* Scotland seeks Britain's North Sea oil if it breaks away
* Independent Scotland may face 20 bln pound tax relief cost
* North Sea production in decline, harder to extract
* BP, Shell express concern on Scotland's independence bid
By Karolin Schaps
ABERDEEN, Scotland, March 10 Scottish
nationalists are betting $2.5 trillion of hydrocarbons trapped
miles beneath the North Sea could bankroll an independent
Scotland, but winning control of the European Union's largest
oil reserves would be no blank cheque.
Scotland says the bulk of Britain's North Sea oil and gas
reserves are in its waters, while London says any division would
be subject to negotiations should Scots vote to end their
307-year-old union with England in a referendum on Sept. 18.
Oil is the punch in Scottish First Minister Alex Salmond's
pitch for independence: he accuses London of squandering the
North Sea's mineral wealth and says Scotland would be one of the
world's richest countries if it took control of its own destiny.
But North Sea production is in decline, and an independent
Scotland would face tens of billions of dollars in reduced
revenues because of the tax relief companies need to
decommission 6,200 miles (10,000 kilometres) of pipeline, 5,000
wells and 475 rigs and platforms in future decades.
"I think it could be a problem," said Gavin McCrone, a
former British civil servant who has written a book about the
consequences of independence.
McCrone, who warned in a confidential brief for British
ministers in 1974 that North Sea oil would strengthen the
nationalist economic case for breaking the union, argues that
while an independent Scotland could be viable economically, it
could be in for a bumpy ride for a number of years, depending on
its currency, fiscal position and how North Sea revenue is
The British government has told Scots they will not be able
to keep the pound if they break away and that the size of the
United Kingdom - whose economy is 10 times the size of
Scotland's - puts it in a better position to support
increasingly expensive North Sea production.
Prime Minister David Cameron, while visiting a BP
platform last month in the ETAP fields 150 miles east of the
Scottish oil city of Aberdeen, made the case for togetherness.
"We can afford the tax allowances, the investment, the
long-term structure that is necessary to ensure we recover as
much from the North Sea as possible," he said.
Half a century after the first exploration licences were
granted, the prospect of carving up one of the world's most
mature offshore oil and gas basins has prompted a reassessment
of Britain's North Sea oil bonanza and what it would mean for an
Since Queen Elizabeth pressed a gold-plated BP button to
bring the first oil ashore in 1975, the oil and gas trapped in
the ancient valleys below the North Sea has cushioned British
manufacturing decline, supported sterling and earned at least
half a trillion dollars for the British taxpayer.
Over 42 billion barrels of oil equivalent, enough to satisfy
world oil demand for more than a year, has been extracted from
the UK Continental Shelf, a vast patchwork of basins where the
remains of planktonic algae and rain forests turned into oil and
gas over hundreds of millions of years.
Brent, the name of a Shell field that began
production in 1975, symbolised Britain's North Sea success:
Brent has produced 4 billion barrels of oil equivalent and it
became one of the world's dominant oil benchmarks.
Aberdeen, formerly a struggling city nestled on the east
coast of Scotland around 120 miles (200 km) north of the capital
Edinburgh, boomed as the oil flowed, and 137,000 locals, or 60
percent of the working population, are now supported by the
But production in Britain's North Sea peaked in 1999, and
the Brent Delta platform stopped production in 2011.
Decommissioning Brent facilities alone will cost several billion
pounds, according to Shell.
With depleted reserves, companies have to pay more to
extract each barrel, and they face hefty costs to seal wells,
dispose of pipelines, and bring rigs back to shore.
The decommissioning will cost the British taxpayer 20
billion pounds in tax relief over coming decades. But if Scots
vote for independence, Scotland's taxpayers will have to
shoulder at least some of those costs.
"The UK government is obliged to pay a percentage of the
decommissioning cost through tax relief; I am unsure how the
Scottish Government will meet this liability," said Sarah
Hillyear, operations manager at Decom North Sea, an
Aberdeen-based industry group focused on oil and gas
'300,000 POUNDS PER SCOT'
The Scottish government said decommissioning costs should be
seen in the context of its 1.5 trillion pound ($2.5 trillion)
valuation for reserves, that costs would be relatively small in
comparison to forecast tax revenue and that it would also seek a
contribution from Britain.
But Britain's statistics office has valued the reserves at
only 120 billion pounds, and while North Sea revenues make up
just 2 percent of the United Kingdom's tax take, they would make
up 16 percent of Scotland's, according to the British Treasury.
Nationalist leader Salmond, a former oil economist at Royal
Bank of Scotland, has said North Sea reserves are worth
300,000 pounds for each man, woman and child in Scotland.
In an effort to underscore his argument that London has
mismanaged the North Sea's wealth, Salmond has pledged to create
Norwegian-style stabilisation and sovereign wealth funds to
insulate public finances and invest for future generations.
But decomissioning costs and Scotland's spending projections
indicate there is likely to be little oil money left over to
build that cushion.
Given that an independent Scotland would run a budget
deficit on its 63.7 billion pound budget, any reductions to oil
and gas revenues from tax relief or production declines could
have a significant impact.
"Scotland's higher dependency on oil and gas revenues could
limit its fiscal flexibility in the absence of a fund set up to
preserve these," Standard & Poor's said. "A new Scottish state
would presumably begin life with a high stock of government debt
and revenues highly sensitive to the price of oil."
Oil majors such as BP and Shell invested heavily in the
early years of North Sea exploration, but as the basin matured,
smaller firms such as Premier Oil or EnQuest now
also operate fields.
BP Chief Executive Bob Dudley said last month that he wanted
the United Kingdom to stay together, a view echoed by Shell
Chief Executive Ben van Beurden.
"We're used to operating in uncertain political and economic
environments. But, given a choice, we want to know as accurately
as possible what investment conditions will look like 10 or 20
years from now," van Beurden said.
Though no companies have yet publicly said they would hold
off on further investment, the uncertainty over Scotland's
future fiscal policy could give some investors pause.
"This pretty much guarantees a dip in production down the
line," said an energy industry expert who asked not to be named.
Whatever the fiscal challenges, Aberdeen oozes oil wealth:
BMW and Mercedes cars nose along roads with names such as Brent
Road or Wellheads Drive; five exclusive golf clubs surround the
city; and a 12-bedroom mansion is on sale for 3 million pounds.
Engineering students at Aberdeen's Robert Gordon University
are swimming in job offers as oil companies bid for the best
students. Specialist engineers can earn 800 pounds a day.
"It's just kind of in the air. Most people here work in the
industry," said Jenny McConnachie, subject leader for mechanical
engineering at the university, whose engineering department
boasts gigantic replicas of Total oil rigs.
For some in Aberdeen, such as Kenny Anderson, the
55-year-old owner of a construction firm that receives around
half its business from oil and gas companies, the risks of
independence should be embraced, not feared.
"Independence will make us more dynamic; we will have to
behave like grown-ups, we will have to take responsibility," he