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Wednesday, 23 November 2011

Oil's fair in love & war

In recent history - there have been few things that have incited enough excitement for me to jump up from my seat and scream at the television until I'm hoarse (OK, maybe the Luis Suarez handball during the last world cup) - but that's exactly what I was doing last month when David Cameron met Bob Dudley.

The revelation that North Sea oil will continue to flow from Scottish Waters to Westminster coffers for the next 40 years may have came as a bit of a shock to many of you - after all, you've each been spoon fed the lie that oil was running out and probably accepted it as a bone-fide reason that Scottish independence "might have been a good idea 30 years ago, but it's too late now"

I for one wasn't surprised, although in truth I owe that more to my profession of 13 years than any political insight I may have had. In trawling around the north sea maintaining, calibrating and upgrading oil and gas metering systems, you pick up on nuances and trends between asset-holders that form a very different picture to that portrayed by the union parties and their supporters. Oil & Gas, far from running out - is laying dormant  - waiting for the right conditions to be brought on stream.

It shouldn't surprise you to learn that a government's dependency on oil and gas tax revenues is the raison d'etre for both "dwindling north sea production" and the mothballing of oil and gas reserves that would otherwise bolster that decline. Now imagine - you're the operator of a marginal field in the North Sea - with an estimated daily production of 30,000 bbls per day and about to develop a sub-sea field that will double your hydrocarbon production - suddenly and without warning - Gordon Brown hits you and your competitors with a 10% increase in windfall tax. Do you;

a) Develop that multi-million pound sub-sea development which will be taxed to hell and cripple your profit margins?

b) Catalogue the development as a part of your portfolio - making you more attractive to a potential buyer and allow your current production to decline.

Now tie the above in with the slow but sure divestment of oil and gas assets from "oil giants" Shell, BP, Exxon  etc. On the face of it - it may just seem like business as usual - unless you knew that for every million pounds invested in the North Sea, these 3 companies could expect to make £10,000,000 back from it - whereas investing £1,000,000 in West Africa or South America yields £100,000,000 - all on account of the tax regime enacted by the host government. The result? Bigger operators reluctant to develop - but the introduction of smaller, fleeter operators with lower margins able to operate & develop old assets with significant resources and still make healthy profits.

So what does this say about the UK government and it's relationship with oil? Well, the Treasury love being paid - but they're reticent to saying exactly how much it does get paid in oil and gas revenue. It's a closely guarded secret apparently - but a slip up by a treasury official a few years ago lends those with eager ears a hint. In 2008 - industrial action by the Ineos Refinery workers resulted in the shutting down of the fabled Forties Pipeline. The strike action itself revealed the sensitivity of allowing private companies disputes to endanger the energy security of the nation (something I'll get into later in this blog) but it also revealed something else - the amount of tax the treasury was losing while the pipeline remained shutdown - a whopping £25 million per day, more than £1,000,000 per hour.

Consider that Forties accounts for roughly 1/3 of UK oil and gas throughput (700,000 barrels per day) with Flotta on Orkney (500,000 per day) and Sullom Voe on Shetland (600,000) accounting for the rest -  that figure rises to over £75million a day in oil and gas tax receipts ALONE. Some quick math suggests that in 2008 - with an oil price of $120 per BBL - Tax receipts would have been in excess of £20Billion - and that doesn't include the Gas production through terminals like Shell's St Fergus gas terminal, ExxonMobils' Scottish Area Gas Excavation terminal (S.A.G.E.) and Total's own Gas and Condensate plants.

It doesn't take a genius to work out how much Scotland is being short-changed when you consider further how an independent Scotland would operate. Would income tax for the multitude of oil and gas professionals be paid to Whitehall? Not a chance. National Insurance Contributions? Not likely. What about the VAT, fuel duty, corporation tax? NO WAY. Add all these up and you get the impression that maybe £30 billion a year is a steal for what our natural resources generate for the UK economy.

The more you look at how the UK is managed - the more you have to wonder what Scotland's place in it really is. To white-city folk - we're scrounging, dole-hungry dossers who they fork out millions if not billions of pounds to keep in exclusive cancer drugs and free education. Well, the myth has been well and truly busted - Scotland - far from being a sponge on the UK, has paid it's way many times over since oil and gas started to flow to these shores - maybe it's time someone else held the purse-strings.