Scotland Independence Row Imperils UK Investment Plans

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  • Deepening political divisions between the UK and Scottish governments could undermine confidence in the North Sea energy sector.
  • While oil and gas were central to debate ahead of Scotland's 2014 independence vote, the renewable energy agenda will figure prominently this time around.
  • Regional operators are monitoring developments, having recently outlined plans to make huge investments in the UK energy system.

The Issue

Scotland's First Minister Nicola Sturgeon and her Scottish National Party (SNP) government have launched a new campaign targeting a second independence referendum in October 2023. A maritime boundary with England would likely give Scotland the lion's share of UK oil and gas in the event of a "Yes" vote, while major North Sea operators such as BP and TotalEnergies could see their assets change jurisdiction. Whether a referendum takes place or not, wrangling over energy policy, driven by tensions over the Union, could jeopardize billions of pounds of planned investment in upstream and transition projects.

Second Time Lucky?

In launching this month’s renewed push, the Scottish government published the first in a series of papers articulating its new vision for an independent Scotland. The SNP has said it will go into granular detail over the next 18 months to answer key questions about the costs, risks, challenges and trade-offs involved.

In the first independence vote in 2014, 55% of Scotland chose to remain in the UK. Back then, North Sea oil revenues were key to the independence campaign's economic case. But Sturgeon’s desire to make Scotland a renewable energy powerhouse will figure prominently in debate this time around, along with the carve-up of offshore energy resources, fiscal and regulatory policy, and choice of currency.

Under international law, coastal states have sovereign rights to exclusive exploration and exploitation of the natural resources within their exclusive economic zone, as well as over offshore wind, wave and tidal energy, and carbon capture and storage (CCS) projects. There is currently no agreed maritime boundary between Scotland and England. But experts, for example, have suggested that if it were based on the median line between Scotland and England, it would give Scotland over 90% of oil and roughly 60% of gas produced.

Scotland's Territorial Waters


Major Production Hub

The UK remains a core part of European energy majors’ portfolios and companies have earmarked north of $50 billion of investment there through 2030, most of it for transition projects. Total has the highest exposure to the UK upstream with around 159,000 barrels of oil equivalent per day in 2021, or 7% of the French major's group production. BP had about 130,000 boe/d of basinwide output last year, or 6% of group production, while Shell had roughly 130,000 boe/d, or 5% of group output.

BP intends to invest £18 billion ($22 billion) in the UK through the end of 2030, or roughly 15%-20% of its planned global capital spending budget of $14 billion-$16 billion through 2025. About 25% of the UK spending will be allocated to oil and gas projects, and 50% to low-carbon energy solutions, such as offshore wind, CCS and hydrogen. Shell has earmarked £20 billion-£25 billion for UK investments over the next 10 years — some 10% of its projected annual capex. About one-quarter of these funds will be directed toward upstream projects and the rest to low-carbon schemes.

But some industry experts warn that the political instability caused by the tensions over Scottish independence and the devolved Scottish Parliament’s position on future upstream development risk undermining investor confidence. The UK government's decision last October to again reject funding for the Acorn CCS project in Aberdeenshire — backed by Shell, Harbour Energy and Storegga — in favor of two CCS schemes in northern England riled Scottish politicians and business leaders. Acorn had been billed as one of the most mature, scalable and cost-effective UK CCS and hydrogen projects with the potential to be ready mid-decade and crucial to Scotland’s 2045 net-zero target. It was instead put on a reserve list.

The decision led one Scottish lawmaker, Allan Dorans, to ask: "Do major Scottish projects only have priority in the months ahead of an independence referendum?" In the lead-up to the 2014 vote, Acorn was one of two projects in the running to win £1 billion of UK government funding for CCS before the competition was scrapped the following year.

Acorn CCS Project


Taxing Times

The risk of political instability comes on top of investor concern over the UK government’s sudden windfall tax on profits, introduced last month, and what that says about fiscal stability. BP, Shell and Harbour have already said they will review their investment plans in light of the new tax treatment. An independent Scotland might also be tempted to seek a boost from North Sea revenues as it looks to accelerate the shift away from fossil fuels.

The significant worsening of Scotland’s implicit budget deficit relative to the rest of the UK during the last five years is broadly attributable to the decline in North Sea revenues, according to UK-based law firm Herbert Smith Freehills (HSF). If those revenues are excluded, Scotland’s underlying fiscal position relative to the rest of the UK has remained stable over 20 years, with average deficits around 7% higher during that period.

The Sustainable Growth Commission report in 2018, commissioned by the Scottish government, advised that “oil revenues should be treated as a windfall fiscal bonus” rather than relied on for maintaining fiscal management. “That remains a sensible assumption,” said Paul Butcher, head of public policy at HSF.

So What Is Going to Happen?

Since 2014, Britain’s departure from the EU — which most Scots did not support — and the coronavirus pandemic may have led to an uptick in public backing for independence but not substantially moved the dial. “Support for independence has lagged for the last year," said Butcher, adding that the SNP may be seeking to shake things up with its new campaign.

It remains to be seen whether the SNP can legislate for a vote in the face of UK government opposition, and how negotiations might then play out. But Butcher said it has generally been understood, albeit not accepted by the SNP, that legislation for any referendum on Scottish independence falls outside the Scottish Parliament's legislative competence.

"The Scottish government could refer the question to the UK’s Supreme Court, but most legal commentators predict it would lose," Butcher said. Even that may not be the end of the matter, however, he noted. "In the longer term, politics is likely to play a greater role than the law.”

Policy and Regulation, Carbon Capture (CCS), Offshore Oil and Gas, Elections, Low-Carbon Policy
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