Government Expenditure and Revenue Scotland 2008-09

5 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 2004-05 to 2008-09, 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% 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% 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%. There were deductions for exploration, appraisal and development costs on a 100% first year basis. In 2002, a Supplementary Charge ( SC) of 10% was introduced. This made the effective corporation tax rate ( CT + SC) 40%. From January 2006, the SC was increased to 20% making the overall tax rate 50%.

3. License Fees: The UK Government grants licenses for operators to "search and bore for and get" ²⁸ 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 5.1 shows the North Sea revenue collected by the UK Exchequer since 1980-81.

Table 5.1: Total North Sea Revenue: UK 1981-82 to 2008-09 ^{1, 2}

Year	£ million	Year	£ million	Year	£ million	Year	£ million
1981-82	6,395	1988-89	3,301	1995-96	2,341	2002-03	5,097
1982-83	7,867	1989-90	2,502	1996-97	3,351	2003-04	4,284
1983-84	8,788	1990-91	2,342	1997-98	3,330	2004-05	5,183
1984-85	12,326	1991-92	1,017	1998-99	2,511	2005-06	9,384
1985-86	11,217	1992-93	1,338	1999-00	2,564	2006-07	8,924
1986-87	4,701	1993-94	1,266	2000-01	4,455	2007-08	7,831
1987-88	4,736	1994-95	1,673	2001-02	5,426	2008-09	12,925

1. Source ONS Public Finance Statistics
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 5.2 shows the levels of revenue raised from the three key components of North Sea revenue since 2004-05.

Total North Sea revenue has increased by 149.4 per cent in nominal terms since 2004-05. This reflects the increase in wholesale oil and gas prices over this period and the higher supplementary corporation tax introduced in January 2006. Licence fees were gradually phased out over the period, so that by 2008-09 no revenues were raised from this source.

Table 5.2: Composition of North Sea Revenue: UK 2004-05 to 2008-09

	(£ million)
	2004-05	2005-06	2006-07	2007-08	2008-09
Licence fees	68	61	60	56	0
North Sea corporation tax	3,831	7,307	6,709	6,095	10,358
Petroleum revenue tax	1,284	2,016	2,155	1,680	2,567
Total	5,183	9,384	8,924	7,831	12,925

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.

The following section presents a range of estimates of North Sea revenue that could be allocated to Scotland under various assumptions about the apportionment of the oil and gas industry.

Scotland's Share of North Sea Revenue

For many years, there has been considerable debate on how the delineation of North Sea oil and gas output might be determined.

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 3 and 4.

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

Table 5.3: Per Capita Share of North Sea Revenue: Scotland 2004-05 to 2008-09

	(£ million)
	2004-05	2005-06	2006-07	2007-08	2008-09
Total North Sea revenue	5,183	9,384	8,924	7,831	12,925
Scotland's per capita share	440	793	754	660	1,088
Scotland's percentage share of North Sea revenue	8.5%	8.5%	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 ²⁹. Kemp and Stephen (2008) 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 5.1. All oil and gas fields located in this region were apportioned to Scotland under the assumption of an illustrative geographical share.

Figure 5.1 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 remained at 96% in 2009, while its geographical share of gas production fell to 58% from 61% in the previous year. Scotland's share of total hydrocarbon production stood at 80% falling marginally from 81% in both 2007 and 2008.

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. ³⁰ 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 5.4 provides estimates of Scotland's share of North Sea revenue using this methodology. It should be noted that the figures provided in Kemp and Stephen are on a calendar year basis. The estimates for financial years are calculated by first estimating the quarterly proportions using a cubic spline methodology. These are applied to the quarterly revenue data, and summed to form the financial year estimates.

Table 5.4: Geographical Share of North Sea Revenue: Scotland 2004-05 to 2008-09

	(£ million)
	2004-05	2005-06	2006-07	2007-08	2008-09
Total North Sea revenue	5,183	9,384	8,924	7,831	12,925
Scotland's geographical share	4,532	8,128	7,496	7,450	11,771
Scotland's percentage share of North Sea revenue	87.4%	86.6%	84.0%	95.1%	91.1%

Box 5.1 - Evolution of North Sea Revenues Since 1980/81

Between 1981-80 and 2008-09, the North Sea has generated approximately £147.1 billion in revenue for the UK Exchequer. Revenues peaked in the mid 1980s before declining in the early 1990s. More recently, North Sea revenues have followed an upward trend. Using the estimates provided in Kemp and Stephen (1999 and 2008) it is possible to estimate Scotland's illustrative geographical share of North Sea revenue for each year from 1981-82 onwards 31. The results are illustrated in cash terms in the table below. They suggest that over the period 1981-82 to 2008-09, Scotland's illustrative geographical share of North Sea revenue was £130.4 billion, this equates to approximately 89% of total UK North Sea revenue over the period. Scotland's Geographical Share of North Sea Revenue: 1981-82 to 2008-09 Year % of Total UK revenue £(million) Year % of Total UK revenue £(million) Year % of Total UK revenue £(million) 1981-82 97.9 6,263 1991-92 63.3 644 2001-02 83.1 4,507 1982-83 97.6 7,681 1992-93 62.7 838 2002-03 87.8 4,473 1983-84 96.0 8,437 1993-94 72.4 916 2003-04 86.9 3,725 1984-85 93.0 11,467 1994-95 82.3 1,377 2004-05 87.4 4,532 1985-86 93.5 10,488 1995-96 79.5 1,862 2005-06 86.6 8,128 1986-87 94.3 4,432 1996-97 80.5 2,697 2006-07 84.0 7,496 1987-88 89.7 4,249 1997-98 74.7 2,487 2007-08 95.1 7,450 1988-89 88.9 2,935 1998-99 78.0 1,958 2008-09 91.1 11,771 1989-90 82.2 2,057 1999-00 81.3 2,083 1990-91 70.0 1,640 2000-01 84.4 3,759

Contribution to current revenue

Tables 5.5 and 5.6 show the estimated contribution to total Scottish current fiscal revenue from the North Sea in 2008-09, using a per capita and geographical share respectively.

Table 5.5: Current Revenue (Per Capita Share of North Sea Revenue): Scotland 2008-09

	Scotland		UK	Scotland as % of UK revenue
	£ million	% of total revenue	£ million
Total current revenue (excluding North Sea revenue)	43,466	97.6%	520,656	8.3%
North Sea revenue	1,088	2.4%	12,925	8.4%
Total current revenue	44,553	100.0%	533,581	8.3%

Table 5.6: Current Revenue (Geographical Share of North Sea Revenue): Scotland 2008-09

	Scotland		UK	Scotland as % of UK revenue
	£ million	% of total revenue	£ million
Total current revenue (excluding North Sea revenue)	43,466	78.7%	520,656	8.3%
North Sea revenue	11,771	21.3%	12,925	91.1%
Total current revenue	55,236	100.0%	533,581	10.4%

As tables 5.5 and 5.6 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 2008-09. In contrast, under an illustrative geographical share, Scotland's estimated share of total UK current revenue increased to 10.4 per cent in the same year.

Sensitivity analysis

Prior to 2006-07, earlier GERS reports presented illustrative figures to show North Sea revenue allocated to Scotland under various assumptions. For consistency, Table 5.7 shows estimated North Sea revenue under these various percentage allocations.

Table 5.7: Hypothetical Shares of North Sea Revenue: Scotland 2004-05 to 2008-09

	(£ million)
	2004-05	2005-06	2006-07	2007-08	2008-09
Total North Sea Revenue	5,183	9,384	8,924	7,831	12,925
Hypothetical shares
66%	3,421	6,193	5,990	5,168	8,617
75%	3,887	7,038	6,806	5,873	9,694
90%	4,665	8,446	8,168	7,048	11,633