What next for North Sea oil from the perspective of energy democracy
Date: 25 August 2015
North Sea oil reserves are both a valuable public resource and a dangerous polluting threat.
The current low oil price creates an opportunity to re-assert democratic control over the North Sea. Now is the time to part-nationalise and harness oil policy to a rapid transition. That means maximising revenues per barrel, slowing extraction rates and building a future out of decommissioning. Achieving the best public good will require significant state investment, intervention, democratic engagement and accountability and an end to ‘light touch’ regulation. It will also require bravery, as companies in the North Sea have a history of resistance and corporate bluster when faced with moves that threaten their profit margins.
Beyond the immediate step of ending tax loopholes and breaks for the oil barons, Scotland’s oil should be taken into partial public ownership. The low oil price makes this even more feasible then when oil prices were high. Oil companies are arguing that they cannot keep operating without state support. Any such support should be tied to receiving a stake in oil fields through mandatory state participation in joint venture contracts. Scotland could thus take a significant stake of 30 – 60% in joint oil ventures through partial state ownership. Private oil companies should continue to pay royalties and taxes on the share of crude that the companies take.
Taking a majority stake would not require Scotland to operate the fields. It’s standard for private oil companies to be minority shareholders, while operating the concessions. For example, Shell was the operator for the Kashagan field in Kazakhstan while owning 16.8%; BP owns 50% of the GUPCO joint venture in Egypt that it operates. In cases like this, standard international practice is for the private companies to cover, or “carry” the costs of the state’s share. By not directly participating in running oil operations, Scotland would not need to build up a fully-fledged national oil company.
A practical and simple model would be to mirror Norway’s fiscal regime. The Norwegian state has a direct financial interest in 121 extraction licenses in Norwegian waters, and it levies a 50% Special Tax (compared to Britain’s 20% Supplementary Charge). These two measures generate 95% of Norway’s oil revenues, and provide a simpler mechanism, and would reduce the potential for tax avoidance. Despite generating vastly greater revenues for government (£74 billion more than if the UK’s tax regime was applied between 2002–2008), the Norwegian model doesn’t reduce the viability of investments for private companies. It is designed “so that an investment project that is profitable before tax would also be profitable after tax.”
The standard industry response to such proposals is that Scotland has higher costs than Norway. However, empirical evidence shows that in 25 out of 32 years between 1976 and 2008, Norwegian investment per barrel extracted was higher than that in the UK. And in two out of the only seven years in which UK costs were higher, this was due to the required safety investments after the Piper Alpha disaster.
By bringing North Sea oil extraction, especially larger projects, under part public ownership, Scotland could ensure more control and accountability as a shareholder. With less need to incentivise future drilling, there will be reduced pressure for tax hand outs for the companies. Part-public ownership, as in Norway and most other oil extracting countries, would make it easier to boost the revenues per barrel.
This does not mean that all North Sea oil fields should be taken into part public ownership. It’s important to assess which fields should be shut down sooner, and which have any future.
And part-nationalisation should not be an opportunity for private companies to offload their decommissioning responsibilities onto the state. Just because the public takes a stake during the North Sea’s twilight years, does not mean the public should underwrite the costs to clean up the private sector’s mess. Responsibility for decommissioning should be assessed field by field, based in large part on who controlled and profited from extraction.
There are opportunities to increase revenues. The British state is known to capture a remarkably small portion of the enormous revenues that flow from the North Sea. In 2008, Norway’s average take per barrel was £27.50 – more than double that of the UK. In the past three decade’s, Norway’s take per barrel has been significantly higher than the UK’s in 9 years out of 10.
Slow down extraction and preserve reserves
We know that there is more oil and gas in the world than it is safe to burn. The International Energy Authority estimate that “no more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal” (i.e. limiting global climate change to 2°C). Others, such as the Potsdam Climate Institute, estimate only one-fifth of proved reserves can be burned to limit the chances of the world exceeding 2°C of warming.
What does this mean for Scotland’s energy policy options? In our view, the most important outcome for energy policy is that Scotland’s modern and wealthy economy is harnessed to speed a transition away from fossil fuels and towards low-carbon means of energy production. This will not be achieved by rapidly shutting down the oil industry – the necessary investment in low-carbon infrastructure would disappear with economic recession. But a policy of maximising fossil fuel extraction rates is not compatible with the need to avoid dangerous changes to the stable climate in which human well-being has thrived.
Every barrel of oil extracted and burnt generates revenue but it also reduces the nation’s assets. In a future where natural resources, such as easily accessible oil and gas, are becoming increasingly rare it is prudent to maintain natural resources for the future.
Fossil fuels, despite their name, are not only used for fuel. Electronics, medicines, fertilizers and everyday plastics and chemicals such as paint and solvents, all rely on oil-based products. It is difficult in a market economy to make sure that extracted crude oil is put to non-fuel use but future resource and climate policy may well restrict the use of fossil resource in this way.
By implementing an energy policy which aims to slow down extraction, preserve reserves and maximise revenues, Scotland could create the conditions needed to transition to a low-carbon energy economy, retain natural assets for the future and play a fair role in tackling climate change.
This blog is an extract from a longer report Jobs in Scotland’s New Economy released today by Scottish Green MSPs.
