The Scottish Nationalist Party (SNP) campaigned in the recent referendum seeking Scottish devolution on the grounds that the rest of Britain had profited from the taxes on “Scottish Oil”. According to Salmond and Sturgeon there were massive reserves of oil and gas in the North Sea ready to be exploited and, if granted independence, the Scots could thrive on the revenues from the sale of that oil if they were received directly, rather than through Westminster.
In the wake of the current oil price war with Russia and Saudi Arabia the price of oil has fallen dramatically; with (North Sea) Brent suffering 60% price drop. In late March 2020 the price of Brent Crude has reached US$28.27 per barrel. This is slightly up on Brent’s £25 recent low. That is, of course, the posted price for Brent, which is used as a ‘benchmark’ crude. Actual cargoes of crude oil are changing hands at large and widening discounts to the global benchmarks. The discounts mean that in the physical market, some crude streams are trading at $15, $10 and even as little as $8 a barrel. In Nigeria, the biggest oil producer in Africa, is selling its flagship Qua Iboe crude at a discount of $3.10 a barrel below the Dated Brent benchmark, the largest in at least two decades. Colombia is selling its Vasconia crude at a discount $7.75 a barrel to Brent, a 4 1/2-year low. [i]
In a recent analysis by Wood Mackenzie,[ii] the North Sea producers have been successful in reducing their costs but have not reached a profitable point below US$30.00 per barrel for the best and most efficient producers. They conclude that, "In the short-term, the North Sea can survive. but close to a quarter of the fields will run at a loss in this price environment. The major concern here is not volumes. Early shut-ins would accelerate $20bn in decommissioning spend." The first North Sea fields have already been shut and development spending has ground to a halt. When a well is shut it goes through a period of decommissioning when giant platforms are disassembled or moved and the complex underwater structure sealed and, at least, partially disassembled.
If oil and gas companies cannot pay for decommissioning, taxpayers may ultimately be liable. Annual investment in the North Sea could fall below $1 billion as early as 2024. The threat of stranded assets is real – we estimate nearly 6 billion barrels... could be left in the ground,” Woodmac said.
This has had a devastating effect on employment in the North Sea oil industry. Oil companies have cut their workforce by 40% in the last two weeks to help stem the spread of coronavirus. The number of workers operating the North Sea’s platforms typically stands at about 11,500 but the number of people operating the rigs has already fallen to 7,000
More than 4,000 rig contractors have lost their jobs in the wake of the UK lockdown, during a difficult year for the oil industry after the collapse of global oil prices.[iii]
Investment plans have been cut or abandoned. Cairn Energy has cut its budget by almost a quarter for this year and restrained its efforts to explore new fields for oil and gas reserves by a third, to $100m. Similar spending cuts have been made by most major oil companies, which are also likely to deal a blow to the engineering and equipment services companies which support the major North Sea oil projects.
Since the projected oil revenues of the SNP were the bedrock on which Scottish independence was founded, the negative tax revenues from that sector and the social and manpower burden of spending large sums on decommissioning wells and offering compensation to the displaced workers in the industry make the financial burden of Scottish independence unlikely.
There is no economic case for further Scottish devolution; no rational reason for the continuation of the Barnett Formula which picks the pockets of the rest of the United Kingdom to line the pockets of the Scots, and no reason to increase the Scottish powers of taxation when their economy needs to be subsidised to allow Scotland to continue is massive social programs.
Scotland was very lucky to have voted against independence in the last referendum. It would be bankrupt by now. The SNP should be constrained from committing political seppuku in the same manner as practiced by the Scottish Labour Party in the last election. There are hundreds of thousands of Scottish jobs at stake which are endangered by the SNP’s wild economic forecasts.
While there are many historical, social and tribal reasons why Scotland would like its independence, the economic price of independence is prohibitive. The notion of Scotland joining the European Union is even more self-delusional as its size and GNP would classify it as a net donor to the EU, not a recipient of aid. As a general rule it is a political trope that there is little to be gained by the SNP in picking the pockets of the poor, despite the size of the emotional pleasure of leaving the rest of the United Kingdom. independence is unlikely and unaffordable.
[i] Alex Longley and Javier Blas,"Oil's 60 Percent Crash Is the Tip of an Iceberg ", Bloomberg, March 25, 2020
[ii] Oil Price Intelligence Report, 24 March 2020
[iii] Jillian Ambrose, “More than 4,000 North Sea oil rig workers lose job amid Covid-19 crisis”, Guardian 27/3/20