Scotland Referendum (1): Mutual Gain

The referendum on the separation of Scotland from the United Kingdom on September 18th this year, will provide the Scottish electorate with a choice between the United Kingdom, with Scotland as part of it, and certain loss on all sides as two separate countries.

With all the arguments about Scotland’s being better or worse off from separation, the truth is that both Scotland and the rest of the UK will be worse off if Scotland separates.  One of the key issues in the referendum campaign has been the future of the UK oil and gas industry and tax revenue deriving from it.

Oil and Gas Production and Exports

At its peak in 1999 the UK Continental Shelf (UKCS) produced around 240 million tonnes of oil equivalent (mtoes) split about 150 million tonnes of oil and 90 mtoes of gas (62 : 38)[1].  Much of the gas has been produced in the south section of the North Sea – off Lincolnshire and Norfolk – and from Morecambe Bay, i.e. not off Scotland.  In 2013 UKCS production was 44 mtoes (oil) and 32 mtoes (gas) – pretty much the same ratio (58 : 42) as in 1999, i.e. a combined reduction of 68%)[2].

Oil and gas production and exports affect the economy in four ways:

1  The Gross Domestic Product (GDP)

2  The Balance of Payments (total trade and financial transactions between the UK and foreign countries)

3  Government revenues (from taxes on energy producing companies)

4  Jobs in the industry and supporting industries (which also affect government income)

(1) Gross Domestic Product

As oil and gas (i.e. excluding downstream chemical processing which can and does operate on imports), oil and gas GDP (as product sales less purchases) has varied over the last 8 years (i.e. pre and post-recession) between £19 billion (2008/9) and £29 billion (2009/10) at an average of 23 billion.  Currently (2013/14) it is running at about £18 billion per annum, just under the combined chemical and pharmaceutical industries at £18.8 billion)[3].  At around 10% of the UK’s goods producing economy, oil and gas production is a hugely significant industry.

It may be noticed that the effect of the 68% reduction in output of oil and gas over the period from its peak in 1999 to the present is masked in its effect on GDP by the doubling in oil price over the period from about £240 per tonne to nearly £500 currently.

(2)  The Balance of Payments

As shown in “Produce & Prosper” dated 2009 (Table 2) on this website, the economic effect of the drop in production however shows up acutely by its effect on the UK Balance of Payments.  This is because oil price rises affect both exports and imports, as shown in Table 1)[4]:

Table 1: Oil and Gas Exports and the UK Balance of Payments
Year Exports £ billion Net Balance of Payments £ billion)[5]
Oil and Gas All UK goods Oil and Gas All UK goods
2004 16.1 191 0.4 -61
2011 16.6 299 -12.1 -100
2013 (estimated) 14.2 304 -15.3 -107

Clearly non-oil and gas exports – primarily manufactures, have risen significantly in £ terms over the last 10 years, offset partially by the sharp decline in oil and gas but, as observed before[6], more significantly by a huge increase in credit financed imports in the middle years of the Blair-Brown government.

This massive goods deficit leads to a current account deficit of around £60 billion.  This can only be eliminated by something like a 50% expansion in manufactures producing an increase of about £80 billion in net output.  (See )[6] on this website.)

(3)  Effects on Government Revenues

The UK government levies a combination of corporation tax, petroleum revenue tax, royalties and (since 2012) a special “excess profits” tax on oil and gas producing companies.  With one exceptional year (2008/9), these taxes have yielded about 16-22% on the sales value of crude oil production.

Totals paid over the period of Table 1 have been between £6.5 billion (2012/13 and 2009/10) and £12.9 billion (2008/9), basically on a downward trend reflecting the 62% reduction in production partially offset by the oil price doubling from 2004 to 2011.

These revenue totals are comparable to the yield from tobacco duties and alcohol (£9.8 and £10.6 billion respectively).

(4)  Effect on Jobs

Approximately 240,000 jobs are directly involved in (a) the exploration and production companies (32,000) and (b) about 208,000 in their supply chains.  Around 108,000 are in Scotland (76,000 in Aberdeenshire) and 132,000 very widely distributed over England (maximum concentration, in Cumbria – about 6,000).

The Future of the UK Oil and Gas Industry

Many parts of the UK therefore have a stake in the UK oil and gas industry.

If the 8.5% per annum decline in production volumes which has ruled since the peak of 1999 continues to 2030, then output will be down to 19.5 mtoes per annum and total extraction between now and then would be about 700 mtoes or 5 billion barrels.  If the decline is at the 5% assumed by DECC in its latest forecast)[2], then the figures will be 32 and 850 mtoes or 5.9 billion barrels.  Either way these figures make the Scottish National Party’s claim of 24 billion barrels recoverable)[7]) look absurd and a downright distortion to put before the Scottish electorate in the Referendum on September 18th)[8].

Mutual Gain

What the figures tell any level-headed individual is that with 240,000 jobs dependent on the industry, spread all over the UK, but with 45% in Scotland, urgent steps are needed to start to redeploy the expertise and manufacturing capability of these people in the form of expertise and manufacturing exports to the whole world.  Clearly this needs to be done UK-wide by employing UK Trade and Investments – now a major player in the exports business – as well as the efforts of the whole UK industry itself and the UK professional engineering institutions.

It makes absolutely no sense to split up the industry while squabbling over declining government revenues.  All this will do is create mutual loss, with the only beneficiaries being lawyers and some politicians.  Far, far better is a UK project to concentrate on the gradual redeployment of the expertise of 240,000 people whose income taxes alone will keep over £3 billion per annum going into government coffers indefinitely.  Perhaps half of the manufactures in the supply chain are oil and gas specific, but the rest can go into a whole range of industries where pumps, pipes and vessels are needed.


[1]  In 2013 the UK was 19th in the world for oil production.  In 1999 10th – or about 3.3 % of world production.

[2]  Figures taken from the Department of Energy and Climate Change, March 2014.

[3]  SIC 20 and 21 Chemical Industries Association 1st January 2014.

[4]  National Statistical Office Pink Books for the relevant years.

[5]  This goods deficit is partially offset by about £40 billion surplus on the services account – principally technical and financial.

[6]  S F Bush, Institute of Economic Affairs Brexit prize essay: “Britain Revitalized and Independence Regained”, London, April 8th 2014.

[7]  Twenty-four billion barrels corresponds to the present production rate (72 mtoes) continuing unchanged for 48 years to 2062.

[8]  Deloitte, the international accountancy firm estimate (19th July) that 2014 production could be lower than the late seventies at 30 mtoes, only 7 new wells were drilled in the 2014 Quarter 1, half that of 2013 Quarter 4.

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