Government Expenditure and Revenue Scotland: 2017-2018

Chapter 2: North Sea Revenue

North Sea Revenue: 1998-99 to 2017-18

Introduction

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

Table 2.1 shows the revenue raised from each component of North Sea revenue since 2013‑14. UK North Sea revenue was £4.5 billion in 2013-14, but has declined since, due to lower production, rising expenditure, and lower oil prices. UK North Sea revenue was £1.2 billion in 2017-18.

Table 2.1: Composition of North Sea Revenue: UK 2013-14 to 2017-18

	£ million
	2013-14	2014-15	2015-16	2016-17	2017-18
Licence fees	71	70	67	67	72
North Sea corporation tax	3,310	1,544	410	622	1,688
Petroleum revenue tax	1,118	77	-562	-653	-568
Total	4,499	1,691	-85	36	1,192

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. However oil prices have risen to their highest levels since 2014 which, along with stable production, will have a positive impact on tax revenues all else equal.

During 2017-18, the oil price averaged $57.4 per barrel, and rose above $70 for the first time since 2014. The average price represents an 18% increase from $48.5 in the previous year but is still significantly lower than its level in 2013-14 ($107.6). ^[16]

North Sea production remained broadly stable in 2017-18 compared to 2016-17, with gas production down 2% ^[3] while crude oil and natural gas liquid production fell by 0.4%. ^[4] This period covered the temporary shut-down of the Forties Pipeline System, which transports close to a third of the UK’s oil production, for the majority of December 2017.

In 2017, total expenditure on the UK Continental Shelf continued to fall, falling 16% in real terms compared to 2016, to stand at £14.5 billion. This fall was primarily due to lower investment, which fell by 35% in real terms. In contrast, there was an increase in exploration and appraisal expenditure, rising by 39% in real terms from a low base, while decommissioning expenditure and operating costs increased by 2% and 1% respectively in real terms. ^[5]

Significant changes were made to the fiscal regime in the March 2015 and 2016 Budgets, including the Supplementary Charge being halved to 10%, and Petroleum Revenue Tax ( PRT) progressively being reduced from 50% to 0%.

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.

Scotland’s Share of North Sea Revenue

In the ONS Regional Accounts, the UK continental shelf is not allocated to specific geographic regions, but is considered a separate region of the UK (the extra-regio territory). 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 shown in GERS:

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.

Table 2.2: Population Share of North Sea Revenue: Scotland 2013-14 to 2017-18

	£ million
	2013-14	2014-15	2015-16	2016-17	2017-18
Total North Sea revenue	4,499	1,691	-85	36	1,192
Scotland’s population share	374	140	-7	3	98
Scotland’s share of North Sea revenue (%)	8.3%	8.3%	8.2%	8.2%	8.2%

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 uses the share reported in the ONS Country and Regional Public Sector Finances publication. The estimate is based 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.

Table 2.3 shows Scotland’s illustrative geographical share of UK North Sea revenue, broken down by licence fees, corporation tax, and petroleum revenue tax. Since 2015-16, Scotland’s illustrative geographical share of North Sea revenues is estimated to be above 100% or negative. This reflects the fact that the Scotland’s share of petroleum revenue tax, which is currently negative, is lower than its share of corporation tax.

Table 2.3: Geographical Share of North Sea Revenue: Scotland 2013-14 to 2017-18

	£ million
	2013-14	2014-15	2015-16	2016-17	2017-18
UK revenue	4,499	1,691	-85	36	1,192
Licence fees	71	70	67	67	72
North Sea corporation tax	3,310	1,544	410	622	1,688
Petroleum revenue tax	1,118	77	-562	-653	-568
Scottish geographical revenue	3,446	1,377	50	266	1,327
Licence fees	58	58	55	63	68
North Sea corporation tax	2,716	1,272	334	595	1,600
Petroleum revenue tax	672	47	-338	-392	-341
Scottish share of UK	76.6%	81.4%	-59.2%	739.7%	111.3%
Licence fees	82.1%	82.2%	81.6%	94.6%	94.8%
North Sea corporation tax	82.0%	82.4%	81.4%	95.7%	94.8%
Petroleum revenue tax	60.1%	61.3%	60.1%	60.1%	60.1%

Scotland’s estimated geographical share of the North Sea sector, used in this report, is highlighted in the figure below.

UK Continental Shelf and Scottish Boundary

Source: Marine Scotland