Whose oil is it anyway?

ONE OF the key issues that will affect the voting in Scotland?s referendum next September on whether to go it alone or stay on as part of the United Kingdom will be the future of North Sea oil. If indeed the Scots vote for independence, this will be top of the agenda in negotiations with Whitehall, considering that a majority of its oil reserves and oil and gas extraction rigs lie off the Scottish coast. Over the past four decades, it is estimated that the UK treasury has benefitted from offshore oil and gas production taxes to the tune of about ?300 billion. Over 90% of this would be from Scottish waters, namely North Sea facilities. Pro-independence supporters believe that this rightfully belongs to Scotland. Under the present arrangement, the oil tax revenues are assigned to an economic region set up by the UK government, which is called the UK Continental Shelf (UKCS). This means that oil resources are not officially assigned to Scotland, but instead to a region distinct from the British mainland.

However, if Scotland were to become an independent, sovereign state, it would demand that the UKCS be divided on a ?geographical? basis. Prof Alex Kemp from the University of Aberdeen and the leading expert on Scotland?s oil industry, says if Scotland was to become independent, the ?median line? principle would be the obvious basis to proceed on. This means drawing a dividing line on which all points are the same distance from the Scottish and rest of the UK?s coastline. This was the method used when the North Sea was originally divided up between the UK and other countries in the 1960s. The treaty signed between the UK and Norway used the median line formula. It is the same principle as the United Nations Convention on the Law of the Sea (UNCLOS). If Scotland were to get a ?geographical share? based on the median line, it would mean about 90% of the UK?s oil resources would be under Scottish jurisdiction.

London is not going to let that happen, in which case, if Scotland were to opt for independence, it would have to approach the international court of justice. There have been departures from the median line principle in various settlements made by the international court. There is already a line drawn from the Britain-Scottish border straight across the North Sea, which is meant for civil and criminal court proceedings. North of that line, Scottish law prevailed and south of it, English law prevailed. According to research by Kemp, in 2010, the Scottish share of total oil production in the UKCS was more than 95%, while for gas, it was 58%. The Scottish share of total hydrocarbon production was 80%. The Scottish tax share exceeded 90%. This reflects the much higher value of oil compared to gas.

No discussion has yet taken place between the UK and Scottish governments on the details of what would happen to oil revenues. The latest figures released by the Scottish government for 2011-12 show that ?11.25 billion was paid into the UK exchequer from North Sea revenues, historically high oil prices and a raised supplementary tax rate making it one of the largest ever. The same report outlines what difference this would make to Scotland?s financial position if it were to get a ?geographical share? of the revenues instead of a ?per capita? slice. In 2011-12, it would have meant an extra ?10.57 billion being paid to Scotland, the report claims?which is important to keep down the scale of Scotland?s deficits?with 94% of the revenues being generated in Scottish waters. Of course, these figures are only indicative of the oil revenue Scotland would receive and do not account for all the other changes, which would take place to income and taxation if Scotland were to be independent. International credit rating agency Fitch recently put out a note which said: ?A geographical division of oil is an extreme outcome, as is a per capita division that would leave the residual UK with 92% of reserves. A compromise would probably be reached.? The Yes Scotland campaign says: ?International law makes clear that fields generating around 90% of the revenues will be in Scottish waters. This figure is based on comprehensive analysis undertaken at Aberdeen University. The companies that currently hold the licences for the various oil fields will continue to operate as now, but the taxes they pay will come to the Scottish exchequer rather than go to the chancellor in London.? The battle is on, but instead of blood, a lot of oil is likely to be spilled.