Oil and gas forecasts reflect gulf between London and Edinburgh

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A £4bn divergence in forecasts for Scottish oil and gas revenues issued by the UK Treasury and the Scottish government on Wednesday is a sign of the huge gulf in perception between Edinburgh and London over post-independence economic prospects.

Under the Scottish government’s central scenario, revenues would be £7.3bn in 2017-18, while the Treasury cites figures from the Office for Budget Responsibility (OBR) that put them at £3.1bn.

“The Scottish government is substantially more optimistic about the medium-term path for oil revenues,” the Treasury said in its analysis of Scotland’s fiscal outlook.

The report identifies the decline in North Sea oil revenues as one of the “key structural pressures” facing Scotland – pressures that it says would be smoothed by union. But, some analysts questioned the OBR’s figures. “They are based on very conservative views of North Sea production and the oil price,” said Alex Kemp, professor of petroleum economics at the University of Aberdeen.

The Scottish government assumes increasing output and a rising crude price – assumptions widely shared in the industry. Oil and Gas UK, the offshore trade body, says production should rise 14 per cent by 2018.

The issue of how much Scotland can earn from its hydrocarbon riches is pivotal to the debate on independence. For Alex Salmond, the North Sea will underpin Scotland’s economy for decades to come. Figures released by his government on Wednesday say Scottish North Sea tax receipts over the next five years could be as high as $38.7bn.

But the Treasury’s analysis paints a gloomier picture. Oil revenues, it says, are volatile and in decline, and forecasts for those revenues are constantly being revised downwards. That has caught Edinburgh out in the past: oil revenue came in below the Scottish government’s most pessimistic estimate by about £2bn in 2012-13 and more than £3bn in 2013-14.

Scotland and Westminster agree that the North Sea retains huge potential. It has already yielded about 42bn barrels of oil equivalent and another 20bn barrels remain to be extracted.

But much of the “easy” oil is gone, and what is left is expensive and difficult to produce. Output has been in decline since hitting a peak of 4.5m barrels of oil equivalent per day in 1999: last year it was just 1.4m.

Tax revenues have also fallen. They were about £5bn lower in 2012-13 than the year before, a drop of more than 40 per cent.

But the Scottish government insists the reasons for that fall – chiefly a dip in production caused by unplanned field shutdowns in the past two years – are temporary. It also points to the capital allowances oil companies active in the North Sea receive on their investment spending. As a result, the record investment seen last year sharply reduced taxable income.

“In the coming years, investment spend is expected to return to more “normal” levels and production is forecast to rise,” the Scottish report said. “Both these trends will help to increase tax receipts.”

The Treasury’s view is far less cheery. “North Sea oil and gas receipts are on a long-term downward trend as the basin matures,” it says. “This long-term decline . . . would be a major challenge facing an independent Scotland.”

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