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Petrodollars Turn Aberdeen Into Independence Battleground

June 20, 2014

Aberdeen at Heart of Scottish Independence Bid

The Edda Ferd platform supply shipping vessel sits docked as oil storage silos stand on the quayside at Aberdeen Harbour in Aberdeen. Less than three months before a Sept. 18 referendum on whether Scotland will call time on the 307-year-old U.K., Aberdeen is at the heart of the sparring between Scottish nationalists and the British government. Photographer: Simon Dawson/Bloomberg

In the Fittie Bar next to Aberdeen’s industrial harbor, where North Sea oil workers come to drink between stints offshore, the debate over Scottish independence is raging.

Amid rounds of whisky and beer, engineer Paul Murray lectures the bar on how Scotland can go it alone with an economy underpinned by the energy resources that pay his salary. Sean Mizen, an Englishman who works on the oil rigs, said the U.K. is better off by sticking together.

“We’ve got the finances to do it,” said Murray, 46, facing a row of upturned Scotch bottles behind the bar. “Scotland can stand on its own and be a nation on its own.”

Scotland’s Independence

“You can’t just live on what’s out there,” replied Mizen, 30, who has a preference for Captain Morgan’s rum.

Less than three months before a Sept. 18 referendum on whether Scotland will call time on the 307-year-old U.K., Aberdeen is at the heart of the sparring between Scottish nationalists and the British government. Should Scots vote yes, the city and the oil industry it thrives on will become the economic linchpin of Europe’s newest sovereign state.

Aberdeen is home to the highest paid employees in Scotland, second only to London in the U.K. With unemployment in the Aberdeenshire region at 3.3 percent, it’s less than half the national average, making it harder to find workers than jobs. House prices are rising faster than in Edinburgh, Scotland’s capital and the center of its finance industry.

Energy Capital

“It’s one of the great energy centers of the world,” Alex Salmond, the nationalist leader of the semi-autonomous Scottish government and the figurehead of the nation’s independence push, said in an interview last week in the city. “That’s the hydrocarbon capital of Europe.”

Salmond’s pro-independence Scottish National Party first claimed “It’s Scotland’s Oil” in a slogan in the early 1970s as North Sea offshore production started to ramp up.

Four decades later, after winning control of the reestablished Scottish Parliament in Edinburgh, the nationalists are closer than ever before to gaining control of the tax revenue the oil generates. Polls show enough people are undecided to raise the possibility of the Yes camp overtaking the pro-union Better Together campaign and winning the vote.

The SNP says Scots are better off on their own as oil companies seek to reverse a decline in North Sea production. The U.K.’s three main political parties, which oppose full autonomy and have ruled out sharing the pound with an independent Scotland, say sovereignty will leave the country exposed to a volatile and dwindling source of cash.

Great Unknown

The U.K. produced the equivalent of about 42 billion barrels of oil since the 1960s and there could be as many as 24 billion barrels left, according to a report in February by Ian Wood, the former head of Aberdeen-based oil-services company John Wood Group Plc. (WG/) Production peaked in 1999 and has fallen by about a third since 2010, the report shows.

Executives and locals alike are concerned by the uncertainties that the referendum has raised, such as potential tax increases and the new state’s lack of a track record in running an oil industry and ensuring output picks up.

“It’s not a known quantity anymore,” said Jonathan Garton, operations director of a Costain Plc (COST) business in Aberdeen that provides project management services to oil and gas companies. He said he wasn’t speaking for his company. “Because the sector is such a big player, if an independent Scotland feels they actually need a little bit more money, they haven’t got too many places to turn,” he said.

Aggressive Estimate

The chief executive officers of both BP Plc (BP/) and Royal Dutch Shell Plc (RDSA), two of the largest North Sea producers, both said earlier this year they would prefer Scotland to stay put.

For the nationalists, though, Aberdeen is the jewel in the crown of an independent Scotland.

Scots can look forward to being better off by about 1,000 pounds ($1,700) a year within the next 15 years, Salmond said last month. That’s as an independent Scotland gets 34.3 billion pounds of tax income from the North Sea between now and 2019, according to a government report published on May 28.

The projection assumes that production increases to the equivalent of about 1.6 million barrels of oil a day from the current rate of 1.4 million barrels by 2018, the report shows. This is a “very aggressive” estimate given the recent trend for declines, according to Katherine Spector, a commodities strategist in New York with CIBC World Markets Inc.

The Scottish calculations are also based on oil prices averaging $110 a barrel for the period. Brent crude contracts for August settlement traded at $114.97 yesterday, the highest since September, as Islamic militants fought against the government in Iraq. Analysts surveyed by Bloomberg News estimate that the median price on the ICE Futures Europe Exchange will slide to $100 in 2017 from about $107 this year.

‘Black Hole’

While accepting Scotland would likely get a geographical split of the U.K.’s North Sea oil fields, or 90 percent based on maritime borders, Salmond’s opponents say the numbers don’t add up when it comes to how lucrative they are.

They cite the U.K. Office for Budget Responsibility, which estimates that the price of a barrel of oil will fall to about $99 in 2016 while North Sea production will dip this year and remain static after that. Tax receipts from the North Sea will be closer to 15.8 billion pounds, less than half Salmond’s estimate, based on the OBR data.

“They’ve taken the most hyper-optimistic revenue forecasts,” Danny Alexander, chief secretary to the Treasury and the senior Scot in the U.K. government, said in a June 12 interview in Aberdeen after addressing a conference the day after Salmond. “More importantly, it just leaves an absolutely gaping black hole in the finances of an independent Scotland.”

Norway Fund

The nationalist blueprint for an independent Scotland unveiled last November also includes a Norwegian-style oil fund to build up money for future generations, claiming the U.K. missed a trick. Every oil-producing nation has such a fund, even Iraq, Salmond said.

The National Institute of Economic and Social Research has said Scotland’s 150 billion-pound economy will need every penny of the oil revenue to maintain public spending and service its portion of the U.K. national debt.

Both Scotland and the U.K. are right, and also wrong, said Ilan Goldfajn, chief economist at Itau Unibanco Holding SA (ITUB4) in Sao Paulo. He agrees with the Scottish estimate for oil prices, though doesn’t think North Sea companies will increase production over the period.

“Given our scenario, both affirmatives are true,” Goldfajn said in an e-mail. “The Scots are too bullish on production and the U.K. too bearish on prices.”

Dominant Industry

No matter who is right in the end, the oil rigs off the Aberdeenshire coast will dominate an independent Scottish economy in a way they don’t within the U.K. Scotland has 5.3 million people, or 8.4 percent of the U.K. population. About 215,000 of them live in Aberdeen.

The industry represented about 15 percent of Scottish tax income between 2000 and 2012, figures from Salmond’s government show. Last year, tax from North Sea companies accounted for 1.1 percent of total U.K. receipts, based on data from the Institute for Fiscal Studies. Scotland’s estimated revenue from the North Sea swung from 10 billion pounds in 2012 to 5.6 billion pounds last year, the IFS said in its report this month.

“This means that the volatility in this revenue stream becomes economically much more significant to Scotland than it is for the U.K.,” the IFS said.

In Aberdeen, on the northeast Scottish coast where U.S. investor Donald Trump has a golf course, there’s little sign of the dips in revenue. Yet you also have to look hard for evidence of the money.

Granite City

The city’s seafront, walking distance from the Fittie Bar, offers a rare array of color in a place known as the Granite City for the gray rock that was used to build much of the town. Buildings and streets often match the color of the rain clouds that frequently roll in from the North Sea.

Paul Theroux, the U.S. travel writer, said this “stony, cold-faced city” had all the high prices of a boom town yet lacked the “compensating vulgarity.”

The drink-fueled debate in the Fittie Bar and the cafes and streets reflects the divide across the country as the campaigns head toward their final stretch.

A poll published this week showed 36 percent of voters favor independence, an increase of two percentage points from a month ago, while 43 percent would prefer to stay put, a drop of three points, according to ICM Research. The proportion of people undecided on how they will vote on Sept. 18 rose by one percentage point to 21 percent.

The push to keep the U.K. intact more than three centuries after Scotland united with England and Wales in the 1707 Acts of Union intensified in recent weeks.

Harry Potter

Prime Minister David Cameron’s Conservative Party joined its Liberal Democrat coalition partner and the opposition Labour Party in promising more power over finances for the Scottish government in Edinburgh should voters reject independence.

Harry Potter author J.K. Rowling last week triggered abuse on social media from some nationalist supporters by donating 1 million pounds to the Better Together campaign. Former U.S. Secretary of State Hillary Clinton said she would prefer to see Scotland remain in the U.K., as did Chinese Premier Li Keqiang at a press conference with Cameron this week.

The U.K. government’s Scottish secretary, Alistair Carmichael, said on June 18 nationalists shouldn’t try to stop businesses publicly opposing independence.

Suzi Millard is among those who have made up her mind, and she’s also not convinced by Salmond’s argument.

She owns the Sand Dollar cafe on the city’s seafront, where a small row of restaurants and stores look out to about 20 ships dotting the North Sea horizon. Three nights a week, she turns her casual diner into a bistro, serving fine food to customers including employees from BP and A.P. Moeller-Maersk A/S. (MAERSKB) She might increase this to five nights a week because the oil industry is “booming,” she said.

Fish & Chips

Born and raised in Rosehearty, a town about 45 miles north of Aberdeen, Millard said any dip in the oil industry’s fortunes is bad for business. “We couldn’t survive economically, financially,” she said, as waiters served customers plates of battered haddock and fries with tartare sauce.

Salmond, 59, who once worked as an oil economist at Royal Bank of Scotland Plc, is telling voters that Scots haven’t reaped the benefits from the North Sea, which stretches more than 500 miles (800 kilometers) from Aberdeen to Gothenburg.

Successive U.K. governments have viewed the North Sea as a mere “cash cow” to be milked whereas an independent Scotland will create a new, Aberdeen-based regulator that will be a “joint working structure” with the industry, Salmond said.

“The only question they’ve ever asked about the oil industry is how much can we get and how soon can we get it,” said Salmond. “The question we’re asking is how can we work together for the next 50 years to achieve the best possible result for this industry and for the people.”

Summer Drinking

It’s already pretty good for a lot of Aberdonians or people who are based in the city.

Murray, in the Fittie Bar, makes 140,000 pounds a year as an engineer on underwater drilling projects. He takes the summer off, which allowed for the midweek, afternoon drinking session, he said. Mizen, who removes asbestos from oil rigs, said the going rate in his profession is about 85,000 pounds a year.

The median annual wage in Aberdeen is 31,734 pounds, more than any city except London, according to figures from the Office for National Statistics.

Hotels in Aberdeen were more expensive and produced more revenue per available room than in every other U.K. city except London for the year through April 2014, according to data from researcher STR Global.

The average house price in Aberdeen jumped 12 percent in April, four times quicker than they rose in Edinburgh and almost as much as they rose across London, according to LSL Property Services Plc. (LSL) House prices in the Granite City are now close to where they were in early 2007 before the financial crisis, according to the Aberdeen Solicitors Property Center.

Long History

“Aberdeen has a long history of the oil industry and, even in the slumps, they’ve not gone away,” said Anthony Dawson, senior partner at legal firm James and George Collie LLP and a former Scottish badminton champion. He declined to comment on whether Scotland should leave the union.

Back in the Fittie Bar, down the street from tanks bearing Halliburton Co. (HAL:US) logos, barmaid Heather Gill, 53, kept the drinks coming as Mizen and Murray discussed the impact of independence on oil, immigration and education.

While she normally asks customers not to discuss the referendum, Murray and Mizen are the only customers in the bar after two of their drinking companions had left, she said.

Murray stood surrounded by paintings referencing the country’s maritime past and badgered Mizen on Scotland’s role in the U.K.’s economic history. There’s more than enough oil out there to help the new state survive, he said.

“Turn the question upside down,” said Murray, who carries a Scottish National Party membership card in his wallet. “If Scotland were an independent nation and we wanted to partner with England and Wales, what benefit would there be? Absolutely zero.”

To contact the reporter on this story: Donal Griffin in Dublin at dgriffin10@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net Rodney Jefferson


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