Low oil price the real threat to North Sea, Scottish independence or not?

Ben Samuel's picture
Ben Samuel, Deputy Editor European Spot Gas Markets , ICIS
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Now that the UK has voted to leave the European Union (EU), the prospect of a second referendum on Scottish independence is more likely. In the previous vote, major energy companies invested in the Scottish oil and gas industry, including BP and Shell, were vocal in supporting a continued union.

At the time, the companies cited studies indicating that production of remaining oil and gas assets is best-positioned to flourish under a stable tax regime with minimal legislative upheaval. These conditions are not necessarily affected by Brexit, and on that basis, it is possible that energy majors would be in favour of Scotland’s continued UK membership.

However, most North Sea majors are unlikely to attempt advising the public before a post-Brexit agreement is in place – and this may be several years off.

Since the Scottish referendum, the country has been granted additional fiscal control, but alongside this global oil and gas prices have plummeted. The Scottish Nationalist Party’s (SNP) idea of an independent nation with a Norwegian-style energy fund looks impossible given the current environment – and a new pitch to the electorate would be wise to avoid any mention of this strategy.

The SNP predicted up to £48bn in tax revenue from oil and gas production between the fiscal years of 2012-2017, based on an oil price of $113/bbl. Now that Brent is below $50/bbl, taxes have been lowered in an attempt to stimulate investment into the North Sea, or at least prevent job losses. However, the impact of these tax breaks has been deemed to be negligible so far.

In the short-term, investment into the basin looks set to take another hit. The uncertainty generated by Brexit would be further intensified by another Scottish vote and this is likely to stifle investment decisions further.

Regardless, this could all be considered a side issue compared to the low oil price, which is a result of both overproduction and a slowdown in global economic growth, especially in China.

Regulatory stability is, of course, essential to long-term investment in any industry, but fundamental economics will always be the deciding factor. In the event of a Scottish referendum, should Westminster and Holyrood make cast-iron guarantees that regulations and taxes will remain unchanged whatever the outcome, a jump in investment will not happen without a rise in oil prices.

Join the Conversation: Will the uncertainty generated by Brexit affect the North Sea oil and gas industry in the short-term? Leave your comment below.

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