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With British Unity Intact, What’s Next for UK Energy?

With British Unity Intact, What’s Next for UK Energy?

With uncertainty put to rest over the Scottish referendum, several British energy sectors are hoping investment will resume after coming to a standstill before the vote. Not only that, but the oil and gas industry in the United Kingdom is looking to build on the election result by pushing for a series of tax breaks that could allow companies to reverse the decline in production.

The Scottish people voted ‘no’ Sept. 18 to declaring independence from the United Kingdom. The 55 to 45 percent result meant Scotland will remain within the UK fold, and leaves rules and governing structure over the energy industry unchanged.

The oil industry breathed a sigh of relief. In the run up to the vote, several major oil companies operating in the North Sea spoke out against independence, among them, BP. “As a major investor in Scotland – now and into the future – BP believes that the future prospects for the North Sea are best served by maintaining the existing capacity and integrity of the United Kingdom,” CEO Bob Dudley said in a statement.

Related: Scotland’s Oil Future Will Remain In British Hands
The prospect of a split in the 307-year-old union fed uncertainties, and the UK saw 17 billion GBP flee the country in the run up to the vote.

Most of the UK’s oil and gas production occurs in Scottish waters off the North Sea coast. But production peaked in 1999 and has been in swift decline since. For the first time in 30 years, in 2013 the UK became a net importer of petroleum products.

Despite the rosy predictions by Scottish nationalists that the country would be able to dramatically revive oil production, turning around the sector was always going to be difficult, regardless of who controlled the North Sea oil fields.

Even BP’s Dudley is not optimistic. “BP has been in the UK North Sea for 50 years and we hope to operate here for many years to come. However, the province is now mature…” Dudley said in a Sept. 10 press release. “The opportunities today are smaller and more challenging to develop than in the past. We also face the challenges of extending the productive life of existing assets and managing the future costs of decommissioning.”

In their bid for independence, Scottish nationalists relied heavily on revenues from the oil industry to make their fledgling state viable. That would have likely meant very substantial changes in the way the oil industry was taxed.

The oil industry feared worse, and they had good reason to be afraid. “BP, in an independent Scotland, will need to learn the meaning of nationalization, in part or in whole, as it has in other countries who have not been as soft as we have forced to be. We will be the masters of the oil fields, not BP or any other of the majors,” former Scottish Nationalist Party Deputy Leader Jim Sillars said prior to the vote.

But, the nationalists lost, and the oil majors praised the result.

With the country intact, the oil and gas industry is hoping that the recommendations put forth by Sir Ian Wood to reduce taxes will be implemented in the next budget. Reducing the tax burden, many oil companies argue, will improve returns and allow operators to halt the long decline in British oil production. This is a pivotal issue, and not just for the industry. Oil and gas is the largest source of corporate tax revenue in the UK.

“To safeguard the industry’s future, it is particularly important that that the government now presses swiftly ahead with fiscal reform as well as the implementation of Sir Ian Wood’s recommendations to maximize the economic recovery of our oil and gas resource,” Malcolm Webb, CEO of Oil and Gas UK, said in a statement.

It isn’t just the oil industry that’s excited to move forward; Scotland is also home to a thriving renewable energy sector. The United Kingdom is a global leader in offshore wind power, with 3.7 gigawatts installed at the end of 2013. That is expected to rise to 11 gigawatts over the next five years.

And Scotland is home to 43 percent of the UK’s installed wind capacity. “We are delighted with the result,” Ian Warwick, CEO of renewable investment manager Deepbridge Capital, told Bloomberg News. “It allows us to now progress plans to invest further in Scotland.”

Related: Total Prepares for $50m Investment in British Shale

Renewable energy firms are also relieved because the “no” vote leaves the array of British subsidies in place. Scotland received an estimated 560 million GBP in subsidies from the British government for renewable energy in 2013. With those policies in place, renewable energy companies can continue with their investments.

And unlike the oil sector, renewable energy is destined for considerable growth in the coming years. The Scottish government has previously declared a goal of generating 100 percent of its electricity from renewable energy by 2020, up from about half currently.

A move for independence would have thrown the future of the industry into doubt. But, with British unity reaffirmed, both fossil fuel and renewable energy companies are optimistic about the future.

By Nick Cunningham of Oilprice.com

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