Cabinet Secretary for Finance and Sustainable Growth
Aberdeen Centre for Research in Energy Economics and Finance
July 30, 2009
Inaugural Lecture
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It gives me great pleasure to speak with you tonight at the launch of the Aberdeen Centre for Research in Energy Economics and Finance.
My thanks go to Vice-Principal Professor Chris Gane for his introduction and to Professor Alex Kemp, his colleagues in the Research Centre and the University of Aberdeen for their kind invitation to attend this evening's event.
The University of Aberdeen has a long history of research in Energy Economics.
I believe that research in North Sea Economics has been conducted in the University's Economics Department since as far back as 1973. One of the first papers to be published in 1975 was titled "Fiscal Policy and the Profitability of North Sea Oil Exploitation" in the Scottish Journal of Political Economy - a topic that is of as much relevance today as it was in the mid-1970s.
Over the years, the University's expertise in this area has grown. In 1986, the Aberdeen University Petroleum and Economic Consultants was established to provide a consultancy service to the oil and gas sector. An excellent example of the collaboration and commercialisation of University research and expertise.
At the same time, the wider economics department has gone from strength to strength. In the recent 2008 Research Assessment Exercise, which measures the research strength of University Departments, 100% of the research activity of the Department of Economics was judged to have been of international quality. A fantastic accolade for the University and economics department.
But it is not just in research that the University is leading the way. The Aberdeen Business School, one of the best in the country, has recently started a postgraduate course in International Business, Energy and Petroleum.
Elsewhere, the University has pioneered postgraduate programmes in subsea engineering, Energy Futures and petroleum geo-science.
I am therefore delighted that this new institute, which promises to be a centre for pioneering academic research and teaching, will be based in this University and this city - Europe's energy capital.
I am also pleased to see so many of the University's students, future leaders in the field of energy, attending tonight's launch. I hope that they are able to take advantage of the opportunities and expertise that the new centre has to offer.
Professor Alex Kemp
I am conscious that my speech tonight will be followed by Professor Alex Kemp who will set out the research agenda for the new centre. I will therefore leave the discussion of quantitative time series modelling, oil price forecasting and investment hurdle criteria modelling to him.
Before this however, I would like to pay tribute to Professor Kemp.
Professor Alex Kemp is without question one of the world's leading energy economists and the authority on the North Sea.
Having started out as an economist with Shell International Petroleum in 1962 he has now published over 200 articles in books and academic journals in a career stretching over 40 years. Over this period, he has advised oil companies, governments and organisations such as the World Bank.
He is a Fellow of the Royal Society of Edinburgh and a Fellow of the Royal Society of Arts and in 1999 was awarded the Alick Buchanan-Smith Memorial Award for Personal Achievement and Contribution to The Offshore Oil and Gas Industry for his fine leadership in the field of oil and gas.
In 2006, he was awarded the OBE. And in 2007, Professor Kemp accepted a position as a Member of the Council of Economic Advisers to the First Minister and we benefit enormously.
On a more personal note I look forward to reading The Official History of North Sea Oil and Gas which I am told, will be published soon - though I believe Professor Kemp would have liked this to have been much sooner!
This authoritative piece of research should provide illumination not only on past policies but on lessons for the future.
Alex has also undertaken groundbreaking research into the economics of alternative energy sources and in particular, the economics of carbon capture. As with the energy sector in Aberdeen, Professor Kemp's research, and that of the energy economists at the University, has evolved to reflect the challenges and opportunities for the industry today and into the future.
And this is a recurring theme in my talk tonight - the importance of looking to the future and identifying the opportunities that exist for Aberdeen and Scotland. I am certain that this centre will make a substantial contribution to this process
For the energy sector, Aberdeen and for Scotland.
The Oil and Gas Sector
Scotland is a nation with immense energy resources and potential.
Some four decades ago, the discovery of oil in the North Sea laid the foundations for Scotland to play a global role in world energy markets.
Since then, approximately 40 billion barrels of oil equivalent of oil and gas have been extracted from the North Sea. And many billions remain to be produced, albeit often in more challenging environments and in smaller fields.
This sector and the role that Aberdeen plays in supporting the industry are vital to Scotland's economy.
This is reflected in the jobs and investment directly supported by the oil and gas sector, and in the knock-on economic activity that it generates.
The sector supports nearly 200,000 jobs in Scotland - over 40% of which are in the Aberdeen area.
And Scottish firms, many of which are based in this city, are leading global players.
Indeed a Scottish Enterprise survey in 2007 showed that exports accounted for 40% of the sales from the Scottish supply chain with exports from the oil and gas supply chain topping £5 billion.
At the same time, Aberdeen has established itself as one of the world's largest energy hubs and has an enviable reputation across the world for innovation and excellence.
Just this week GDF Suez announced it is going to establish an exploration and production centre in the city which will create 80 jobs. And this September, Aberdeen will once again host the biennial "Offshore Europe" event, bringing in more than 40,000 visitors each day, drawn from over 100 countries.
Aberdeen is uniquely placed to consolidate energy as a key driver of the local economy for many years to come.
North Sea Revenues
It is clear that Scotland has benefited greatly from the oil and gas sector.
However, a large part of the direct benefit from Scotland's oil and gas reserves has flowed to the UK Exchequer through North Sea revenues.
Since 1976-77, the UK Government has raised approximately £155 billion in direct tax revenue from the North Sea. Adjusted for inflation, this is equivalent to approximately £270 billion; or nine times the annual Scottish Government Budget.
And based on the Treasury's most recent projections it is clear that the North Sea will remain a major source of tax revenue for years to come.
This is a significant windfall for the public finances. And research by Professor Kemp and his colleague Linda Stephen has shown that approximately 90 per cent of total tax revenue generated in the North Sea since 1980 has occurred in Scottish waters - an estimate that equates to £230 billion of revenue.
Oil Fund
The prosperity that oil and gas has brought to Scotland, and how we can sustain this windfall for future generations, is a question of the utmost importance for the Scottish Government. And it is central to the National Conversation we are having with the people of Scotland. A conversation which is considering our nation's future and how we can create the best environment for Scotland to flourish.
I recognise that there are differences of opinion over the options for reform and this is why we are encouraging the people of Scotland to reflect, debate and then decide upon Scotland's constitutional future.
Scotland's economic responsibilities and our oil and gas reserves are central to this debate. This is why I have today published the paper 'An Oil Fund for Scotland', setting out, what I believe is an unanswerable case, for the establishment of an oil fund into which some of the proceeds of North Sea revenues could be invested.
Such a fund would allow us to save a proportion of the windfall generated by our oil and gas reserves for the long term. It would provide a permanent source of wealth and would generate revenue long after our oil and gas reserves have entered their twilight years.
And it would enable us to protect our economy from unexpected shocks. Allowing us to provide a fiscal stimulus when the economy slows, or to offset temporary falls in tax receipts, without incurring large debts for future generations
Not only are such actions sensible financial management, they also ensure that future generations share in the benefits of our oil and gas reserves.
International Examples
The concept of an Oil Fund is not new or unique to Scotland.
Despite the support of previous UK Energy Ministers, such as Tony Benn and Malcolm Wicks, the UK has yet to save any of our oil and gas windfall in a fund for future generations.
Indeed the UK sits as an outlier in this respect. Most countries with major oil and gas reserves have already created oil funds, into which they have invested a share of the returns from their oil and gas reserves.
Norway started transferring revenues into their oil fund just 13 years ago. The Norwegian Pension Fund - Global is currently valued at £214 billion - the equivalent of nearly £50,000 for every Norwegian.
By investing a proportion of their oil wealth, the Norwegians have safeguarded their financial future and built an economy that is consistently placed near the top of the UN's quality of life league table.
Elsewhere, in countries where responsibility for natural resources has been devolved, oil funds have also been successfully established.
The Alaska Permanent Fund, in the USA, is currently valued at £19 billion. And each year, they pay out a dividend to their citizens worth on average over £1,000 annually over the past decade
And in Canada, the Alberta Heritage Savings Fund, is currently valued at £8 billion. Over the years this has funded over £16 billion of investments in the Province. It has also helped establish endowment funds, to provide academic scholarships and support biomedical and health research.
And closer to home, the Shetland Isles established an oil fund in the 1970s which has since generated millions of pounds of investment in the local community. So there is an opportunity here.
Devolving control of North Sea taxation and production to the Scottish Parliament would allow Scotland to control its own natural resources and ensure that they provided a lasting benefit for the country. An Oil Fund would be a central objective of the Scottish Government.
Scottish Oil Fund
Based on current projections for future North Sea oil and gas revenue, if Scotland were to establish an oil fund, and commit to investing a significant proportion of projected future North Sea tax returns, the funds value would be substantial.
Investing just £1bn per annum could mean that based upon reasonable rates of return, a Scottish Oil Fund could be valued at over £30 billion after 20 years. While if we saved £5 billion a year it would be worth over £150 billion.
In our paper published today, we set out a range of options ion the context of Oil Fund.
The key focus of an Oil Fund is to look to the future - to invest resources now for long term prosperity.
In this regard, an Oil Fund can play a vital role in supporting our transition to a low carbon economy and in the development of alternative energy sources.
In particular, the investment profile of an oil fund can be used to assist in developing low carbon energy sources, thus providing an additional source of sustainability and inter-generational fairness.
The Future
An Oil Fund is about investing in Scotland's future.
The outlook for Scotland is bright. We have been blessed with an abundance of energy resources.
Energy is at the heart of Scotland's future prosperity and a cornerstone of our economic strategy.
Notwithstanding the uncertainties that have arisen over the last year, the oil and gas sector will remain a vital part of the Scottish economy over the coming decades.
While production has fallen since 2000, it is estimated that up to 40% of the North Sea's oil and gas reserves have yet to be recovered. Scotland will remain a net exporter of oil and gas for a long time to come. And while we recognise the need to move to a low carbon economy, oil and gas will continue to play an important role in the coming decades, even with the continued development of renewable energy.
The decommissioning of existing platforms will also offer considerable opportunities in the coming years. The decommissioning market could be worth some £25 billion over the next 25 years and will provide new opportunities for many suppliers and operators.
Therefore, with the correct incentives and appropriate environment management, the sector will remain an important part of the Scottish economy.
And in looking to the future we should continue to reach out across Europe and beyond in pursuit of our ambitions.
Aberdeen is a prime example of this ambition and vision. It has established itself as a hub for the offshore oil and gas industry, with worldwide expertise in skills and innovation which will last long after output in the North Sea reaches its twilight.
We as a Government will do all we can to support the City's and the industry's ambitions.
In this respect I have discussed with the Chancellor to ensure that the North Sea regime reflects changes in the oil and gas industry and that the correct incentives are in place to promote exploration, production as well as investment for the long term.
And we must continue our promotion of Scottish oil and gas services expertise and anchor Aberdeen as hub of expertise in the Eastern Hemisphere. We must also continue to explore opportunities for sustainable use and decommissioning of the oil and gas infrastructure.
At the same time however, we must embrace new technologies as we move to a new age in energy supply and demand and diversify into sustainable energy sources.
For example, Scotland has outstanding opportunities in Carbon Capture and Storage. With our technological expertise, and decades of experience of working in deep waters offshore, Scotland has the potential to lead the way in this new industry.
We have a real and valuable competitive advantage in this field. It offers an enormous opportunity not just for the environment, but as an economic development tool as well. .
Therefore I was particularly pleased to hear of the new Centre's proposed work into the economics of CO2 Capture and Storage and research into financial incentives for encouraging CO2 abating investments.
I see the development of these activities as being central to Scotland's energy future.
At the same time, Scotland has vast potential in renewable energy, unrivalled perhaps in Europe.
We have around a quarter of both Europe's tidal and offshore wind capacity, and 10% of its potential in wave power. We have opportunities in hydro-power, onshore wind and biomass.
Over the past year, we have been working to establish the Scottish European Green Energy Centre. The Centre - which will play a pivotal role in positioning Scotland at the heart of research, development and deployment of low carbon technologies across the EU - will open in Aberdeen next month.
I am also pleased to see our universities and industry punch above their weight in the renewables sector, - and here at Aberdeen University, and in Glasgow and Edinburgh, we have seen them come together through the new Energy Technology Partnership, and its work to develop and disseminate ground breaking renewables and low carbon research.
Conclusions
I began my remarks tonight by emphasising the outlook for the future.
It is clear to me that this city and our country have a prosperous and exciting future.
When it comes to Scotland's energy and economy, Aberdeen and this University have a vital contribution to make. In the continued success of the oil and gas sector in the North Sea. In carbon capture and storage technology. In the disseminating of the expertise we have built up through decades of work off-shore. And in the movement toward alternative energy sources in the medium to long term.
Institutions such as this Research Centre will play a vital role in promoting our understanding of the opportunities, and the challenges, that we face as we seek to meet our ambitions for our economy, our people and our environment.
I look forward to hearing about the centre's as it contributes to the future of the oil and gas industry and sustainable energy research and I wish you every success in your endeavours.