Better together, but still questions

Scotland has voted to remain part of the United Kingdom, results from the referendum held yesterday revealed this morning. Sanjoy Sen gives his view. 

So, Alistair Darling and the “Better Together” campaign overcame a late scare in the opinion polls and have emerged triumphant in a hard-fought independence referendum duel. 

Up to a month ago, a “no” vote might have been considered a mandate to maintain the status quo but the last-minute pledge from “Team Westminster” (arguably instrumental in swaying the result) appears a game-changer in Scottish and UK politics. 

What these changes entail remains to be seen, but Scotland certainly looks set to take on much greater responsibilities via a new “devo max” settlement. Upon independence, the oil and gas sector would have formed the largest sector (almost 20% of GDP) of the Scottish economy; as “devo max” is thrashed out, it could feature strongly in discussions. 

To date, powers have essentially been devolved to Holyrood (e.g. health) or reserved to Westminster (e.g. defense); could oil regulation and taxation now transfer fully to the Scottish Government or, uniquely, could it come under a joint UK-Scottish arrangement? The latter introduces greater complexity in countries with federal systems of government (the direction in which the UK may now be heading); Newfoundland and Canada have witnessed some spectacular clashes over oil revenues and management. 

Over here, relationships could vary depending upon who’s in power; expect an SNP Scottish government and a Conservative UK government to be somewhat less aligned than if Labour regains power in both Holyrood and Westminster sometime soon. Note also that devolution could complicate matters for regulatory bodies (such as the under-construction Oil & Gas Authority) which must seamlessly pick up the workload to maintain investment and safety. 

The “no” campaign’s late pledge included protection of the Barnett formula; this would effectively preserve the system by which most taxes are pooled prior to distribution across the UK. Oil revenues currently contribute to the pool; if Scotland demands greater rights over these, is there a dis-connect with Barnett? 

And if Scotland successfully argues for exclusive oil revenues, how will it cope with global oil price instability? One potential compromise is partial tax devolution (e.g. with the 32% Supplementary Charge solely to Holyrood) whilst also retaining a form of Barnett. 

Although little discussed during the referendum campaign, decommissioning remains the industry’s “elephant in the room.” 

While industry body Oil & Gas UK project a total spend of £35 billion, experience to date suggests this could escalate rapidly. If tax revenues are devolved to Holyrood, is it possible that tax relief liabilities are also? 

While the “yes” campaign contended oil would form merely a bonus within a buoyant overall economy, “no” warned of a declining and volatile resource. Today’s stark facts are undisputed, however, and remain unchanged by the referendum result. Production is half the 1999 peak, exploration lies in the doldrums and operators face spiraling costs associated with mature asset integrity and marginal developments. 

Aberdeen has recently seen redundancies and pay cuts with the supply chain under pressure to slash costs. All is not doom-and-gloom, however; current West of Shetland developments could catalyze further frontier exploration whilst the North Sea experience and technology is in demand worldwide. 

Fundamental to the future of the UK (or Scottish) Continental Shelf is the successful implementation of the Wood Report. Whilst its fundamental concept (Maximum Economic Recovery, MER) was welcomed by both UK and Scottish governments, its application could prove challenging; industry insiders have described Wood as a bigger issue than the referendum itself. Striking the balance between encouraging co-operation and sanctioning against those who don’t could prove an early test of Holyrood diplomacy. 

Whilst not the momentous event that a “yes” vote would have been, these are nevertheless unique and never to be repeated times; Scotland (and the rest of the UK) will never be the same again. Opportunities and challenges await as Scotland negotiates its newly-devolved powers and oil may well will be at the center of them.

Sanjoy Sen is a chemical process engineer with 20 years' industry experience primarily in the UK North Sea, and is based in Aberdeen, Scotland. He holds a BEng degree in chemical engineering from the University of Sheffield and an MSc degree in petroleum engineering from Heriot-Watt University. He recently attained a distinction in his LLM in oil and gas law at the University of Aberdeen where his dissertation considered the future of the UK North Sea following the 2014 Scottish independence referendum. He is a fellow of the UK’s Institution of Chemical Engineers.