Just two-and-a-half years after the 2014 referendum, the prospect of Scottish independence is again on the UK agenda. The picture has improved since 2014, but there are still a number of issues on the UKCS.
Since the 2014 vote, there have been sweeping changes in both the North Sea industry and to the UK’s political landscape, the two most critical being the oil price plunge and last year’s Brexit vote. Companies operating in the UKCS have faced a turbulent few years as they sought to survive the downturn by cutting costs to ensure cash flow.
The offshore industry has been a cornerstone of the UK economy
Despite the oil price crash, Wood Mackenzie still attributes a pre-tax NPV10* of £44 bn to fields in Scottish waters. In August 2014, Wood Mackenzie analysed the implications of Scottish independence. At that time, the UKCS was plagued with production under-performance, faltering exploration and a very high cost environment
Since the 2014 referendum, commercial reserves have decreased by about 30%. This is chiefly due to 1.6 billion boe of reserves produced being replaced with just 0.1 billion boe of commercial discoveries.
The fiscal landscape has also changed. Currently government tax receipts are negative, as companies receive more in decommissioning rebates than they pay in tax. The volume and value of reserves was central to the 2014 debate, with oil revenues expected to underpin an independent Scotland’s economy.
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So where are we now?
We estimate that, as of 1 January 2017, the UKCS holds 6 billion boe in recoverable reserves, of which 5.3 billion boe - 88% - lie in Scottish waters. This split has been calculated using the Scottish Adjacent Boundary Order 1999, and includes producing fields, fields under development which will start production soon and the ready-to-go pre-FID projects.
Based on this reserves calculation, a pre-tax standalone NPV (1 Jan 2017) of £44 billion for the fields in Scottish waters. It is clear that oil and gas tax revenue will play a smaller part in the economic case for independence should a second referendum be held.
We hold a further 4.3 billion boe of contingent resources for Scotland, some of which may be upgraded to reserves depending on a number of factors, including cost reductions and oil price. We hold a further 1.3 billion boe of yet to find resources for Scotland, those which are undiscovered. However, this is an estimate of undiscovered volumes and is the most uncertain category, especially as exploration drilling is at an all-time low.
While 11 billion boe of reserves and resources lie in Scottish waters, this sits alongside the obligation to decommission the majority of fields, equating to 80% of the total UK decommissioning bill. Companies will be looking for reassurances that, should Scotland vote for independence, they will continue to have access to the decommissioning tax relief they currently receive.
But the outlook is not encouraging
With new investment and jobs at stake, and the complicating factors of boundaries and decommissioning tax relief, much is at stake.
*Net Present Value at a 10% discount rate
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