Sanjoy Sen is a chemical engineer and PPC for Aberdeen North.
With almost 20 years’ experience in engineering, I’m taking my first steps into the world of politics. Like many people in Scotland, I was energised by the referendum. I joined the Conservatives soon afterwards, since I felt they were the only party willing and able to deliver what people wanted: to remain part of the union and to enjoy greater devolution.
I don’t believe you need a medical qualification to work in the Department of Health or a military background to be in the Ministry of Defence. But I do believe that more people with experience outside of politics should bring that experience into politics. That’s what I would seek to do. This article isn’t directly about me, though: instead, here’s my take on the industry I’ve spent most of my career working in.
Out of sight and out of mind (beyond Aberdeen, that is), North Sea oil is arguably the UK’s greatest industrial success story of recent decades. Its economic contribution over the past half-century has been immense; as recently as 2011, the North Sea contributed some £11 billion in tax, employed 450,000 workers and halved our import requirements. Some context, though: UK production and reserves form less than one per cent of the global total. And our economy is highly diversified. A petro-state we clearly are not.
It was in UK waters that deepwater production was pioneered and these are where subsea advances continue to be made – proof positive that Britain still does large and complex engineering. Painful lessons were learned from the 1988 Piper Alpha disaster and there can be no room for complacency. During an offshore visit last year, we were reminded that the Deepwater Horizon rig enjoyed an impressive safety record right until its fatal demise in the Gulf of Mexico. You’re only as safe as the last thing you do.
Some 85 per cent of UK offshore reserves lie closest to Scotland (much of these actually lie closer to Shetland, which prompts an interesting debate as to how these independence-sceptic islands would have handled a Yes vote.) Whilst the 1970s were characterized by the emotive slogan “It’s Scotland’s Oil”, the pre-referendum independence argument centred around bullish revenue projections based on oil prices of $110 per barrel and beyond.
Little wonder, therefore, that the recent crash to $50 or so is provoking much debate; the gap between actual versus predicted revenues is equivalent to the entire Scottish schools budget. Whilst it’s hard to predict when prices are going to fall further, it’s a certainty that at some point they will. And, given the major geo-political forces at play (American shale, Saudi market share strategy, post-Ukraine sanctions on Russia), this current dip might not resolve itself rapidly.
It’s an inescapable fact, therefore, that oil production remains far more significant in the Scottish context (20 per cent of GDP) than in the overall UK context (two per cent). The recent crash throws this into sharp focus: whereas reduced energy costs benefit the wider UK economy (including cheaper fuel for motorists), in Scotland it has resulted in redundancies in the prosperous north-east.
When the UK economy remained mired in recession in 2012, George Osborne cited an extended shutdown on the Buzzard field (easily the UK’s top producer) as a contributory factor. A separate Scottish economy could prove even more vulnerable to events that lie outside the control of politicians. The SNP nevertheless remain keen to trade Barnett for the fluctuations of oil revenues, although their Smith Commission demands were more muted in terms of assuming regulatory control.
Newspapers rarely go long without offering another horrified exposé of minimal fiscal contributions by prominent businesses or individuals. North Sea profits, in contrast, are fully payable in the UK and cannot be offset against external losses. Fields typically pay 60 per cent tax, a combination of ring-fenced Corporation Tax (30 per cent) and the Supplementary Charge (30 per cent). Older producers, including the iconic Brent and Forties developments, also pay Petroleum Revenue Tax, generating an eye-watering 80 per cent marginal rate. What industry does enjoy in return are a raft of complex tax breaks to support new developments and, when required, the immense costs of final decommissioning (estimated at £35 billion).
So is the North Sea fiscal regime volatile and unpredictable? Yes – but so are the global market conditions it needs to respond to. Tax rates have historically increased with oil price as successive governments have chased soaring profits. (We’d be somewhat surprised if they didn’t.) More slowly, rates have also come down following price falls. This is the situation we currently find ourselves in: politicians, industry and even trades unions are in broad agreement that further cuts and breaks are urgently required. A softer deal for ‘Big Oil’ is a tough sell ahead of a general election, though.
Following the 12 per cent hike in the Supplementary Charge in 2011, proposed mega-projects such as BP’s Clair Ridge and Total’s Laggan-Tormore remained attractive. Most remaining reserves lie in smaller, marginal reservoirs, however, and these were hit harder. Another critical factor is at play here: despite high taxes, the UK’s political stability has attracted a plethora of international investors eager to acquire divestments from oil majors.
As a consequence, equity ownership in license blocks has become highly fragmented and also heavily dependent upon existing platform and pipeline infrastructure. Tasked with delivering maximum economic recovery (as recommended by Sir Ian Wood’s recent report), a key aim of the new Oil & Gas Authority is to now foster co-operation between myriad operators.
Much has been made of how successive governments have used these £300 billion of oil revenues. The SNP view these as squandered, citing the $500 billion accumulated in Norway’s oil fund. Defending historic Labour and Conservative spending decisions might defy any of us, but the underlying principle is clear: putting revenues to work today funds growing public services and welfare requirements without recourse to greater levels of national borrowing or personal taxation. Scottish nationalists, incidentally, appear less enthusiastic about other aspects of the Norwegian way, such as Scandinavian levels of personal taxation and state ownership. And don’t mention a separate currency or rejection of EU membership.
So is the North Sea an unalloyed success with no scope for improvement in hindsight? Both Labour (for financial reasons) and the Conservatives (for ideological reasons) divested state ownership. By contrast, Norway’s state-owned oil giant (imaginatively titled Statoil) has flourished, although privatisation is now under way ahead of global expansion. Much of Norway’s success can be attributed not to state dominance but to a healthy balance of attracting major foreign investment whilst also developing home-grown industry.
Should the UK have done the same? In an ideal world, yes but, recalling the state of nationalised industries and union relations during the 1970s, it’s hard to think beyond a maritime equivalent of British Leyland.
And in judging what Britain didn’t do, let’s not forget the pitfalls. Many governments retain large national oil companies and insist upon local manufacturing. In reality, this can translate into bloated, inefficient entities dishing out contracts to well-connected cronies; retention of natural resources gets touted a cause for national pride, whilst the wider public sees relatively little benefit. Closer to home, Denmark signed away its entire offshore sector in a 50-year concession before evaluating the extent of its reserves. Newfoundland set out to mimic the Norwegian model, but found itself bogged down in federal-provincial wrangles whilst its unrealistic demands spooked investors.
Visit Aberdeen’s under-sized airport at 5 am and you’ll quickly understand that the UK oil industry extends well beyond North Sea production; red-eye flights are packed with technology professionals carrying onward connections to all corners of the globe. Many such workers represent foreign companies, however. The Norwegians have out-performed us in drilling services whilst the Dutch are pushing ahead in offshore installation and decommissioning. Major opportunities have been lost here.
Where the UK has truly fallen down is in the promotion of science and engineering careers. At school, we learned that North Sea oil would be over by 2000. That turned out to be the year I began my career in Aberdeen. Such pessimism and short-termism has created a major skills gap currently being addressed by out-sourcing or immigration. Complex equations and laboratory experiments have proven a ‘turn-off’ when making study choices: these need to be marketed not as dry theory but the route to global career opportunities in multi-million dollar mega-projects. What industry needs right now are a new generation of oil technologists working at the molecular level to help us recover more than 50 per cent of oil typically left stranded in mature reservoirs.
What of the future? To an oil industry professional, the trends are clear: North Sea output is now below half its 2000 peak. Norway has responded to similar challenges by heavily incentivizing exploratory drilling (effectively a 78 per cent tax break to ‘Big Oil’); its gamble was recently rewarded by the giant Johann Svedrup discovery. Fiscal stimuli and technological advances can significantly extend the production tail (up to 24 billion barrels could yet be recovered), but there’s no escaping that this is a finite resource.
To date, renewable energy has often been synonymous with subsidy-hungry, intermittent output. Oil industry contractors have already begun to deploy their experience and infrastructure in offshore wind. More needs to follow in terms of wave and (more predictable) tidal power plus the subsea interconnectors to feed the grid. Carbon dioxide from power stations could be re-injected into reservoirs to increase oil recovery: something there for greens and climate sceptics.
Although an architectural gem in granite, Aberdeen’s city centre remains in urgent need of regeneration. Meanwhile, the Aberdeen North constituency in the ‘oil capital of Europe’ retains significant pockets of deprivation. Such is public disillusionment with the historically Labour-dominated council that it’s little surprise that the SNP are making significant in-roads here. A recent placard at a demonstration against the Marischal Square redevelopment (an admittedly overpoweringly modernist proposal) called for ‘Culture not Shopping’. Successful cities recognise the need to combine both to attract investment and tourism. The assumption that oil revenues are going to power this city forever is not easily challenged.