Government Expenditure & Revenue Scotland 2012-13

4 NORTH SEA REVENUE

Introduction

This chapter provides a discussion of North Sea revenue and sets out the methodologies adopted in this publication.^[17]

The North Sea Fiscal Regime

North Sea revenue in GERS has previously covered three key sources: petroleum revenue tax, corporation tax and licence fees. As discussed in Box 3.2, receipts from offshore installations as part of the Emissions Trading Scheme are now included in the public sector finances. Estimates of ETS receipts associated with North Sea oil and gas production are included in GERS as part of the overall revenue from the North Sea.

For the period 2008-09 to 2012-13, the taxation or charging regime for each of these elements was as follows:

1. Petroleum revenue tax (PRT): PRT was charged at a rate of 50% 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 a 100% first year basis with an uplift of 35% 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% on profits net of any PRT payments. A Supplementary Charge (SC) is levied on top of CT. The supplementary charge was increased to from 20% to 32% in March 2011 resulting in an overall corporation tax rate (CT + SC) of 62%.
3. Licence Fees: The UK Government grants licences for operators to "search and bore for and get"^[18] petroleum in specified areas for a set period of time. Operators pay an annual fee for holding these licences. Licence fees are charged at an escalating rate on each square kilometre that the licence covers.
4. EU Emissions Trading Scheme (ETS): The UK Government auctions allowances within the EU Emissions Trading Scheme, which grants operators the right to emit additional greenhouse gases.

Annual North Sea revenue has fluctuated 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 2012-13 ^{1, 2}

Year	£ million	Year	£ million	Year	£ million	Year	£ million
1980-81	3,861	1989-90	2,502	1998-99	2,511	2007-08	7,474
1981-82	6,395	1990-91	2,342	1999-00	2,564	2008-09	12,456
1982-83	7,867	1991-92	1,017	2000-01	4,455	2009-10	5,991
1983-84	8,788	1992-93	1,338	2001-02	5,426	2010-11	8,406
1984-85	12,326	1993-94	1,266	2002-03	5,097	2011-12	11,336
1985-86	11,217	1994-95	1,673	2003-04	4,284	2012-13	6,632
1986-87	4,701	1995-96	2,341	2004-05	5,183
1987-88	4,736	1996-97	3,351	2005-06	9,384
1988-89	3,301	1997-98	3,330	2006-07	8,924

1. Source: ONS Public Finance Statistics, 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 each component of North Sea revenue since 2008-09. Total North Sea revenue fell by 51.9% in nominal terms between 2008-09 and 2009-10, reflecting the decrease in wholesale oil and gas prices as a result of the global economic downturn. As wholesale oil and gas prices recovered, revenues rose again in both 2010-11 and 2011-12.

North Sea revenue decreased by 41.5% between 2011-12 and 2012-13. North Sea tax receipts are driven by a number of factors, including the oil price, the sterling dollar exchange rate, production, operating expenditure and capital investment. The drivers of the decline in 2012-13 were primarily production and capital investment. Production in the North Sea fell by 15% between 2011-12 and 2012-13.^[19] This above trend fall in production reflects a combination of unplanned production stoppages at several large gas fields and higher levels of maintenance activity in the North Sea. Secondly, capital investment in the North Sea has risen in recent years, which has reduced companies' tax liabilities.

Table 4.2: Composition of North Sea Revenue: UK 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Licence fees	63	67	70	67	69
North Sea corporation tax	9,826	4,998	6,864	9,218	4,793
Petroleum revenue tax	2,567	923	1,458	2,032	1,737
Emissions trading scheme revenues	0	3	14	19	33
Total	12,456	5,991	8,406	11,336	6,632

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 the same as 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 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Total North Sea revenue	12,456	5,991	8,406	11,336	6,632
Scotland's per capita share	1,048	503	705	948	552
Scotland's percentage share of North Sea revenue	8.4%	8.4%	8.4%	8.4%	8.3%

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. Professor Kemp is Professor of Petroleum Economics and Director of Aberdeen Centre for Research in Energy Economics and Finance (ACREEF) at the University of Aberdeen. Professor Kemp and Linda Stephen have published extensively on licensing and taxation issues on the UK Continental Shelf (UKCS). Professor Kemp is the author of "The Official History of North Sea Oil and Gas", and is considered to be the leading expert in UK petroleum economics.

Methodology

The model used by the researchers to estimate Scotland's illustrative geographical share of North Sea activity was first detailed in a North Sea Study Occasional paper published by the University of Aberdeen in 1999^[20] . 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. UKCS production, costs and revenue is allocated on a field by field basis to either the rest of the UK or Scotland using this boundary.

Using this methodology, all fields in the Moray Firth, Northern North Sea, West of Shetland regions of the UKCS are allocated to Scotland. Fields in the Southern North Sea and Irish Sea are assigned to the rest of the UK. The Scottish boundary, based on the median line principle, intersects the Central North Sea (CNS) region. Fields in the CNS region to the north of the median line are assigned to Scotland and fields lying to the south assigned to the rest of the UK. No fields are intersected by the median line.

Figure 4.1 UK Continental Shelf and Scottish Boundary

Source: Scottish Government Marine Directorate

Kemp and Stephen estimate Scotland's share of tax revenue from Petroleum Revenue Tax, Ring Fenced Corporation Tax and the Supplementary Charge using a detailed financial model of the North Sea oil and gas sector. The model incorporates all changes made to the North Sea fiscal regime over the years. At an aggregate level the results produced by the model are consistent with HMRC estimates of tax revenues from oil and gas production in the UK.^[21]

The model draws upon a database incorporating field and company level data for all of the UKCS that has been built up over a sustained number of years at the University of Aberdeen. Information on investment expenditures, operating costs, production, and decommissioning costs are incorporated in the database. Production data are consistent with DECC published field data.^[22]

The database contains information on all fields developed since the 1960s, including those which have development approval but are not yet producing. Also included are future fields which have not yet received development approval but are being considered for development by the operators concerned. Where possible the data has been validated by the operators and in other cases independent estimates have been made by the authors drawing on a range of different data sources as appropriate. The results of the modelling are tested against official published data for the whole of the UKCS relating to production, investment and operating expenditures, gross revenues, and tax revenues. The results are revised in the light of new information on production and expenditure.

Where the field database does not include field specific costs for legitimately deductible items for ring-fenced taxation (i.e. company level overhead costs, R&D expenditures, and loan interest) these are estimated, constraining to published totals, and allocated to the regions of the UKCS.

Company level costs are distributed across fields. For example, companies' exploration and appraisal costs are allocated across fields based on the respective number of wells in each field, as a measure of activity, adjusted for the relative cost of wells in different regions of the North Sea. A similar approach is adopted for allocating other eligible overheads between regions of the UKCS. For example, R&D expenditure and loan interest are allocated in relation to the percentage of total field development expenditures in the Scottish and rest of the UK sectors of the UKCS. Likewise, overheads are allocated between the two sectors in accordance with the share of total UKCS operating costs in the respective sectors.

Quality Assurance Process

Officials in the Scottish Government work closely with Kemp and Stephen to further quality assure the modelling results. This involves regular and iterative discussion about the findings and the model results. Of particular focus during these discussions are the drivers of changes in the results to ensure quality and better understanding of the model results.

In addition, Kemp and Stephen are actively involved in quality assurance of the commentary on the model results included in this publication to ensure they are satisfied that the results are being used appropriately and accurately. The Scottish Government also takes the following measures to be satisfied that the statistics are of high quality and fit for purpose.

The model results are compared with other sources of information to ensure that the key drivers are consistent with trends from other sources. This includes published information such as production, revenue, tax and cost data published by the Department of Energy and Climate Change (DECC) and Her Majesty's Revenue & Customs (HMRC) for the UK as a whole. Also used is propriety intelligence obtained by the Scottish Government. This includes corporate intelligence received from the oil and gas industry and other relevant factors. The Scottish Government also has access to detailed field level data from third party providers that informs the experimental quarterly Oil & Gas statistical release, which is used to quality assure the model results.^[23]

The Scottish Government is currently undertaking a process of significant investment in developing North Sea statistics. Estimates of revenues associated with the North Sea form a key part of the analysis presented in GERS and Scotland's wider economic statistics. Going forward, the Scottish Government will continue to consult with users as to how these statistics could be improved. This will involve working with other organisations with expertise on the North Sea and continuing to ensure that all Scottish Government statistics publications have a consistent treatment of the North Sea oil and gas industry.

The Scottish Government Oil and Gas model - which produces the information contained in the quarterly experimental statistics release - is being developed in accordance with these principles. The experimental results from the model were published for the first time in November 2013, and will now be produced quarterly incorporating user feedback and continual improvement. The early results coming from this model are used in addition to the other sources discussed above to quality assure the Kemp and Stephen analysis. The proposals for the next stage of development of these statistics will be discussed with the Scottish Economic Statistics User Group in Spring 2014.

Results

Kemp and Stephen's most recent analysis shows that Scotland's geographical share of oil production is estimated to have stood at 96.1% in 2012, while its geographical share of gas production is estimated to have stood at 46.6%. Scotland's share of total hydrocarbon production was 76.0% in 2012, down from 78.4% in 2011. The authors estimate that Scotland's illustrative geographical share of North Sea tax revenue was 85.2% in 2012. This is higher than Scotland's estimated share of production, reflecting that oil fields, which are more prevalent in Scottish waters, are relatively more profitable than gas fields, which tend to be concentrated in the Southern Gas Basin in the rest of the UK. However, it represents a fall in Scotland's share of North Sea tax receipts in 2011-12. This decline reflects two factors. Firstly, as outlined above, Scotland's share of overall production is estimated to have fallen between 2011-12 and 2012-13. Secondly, Kemp and Stephen estimate that investment and operating costs have increased more rapidly in the Scottish portion of the North Sea, thereby reducing the tax liabilities of companies operating in this area.

Using the above estimates of Scotland's illustrative geographical share of total North Sea production taxes and the methodology outlined in Box 3.2 for North Sea ETS receipts, it is possible to apportion the total UK revenue figure from the ONS Public Sector Finances Statistical Bulletin to Scotland. Table 4.4 provides estimates of Scotland's share of North Sea revenue using this methodology.^[24] The estimates of Scotland's illustrative geographical share of North Sea revenue for the years 2008-09 to 2011-12 have been revised since the last edition of GERS. Further discussion of these revisions can be found in Annex C.

Table 4.4: Geographical Share of North Sea Revenue: Scotland 2008-09 to 2012-13

	(£ million)
	2008-09	2009-10	2010-11	2011-12	2012-13
Total North Sea revenue	12,456	5,991	8,406	11,336	6,632
Scotland's geographical share	11,577	5,679	7,454	10,000	5,581
Scotland's percentage share of North Sea revenue	92.9%	94.8%	88.7%	88.2%	84.2%

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 2012-13, using a per capita and geographical share respectively.

Table 4.5: Current Revenue (Per Capita Share of North Sea Revenue): Scotland 2012-13

	Scotland		UK	Scotland as % of UK revenue
	£ million	% of total revenue	£ million
Total current revenue (excluding North Sea revenue)	47,564	98.9%	580,293	8.2%
North Sea revenue	552	1.1%	6,632	8.3%
Total current revenue	48,117	100%	586,925	8.2%

Table 4.6: Current Revenue (Geographical Share of North Sea Revenue): Scotland 2012-13

	Scotland		UK	Scotland as % of UK revenue
	£ million	% of total revenue	£ million
Total current revenue (excluding North Sea revenue)	47,564	89.5%	580,293	8.2%
North Sea revenue	5,581	10.5%	6,632	84.2%
Total current revenue	53,146	100.0%	586,925	9.1%

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, 8.2% in 2012-13. In contrast, under an illustrative geographical share, Scotland's estimated share of total UK current revenue increased to 9.1% in the same year.