Chapter Two: Westminster Let Oil Companies Profit at Scotland’s Expense by Getting Priorities Wrong

The Wood Review was commissioned in June 2013 by Sir Ed Davey, the then Secretary of State for Energy and Climate Change.

Sir Ian Wood’s remit was essentially to come up with a plan for maximising economic recovery from the remnants of the depleted North Sea oil money tree.   And Wood quickly produced the goods.   So persuasive was the review that the coalition government fully accepted all its recommendations.   The backslapping and applause that greeted the publication of the Wood in February 2014 report continues to this day.   And the cheerleading is almost universal with political parties of all persuasion joining in.

It gave rise to the creation of a new industry regulator, the Oil and Gas Authority (OGA), whose performance has also been cheered from the rafters. Well, here goes – head above the parapet time, and no oil man’s protective hard hat to wear.

First, a question: what exactly is happening to Scotland’s oil wealth as a consequence of the Wood Review and the creation of the OGA?

Press reports suggest all is well. Indeed, in response to a 2.9 per cent increase in oil and gas output in 2016-17, even Paul Wheelhouse, the Minister for Business, Innovation and Energy in the Scottish Government, has been quoted as saying “Scotland’s oil and gas industry has a bright future, and it is encouraging to see this continued increase in production which has risen by a total of 25 per cent over the last two years.”.

In November 2014 the Department of Energy & Climate Change led a call for evidence on how to implement the Wood Review’s recommendations. However, it was made crystal clear they would not listen to any challenge to the recommendations. All they were interested in was how to best implement them.

Arguably that was a strange, almost evangelical, approach for a government to adopt. Thus, presumably, it would have been deemed inappropriate to ask for clarification on what Wood and the Government meant by Maximising Economic Recovery (MER). Nowhere in the Wood Review is it defined. However, this is where the OGA eventually rides to the rescue. According to the OGA annual report and accounts for year ended March 31 2017: “The Oil and Gas Authority’s (OGA) role is to regulate, influence and promote the UK offshore oil and gas industry in order to achieve the statutory principal objective of maximising the economic recovery of the UK’s oil and gas resources (MER UK).”

And to measure their success: “The OGA has developed a success stories tracker, dashboard and methodology which allows impact to be quantified using three key metrics which look at expected future volume of oil and gas production, capital expenditure committed to new projects, and reduced or avoided costs through improved or accelerated outputs.”

Thus MER means maximising production output as cheaply as possible and as quickly as possible and maximising capital expenditure committed to new projects.

The key headline figure is of course production. Against these measures OGA has done well, and few would dispute OGA Chairman Sir Patrick Brown’s statement that the chief executive Dr Andy Samuel has produced “a truly outstanding performance.” And that presumably was instrumental in the chief executive receiving an eye watering bonus of £60,000-£65,000 making a total full year equivalent salary of £335,000-£345,000. Nice remuneration for a civil servant with responsibility for driving down costs in the oil sector.

But OGA salaries are again a sideshow distraction from the main issue that, in tune with UK policy over the past 50 years, little consideration appears to have been given to maximisation of government take from this national resource.

Or indeed to maximisation of North Sea oil jobs. MER blatantly maximises return to super-rich oil companies and will presumably do no harm to parties with investments in oil companies. To its credit, the OGA report does disclose its directors’ shareholdings in oil companies or their use of blind trusts to signal their impartiality with respect to decisions of the OGA that might impact on their personal wealth.

What kind of rationale is there for maximising oil and gas output from the North Sea when prices are low? Is this policy inspired by Gordon Brown selling the UK’s gold reserves at rock-bottom prices? There must be a better way to protect Scottish oil interests.

Should the Scottish Government insist that the OGA set targets for government tax take and North Sea oil-related jobs to be maximised, rather than production?

In 2016-17 this tax take was negative! The government effectively paid the oil companies to increase production through tax rebates and investment allowances. And, according to Oil and Gas UK, total oil-related job losses in the North Sea was a staggering 60,000, some 20,000 higher than had been forecast.

According to Oil and Gas UK there is still a potential 24 billion barrels of oil equivalent that might be extracted from the UK continental shelf. The OGA report “estimates the baseline figure for remaining recoverable oil and gas to have increased to around 11 billion barrels, with a potential of up to 20 billion barrels including unrisked prospects and yet-to-find fields”. OGA quote a figure of £300 billion potential added value from oil-related activity.

Interesting. These estimates are not dramatically different from the figures used by the SNP in their estimates of future revenue prior to the 2014 referendum.

At the risk of being too repetitive, is it too late to plan the harvesting of whatever oil reserves remain, assuming they should be harvested at all, and at long last follow the Norwegian model? If 20 billion barrels remain, this is not far short of half of total production to date.

Should Holyrood be outraged with the loss of 60,000 jobs in one year given that government support for the industry in that period exceeded any tax returns from the industry? Has the time come for Westminster to devolve full control of Scotland’s share of North Sea reserves to Scotland?

In summary, international oil companies and billionaires appear to be in control of the levers of power with regards to exploitation of Scotland’s oil reserves. And maximisation of economic recovery must shift emphasis towards maximising national wealth rather than that of oil companies which seem happy to outsource jobs from Aberdeen to India when the mood takes them.

Who is gaining here and who is losing? Robbing paupers to pay princes? What influence has the so-called national bank of the UK, the Bank of England (beggars belief we accept this) had over this short-term approach to revenue generation? The UK cannot continue spending sprees on military and political interference in the affairs of other sovereign states. It is this harping back to our imperialistic past that forces other short-term actions to undersell our resources. An independent Scotland would not be burdened in this way