Government Expenditure and Revenue Scotland 2020-21

2 North Sea Revenue

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 201617. UK North Sea revenue was £36 million in 2016-17, primarily due to licence fees, as refunds of petroleum revenue tax exceeded corporation tax receipts. Receipts recovered in 2017-18, but have fallen again since, to be £414 million in 2020-21.

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.

During 2020-21, the oil price averaged $44.35 per barrel. This represents an 27% decrease from the previous year average of $61.18 per barrel. Prices in 2020-21 were volatile, with the daily price falling to $9.1 in April 2020. This reflected falls in demand for oil related to Covid-19; however, as economies have recovered from the initial impact of the pandemic, prices have recovered, reaching a peak of $69.9 in March 2021.^[13]

Overall North Sea production fell 6% in 2020-21, with crude oil and natural gas liquid (NGL) production falling by 8.4% and annual gas production by 3.6%, as restrictions and maintenance activities curtailed output on the UK’s Continental Shelf.^[14][15]

In 2020 total expenditure on the UK Continental Shelf decreased by 22% in real terms compared to 2019, to stand at £11.59 billion. The decrease was primarily due to a significant decrease in exploration and appraisal (E&A) and capital expenditure, which were down 60% and 32% respectively in real terms. Decommissioning expenditure and operating costs also decreased by 24% and 11% respectively in real terms. ^[16]

The fiscal regime has been unchanged since in the March 2015 and 2016 Budgets, when the Supplementary Charge was halved to 10%, and Petroleum Revenue Tax (PRT) progressively reduced from 50% to 0%.

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.

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.

Two estimates of Scotland’s share of North Sea revenue are shown in GERS:

1. A population share

2. 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 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 2018-19, Scotland’s illustrative geographical share of North Sea revenues is estimated to be above 100%. 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.

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

Source: Marine Scotland