When it comes to oil and gas, Scots are used to being treated like backwoods yokels by Westminster, deemed incapable of looking after this valuable resource and lied to about its value. Oil and gas is a priceless treasure to the UK, and Westminster is terrified of losing control of it.
That’s because not only are the billions of pounds in oil and gas tax receipts valuable in and of themselves, but they also halve the balance of payments deficit, thereby protecting the value of the pound.
But how exactly does Scotland turn oil and gas into money?
For a long time the exact value of the North Sea was shrouded in mystery, with Westminster even going as far as to create an artificial entity called ‘Extra-Regio Territories’ on the books (also including revenues from overseas consular activities) which hid the value of oil and gas by removing it from Scotland’s accounts, replaced by the poor trade of a mere per-capita split of all “extra-regio” revenues.
The UK Government regarded these as special resources of the UK and not Scottish, despite the fact the oil and gas fields sit mainly in Scottish waters, are policed by Police Scotland and supported by infrastructure paid for by the rate payers and council tax payers of north-east Scotland without any financial support from Westminster to recompense – despite Westminster reaping the rewards.
If you talk to a British politician they”ll often tell you that the oil and gas are ‘British’ as it was the UK that invested to create the industry. However, the bulk of support given to the industry was in the form of tax breaks which allowed private companies to offset setup costs against future tax payments.
In other words, the UK government spent nothing and got increased long-term revenue by merely promising they’d let companies off some of the tax on their profits, if they made any. It’s similar to the recent situation when the UK government made great play of a £130m “loan guarantee” to help secure the future of the Grangemouth oil refinery (actual expenditure: zero), while the Scottish Government came up with £9m of real live hard cash.
Despite these tax breaks, oil and gas has been very lucrative for the UK Treasury, with a significant amount of money being garnered through various taxes and levies:
PRT – Petroleum Revenue Tax
This tax is only relevant to fields developed before March 1993. PRT was introduced in 1975 and applies to all fields on the UKCS (except those which had signed a sales contract with British Gas prior to 1st July 1975). At the year 2000 the rate of PRT was 50% of field profits, with numerous deductible items to reduce the headline cost.
Corporation Tax (CT) for oil and gas production is ring-fenced and treated differently from normal CT which is currently sitting at 26% (and is being reduced by the Westminster coalition to a final goal of 20%). Oil and gas CT is currently 30%, and there’s no plan to change it. (Although to be fair, PRT is deductable from profits before calculating CT.)
The UK government also charges what is known as a supplementary charge which currently sits at 32% of profit (again after PRT). Only a few short years ago the SC stood at a much more modest 20% until George Osborne decided to undertake a raid on the oil and gas industry, leading to mature and brownfield sites becoming financially unviable, damaging production and jobs in the industry.
Just how significant this effect was became clear in an analysis by Professor Alex Kemp and Linda Stephen. The two Aberdeen University professors suggested that as a result of Westminster’s raid on the oil industry, there could be 79 (or 8%) fewer fields developed, and £29 billion less investment over the next 30 years.
Overall this tax regime means that the marginal tax rate on the older PRT-paying fields is now an eye-watering 81% and on newer fields not paying PRT, 62%. It is these taxes and levies that have ensured Scotland consistently contributes more to the UK Treasury than our fair share.
Despite being “a goose that lays a golden egg”, Scotland never seems to get its own nest feathered – the No camp is fond of noting that Scotland gets £1200 more per head in spending than the UK average, but always neglects to mention that this is only around 70% of the extra £1700 each that we send south to serve the “greater good”.
The insatiable maw of London also led Westminster to refuse to fund infrastructure necessary to grow the industry and attract investors, such a a gas pipeline that would have created 17,000 jobs and a chemical plant at Nigg had it gone ahead. More recently it was also revealed that the UK government had blocked oil and gas exploration off the west coast to preserve Trident nuclear submarine manoeuvres.
Had Scotland been independent upon discovering oil, it would never have needed to incur any debt. Instead of paying 8.4% of the UK’s debt interest every year (totalling £64.1bn over the last 32 years, and £4.2bn this year alone), Scotland would have been in surplus – indeed, a “chronic” surplus, according to the suppressed McCrone Report – and very likely in possession of a sizeable oil fund to protect against fluctuations in price.
But of course that’s all water under the bridge now – we can’t turn back time, only make the best of what we have left. As we saw previously, Scotland’s share of offshore tax revenue sits at 94% due to the prevalence of oil production (which is more profitable than gas). This means that 94% of the revenues from oil and gas would accrue to an independent Scottish government.
That’s still a significant amount of money by anyone’s standards, with the Scottish Government putting exports of oil, gas and refined petrochemical products at an estimated annual sales value of £30.3bn, with a bonus of £17.2bn in sales of support services to the oil and gas industry being recorded in 2011 for a combined value to the Scottish economy of almost £50bn a year.
That’s almost a third of Scottish total GDP, and with such reliance on a single industry Unionists regularly raise the spectre of what happens when oil runs out. But if Scotland stays in the UK, it’s unlikely that Westminster will use the remaining revenues to rebalance the Scottish economy to plan for a post-oil world. Frankly, it can’t afford to and still pay for Trident, HS2 and cuts to bankers’ taxes.
An independent Scottish Government, however, could reasonably be expected to urgently prioritise such a task, in particular focusing on investment in renewables to secure the future of both the energy supply and the economy forever.
Scotland is one of only two nations in the world to discover oil and not create an oil fund (the other being Iran). But it’s still not too late, if we take control of North Sea revenues now, to build a roof to protect ourselves from the rainy days to come.