Scotland debates oil legacy ahead of independence vote

IF_blog_Scottish_oil_rigDavid Kingman looks at a recent debate in the Scottish Parliament which touched on the future legacy of its oil industry, and the ways this could be affected by independence

Ever since the 1970s, the UK economy – and the Scottish economy in particular – has benefited from the boom in oil and gas extracted from the fields in the North Sea. Most experts believe that the height of this boom has already passed, although there are still thought to be around 24 billion barrels of oil left which have yet to be harvested.

It should be noted that how long we will go on extracting oil from the North Sea depends on a much wider range of factors than simply the remaining number of barrels, including whether the price of oil will remain high enough for extraction from the trickiest and most expensive oil reserves still to be viable.

It seems likely that it will go on providing future generations with a substantial benefit for some time to come. How that benefit should be managed, and what we should do about the oil industry’s less wholesome environmental legacy, were issues which were addressed in an interesting exchange in the Scottish Parliament chamber on 9 January, which the BBC reported on.

A Scottish Sovereign Wealth Fund?

Essentially, the debate consisted of three elements. The first one was, in many ways, the most significant: in the event of independence, how should Scotland ensure that its citizens get the best value from their oil reserves.

The Scottish National Party, led by First Minister Alex Salmond, has raised the possibility of creating a sovereign wealth fund (SWF) for Scotland funded by revenues from the oil and gas industries, under a similar design to the SWFs in Norway and other resource-rich countries.

During the debate, Labour’s Rhoda Grant raised the vital question of how they planned to fund this proposed SWF, arguing that it would have to come from either a new tax levied on the oil and gas industry, or by funding it directly out of existing taxation. Under either scenario, present-day Scots would be deprived of some of the benefits that the oil and gas money could bring.

This is one of the moral debates surrounding SWFs, in that they represent a transfer of resources from the present to the future, which may not be either equitable or wise. No-one knows for sure, but it seems likely that if Scotland went independent it would have to take on a share of the UK’s burdensome national debt, not to mention accepting the pension liabilities for Scotland’s public-sector workers, and all the other long-term financial obligations which come with running a government.

Would it be better if Scotland spent some of this money now to pay off these obligations, or should they invest it on behalf of future generations in the form of a SWF? The answer seems far from clear-cut.

Decommissioning liabilities

On the subject of financial commitments, the oil and gas industries do have liabilities of their own which the public purse could have to bear. The oil rigs and other equipment which have been used to extract these natural resources from the North Sea will eventually need to be carefully removed, as they represent a major danger to the environment.

The costs of doing this could run to £4.5 billion between now and 2017, although most of this money will come from the oil and gas companies themselves. However, in order to encourage them to take care of these problems, the UK has had to enter into agreements offering the companies favourable tax relief for doing so, which an independent Scotland will have to honour if it doesn’t want to be left with a big environmental – not to mention financial – mess on its hands.

The final part of the debate, initiated by Liberal Democrat MSP Tavish Scott, focused on maintenance, particularly the need for “constant engineering, the constant re-investment and the constant attention” of oil platforms which are over 40 years old in some cases.

Whatever happens during the vote on Scottish independence in 2014, this debate shows that future generations who live in Scotland will be greatly affected, both environmentally and economically, by the choices that current politicians make about the Scottish oil and gas industry today.

Posted on: 19 January, 2013