1: WILL WE GET THE OIL MONEY? INDEPENDENCE

0 Comments | Sunday Herald, The, Mar 25, 2007 | by WESTMINSTER EDITOR JAMES CUSICK

'IT'S Scotland's Oil."

The old nationalists campaign slogan has been around since the mid-1970s when it was first suggested by the SNP that Scotland's lack of sovereign control over newly-discovered petroleum riches meant revenues from the North Sea couldn't be specifically targeted to specific problems affecting Scotland's economy.

Thirty years on, the same question is often heard in a more refined form: so where would the boundaries of Scotland's oil be?

The answer is crucial to the immediate future of a viable independent Scottish economy.

Although the chancellor of the exchequer, Gordon Brown, told the Commons in his Budget speech last week that North Sea oil tax revenues fell to GBP8 billion from GBP13bn last year, and that revenue intake in 2006-07 was likely to be GBP1.3bn down from the previous forecasts due to a greaterthan-expected decline in production levels, rising capital costs and a strengthening of the dollar-sterling exchange rates - it would be a mistake to take this economic freeze-frame and describe it as picturing an industry in decline. It isn't, but it's an industry and resource that reached its production peak in 1999. However, with some 36 billion barrels of oil taken out of the North Sea since production began, that points to 20 billion barrels still left.

Some 25 to 30 years of this industry remains, according to the latest projection of future production levels, and for any future Scottish government oil revenue represents a decent early foundation. It no longer, as it did in the 1970s, represents untold wealth. New production coming from smaller fields and the cost of oil per barrel increasing means revenues, at the current rates of taxation, coming down. As one economist commented: "It means you'll still feel rich, but you are getting richer at a declining rate." Of immediate concern in an independent Scotland would be how the UK North Sea would be divided into two sovereign sectors - English and Scottish.

The existence of separate legal systems in England and Scotland means there's already a division of the North Sea into two component regions. The Continental Shelf Act 1964 and the Continental (Jurisdiction) Order 1968 split the UK North Sea - the area above latitude 55 degrees north is identified as coming under the control of Scots law. This immediately means more than 90-per cent of the UK's oil wealth would come under an independent Scotland's control.

However, oil would mean a new legal ball game if Scotland achieved independence. The hypothetical divide, according to Alex Kemp, the Schlumberger professor of petroleum economics at Aberdeen University, could mean using the international principle of equidistance, as applied under the UN Conventions on the Laws of the Sea.

The rules inside this international convention have been marshalled in legal disputes, resolving the who-owns-what maritime resources of new states, but with 30 years of experience in looking at the North Sea and its petroleum resources, Kemp is sure of one thing: "There would need to be negotiations. At first between Scotland and England and then perhaps in international arbitration, but it would be a fair estimate that well over 90-per cent of the oil wealth would fall in the Scottish sector with most of the North Sea gas resources, plus the fields in the Irish Sea, going to England."

Whitehall appears to have been aware of this tough economic reality for some time. In a report written in the mid-1970s, the then Scottish Office economist, Gavin McCrone, indicated ownership of North Sea oil would deliver to an independent Scotland "embarrassingly large tax surpluses". McCrone's full report was never made public, fearing it would inflame the It's-Scotland's-Oil debate about the continuing value of the union.

For Kemp, the economic impact of oil on the Scottish economy isn't fully grasped in Whitehall. Brown's Budget last week was, understandably, focused on tax revenues, but there are other issues. Professor Kemp said: "The London government, for instance, isn't too bothered about oilrelated employment. However, the employment oil generates is important in Scotland." The implication is that oil as a resource would invade and influence parts of the Scottish economy in ways it doesn't at the moment. Any move towards an independent Scotland gaining sovereign control of the North Sea's petroleum assets shouldn't, however, be regarded as problem-free. It won't be.

All the licensing agreements that affect production and exploration lie with the Department of Trade and Industry in London. There have been 24 rounds of licensing deals since oil production started 30 years ago. These cover everything from drilling obligations to exploration, safety regulations and beyond. The reality could be years of detailed renegotiation where everything from the borderline to a half-ofa-percent tax is fought over. Throw in the volatility of international prices and a resource past its greatest days, oil would be a resource that takes a lot of looking after.