News: Seven things North Sea investors must know before Scots vote

  1. As Scotland prepares to go to the voting stations for Thursday’s referendum on independence many questions remain unanswered and many points remain contentious - not least on the issue of North Sea oil.

    The UK North Sea (UKNS) oil industry would represent the economic crown jewel in an independent Scotland – but what would a Scottish breakaway mean for investors in the many London listed companies operating in the region?

    Natural resources, unlike financial services, can’t simply be packed up and moved to London.

    North Sea oil firms can't simply queue at the exit - even if they're inclined to do so.


    1 - So what is at stake? How much oil is there in the UKNS? What is it worth to whoever governs it?

    The size of the would-be Scottish oil bounty is one of several bones of contention in the independence debate.

    Alex Salmond's Scottish National Party (SNP) and the YES campaign say there are 24bn barrels of oil yet to be recovered from the North Sea. In terms of revenues, the SNP predicts revenues of between £6.8bn and £7.9bn in 2016 and 2017.

    Critics, however, point out that the reserve figure includes oil from marginal fields that would be produced after 2050 and are currently not deemed to be viable with today’s oil prices and technology.

    The SNP stats are borne out of Sir Ian Wood's Westminster-commissioned review of the North Sea, which was published in February this year.

    The man himself has publicly disputed the gloss put on his figures by the SNP.

    Aberdeen born Wood - who says he's not backing either side publicly - has spoken out and claimed that the YES campaign literature had misquoted his report and at the same time he warned young Scottish voters over the anticipated decline in North Sea output.

    "We were producing 4.6 million barrels a day in 1999, now we’re producing 1.45 million. The consensus is it will be 250,000 barrels by 2050 and after that next to nothing," Wood said.

    He added: "Young voters must be aware that by the time they’re in their 40s Scotland will have little offshore oil and gas production and this will severely hit our economy, jobs and public services."

    BP, the London listed oil 'super-major', meanwhile, considers a meagre 3bn barrels of North Sea oil resources as 'recoverable' - i.e. they are found within existing fields and/or are earmarked in planned developments.


    2- Who gets what if the union breaks up?

    It is at this point worth pointing out that not all of the UK North Sea is categorised as being in Scottish waters.

    According to the latest revision in 1999 of the maritime border between Scotland and England, a southern portion of the North Sea, including the Fulmar oil field which is jointly owned by Canada’s Talisman Energy and Chinese backed Addax Petroleum, could prove a contentious issue.

    Fulmar, which was discovered in 1975 and has been estimated to host a total of 544mln barrels of recoverable oil, is located to the east of Dundee.

    City broker Westhouse reckons in the event of a YES vote the breakaway government would try to negotiate the inclusion of Fulmar under Scottish governance.


    3- Will time be wasted by the practicalities of a break-away?


    Scotland’s ‘nation building’ following a YES vote will have to include the creation of a new Scottish energy and environmental authorities and would also involve drawn out negotiations with England.

    It would, naturally, take time to put together and would likely cause a degree of uncertainty for stakeholders already invested in the North Sea and those pursuing new projects.

    This will come at a bad time for the region, some experts say.

    Investment into region has been volatile, with flip-flop tax moves from Westminster over last ten years. Much of the emphasis had been on Wood's recommendations and the clock is already ticking louder than would be ideal.


    4- Will an independent Scotland interfere with oil taxes?

    North Sea oil will be the golden goose of an independent Scotland, for the first decade or two at least; therefore logic would suggest the oil industry would be well looked after.

    The rational expectation would be that any new fiscal regimes would be favourable, while at the very least the SNP has already promised to maintain existing levels of taxation, for existing operations.

    Westhouse analyst Jamal Orazbayeva, in a recent note, said: “Implementing fiscal changes would not be an overnight process and given the dependency of Scotland on the oil industry, we think radical, unfavourable changes would be unlikely.”

    It is also worth noting that an independent Scotland would presumably be keen to promote new investment into its new country, and that could well be catalyst for the oil industry and the region.

    With financial services set to move south to England, attracting investment would be particularly important for the Scots.

    That said, logic doesn’t always necessarily prevail, and should the Scottish government choose to meddle with taxes or oil policies, an independent Scotland would not be the first country to allow nationalist pride to influence short-sighted decisions on natural resources.

    It should also be highlighted that YES campaigners openly laud Norway’s oil and gas system, where surplus income from Norwegian North Sea oil is accumulated and reinvested by the state.

    The SNP has promised to create an oil fund for the benefit of the Scottish people.

    Quite how this will work will be keenly observed in the event of a YES vote and oil companies may be wary of any indication that independent Scotland is looking to squeeze profits.


    5- Decline and legacy


    Without new discoveries and major investment to maximise recoveries UKNS oil is running out and will drop off significantly over the coming decades.

    Current publicly available estimates suggest meagre North Sea production by 2050, with a drop off of about 80% over the next 35 years to just 250,000 barrels per day (from about 1.5mln barrels a day currently).

    Also worth consideration is the matter of decommissioning costs – the cost to clean up and make safe fields once production operations cease - and who pays what will be an important consideration in the coming months, should there be a YES vote.

    It is likely to be at the centre of fierce negotiations, especially given the economic benefit for much of the North Sea's producing life span went to Westminster.

    Just what Scotland's economy will do once the oil runs out is rather subjective - YES campaigners will argue that the intervening oil income will give the economic clout to invest in new industry and new opportunities.

    The NOs, however, will say that the Scottish economy will at that point be adrift without one of its principal source of value.


    6- But what about exploration and development successes?

    Although the North Sea’s halcyon days of the 1970s are gone forever, new exploration success and new oil field developments do provide caveats to the forecasts of a rapid decline.

    Unlike in the Big Oil dominated days of the past, however, this is now the domain of mid and small cap exploration and production companies – many of which are listed on the stock exchange.

    This week alone Surrey-headquartered Hurricane Energy (LON:HUR) provided a timely reminder that there is still new source of oil to be tapped in the North Sea.

    Hurricane, led by founder Dr Robert Trice, has pioneered the ‘fractured basement’ oil play in the region.

    Trice founded Hurricane with a clear strategic goal: to prove that fractured basement oil fields, which have been developed effectively in Vietnam, Libya and Yemen, not only existed in the North Sea but that they could operate economically.

    Hurricane has now achieved this, with the recent success of a well on the Lancaster discovery.

    Indeed, the latest available analysis points to production rates in the order of 20,000 barrels are possible per well, per day. That means Hurricane can advance the field to early production by drilling just one more well.

    Another London listed oil firm, Ithaca (LON:IAE), also underlined the potential for new North Sea projects, as the fourth development well at its Stella oil field project yielded more than 12,000 barrels oil equivalent per day, which, according to analysts, means the field’s initial production target of 30,000 barrels per day is “readily achievable”.


    7- English shale & fracking


    Energy security and self-sufficiency is an increasingly important issue and it is already one of the most compelling arguments in favour of developing Britain’s shale gas deposits.

    Furthermore, the current geopolitical environment – the backdrop of conflict in the Middle East and the continued sanctioning of Russia - means this particular argument is especially pronounced.

    Losing the vast majority of its current offshore oil and gas reserves would makes this a more acute issue for England, which will have to import more of its fuel and energy. In turn this makes England more exposed to international energy markets and potentially higher fuel prices.

    As such a YES vote will add even more political will and greater economic pressure for exploration and development of English shale projects.

     

 
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