Government Expenditure and Revenue Scotland 2010-2011

4 NORTH SEA REVENUE

Introduction

This chapter provides a discussion of North Sea revenue and sets out the methodologies adopted in this publication.

The North Sea Fiscal Regime

North Sea revenue stems from three key sources: petroleum revenue tax, corporation tax and license fees.

For the period 2006-07 and 2010-11, the taxation or charging regime for each of these three elements was as follows -

1. Petroleum revenue tax (PRT): PRT was charged at a rate of 50 per cent on field-based profits from oil and gas extraction on fields given development approval prior to March 1993 at which time it was abolished for all new fields. There were deductions for all exploration, appraisal, and development costs on 100 per cent first year basis with an uplift of 35 per cent for field investment costs prior to field payback. There were also volume and safeguard allowances.

2. Corporation tax (CT): Ring-fenced corporation tax was charged at a rate of 30 per cent. There were deductions for exploration, appraisal and development costs on a 100 per cent first year basis. In 2002, a Supplementary Charge (SC) of 10 per cent was introduced. This made the effective corporation tax rate (CT + SC) 40 per cent. From January 2006, the SC was increased to 20 per cent making the overall corporation tax rate 50 per cent¹⁵.

3. License Fees: The UK Government grants licenses for operators to "search and bore for and get"¹⁶ petroleum in specified areas for a set period of time. Operators pay an annual fee for holding these licenses. License fees are charged at an escalating rate on each square kilometre that the licence covers. However, licence fees were gradually phased out over the period and, by 2008-09, no revenue was raised from this source.

North Sea revenue has been relatively volatile over the last two decades. Table 4.1 shows the North Sea revenue collected by the UK Exchequer since 1980-81.

Table 4.1: Total North Sea Revenue: UK 1980-81 to 2010-11^{1, 2}

Year	£ million	Year	£ million	Year	£ million	Year	£ million
1980-81	3,861	1988-89	3,301	1996-97	3,351	2004-05	5,183
1981-82	6,395	1989-90	2,502	1997-98	3,330	2005-06	9,384
1982-83	7,867	1990-91	2,342	1998-99	2,511	2006-07	8,924
1983-84	8,788	1991-92	1,017	1999-00	2,564	2007-08	7,464
1984-85	12,326	1992-93	1,338	2000-01	4,455	2008-09	12,925
1985-86	11,217	1993-94	1,266	2001-02	5,426	2009-10	6,491
1986-87	4,701	1994-95	1,673	2002-03	5,097	2010-11	8,786
1987-88	4,736	1995-96	2,341	2003-04	4,284

1. Source: ONS Public Finance Statistics and HMRC
2. Note: Gas levies are not included in total public sector revenue from the UK continental shelf because it is categorised as a tax on expenditure rather than an income from oil and gas production. Gas levies were abolished from 1 April 1998.

Table 4.2 shows the levels of revenue raised from the three key components of North Sea revenue since 2006-07.

Total North Sea revenue increased by 44.8 per cent in nominal terms between 2006-07 and 2008-09, reflecting the increase in wholesale oil and gas prices over this period. However, between 2009-10 and 2010-11, North Sea revenue fell from £12.9 billion to £6.5 billion (49.8 per cent), as wholesale oil and gas prices fell as a result of the global economic downturn. Revenues then rose again in 2010-11 (35.4 per cent), as wholesale oil and gas prices recovered.

Table 4.2: Composition of North Sea Revenue: UK 2006-07 to 2010-11

	(£ million)
	2006-07	2007-08	2008-09	2009-10	2010-11
Licence fees	60	56	0	0	0
North Sea corporation tax	6,709	5,728	10,358	5,568	7,328
Petroleum revenue tax	2,155	1,680	2,567	923	1,458
Total	8,924	7,464	12,925	6,491	8,786

Scotland's Share of North Sea Revenue

In the ONS Regional Accounts, the convention is for the UK Continental Shelf (UKCS) to be included as a (notional) separate region of the UK (the extra-regio territory) and not to allocate this to specific geographic regions within the UK mainland.

A number of different approaches can be used to allocate a share of North Sea revenue to Scotland.

Three key estimates of Scotland's share of North Sea revenue are adopted in the GERS report:

1. Zero share

2. Per capita share

3. An illustrative geographical share

These are the figures which are used in the headline estimates of total public sector revenue in Chapters 2 and 3.

As the situation under option 1 is dealt with in the revenue estimates for all non-North Sea revenues, the discussion below focuses on per capita and geographical shares.

Per Capita Share

One interpretation of North Sea revenue is to view it as a non-identifiable UK revenue, in which case a per capita share may be apportioned to Scotland.

Table 4.3 provides an estimate of Scotland's share of North Sea revenue under this approach.

Table 4.3: Per Capita Share of North Sea Revenue: Scotland 2006-07 to 2010-11

	(£ million)
	2006-07	2007-08	2008-09	2009-10	2010-11
Total North Sea revenue	8,924	7,464	12,925	6,491	8,786
Scotland's per capita share	754	629	1,087	545	736
Scotland's percentage share of North Sea revenue	8.4%	8.4%	8.4%	8.4%	8.4%

An Illustrative Geographical Share

An alternative approach is to apportion a geographic share of North Sea revenue to Scotland. In order to estimate this share, GERS draws upon academic research carried out by Professor Alex Kemp and Linda Stephen from the University of Aberdeen. Kemp and Stephen estimate Scotland's share of North Sea revenue based on a detailed financial model of the North Sea oil and gas industry and an assessment of Scotland's geographical share of the North Sea.

In their analysis, the researchers base the Scottish boundary of the UKCS on the median line principle as employed in 1999 to determine the boundary between Scotland and the rest of the UK for fishery demarcation purposes. Other alternatives are possible. Scotland's estimated geographical share of the North Sea sector, used in this report, is highlighted in the following diagram. Demarcation by the median line is highlighted by the dark shaded area in Figure 4.1. All oil and gas fields located in this region were apportioned to Scotland under the assumption of an illustrative geographical share.

Figure 4.1 UK Continental Shelf and Scottish Boundary

Source: Scottish Government Marine Directorate

Based on a detailed database of North Sea oil and gas fields, Kemp and Stephen estimated the tax revenue raised in each field. Their detailed modelling took account of production levels and a range of costs including research and development, and decommissioning. Taking the median line as the line of demarcation, the authors assigned revenue from each field to Scotland and the rest of the UK. The authors' most recent estimates show that Scotland's geographical share of oil production stood at 97 per cent in 2010, while its geographical share of gas production remained at 58 per cent. Scotland's share of total hydrocarbon production was 81 per cent in 2010, up marginally from 80 per cent in 2009.

Details of the methodology used by Kemp and Stephen are provided in the paper Kemp and Stephen (2008), 'The Hypothetical Scottish Shares of Revenues and Expenditures from the UK Continental Shelf 2000-2013' which is available from the weblink below.¹⁷ Using estimates of Scotland's geographical share of total North Sea revenue, it is possible to apportion the total UK revenue figure from the ONS Public Sector Finance statistics to Scotland. Table 4.4 provides estimates of Scotland's share of North Sea revenue using this methodology.¹⁸

Table 4.4: Geographical Share of North Sea Revenue: Scotland 2006-07 to 2010-11

	(£ million)
	2006-07	2007-08	2008-09	2009-10	2010-11
Total North Sea revenue	8,924	7,464	12,925	6,491	8,786
Scotland's geographical share	7,503	7,115	11,740	5,930	7,951
Scotland's percentage share of North Sea revenue	84.1%	95.3%	90.8%	91.4%	90.5%

Contribution to Current Revenue

Tables 4.5 and 4.6 show the estimated contribution to total Scottish current fiscal revenue from the North Sea in 2010-11, using a per capita and geographical share respectively.

Table 4.5: Current Revenue (Per Capita Share of North Sea Revenue): Scotland 2010-11

	Scotland		UK	Scotland as % of UK revenue
	£ million	% of total revenue	£ million
Total current revenue (excluding North Sea revenue)	45,177	98.4%	542,877	8.3%
North Sea revenue	736	1.6%	8,786	8.4%
Total current revenue	45,914	100.0%	551,663	8.3%

Table 4.6: Current Revenue (Geographical Share of North Sea Revenue): Scotland 2010-11

	Scotland		UK	Scotland as % of UK revenue
	£ million	% of total revenue	£ million
Total current revenue (excluding North Sea revenue)	45,177	85.0%	542,877	8.3%
North Sea revenue	7,951	15.0%	8,786	90.5%
Total current revenue	53,128	100.0%	551,663	9.6%

As Tables 4.5 and 4.6 highlight, the estimated size of current revenue in Scotland alters significantly depending on whether a per capita or an illustrative geographical share of North Sea revenue is apportioned to Scotland.

Assuming a per capita share, Scotland's estimated share of total UK current revenue remains at the same level as the share assuming the exclusion of North Sea revenue, that is, 8.3 per cent in 2010-11. In contrast, under an illustrative geographical share, Scotland's estimated share of total UK current revenue increased to 9.6 per cent in the same year.