Freedom and a New Oil and Gas Frontier?

09/08/2014

Independence for Scotland is a big discussion point at the moment and the relative merit of a “yes” or a “no” vote is not going to be covered in this blog. What is going to be covered are some of the issues that will arise should “yes” be the Scottish people’s answer on Thursday, September 18th. If a new country is born then historical tax schemes, accounting for the transfer of hydrocarbons through international boundaries and both countries’ energy balances, are all going to be very topical discussions.

“The Hypothetical Scottish Share of Revenues and Expenditures from the UK Continental Shelf 2000 – 2013,” written by Professor Alexander G. Kemp and Linda Stephen, details the potential distribution of the hydrocarbon reserves between the UK and an independent Scotland – estimating that around 96% of oil and 60-65% of gas production would form the Scottish share on a supposed border extending into the North Sea. Conversely, in an article in the UK press in 2013, iGas reported that estimates of the shale gas in the UK (excluding Scotland) were grossly under-calculated and that a 300-sq-mile area in the North West alone contains up to 172 trillion cubic feet of shale gas – where the UK uses 3 trillion cubic feet a year. The energy policy of the remainder of the UK with regard to fracking could therefore be heavily influenced by September 18th, especially in light of the impact fracking has had on the US economy.

If Scotland becomes independent, a new regulatory body to oversee the existing contracts previously handled by the Department of Energy and Climate Change (DECC) will be required. This will be a complex activity since a new country would inherit signed contracts relating to production, taxation and decommissioning costs, which may not align to the future plans. Additionally, this body will need to oversee Health, Safety and Environmental performance since the current regulatory body (HSE Executive) is a UK organisation. The new organisation would need to develop competence in assessing and determining competence of people and organisations and create their own legislation, which is a significant amount of work.

Pipelines are another area that may cross international boundaries and will require resolution on taxation, especially when currencies are considered. Much has been made in recent weeks of the currency that an independent Scotland would use – the Great British pound, the Euro or a new currency – and how this would feature in the international currency market. For domestic companies reporting production and revenue figures, dealing with international boundaries and different tax structures will be a challenge, which could be complicated if the currency is pegged against another. Accounting and revenue recognition will be a key activity in the event of independence. One reassuring fact remains constant through all this – malt whisky is and will remain Scottish and so I will raise a dram and wish the people of Scotland all the best! Along with Messers Cameron and Salmond, I will be eagerly awaiting the results of the Scottish referendum next Friday and the impact of a new oil geopolitical drama – or not. More on that to come…

About the Author
Andy Coward is Senior Director, Business Solutions at P2 Energy Solutions.

www.p2energysolutions.com

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