Scottish oil, gas potential held back by UK government, energy minister says

Fergus Ewing, Scotland Minister for Energy, Enterprise, and Tourism, took the opportunity to talk to the foreign press following ceremonies hosted by Hydro Group, Aberdeen, to mark the first anniversary of Scotland’s Oil & Gas Strategy document. A referendum on Scottish independence from the UK, currently set for Sept. 18, 2014, provided the backdrop for much of the conversation.

“We have always felt that the potential for oil and gas businesses [in Scotland] has been held back by a lack of appreciation regarding the significance of their contribution on the part of the Westminster government.” Ewing explained that this had been manifest over the years by the UK treasury’s continued expectation that oil and gas would eventually run out as a revenue source. “It was supposed to run out in the ’80s and it didn’t. It was supposed to run out in the ’90s and it didn’t. If you have a government that says the oil’s going to run out in 10 years, what message does that send to young people?”

Ewing went on to compare how Norway’s tax regime had allowed creation of an oil fund worth hundreds of billions of pounds, whereas Scotland, with similar resources, had no oil fund whatsoever.

Moving beyond the actual resource base and focusing on Scotland’s oil and gas service industry, Ewing noted that nearly half of the revenue generated by these companies came from overseas and that with the proper support this was poised to grow. In this regard, the North Sea’s status as a mature basin was described by Ewing as an advantage, with Scottish companies having already learned the lessons of dealing with this sort of resource and now able to apply these lessons to similar locations elsewhere.

Rather than imposing local content laws and other measures designed to secure Scottish participation in the industry, Ewing said, Scotland had always sought to compete on its own merits and qualities.

Still, challenges remain. “We do not believe that the system of taxation, as applied by the UK, has been very helpful to the oil industry,” said Ewing. “We have had not one, not two, but three tax increases on the oil industry in the past 10 years. One oil executive told me in the US last year that they had a better deal from the Yemen Republic at this point, in terms of stability of tax regime, than from the UK.”

“The tax is never going to be cheap,” Ewing continued. “There’ll always be places where the tax is less and I’m not saying we’re going to have a massive reduction. What we’d want to do is uses tax as lever to get the maximum out of each field. Recovery rates are too low. They’re 38-40% in the UK and nearly 48% in Norway. Every 1% brings in another huge increment of revenue. But you need some incentive. Everybody needs to wet their beak.”

Ewing described the Scottish oil and gas industry’s experience working in the North Sea as directly translatable to renewables, particularly in terms of health, safety, and environment practices. “What we’re doing to support renewables while most of them are relatively nascent technology—particularly wave and tidal, but also offshore wind—is to try to get costs down,” he said, also noting a need to improve the power grid as a whole. Ewing cited an October 2012 report from the UK’s Office of Gas and Electricity Markets that the country only had 4% extra generating capacity as raising the specter that “the lights might go out in England in 2015. Now, sometimes we think that the English government has been in the dark,” he quipped, “but we don’t want the English people to actually be in the dark.”

Contact Christopher E. Smith at chriss@ogjonline.com.

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