William Wallace must be awfully disappointed. The Scottish voted to remain in the United Kingdom, albeit in exchange for a very nice care package of extra powers from Parliament. However, while the dreams of a Celtic revival have been crushed for now, energy companies have been united in approving the result. In fact, rarely has a political matter so united the entire spectrum of this industry.
For all the talk about energy transitions, new sources and untapped reserves, the energy sector craves stability. And so do the public. Alex Salmond, the outgoing First Minister of Scotland, may have crowed about how an independent Scotland would have obtained untold billions from fully tapping up its North Sea reserves but the transition of energy oversight from London to Edinburgh would have caused some real problems. Enthusiasm for independence might have taken a hammering if electricity or oil prices had spiked, even momentarily, while the handover was sorted out.
David Cameron, vindicated by a more comfortable ‘No’ victory than expected, may have promised a ‘devolution revolution’ to Scotland but he is no fool. He knows that the rise in the FTSE and in the share prices of British energy companies could easily be reversed if the energy future of the U.K. is not made clear and secure in the next few days. This is why it is unlikely that the Scottish government will be given direct control of energy matters as part of its newly devolved powers.
In terms of oil and gas, this is no bad thing. The administration of oil reserves is a tricky legislative and economic balancing act for any government and Westminster has the needed experience. This was actually one of the weakest aspects of the SNP’s campaign for independence. Salmond tried and failed to play both sides, arguing that North Sea oil would be a “marvelous bonus” to the Scottish economy and suggesting that a Scottish oil fund could emulate the Norwegian example in time, while also arguing for a reliance on hydrocarbons to be progressively replaced by exploring hydro, wind and tidal power. Plenty of countries are successfully exploring this transition but, coupled with a lack of clarity on how Edinburgh would manage and maintain Scottish power, this left the SNP vulnerable to broadsides from the No campaign.
A fearsome volley was launched back in February when Energy Secretary Ed Davey spoke of the “vulnerability” facing the people of Scotland. “An independent Scotland….(could be) over-dependent on one industry and on one source of tax revenue. We saw (North Sea) tax revenue fall in one year, 2012-2013, by 40 percent….It should sound a note of caution: if we think that there is this money tree of the oil and gas industry which will fund independence, that simply is not true.” Daley’s comments were backed up by the report of Sir Ian Wood that found exploration in the North Sea at an all-time low and recommended a series of tax breaks and incentives to increase collaboration between companies to stem a 38% production drop since 2011.
The SNP response to the report was swift. While agreeing with its findings, the Yes campaign argued that Scottish oil in Scottish hands would be a better way to secure its future. Salmond famously crowed that an independent Scotland would net £1.5 trillion from its remaining North Sea reserves of 24 billion barrels. One day before the referendum, Wood MacKenzie ripped those claims apart, saying that 15.3 billion barrels remained in all the U.K., with 84 percent of these being in Scottish territory and waters. Salmond’s response was therefore not only incorrect but it also failed to take into consideration a very important factor: the opinions of the oil companies themselves. Investments in oil and gas as well as renewable energy had been frozen in the run-up to the referendum but these should now unfreeze as stability returns. Shell made its relief clear, with its CEO Ben van Beurden, saying that “Shell welcomes the decision by the people of Scotland to remain within the U.K., which reduces the operating unce
rtainty for businesses based in Scotland.”
These elements combined can make Cameron feel pretty good about Westminster controlling all of British energy for the foreseeable future. The government’s next budget is expected to implement much of the Wood report’s recommendations to stimulate exploration and encourage an injection of capital into the North Sea oil market. Nevertheless, this fractious referendum campaign shows Cameron must still take certain steps to assuage Scottish concerns in the long-term. The Scottish Renewables body is calling for “a new joint Scottish and U.K. Government energy policy that balances the interests of Scotland within a single GB energy market and a more open and accountable energy regulator.” Following their advice could prove very beneficial to all sides.
by Chris Dalby of OilPrice.com
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