Chapter 2: Learning from Scotland's past - the experience of the oil and gas revolution
Approximately £155 billion in direct tax revenue from oil and gas production raised since 1976-77 has flowed to the UK Government. Adjusted for inflation, this is equivalent to £269 billion at 2008 prices or approximately nine times the annual Scottish Government budget.
23. The last chapter outlined the scale of Scotland's potential as we stand on the verge of the low carbon energy revolution. This chapter asks two questions:
- Are there lessons that we can learn from Scotland's oil and gas revolution?
- Can those lessons be applied to how we should approach the next energy revolution?
Past opportunities missed
24. The benefits to Scotland of the oil and gas revolution have been significant. The economic performance of many regions of Scotland has been transformed since the 1970s, not least the North-East and Shetland. The industry continues to support 196,000 jobs 5 even as the North Sea basin matures and there are potentially up to 24 billion boe (barrel of oil equivalent) still to recover, which will support jobs for several decades to come. However, it is clear that the benefit accrued to Scotland itself could have been even greater. Between 1964/65 and 2009/10, the UK Government has raised approximately £283 billion in direct tax revenue from oil and gas production after adjusting for inflation (2010/11 prices).
25. The lion's share of these revenues has been generated from Scottish waters: according to analysis by academics from the University of Aberdeen, 91% of North Sea revenue was generated in 'Scottish waters' during 2008/09. Between 1980/81 and 2009/10, approximately £242 billion in tax revenue is estimated to have been generated from 'Scottish fields' (in 2010/11 prices) 90% of the UK total. The latest GERS publication shows that Scotland has run a current budget surplus in each of the four years to 2008/09 when oil and gas revenues are taken into account at a time when the UK had a persistent current budget deficit.
26. On a UK level, it is noteworthy that despite the massive financial injection given by the oil and gas sector, the UK still has one of the highest budget deficits in Western Europe in 2010 and has no long-term lasting legacy to show to future generations from the exploitation of its non-renewable hydrocarbon resources.
The example of Norway
27. Other countries acted more wisely with respect to the revenues generated from their exploitation of hydrocarbon resources. The examples of Norway, Alberta in Canada and Alaska in the USA have already been highlighted in this Government's Oil Fund For Scotland paper. To take one example, Norway's Government Pension Fund, created in 1990, stood at a value of 2,792 billion Norwegian Kroner (or £294.09 billion) in the first quarter of 2010. 6 In other words, a country of a similar size to Scotland has created a fund within 20 years whose value equates to £57,400 per inhabitant and which has largely insulated Norway from the financial shocks which have rocked the world economy in the last two years.
28. It is notable that Norway ensured that its environmental capital was managed for inter-generational benefit, and the full benefit of that capital will be felt by future generations. Norway used its bounty to invest in the future care of its people and understood that it is the people who own the environment, and the people should manage this natural gift for future generations. In contrast, the benefit from the discovery of North Sea gas and oil in the UK was largely used to sustain day-to-day government spending. As a result, the UK is left without a substantial, lasting legacy, despite the massive potential offered by its continuing North Sea reserves.
The example of Shetland
29. Closer to home, we have an example of the way in which one local community - Shetland - was able to accrue a legacy for its future on the back of oil and gas exploration. Shetland Islands Council showed foresight in securing via, primarily, the Zetland County Council Act 1974 a lasting revenue stream for the benefit of the islands from the development of the Sullom Voe terminal. The result of this Act and subsequent contractual negotiations is that Shetland today has a lasting legacy of around £216m. 7 This figure is over and above the funds contained in the Shetland Reserve Fund, administered by Shetland Islands Council.
30. The Shetland Charitable Trust, established in 1974 to manage the income stream accrued to Shetland, today provides funding to a number of charitable organisations and projects where there is a clear benefit to the Shetland community. Over the years, the Trust has made a contribution to creating a modern, positive and healthy community in Shetland. Shetland Charitable Trust's financial strength has also given it the power to establish joint venture projects to move into the renewable energy generation market.
What are the lessons to be learned?
31. The example of the Zetland County Council Act 1974 provides a role-model for the rest of Scotland to follow. It offers a model of local people benefiting from the abundant natural resources which surround them; and a model of how a lasting legacy can be created for the benefit of all. Orkney Islands Council also established an oil fund through similar legislation.
32. The examples of Shetland, Norway and other nations who have created natural resource investment funds, contrast vividly with the example of the UK. A key lesson to be learned from the exploitation of North Sea hydrocarbons is that if the UK had had the foresight to act along Norwegian lines, the financial benefits which we and future generations could be enjoying today and tomorrow could be considerable.
33. Even though there are good arguments that Scotland missed out on its share of North Sea oil and gas revenues, the opportunity for Scotland to claim its fair share has not yet passed.
34. Estimates published by Oil and Gas UK in their 2010 Economic Report suggests that between 15 and 24 billion barrels of oil equivalent remain to be recovered. This is a resource with a potential wholesale value of between £800 billion and £1.25 trillion based on forecasts of future oil and gas prices. Oil and Gas UK forecast that about 17% of the UK's remaining oil and gas reserves lie under the waters to the west of Shetland.
35. Recently, there have been a number of oil and gas discoveries in the North Sea. Oil and Gas UK anticipate that 16 new fields will come on-stream in 2010 and 2011, with at least nine expected to start in 2010. They forecast that these will together lead to the production of 100-150 million boe over time. In 2011, another seven fields are already scheduled to start and, with some possible others, which could bring 150-300 million boe of reserves into production during that year. Additionally, brown-field investments are expected to bring a further 200 million boe or more on-stream during the course of this year and next.
36. When we contrast the approach taken in Norway and Shetland with that taken in the UK, it seems clear that there was a failure to seize the full extent of the opportunities which opened up for Scotland with the discovery of North Sea oil and gas. The Scottish Government has already made that case and argued for the creation of an Oil Fund for Scotland to remedy this and secure a lasting legacy from our hydrocarbon resources 8. It is equally clear that, second time around, Scotland must not let the opportunities created by its next low carbon energy revolution pass.
37. If there is one lesson to be gained from Scotland's experience of the oil and gas revolution, it is surely that we must ensure that, in stewarding our plentiful natural assets sustainably and for the benefit of all, the benefit streams from those assets do not bypass Scottish people or flow out of Scotland altogether.