Report - Section 3
The Implications of North Sea Oil
The analysis in the last section is based on the situation as it appeared before the discovery of North Sea oil. Even after its discovery the full significance of North Sea oil was not immediately apparent and it still remains in large measure disguised from the Scottish public by the DTI's failure to make provision for a proper Government return when the fourth round of licences was issued. So far all that Ministers have said is that they expect North Sea oil to be yielding 70-100m tons of oil per annum by 1980 and that on that basis the Government revenue from rent and royalties from the whole of the Continental Shelf including the gas fields in the southern sector may be of the order of £100m per annum at that time. It has been explained that this estimate does not include the yield from ordinary taxation on the oil companies and it has been stated that licensing policy is currently under review but the significance of this has probably not been fully appreciated by the public.
The SNP countered these figures by claiming that North Sea oil should by 1980 be yielding a Government revenue of approximately £800m and have charged the Government with giving Scottish oil away to the international companies ridiculously cheap. Up to now much of the Scottish public may have regarded the SNP figures as pretty wild and they have been publicly condemned as such by Ministers. But authoritative support for the charge that the Government has failed to do a satisfactory bargain with the companies is provided in the criticisms of the Public Accounts Committee which so far remain unanswered. The example of Norwegian policy on Government revenue from oil likewise shows up the failure of British.
The Government's review of licensing policy has been in progress since the early summer of 1973. This has confirmed the total inadequacy of arrangements to secure Government revenue and shows that some of the most attractive measures to put this right would involve breaking the terms on which the licences were given. It is partly for this reason that the Government has so far failed to take a decision, the choice lying between carried interest (ie state participation), which would provide the biggest revenue and also give some power of control but would go back on the terms of the licences, and excess revenue tax, from which the return in 1980 would be some £200m less but would be defensible in international law. The DTI estimates of last summer showed that total Government revenue following adoption of these measures would have been between £800m and £1,200m a year in 1980 depending on the system used and the prices prevailing in 1980; today, following the huge increase in international oil prices of recent months the corresponding figures are in the range of £1,500m to over £3,000m Thus, all that is wrong now with the SNP estimate is that it is far too low; there is a prospect of Government oil revenues in 1980 which could greatly exceed the present Government revenue in Scotland from all sources and could even be comparable in size to the whole of the Scottish national income in 1970.
As well as the gain to the Government Revenue, North Sea oil will of course make a massive contribution to the balance of payments; indeed these two aspects are closely linked. At present world prices the expected output of 100m tons of oil in 1980 is worth approximately £3,000m; assuming price rises from the present £33 a ton to £51 a ton as in the Government revenue calculations the value could be as high as $5,000m Part of this will, of course, be repatriated by the international companies in the form of profits distributed to their shareholders or reinvested in projects in other areas. The balance of payments gain to Scotland would therefore depend critically on the amount of Government revenue secured from the profits. Indeed, since none of the major companies operating in the North Sea are predominantly Scottish owned, the Government revenue would be the major element, apart from the expenditure of the companies on goods and services produced in Scotland, which would accrue from the value of oil produced as a balance of payments gain. Thus assuming measures which would yield Government revenue of the scale referred to in previous paragraphs, plus some additional revenue to shareholders in Scotland and to suppliers of equipment, then the net balance of payments gain might be expected to lie very approximately in the range of £2,000m to £3,500m a year, depending on prices and the share of the Government 'take'.
It is not possible to compare these figures with an accurate estimate of Scotland's present balance of payments position. From the state of Scotland's economy one would expect a balance of payments deficit on current account and a rough comparison of income and expenditure estimates for GDP suggest that this could be of the order of £300m a year in 1970/71. Plainly this is a most unreliable figure and it will vary from year to year, but it is probably sufficient to suggest the orders of magnitude. What is quite clear is that the balance of payments gain from North Sea oil would easily swamp the existing deficit whatever its size and transform Scotland into a country with a substantial and chronic surplus.
All the above figures are, of course, based on the estimated output of 100m tons of oil in 1980. This was the DTI's revised estimate in the early summer of 1973.
Already it is beginning to look as if these estimates may be too conservative. Recent finds and the plans of companies appear to indicate that the Shetland basin may prove very productive indeed. Zetland County Council's consultants worked on the assumption that 70m tons a year might actually be piped ashore in the county. It is now known that Shell expect to land 50m tons a year through their own pipe alone and pipelines may also be expected from Total's Alwyn field, Conoco's Hutton and the recent BP and Burmah finds. In addition to this there are, of course, substantial finds further south, particularly BP's Forties field and Occidental's Piper. Whether or not this, plus any new finds that are made, result in the 1980 estimate of 100m tons being exceeded largely depends on how quickly newly discovered fields are brought into production, but it does now seem extremely likely that production during the 1980s will use well above 100m tons a year with consequent increases in revenue and gain to the balance of payments.
Can one be certain that the oil is without doubt a Scottish asset or, even if it is, that these substantial revenues and balance of payments advantages would indeed accrue to an independent Scotland? Clearly these questions raise complicated issues in international law which could, if allowed, occupy the legal profession for many years. Two possible lines of argument may be expected: either that Scotland should pay England some compensation for appropriating the most productive part of the Continental Shelf, or that the whole shelf should be regarded as the common property of the nations of the former United Kingdom with revenue distributed in accordance with some population based formula irrespective of where oil is discovered. As regards the first of the arguments, the prospective return from oil revenue would at the very least be one of the factors taken into account in determining the financial settlement between the two countries when they become independent. To argue the second would be directly counter to the line that the UK Government has taken with the EEC, that the resources of the Continental Shelf are as much a national asset as are those on land, like coal mines, and that there is therefore no question of the Europeanisation of North Sea oil. Disputes on these matters might well occasion much bitterness between the two countries, but it is hard to see any conclusion other than to allow Scotland to have that part of the Continental Shelf which would have been hers if she had been independent all along.
There might be some argument about where the boundary between English and Scottish waters would lie. At present this is considered to be along the line of latitude which lies just north of Berwick on Tweed, and it might perhaps be held that it should run NE/SW as an extension of the Border. This could have the effect of transferring the small oilfields in the south, Auk and Argyll, to the English sector, but would not affect the main finds.
It must be concluded therefore that large revenues and balance of payments gains would indeed accrue to a Scottish Government in the event of independence provided that steps were taken either by carried interest or by taxation to secure the Government 'take'. Undoubtedly this would banish any anxieties the Government might have had about its budgetary position or its balance of payments. The country would tend to be in chronic surplus to a quite embarrassing degree and its currency would become the hardest in Europe, with the exception perhaps of the Norwegian kroner. Just as deposed monarchs and African leaders have in the past used the Swiss franc as a haven of security, so now would the Scottish pound be seen as a good hedge against inflation and devaluation and the Scottish banks could expect to find themselves inundated with a speculative inflow of foreign funds.
- ^ Department of Trade and Industry, first formed in 1970