George Osborne would be well-advised to concentrate on reducing the dangerously high level of sovereign risk currently facing the British economy instead of over-promoting a shallow recovery built on sand, or worrying about the hypothetical problems that might face an independent Scotland. It is one of the more reassuring and life-enhancing facts of independence that – it won’t be anything to do with Osborne: it isn’t his business. Osborne nevertheless raises three issues of “concern” for an independent Scotland; oil, the deficit, and currency. I shall leave others to deal with Osborne’s foolish powder-puffs; instead, let us examine how well Osborne’s Britain stands up to this same scrutiny on one of his three big issues: the oil industry.
What is the central problem of British development and management of the North Sea Oil resource over the last 40 years? Mis-management, lack of foresight, poor communication, weak research, not to forget short-sighted British Government greed; which may all best be summarised as bad governance: of a kind and consistency that has managed simultaneously to be selfish, self-defeating, inept and cynical (see, for example Denis Healey’s late admission of Government manipulation of the facts in the 1970s, or the decision not to set up an Oil Fund in spite of Civil Service advice over thirty years ago).
Osborne has followed this unfortunate low standard of British management of the oil resource, as to the manner born. Worse, the last thing Scotland needed was a Conservative Chancellor who in 2011 managed to destroy the investment cycle in North Sea oil development through the crass ineptitude of his famously disastrous tax measures, and therefore probably did more to produce the recent hiatus in oil income than even the Credit Crunch could achieve; and compounds the folly now by audaciously seeking to exploit the consequences of his own stupidity for cynical political purposes. It could only happen in London.
Here is what the FT Oil Sector Watcher said in March, 2011 after Osborne’s House of Commons statement on the new oil tax regime:
“This seems a fairly punitive tax and appears very short-sighted. We’ve spoken to a number of North Sea producers today, none of whom were consulted about the tax, and all of whom are deeply unhappy. It doesn’t take much imagination to predict industry’s reaction – that the global exploration/development dollar is a lot less likely to make its way to the North Sea tomorrow than it was yesterday. Hence for a government that is supposedly committed to encouraging investment in the North Sea and prolonging its existence, this feels like an incredibly short-sighted view. The additional tax will change the economics for many projects, many of which are already marginal. Oil companies are an easy target for politicians, especially when oil prices are at $115/barrel, but in one single stroke Osborne has probably accelerated the end of the North Sea by years”.
Osborne had to turn his policy on North Sea Oil upside-down and inside-out within the year. The cost of such blunders to the British people is high.
In spite, or rather because of, endemic, institutionalised, British governmental incompetence in the management of North Sea Oil, we principally have an individual, Sir Ian Wood to thank for a temporary fit of sanity to ‘break-out’ in the Treasury. It is an event perhaps unique in recent British history – and we can rest assured that it will not last. The (Sir Ian) Wood Review “UK Continental Shelf Maximising Recovery Review (UKCS): Final Report” (24th February, 2014) recommended setting up an independent British Oil and Gas Regulator, something that should have happened decades ago; but didn’t. Wood supported the “free market model” light-touch regulation in the very early days of North Sea (1970s), but argued that:
“over time, the number of fields has increased, now to over 300, new discoveries are much smaller, many fields are marginal and very inter dependent, and there is competition for ageing infrastructure. Alongside this, the present Regulator has halved in size in the last 20 years and, as a result, is clearly struggling to perform a more demanding stewardship role. Additionally, the UKCS is facing stiff and growing competition from many international offshore regions and we need to step up our game to attract more investment. The problems the Review has identified will be largely resolved by evolving the model to introduce a stronger Regulator with broader skills and capabilities able to significantly enhance the level of co-ordination and collaboration” (Executive Summary, p.1).
Wood, perhaps understandably, is a master of understatement. The Wood Review was backed wholeheartedly by the Scottish Government and, perhaps because of the lure of greater financial returns in the long-term, for once he overcame even Britain’s total, myopic, self-destructive commitment to a Neo-Conservative (so-called) ‘free-market’ ideology, at any price. The Wood Review regulatory proposals are now being implemented by the British Government.
The new Oil and Gas Authority will begin operations in the Autumn. British Governments having failed to establish a credible Regulator over decades, and whittling away the resources of the weak Regulator it did establish; it is understandable that the Oil Industry might adopt a “wait and see” approach to the new body, given the British Government’s record of ineptitude in managing North Sea Oil (see above) and even of damaging investment in Scotland’s critical oil resource; caution exercised in spite of the proposals coming originally from such a distinguished oil authority as Sir Ian Wood: probably because they are, after all, being implemented by a body foreign to basic competence or even self-interest: a British Government.
Derek Henderson, senior partner at Deloitte’s Aberdeen office has thus reported some delays in sector investment: “It’s likely that the industry could be pausing until it has a better understanding of the impact of (the Wood Review), and the effect on the long-term future of the North Sea, before making any big investment decisions”. Who can blame them? If a good idea could be guaranteed to be ruined on implementation, or later interpretation of its meaning, its purpose, or its powers; British Government would surely be your ‘go-to’ resource to ruin your dreams.
Thus, how did the Daily Telegraph ‘spin’ the news of the new oil regulator?
“North Sea oil investment shrinks in blow to Salmond” (Telegraph, 1st May, 2014).