(Updates with oil revenue in fifth paragraph.)
Jan. 24 (Bloomberg) -- Ever since oil was discovered in the North Sea off the British coast in December 1969, the Scottish National Party claimed it for Scotland.
Now in power and closer than ever to a referendum on whether to break from the U.K. after more than 300 years, the SNP government in Edinburgh led by Scottish First Minister Alex Salmond is counting on tax revenue from the oil industry as a key pillar of the economy along with financial services.
“We’re talking about quite a significant cash bonanza, but one that’s subject to considerable uncertainty,” David Bell, professor of economics at Stirling University and the budget adviser to the Scottish Parliament’s finance committee, said in an interview. “It’s not quite a get-out-of-jail-free card.”
Oil prices have fluctuated by at least 30 percent in 12 of the last 23 years, according to data compiled by Bloomberg. From 2005 to 2010, oil and gas revenue accounted for 6.8 percent to 10.8 percent of the Scottish economy, said Malcolm Barr, JPMorgan Chase & Co.’s chief U.K. economist.
More than 40 billion barrels of oil equivalent, a measure used to include gas, have been extracted from the U.K. Continental Shelf, attracting investment of 468 billion pounds ($729 billion), according to Oil & Gas U.K., the body that represents about 200 companies operating in the offshore industry. Between 1980 and March this year that will have generated tax revenue of more than 166 billion pounds, according to Bloomberg calculations from Office for National Statistics and Her Majesty’s Revenue & Customs data.
At current production levels, the U.K. is the third-largest oil producer in Europe, behind Russia and Norway, and the fourth-largest gas producer with Russia, the Netherlands and Norway ranked higher, according to the BP Statistical Review of World Energy published in June.
What will have to be decided should Scotland vote to leave the U.K. is how much of the remaining oil is Scotland’s based on maritime borders and what the associated tax revenues will fund. The oil was discovered off Scotland’s east coast.
Salmond has said the vote on independence will take place in the fall of 2014, while U.K. Prime Minister David Cameron and his government want it earlier.
“The key argument which would have to be settled is where the line would be drawn,” Alex Kemp, an economics professor at Aberdeen University and author of a history of North Sea oil, said in an interview. “There are always some complications.”
Using the existing fishing management line that demarcates the English and Scottish fisheries would give Scotland about 95 percent of the oil and 58 percent of the gas based on 2010 production figures, Kemp said. His model shows 90 percent of industry falling in the Scottish part, he said.
The SNP government, which has said it would have financed everything from bank bailouts to pensions with oil revenue, accepts Kemp’s figure, John Swinney, the Scottish finance minister, said in an interview.
“That’s an assessment formulated not by the Scottish government but by probably the most significant petroleum analyst and we would accept that as a reflection of the current situation,” Swinney said in London on Jan. 16 after a meeting with Alexander Yakovenko, the Russian ambassador to the U.K.
Opinion polls show increasing support in Scotland for independence, though still a minority in the country has declared an intention to vote for it.
Scotland has had control over such things as health, education, justice and transportation since the re-establishment of the Scottish legislature in 1999, while the U.K. Parliament at Westminster in London retains power over macro-economic affairs, defense and immigration policy.
Based on 90 percent of the oil and gas revenue, Scotland would have received about 10 billion pounds of the 11.1 billion pounds forecast for the current fiscal year that ends in March. That would be equal to 36 percent of the Scottish government’s budget of 28 billion pounds for the current fiscal year.
That budget, allocated from the U.K. Treasury, accounts for about 60 percent of all government spending in Scotland. On that basis, oil revenue would meet about 21 percent of spending. It wouldn’t cover expenditure on health or local government. The SNP also plans to set up a Scotland Futures Fund modeled on the Norwegian Petroleum Fund.
“It’s difficult to see how you’d be able to maintain current spending and set up a sovereign wealth fund,” Bell said. “Oil is a good answer up to a point. It’s hard to see how it would allow us to substantially increase spending.”
Over the past five years, an independent Scotland with control of oil and gas revenue would have had a budget surplus of 7.5 billion pounds, Salmond said in an interview on Jan. 20.
The revenue could alternatively be invested to encourage growth in the economy now, said Salmond, who will publish a referendum consultation document tomorrow on the day Scots commemorate the birth of Robert Burns, their best-known poet.
“It would increase the opportunity for economic flexibility,” Salmond said. “The aim and intention would be to benefit the Scottish economy and Scottish people.”
In the 2008-2009 financial year, when oil prices reached a record, tax revenue from North Sea oil was 12.9 billion pounds before falling by almost half the following year to 6.5 billion pounds and then rising to 8.8 billion in 2010-2011, data from HMRC show.
U.K. oil production more than halved between 1999, when it peaked, and 2010, according to Department of Energy and Climate Change data. Since then, the price has more than quadrupled.
“A newly independent Scotland would need to see a large improvement in its fiscal position to insulate itself from swings in tax revenues coming from the price of oil,” JPMorgan’s Barr said in a note to clients on Jan. 20.
The forecast for North Sea oil revenue was reduced by 2.3 billion pounds in November by the tax authority because of the higher-than-expected drop in production.
What’s more, how much of the remaining oil and gas reserves is extracted will depend on how much is invested in the development of more efficient technology, as well as the taxation and licensing regime and oil prices.
On current estimates, there is somewhere between 14 billion barrels and 24 billion barrels of oil equivalent still to be extracted over the next 30 years, Oil & Gas U.K.’s 2011 Economic Report said. In the event of independence, how that would be split with England also would be up for negotiation.
“The higher the oil price, the more new fields are developed, there is more exploration and more discoveries,” he said by telephone from Aberdeen, Scotland’s oil hub.
There were 14 exploration wells drilled last year, the lowest since 1965, while the number of appraisal wells drilled, 28, was the lowest since 2003, the Department for Energy and Climate Change said Jan. 13. The drilling projects were about half what had been expected at the start of the year after a surprise tax change by the U.K. government, said Mike Tholen, economics director for Oil & Gas U.K.
Instead of production falling by 5 percent in 2011, the estimate at the start of the year, a decline of 15 percent to 17 percent is more likely, Tholen said. That’s about double the 7 percent average annual drop in the previous four years, he said.
“It’s appalling,” Tholen said in an interview. “You have to keep investing to keep producing.”
--With assistance from Sally Bakewell and Nejra Chehic in London: Editors: Rodney Jefferson, Tim Quinson
To contact the reporters on this story: Peter Woodifield in Edinburgh at email@example.com; Brian Swint in London at firstname.lastname@example.org
To contact the editors responsible for this story: Colin Keatinge at email@example.com; Will Kennedy at firstname.lastname@example.org