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Who would get the oil revenues if Scotland became independent?

In the last of a series investigating the key issues around Scottish independence, Terry Macalister looks at how the oil revenues might be divided.

For more Reality checks on Scottish independence click here

The North Sea oil revenues will be one of the key points of negotiation between Scotland and Westminster should Scotland vote for independence. Readers have been debating how the proceeds would be divided on threads throughout the Reality check series on Scottish independence. Our community coordinators, who work below the line monitoring comments and selecting themes which our readers are interested in, have pulled together the following comments, which are typical.

@maisiedotts writes:

It is Westminster who has consistently robbed Scotland of resources think oil fish etc all used as pawns in Westminster’s quest for power. We send only 59 MPs (of all shades and just 52 post 2013) south – think about it, how’s that going to influence Westminster policy out of 650?

@whatshappening writes:

This is the biggest UK political story in a generation.
By the way it could have been all settled by now if:
- The UK gov hadn’t covered up the true extent of North Sea oil in the 70s
- The UK gov hadn’t fixed the result of the 79 devolution referendum and then renegaded on a promise to provide more powers if there was a “No” vote, meaning there wasn’t another referendum on devolution until 1997
- The UK parties in Scotland hadn’t blocked the SNP’s bill to hold a referendum a couple of years ago while they were still a minority administration

Who would get the oil revenues if Scotland became independent?

Analysis

North Sea oil is the jewel – or rather the thistle – in the crown of an independent Scotland. Countries with “black gold” can go it alone in a way others cannot. This explains the desperation of Greenland to drill in its Arctic waters. It knows a big discovery could provide a pathway to quick economic – and then political – independence from the colonial masters in Denmark. Hence Norway’s decision not to join the European Union.

Who gets the oil in the event of Scottish independence? It depends who you speak to and any division of the spoils will be hostly fought over by politicians in Edinburgh and London. If you draw a median line out across the North Sea from the border then 90% of the oil tax revenues will accrue to Scotland. If the calculation is done on the basis of population then that figure will be reduced to 9%, according to the (London-based) National Institute of Economic and Social Research (Niesr).

Angus Armstrong, the author of that Niesr report to sum up their findings, said:

The Geneva agreement on natural resources under the sea dictates that they are divided by the median lines. Most people accept that the Geneva approach is the standard approach. Which gives Scotland 91% of revenues. But this thing, the income, is declining now. It’s also very volatile. If you look at budget deficits it makes a huge difference.

It is not hard to imagine how the Scottish National Party sees the divide but politicians there – led by former oil economist Alex Salmond – are acutely aware that oil and gas production are currently falling fast – 17% last year alone.

The tax revenues will be falling too but then oil prices have also been soaring to recent levels of 8 per barrel from less than in 1998. The crude price is expected to grow further – some predict 0 – leaving plenty of opportunities for well targeted, higher taxes.

The SNP like to point to Norway as an economic model because that Scandinavian nation has a small population of 5m similar to Scotland and yet which is now sitting on a national pension fund worth over £300bn.

Britain meanwhile has spent its hydrocarbon inheritance as it was produced, something Salmond has promised he would no longer do. He likes to argue that an independent Scotland could raise £54bn from tax revenues in the next five years, underwriting the country’s ability to pay off debt and rebuild the local economy.

Most of the big oil fields lie offshore north of a Berwick-on-Tweed border while an enormous new area of hydrocarbon production is being developed west of the Shetland Islands. The southern North Sea – off East Anglia – is still a significant area for gas production but nothing like what lies north of there.

London holds political control of the tax levels currently but the civil servants that work on North Sea regulatory affairs are based in Aberdeen. An independent Scotland therefore would have most of the brain power in place while all the big oil companies use Aberdeen as an industrial centre for their offshore operations too.

Uncertainty over the political future of Scotland will not help investment levels in the North Sea but there seems to be no widespread corporate concern that a self-standing Edinburgh parliament would milk the oil and gas sector dry. As one oil executive told The Guardian privately: “an independent Scotland would have an even bigger vested interest in killing the golden goose.”

And the oil industry believes it has plenty to moan about when it comes to London. The Treasury under George Osborne has been the latest in a long line of Chancellors who have slapped windfall taxes on the North Sea and endangered investment there. One key industry lender – Lloyd’s Banking Group – said Britain held more of a political risk than countries such as Egypt because of endless tinkering by UK ministers with the fiscal regime.

But the UK does have plenty of international political clout at a time when Brussels has indicated a willingness to try to seize control of the health and safety regime offshore. An independent Scotland might find it harder to resist the European Commission and yet Salmond has already shown a commitment to building up renewable wind energy also. Edinburgh is open to blue-sky thinking as well as black gold.

Verdict

It is hard to argue against oil revenues following the physical locations of the fields. That is the way international agreements have generally been made – for instance the recent treaty between Norway and Russia covering the Barents Sea. But some account must surely be made of the historical contributions of London-based groups such as BP for their role in extracting the oil at huge initial expense. Clearly it is fair also to argue that Scotland has benefited from higher levels of public spending from Whitehall plus the financial bail out of Royal Bank of Scotland. The oil question will need to be thrown into a wider mix around issues such as defence. There will be a war of words over the North Sea but presumably not a clash of weapons as was seen over oil in the north and south of Sudan.

Do you have more evidence that might change our verdict? Get in touch below the line and we’ll update our findings.

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