Comment on Oil and Gas in Government Expenditure and Revenue Scotland (GERS) published by the Scottish Government today
Oil and Gas in
Government Expenditure and Revenue Scotland (GERS) 2012-2013
Professor Alex Kemp
The oil and gas estimates for the Scottish shares of oil and gas production and tax revenues reflect modelling undertaken by Professor Alex Kemp and Linda Stephen at the University of Aberdeen. The UK Continental Shelf was divided between the Scottish sector and the rest of the UK on the basis of the median line principle. A large financial model incorporating all the complex tax terms currently in place was applied to a large field database incorporating all the currently producing fields and those sanctioned but not yet in production.
The figures for production of oil, gas, and total hydrocarbon production (including NGLs), and field development, operating and decommissioning costs were then calculated for the Scottish and rest of UK sectors. To estimate tax revenues allowance has also to be made for exploration and appraisal costs, loan interest, R and D costs and non-field specific (but deductible) overheads. Total exploration and appraisal costs for the UKCS were allocated between Scotland and the rest of the UK on the respective numbers of wells in the two sectors, and the wells in the Scottish sector were calculated to be much more expensive than those in the rest of the UK sector. The allocation of loan interest and R and D costs was based on the percentage of total field development costs in the Scottish sector compared to the rest of the UK. Overhead costs were allocated according to the percentage of total operating costs in the Scottish sector compared to the rest of the UK sector. All the modelling was undertaken on a calendar year basis.
The results for aggregate production, expenditures, and tax revenues were checked and confirmed for consistency with published data for the UKCS.
The results indicate that the Scottish share of total oil production has been in the range 96%-97% over the past few years. The Scottish share of gas production has fallen from 61% in 2009 to 48% in 2012. The significant downtime in some fields in the Scottish sector in 2012 was a key factor. The consequence is that the Scottish share of total hydrocarbon production has fallen from 82% in 2009 to 76% in 2012. As a further consequence of this plus the higher cost inflation in the Scottish sector compared to the rest of the UK, the Scottish share of tax revenues has fallen from its historic peak of 96% in 2009 to 84% in 2012.
Future production and tax revenues in the two sectors will reflect the fruits of the current investment boom and future oil and gas prices. A very high proportion of current investment activity relates to the Scottish sector.