White Paper on Scottish Independence – Repercussions for the Oil & Gas Industry

The Scottish Government recently published its White Paper on Independence, Scotland’s Future - Your Guide to an Independent Scotland. Please see the summary below for the main points affecting the oil and gas industry.

Predictability of Fiscal Regime & Regulatory Change

The Scottish Government aims to support and maximise the safe production of oil and gas from the fields off Scotland’s shores, aided by a new stable and predictable fiscal regime.

The White Paper has placed an emphasis on stability and promises to introduce a predictable tax regime, so that post-tax returns from investments can be appropriately evaluated. The White Paper states that the current licensing and regulatory regime will continue and existing energy licences will remain in force in an independent Scotland, with a view to providing operators and investors with certainty on independence.

The White Paper places emphasis on the fact that “the North Sea is a natural storage hub for vast volumes of carbon dioxide,” and further supports the use of existing oil and gas infrastructure in storing and developing carbon capture storage. The White Paper argues that “only independence provides Scotland with the autonomy to make the necessary strategic investments that will support the growth of CCS”.

The Scottish Government has also welcomed the contribution that Sir Ian Wood’s interim report makes to the debate. Particularly, the proposal to create a new regulator and Sir Wood’s belief that the current regulator “is no longer adequate to meet the challenges of managing an increasingly complex basin”. Sir Ian Wood’s report is available to view here.

An Expert Commission established by the Scottish Government is set to consider Sir Ian Wood’s interim report in full along with the creation of an appropriate fiscal and regulatory regime for oil and gas in an independent Scotland.

Health & Safety

The White Paper includes emphasis on the importance of health and safety to the oil and gas industry. There is a presumption in favour of adopting all aspects of the current health and safety standards along with ensuring there is a modern, rigorous and well-funded Scottish regime and a well-equipped coast guard.

Tax Regime

With independence, the Scottish Government will develop a tax regime for the oil and gas industries with three over arching aims:

• to support and incentivise production
• provide long term stability and certainty including a commitment to formal consultation on future reforms
• to provide fiscal incentives that encourage exploration and help maximise recovery rates

The proposed fiscal regime will also aim to recognise factors critical to offshore operations, including:

• exploration periods with long time-lags and significant upfront costs
• highly capital intensive development requirements
• significant geological, technical and economic risks
• specialist technologies and sophisticated business structures
• costs of decommissioning

Encouraging exploration is a key objective of the Scottish Government, who refer to the Norwegian exploration tax reliefs as having contributed to a substantial increase in exploration licenses in Norwegian waters. Overall, the Scottish Government has no plans to increase the tax burden on the industry and expressly states that no changes to the fiscal regime will be made without proper consultation with the industry.

Decommissioning

Committed to providing certainty and stability for future decommissioning tax relief, the Scottish Government will engage with industry on future reforms and does not propose to alter the decommissioning relief currently provided – post-independence decommissioning relief will be provided “in the manner and at the rate currently provided through the current fiscal regime”. There is no reference to Decommissioning Relief Deeds and whether the Scottish Government would be prepared to take on the UK Government’s contractual obligations under DRDs in relation to Scottish assets – if the tax relief regime is not to change then, except in the circumstances of default, there would be no additional cost to such an obligation. The White Paper also proposes that the Scottish Government will negotiate with Westminster to secure a share of the £300 billion in tax receipts from oil and gas production to meet the costs of decommissioning. However, it states that “the outcome of these negotiations will have no impact on the value of relief received by operators”. The Scottish Government will also seek to maximise the economic benefits to Scotland of the decommissioning process.

Scottish Energy Fund

The Scottish Government proposes to create a Scottish Energy Fund for two purposes: to provide investment for future generations; and to provide income that can smooth receipts from oil revenues, recognising that these vary from year to year.

The energy fund will be started once Scotland’s overall budget deficit is reduced to below the level of long-run economic growth and when debt is on a downward trajectory, estimated to occur in 2017/18.

Additional Information of Interest

The Scottish Government has published forecasts of North Sea tax receipts under two scenarios. In the first, production is assumed to remain unchanged at current levels along with the price of oil at their average level over two years to March 2013. Under this scenario, they estimate that oil and gas receipts would generate £6.8 billion in tax revenues 2016/17. In the second scenario, production is forecast to increase in line with industry predictions, although at a lower level of profitability. Under this scenario, oil and gas receipts could reach £7.9 billion in 2016/17.

The White Paper also pledges to move the cost of Energy Company Obligations and Warm Home Discount Scheme to the Scottish Government in an attempt to reduce energy bills.

The White Paper can be accessed here and the section primarily relevant to oil and gas is at pages 300-306.