scotland’s. Scotland paid for itself (in context), but sent tens of billions towards rUK debt. A “fair” settlement of debt would factor that in to the percentage of UK debt that Scotland was responsible for now.

    (Also including, of course, the interest and/or benefits that would have accrued from an oil fund based on the money that was instead funnelled to the Treasury to cover rUK debt. A very conservative estimate would put the size of that fund at over £100bn.)

    Any calculation of Scotland’s share of UK debt (and therefore its deficit and the size of its repayments) simply based on a per-capita division, which fails to take the historical figures into account, is deeply dishonest. In effect, Scotland is currently cashing in a small part of a pension it has paid lavishly for. Oil will have to be $40 a barrel for a long time before it balances out.

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    1. Well it’ll be no surprise that I disagree with that too. The UK has been running deficits since long before 1975 and it seems strange to me to start “year 0” on the debt / deficit calculator from then. In some years of the union we’d have been net contributors, massively so in the early 80s, and in some years we’ve been net beneficiaries. Whether it works out as a zero-sum game… I highly doubt it.

      Funnily enough though, the White Paper takes a stab at working out Scotland’s share of UK debt (page 348) and suggested that our share based on “historical contribution to the UK’s public finances” would be about £100bn (of debt, not oil fund). I’ve no idea how they worked this out but I can’t imagine that the SNP would be interested in suggesting more of the debt than they thought they could possibly get away with.

      I’m sure it would have made for a very interesting topic in the negotiations though, particularly with the oil price crash and the Scottish negotiators desperate to get rUK to stump up for the decommissioning tax breaks that have been promised by UKGov. Thankfully we voted right though 😀

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  5. An additional mechanism for stealing Scotland’s hydrocarbons is to divert profits to corporations. Thatcherite ideology meant that North Sea exploitation is an entirely private undertaking. This is a minority strategy for structuring national reserves, an estimated 7% of global reserves are managed in this way with the rest either partly or wholly managed by nationalised oil and gas companies. There is a reason for this, nationalised oil retains more profit to the nation concerned.

    The current price lull in crude is geopolitical, not geological and in the medium to long term. Regardless of green technologies modern civilisation is still very much dependent on oil and gas prices will rebound robustly. An independent Scotland would be well placed to develop a nationalised oil company to exploit these resources to the nation’s benefit.

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  6. Pingback: The Whyte Paper

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