Talks of an independent Scotland have been going on since 2011 but the unceremonious energy policies of the United Kingdom made these demands more avid. Scotland has long argued that the U.K. governments tend to spend the energy revenues by funding the exchequer rather than reinvesting them, which has resulted in lost opportunities for Scotland. The country argues that it accounts for an estimated 78 percent of total U.K. hydrocarbon production and hence, it should be allowed to have a say in the disbursement of hydrocarbon revenues.
Significance of Scotland oil and gas sector
Oil and Gas sector is extremely significant to the Scottish economy, contributing about GBP 25.1 billion to the Scotland GDP in 2011, which was about 17 percent of the total GDP. There are about 2,000 oil and gas companies operating in Scotland. Scotland is the largest producer of hydrocarbons in the EU, accounting for 64 percent of EU oil production and 26 percent of the EU gas production.
Table 1: Scotland oil and gas statistics
‘If the Scottish Government had the opportunity to invest the net fiscal surpluses achieved since 1980, it could have accumulated assets equivalent to between 62% and 84% of GDP. In cash terms, this would be equivalent to between GBP17,000 and GBP 23,000 per person in Scotland,’ stated the Scottish government in a detailed publication titled Maximising the Return from Oil and Gas in an Independent Scotland issued in July 2013.
Figure 1: Cumulative UKCS Tax Revenue, £billion (2012/13 Prices)
Erratic taxation regime of the UK
The overall tax rate faced by North Sea operators is 81 percent for fields given approval prior to March 1993, and 62 percent for fields given approval after this date. However, the UK government has been announcing frequent changes in the fiscal regime applicable to exploration and production sector. In the budget of 2011, an increase was announced. Such changes have widely damaged investor confidence. Scotland propagates the use of a stable fiscal regime in order to maintain investor interest.
Oil fund to save and invest
The Scottish government is dedicated to the goals of maximizing economic recovery rates, improving production efficiency, maintaining first class health and safety standards, driving forward further exploration on the North Sea, improving asset integrity of critical infrastructure and incentivizing industry to develop enhanced oil recovery techniques.
In order to achieve these rather abstract objectives, Scotland plans to form an oil fund from the oil revenues collected by the government. This fund will be similar to an oil fund set up by Norway in 1990, which is worth USD 450 billion and is the largest sovereign wealth fund in the world.
Many other oil funds have been created by companies with major oil and gas reserves in order to hedge against change in oil prices and to reinvest for further development of hydrocarbon resources. In recent years, new oil funds have been established. Of the thirty-six commodity based funds monitored by the Sovereign Wealth Fund Institute, twenty-three were created after 2000.
Table 2: Sovereign Wealth Top-10 Rankings
The Fiscal Commission Working Group of the Scottish government recommended that the fund could be used to save and reinvest the wealth generated from the hydrocarbon reserves. The government would cautiously plan budgets for expected hydrocarbon revenue and would invest any upside potential to guard against future unexpected falls in revenue. Such procedures are necessary at government levels to protect the country against economic shocks and asymmetric moves in international oil prices.
Tax revenues from Scottish North Sea are expected to total between GBP 6.2 to GBP 8.3 billion in FY14. A fund would be necessary to manage revenues of this magnitude effectively.
The referendum for an independent Scotland is to take place on 18 September 2014. The Scottish government realizes that the long-term challenge for them is creating the conditions that create and maintain a hospitable investment climate in the North Sea area.