Why oil is not a good argument for Scottish independence

Scotland is still a significant oil producer but production has declined steeply in recent years, down from about 2.6 million bpd in 1999.

A mountainous, tribal, oil-producing country is shortly to hold a referendum on becoming independent. Not Kurdish Iraq, but Scotland. But as with the Kurds, the Scottish question hinges on oil – are revenues enough to underpin independence?

Scotland is still a significant oil producer – waters under its likely control yield about 800,000 barrels per day. The Scottish National Party (SNP) has estimated the value of a speculative 24 billion barrels of oil and gas resources at £1.5 trillion (Dh8.96tn) – ignoring the costs and time to extract them.

But production has declined steeply in recent years, down from about 2.6 million bpd in 1999. Contradicting the SNP figures, Sir Ian Wood, a leading oilman, said a “best outcome” for remaining resources was 15 billion to 16.5 billion barrels.

Most of the producing fields are mature, and many will shut down over the next few years. At the moment, the taxpayer is liable for a share of the decommissioning costs. New fields are smaller, more risky or located in the deep and stormy waters of the Atlantic Margin off to Scotland’s west.

With oil prices falling recently below US$100 per barrel, petro-pounds are a volatile and uncertain currency if not cushioned within the much-larger UK economy. And all of the SNP’s six forecasts for future oil income assume prices higher than today’s. They also contain a contradiction – investment (and hence corporate tax deductions) is lower, yet production is higher than in UK government forecasts.

The process of independence would be likely to deter oil companies for several years while the details are worked out – the division of cross-border fields and infrastructure, the establishment of a new legal and regulatory system for the industry. Although there might be room for some improvement, it is not obvious that Edinburgh would manage its oil industry dramatically better than London has.

And operating off Scotland is expensive by global standards. Recovering all the available oil from the remaining fields will need investment in enhanced oil recovery and extending the life of existing infrastructure – probably requiring easing tax levels.

Yet to fund its aspirations, a new Scottish government would be more likely to have to raise taxes on oil production, deterring new projects. Beyond oil, green technologies such as renewable energy and carbon capture and storage also depend on support from more numerous consumers and taxpayers in the rest of the UK.

Proponents of independence wish to spend the oil money at least twice – on improved social services and investment, and on a sovereign wealth fund like Norway’s. But the analogy with Scotland’s Nordic neighbours is misleading. Norway has more oil and, especially, more gas. Both countries started producing oil about 40 years ago – a better moment for independence that has now passed.

A possible Scottish National Oil Company has also been mooted, along the lines of Norway’s very successful Statoil. But ScotOil would either have to use public funds to buy producing fields, with the risk of overpaying, or venture into the risky and difficult game of exploration, or be given a mandatory share of new fields – which would put off private oil companies.

Beyond all these considerations are philosophical ones. Should the independence of any country be conditioned on a lucky bounty of natural resources? What happens when those resources are depleted? Is there any responsibility to the larger political unit that provided, in many cases, capital, expertise and legal security to find and develop the resources? And should decisions on independence be decided solely on cold actuarial calculations of economic advantage?

There may be good emotional, cultural or political arguments for Scottish independence. But economics – and particularly oil – is not one of them.

Robin Mills is the head of consulting at Manaar Energy and the author of The Myth of the Oil Crisis

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