Government Expenditure & Revenue Scotland 2015-16

Chapter 2: North Sea Revenue

In GERS, the term North Sea is used to refer to all offshore oil and gas activity. North Sea revenue in GERS comes from four sources: petroleum revenue tax, corporation tax, licence fees, and the emissions trading scheme.

Table 2.1 shows the revenue raised from each component of North Sea revenue since 2011‑12. UK North Sea revenue was £11.0 billion in 2011-12, but has been declining since, due to lower production, rising expenditure, and, since 2014-15, lower oil prices.

North Sea revenue is subject to annual fluctuations and is driven by a number of factors, including the oil price, the sterling dollar exchange rate, production, operating expenditure, capital investment, and the prevailing fiscal regime. Most of these factors have been acting to reduce revenue in recent years, with lower oil prices in particular having an impact over the past two years. The average monthly Brent crude oil price fell by nearly 36% over 2015‑16. UK Crude oil and natural gas liquid production was however 18% higher in 2015‑16 compared to 2014-15, while gas production increased by 9% over the same period. Operating expenditure fell by 15% in 2015, while investment fell by 22% over the same period.

The March 2016 Budget also saw the Supplementary Charge being halved to 10%, while Petroleum Revenue Tax ( PRT) was reduced from 35% to 0%, having been reduced from 50% in the March 2015 Budget. As shown in Table 2.1, PRT receipts are now negative. This reflects the fact that, although companies no longer pay PRT, they can still claim refunds on PRT paid in previous years against current trading losses and decommissioning spending. As a result PRT receipts will only be negative in the future under the current tax regime.

Estimates of the share of revenue from the EU emissions trading scheme arising in the North Sea are produced by the Scottish Government based on UK allowance data received from the Scottish Environment Protection Agency.

Scotland's Share of North Sea Revenue

In the ONS Regional Accounts, the UK Continental Shelf is included as a separate region of the UK (the extra-regio territory) and not allocated to specific geographic regions within the UK mainland. As such, an assumption as to Scotland's share of the North Sea needs to be made in GERS.

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

1. A zero share
2. A population share
3. An illustrative geographical share

The discussion below focuses on population and geographical shares.

Population Share

One interpretation of North Sea revenue is to view it as a non-identifiable UK revenue, in which case a population share may be apportioned to Scotland. Table 2.2 provides an estimate of Scotland's share of North Sea revenue under this approach.

An Illustrative Geographical Share

An alternative approach is to apportion a geographical 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. Professor Kemp is the author of "The Official History of North Sea Oil and Gas", and is considered to be a leading expert in UK petroleum economics.

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. ^[19] The researchers base the Scottish boundary 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. Production, costs and revenue are allocated on a field by field basis to either the rest of the UK or Scotland using this boundary.

Further detail on the methodology used to estimate Scotland's illustrative geographical share of North Sea receipts is available at:
http://www.gov.scot/Topics/Statistics/Browse/Economy/GERS/Methodology

Table 2.3 shows Scotland's illustrative geographical share of UK North Sea revenue. Scotland's share declined into 2014-15, reflecting the fact that an increase in capital expenditure in this year was concentrated within the Scottish share of the North Sea. This higher level of investment reduces the estimated share of Scottish tax liabilities.

Scotland's estimated geographical share of the North Sea sector, used in this report, is highlighted in the figure below. Demarcation by the median line is highlighted by the dark shaded area.