The Oil and Gas Industry

Scotland and Oil Revenue

When considering Scottish independence, it is hard to avoid the topic of the North Sea Oil and Gas industry and its potential impact on the finances of an independent Scotland. This article will explore the contribution that this industry has made and continues to make to the public purse and to the wider economy.

History

Although there was limited oil extraction from the North Sea prior to the 1960s, large scale commercial operations came into effect after the introduction of the Continental Shelf Act in 1964. Government revenue from the North Sea started to accrue in 1968-1969 although, until 1970-1971, these receipts were purely based on royalties from licenses. Sizeable revenues from Oil and Gas production did not realise until petroleum taxes started to produce income in 1978-1979. Initial revenues were still relatively low at £2,514m in real terms (£565m in cash terms) however, revenues rose sharply from 1980-1981 and peaked at £29,335m in real terms (£12,035m in cash terms) in 1984-1985.

The early 80s boom was followed by a significant drop in revenues over the remaining years of the 20th century, with tax revenues remaining modest until a resurgence in the early 2000s. In more recent years the recovery in government revenue from oil has dwindled due to the sharp decline in world oil prices and an increase in government tax rebates. UK Government revenue from Oil and Gas is now at an all-time low and, in 2015-2016, according to the latest published Oil and Gas figures from the HMRC "Statistics of government revenues from UK Oil and Gas production" [1], the UK Government incurred a net loss of £24m as a result of Petroleum Revenue Tax (PRT) rebates totalling £562m. Note: This differs slightly from the 2015-2016 GERS document as the GERS document includes income from Licenses and from the Emission Trading Scheme (ETS) but the HMRCs publication does not. e.g. in 2015-2016 ,for the UK, License fees were 72m and Estimated income from the ETS was 28m.

Government Revenue

The UK Government raises revenue from the Oil and Gas industry from three direct taxes:

  • Corporation Tax
  • Petroleum Revenue Tax
  • Supplementary Charge

Historically, additional revenue was raised from Royalty Payments and the Gas Levy, however these have since been phased out.

Corporation Tax is based on company profits – the offshore Oil and Gas industry is charged Corporation Tax at 30%, unlike the standard rate of 19% for most other industries.

Petroleum Revenue Tax is also applied on the profits made from oil extraction. This is calculated by ring-fencing the profit and loss for each field - oil companies cannot offset tax liabilities using losses from other fields. Petroleum Revenue tax only applies to fields that were in production before 16 March 2003, however, this tax has been zero rated and has effectively been replaced by the Supplementary Charge.

The Supplementary Charge was introduced in April 2002 by the Blair Government and is in addition to Corporation Tax. The rate has undergone a number of changes over the years reflecting the Oil and Gas economic climate at the time – initially introduced at 10%, increasing to 20% in 2006 and peaking at 32% in 2011, however it currently is set at 10% to give relief for decommissioning expenditure and to support challenging times for the industry. Unlike PRT, profits are calculated at the extraction business level and not per field.

The marginal rate of these taxes is therefore, at present, 40%.

Scotland’s Share

There are a few different ways we can look at Scotland’s share of public revenue raised from Oil and Gas taxation. The Scottish Government publishes Oil and Gas Revenue figures under the Scotland National Accounts Programme (SNAP) [2]. This calculates a geographic share of revenues by drawing upon academic research carried out by Professor Alex Kemp and Linda Stephen from the University of Aberdeen. Kemp and Stephen have published extensively on licensing and taxation issues on the UK Continental Shelf, and are considered to be leading experts in UK petroleum economics.

It is worth noting that whenever Scotland's Public Revenue and Expenditure is discussed in the media or by politicians, the geographic share of Oil and Gas revenue is usually cited, as this is the value that is relevant in the context of an independent Scotland.

For 2015, SNAP lists the value of UK production at £25,610m, £17,431m of which is Oil and £6,550m is Gas. Of the total value, the SNAP Oil and Gas publication attributes £21,458m to Scotland – £16,863m of which is Oil and £3,263 which is Gas. This puts Scotland’s geographic share of production at 84% of the UK total – made up of 97% of total oil production and 50% of total gas production in the UK.

It is important to remember that these numbers refer to the total value of production, not profits – this is key as it is not production that is taxable but gross profits. This is of particularly concern with regards to the North Sea due to Oil and Gas becoming increasingly more expensive to extract, although there are continuing technological advancements in this area.

To put these costs into perspective, despite the UK production value of Oil and Gas totalling £25,610m in 2015, operating and capital costs amounted to £22,688m.

The Government Revenue and Expenditure Scotland (GERS) [3] document presents two different methodologies for allocating the public revenue from Oil and Gas to Scotland’s figures – population share of around 8.2% for 2015-2016 of the UK total and geographic share which uses the Kemp/Stephen methodology mentioned above. The latter results in Scotland’s share of revenue, allocated for determining Scotland’s surplus or deficit, at 78.5% for 2015-2016. While the GERS publications only dates as far back as 1989, there are historical statistics going back to 1980. Analysing these numbers, we can conclude that Scotland’s geographic share of Oil and Gas revenues was considerable over the last 30-40 years.

Exports and the Balance of Trade

While the Oil and Gas sector is currently not generating much in the way of public tax revenue it does, of course, contribute to the economy in other ways such as the contribution made to the UK’s Balance of Trade through its exports.

In 2015 Oil and Gas products were responsible for 4.13% (£21,084m) of all UK exports. This is comparable to other major industries such as Car Manufacturing (5.02%) and Food, Beverages and Tobacco (3.55%). The UK’s main export continues to be Financial Services, which makes up 9.95% of all exports. Total exports for the UK in 2015 were £510,340m.

In the context of Scotland, it is Oil and Gas that essentially tips the balance to turn Scotland from a Net Importer to a Net exporter [4]. For example, according to the Quarterly National Accounts for Scotland (QNAS) for 2015 - published in February 2017 - Scotland's Onshore economy exported £71,866m and imported £83,008m resulting in an onshore trade deficit of £11,412m. Net Oil and Gas exports totalled £12,120m, resulting in a total trade surplus of £2,052m.

Employment

The Oil and Gas industry is a major employer in the UK, employing around 34,000 people directly, 151,500 people indirectly and 144,900 induced in 2016 [5]. "Induced" refers to jobs that are estimated to be reliant on the industry such as hotels, catering, taxis etc. Nearly 60% of those directly and indirectly employed are based in England, with most of the remaining 40% based in Scotland – primarily around the Aberdeen area.

For comparison, the UK’s Automotive sector employs 169,000 people directly and 814,000 indirectly [6] and the Financial Services sector employs 2.2 million people UK wide – 150,000 of whom are based in Scotland.

Conclusion

Despite the Oil and Gas Industry not producing anywhere near the levels of public revenue that it once boasted, and with decommissioning costs set to grow, the sector continues to add value to the wider economy.

As shown above, in 2011-2012 Scotland’s geographic share of Oil and Gas revenue totalled £9,633m, representing 17% of Scotland’s total tax take. In comparison, the UK's total Oil and Gas revenue for the same year amounted to £10,872m, equating to 1.8% of the total revenues.

In 2015-2016, Scotland's Geographic share of Oil and Gas Revenues fell to £60m, which represents 0.1% of total Scottish revenues. This coincides with Scotland's more challenging net fiscal position when compared to the wider UK, and demonstrates the disproportionate impact that this volatile resource has on the Scottish economy.

References

[1] HMRC "Statistics of government revenues from UK Oil and Gas production" [2] SNAP Oil & Gas Production Statistics 2015-2016 [3] Government Revenue and Expenditure Scotland (GERS) 2015-2016 [4] Scotfact Exports and Imports [5] Oil and Gas UK Impact Analysis [6] The Society of Motor Manufacturers and Traders (SMMT)