ODAC        The Oil Depletion Analysis Centre

Second Floor,162 Skene Street, Aberdeen, AB10 1PE UK 

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NEWS RELEASE                                                      Contact:          Douglas Low

For Immediate release                                              Tel:                 +44 (0) 7812 822 643 

Wednesday, 25 April 2007                                        e-mail:             info@odac-info.org  

Tax revenues from 'Scottish oil' may be less than calculated by the Financial Times

An article in yesterday’s Financial Times1 claims that future revenues from North Sea oil will be insufficient to contribute to the Scottish National Party’s planned ‘Oil Fund’. Using data available from the International Energy Agency (IEA), US Energy Information Administration (EIA), UK Offshore Operators Association (UKOOA) and the UK Dept of Trade and Industry (DTI), research by the Oil Depletion Analysis Centre (ODAC) points to the Financial Times analysis as being too optimistic. Future oil and gas production for the UK is forecast to be less than the FT suggests, and accordingly tax revenues are likely to be less.

The FT article states:

A Financial Times analysis shows that the current high level of oil prices would allow Scotland to declare independence from the rest of the UK without having to cut public spending. In 2007-08 the nation would have lower government borrowing than the UK .

However, the Scottish National party’s plan to build a £90bn oil fund to endow the nation with riches in the future looks to be unrealistic because every penny of oil revenues would be needed to finance current public expenditure.

However, the production data used by the Financial Times may be too high:

Within a decade of independence, Scotland would have to wean itself off North Sea revenues, even if oil prices remain high. The UK Offshore Operators’ Association forecast that oil production will fall from 3m barrels of oil (or equivalents) a day in 2007 to fewer than 1m by 2020.

Publicly available data suggests ‘3m barrels of oil (or equivalents) a day in 2007’ and ‘fewer than 1m by 2020’ is too optimistic.

‘Barrels of oil equivalent’ means oil plus natural gas, although gas is otherwise never measured in barrels, without specifying how much of either. According to UKOOA, “Production in 2006 was 2.9 million barrels”, i.e. 2.9 million barrels per day (Mb/d) of oil and gas, and “Production in 2007 is expected to rise to 3-3.1 million barrels”2. This is unlikely. UK natural gas production is falling, it has fallen every year since 20003. The International Energy Agency has forecast in each of its last four monthly Oil Market Reports that it expects UK oil production for 2007 to be the same as or slightly higher than 20064. Falling gas production and stable oil production would imply a combined total similar to or less than 2006, about 2.9 Mb/d.

The US Energy Information Administration has UK oil production falling in 2007 compared to 2006 by about 30,000 barrels/day5. Combined with falling gas production, this would leave the UK ’s total production for 2007 at about 2.8 Mb/d equivalent.

In the longer term, the UK may well be producing much less than 1 Mb/d oil and gas equivalent by 2020. The following graph from the UKOOA Sustainable Development 2006 Report contains their ‘current production’ scenario6. This shows that combined production for oil and gas will have fallen to about 700,000 b/d by 2020.

UK Combined Oil & Gas Production vs. Consumption 1970-2020

 

Between the period when UK oil and gas production peaked, 1999/2000, and now, UK production has more or less followed UKOOA’s ‘current production’ scenario, as opposed to their more optimistic ‘current production plus potential’ scenario.

In the above graph, published July 2006, UKOOA forecasts a mini-revival in oil and gas production from 2005-2010. This revival has never occurred, and as discussed above, it never will7. This begs the question. If UKOOA forecasting for a period so close at hand (2005-2010) can be so wrong, i.e. over-optimistic, is the forecast to 2020 similarly over-optimistic?

In summary, the Financial Times analysis suggests that future tax revenues from North Sea oil production will be insufficient to build up a Scottish ‘Oil Fund’. Data from the IEA, EIA, UKOOA and DTI suggest that the Financial Times analysis might err on the optimistic side. UK oil and gas production will probably be less than the FT article suggests, and accordingly future tax revenues.

Ends

 

Notes for editors:

1.         ' Scotland ’s tough choices as oil cash falls', Financial Times, Mon. 24 April 2007. http://www.ft.com/cms/s/252e0d4a-f294-11db-a454-000b5df10621.html.

2.         ‘Treasury Accused of Turning Blind Eye to UK Oil and Gas’, UKOOA Press Release, 21 March 2007. http://www.ukooa.co.uk/media/view-press.cfm/425.

3.         UK DTI, ‘Natural gas supply and consumption’, http://www.dtistats.net/energystats/et4_1.xls. From ‘Main Points’: “Total indigenous UK production in 2006 was lower by 8.6 per cent compared to 2005.”

4.         IEA Oil Market Report website: http://omrpublic.iea.org/. The March OMR, the latest publicly available, forecasts a rise in oil production of 40,000 barrels/day (b/d) for 2007 compared to 2006. It states: “The UK production forecast remains largely unchanged at 1.66 mb/d in 2006 and 1.7 mb/d in 2007. This year sees a levelling off in production after uninterrupted decline so far this decade. Without the impact of rising Buzzard supply and a number of smaller scale increments, UK production would otherwise be facing a repeat of the 200 kb/d annual decreases seen in each of the past four years.”

            In 2006, UK gas production fell by the equivalent of about 100,000 b/d.

5.         US Energy Information Administration, ‘Short-Term Energy and Summer Fuels Outlook’, 10 April 2007. http://www.eia.doe.gov/emeu/steo/pub/gifs/Slide12.gif

6.         UKOOA Sustainable Development 2006 Report. Figure 19, p14. http://www.ukooa.co.uk/issues/sustainability/2006/pdf/report-2006.pdf (4.1 Mb).

7.         IEA’s 10 year Time Series, UK oil production figures, crude plus natural gas liquids (NGLs): http://omrpublic.iea.org/OECDresults.asp?OECDcountries=United+Kingdom&oecdformat=10+year+Time+Series&Submit=Submit.

 

            DTI monthly oil production data, 1975-present, crude oil only: http://www.og.dti.gov.uk/pprs/full_production/monthly_oil_production/monthly_oil_production.htm

            DTI monthly associated gas production data, 1975-present: http://www.og.dti.gov.uk/pprs/full_production/monthly_associated_gas_production/monthly_associated_gas_Production.htm

            DTI monthly dry gas production, 1995-present: http://www.og.dti.gov.uk/pprs/full_production/monthly_dry_gas_production/monthly_dry_gas_production.htm

8.         UKOOA is now called Oil & Gas UK. ‘New Representative Body Creates Stronger Voice for UK Offshore Oil and Gas’, Press Release, Oil & Gas UK , 23 April 2007. http://www.ukooa.co.uk/media/view-press.cfm/427.

9.            The Oil Depletion Analysis Centre (ODAC) is a UK-registered educational charity working to raise international public awareness and promote better understanding of the world's oil and gas depletion problems. Further information is available on its website.