The Wood, the Shelf and the Black, Black Oil: or, how to manage an Intelligence Misinformation Strategy 

North-Sea-oil-rig-007By John S Warren
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).
QED.


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14 replies

  1. Aye I don’t think any of the no brigade have the sense to ask Westminster questions.They could ask why are they so concerned about Scotland’s currency,and Scotland’s balance of payments,could be they have hawked the oil in the North Sea or used it as collateral against all the extra borrowing,probably the latter.

    • Try asking any unionist who comes up with the usual response to the currency ‘question’ ; ‘All the experts agree that the Treasury is right’ to name one or more of those experts (always handy to have a few genuine experts who say the opposite – like Nobel laureates Professors Sir James Mirlees and Joe Stiglitz, or Professors Anton Muscatelli, Leslie Young, David Simpson, Gavin McCrone etc to hand).

      I’d heard David Mundell say ‘all the experts agree …’ several times before I was allowed to ask the question at a local debate down here a few weeks ago.

      You can guess the response, something along the lines of ‘I don’t have the names to hand’ – and then his big mistake – ‘who does ?’.

      To which I rattled off a few of the internationally-acclaimed experts who have said the opposite – and the two minor experts (both PhD’s – one who spent most of his working life at … the Treasury) who HAVE said such a thing, but are both funded entirely by Vince Cable’s department !

      Mundell’s face was a treat.

  2. God, that damn oil is a big burden!

  3. First things first, don’t have any hope in a positive line on anything good that will contribute towards Scotland’s emancipation. Take what’s being said and virtually turn it on its head to get to the real truth of it. Whoever let Danny Alexander play with the North Sea and its assets is either intent on flooring the dynamic of the industry or is out for a crass short lived killing, or indeed both may be the actual case. Next in line is to take a good hard look at what the OBR is doing with the information feed it is undoubtedly getting regarding the reality of North Sea futures and instantly dismiss the misinformation coming from it as somehow quite perversely infantile. So from these three strands alone it all traces back to a Westminster scheme that snugly matches what happened to the McCrone Report.

  4. Great article, I’ve been “out” of the oil industry for some time but my wife works in the sector, business is booming and the amount of investment pouring into infrastructure in Aberdeen is amazing, let’s hope we can open up the west coast, what a massive boost it would be to Glasgow and such, unemployment would vanish overnight ( Aberdeen is the only place in Britain to have more jobs than people on the dole ) We have the skills on this coast to help our chums on the west coast do this.

  5. In the latest edition of Investers’ Chronicle: “We think that Westminster has been deliberately downplaying the potential of the UK Continental Shelf (UKCS) ahead of September’s referendum on Scottish independence.”
    Does that not tell you something about what the UK are up to?

  6. Another stitch up like mc crone.they have already ignored the 8 billion barrels of oil in the Clair field west of Shetland and,after all according to A. Darling there is only 2 billion barrels of oil left in UK waters.

  7. That Oil is a real burden and it gets worse and worse. With all that undeveloped Oil off the West coast I don’t know what we will do.

    During my first decade offshore in the 70’s/ 80’s the UK government allowed the “gas” to be flared off to get oil production (money) flowing.
    It is estimated that around a third of the gas reserve was flared during this period. A well managed policy would have been to insist upon gas compression and gas pipelines much earlier. Short term cash flow was all Westminster were concerned about.

    If you want an environmental incident cover up then this is it! The North Sea at night in the Brent (photo)/ Ninian area was as bright as day. At times it was 40deg on the deck due to the size of the flare.

    This was mismanagement of a nations resource and an irresponsible environmental policy. I have never seen any figures for this period as regards the gas wasted nor the potential environmental damage caused.

  8. It’s not just Osborne, but also the UK government in general. I’m not particularly a great fan of one man owning a strategic national asset like the Grangemouth oil refinery and petrochemical works. (Refinery is part owned with the Chinese national oil company). Nothing personal against Jim Ratcliffe of Ineos, just the principle. But I agree with him on the government’s stupidity over tax, notably in 2008 when he was whacked with an £850 million VAT bill, at the time of the crash, when he had just borrowed heavily to buy the plant, and interest rates went up on his borrowings. He asked for some flexibility on the VAT bill repayment, but HMRC refused. This could have caused him to go under, and with him, the Grangemouth complex. In any sane system a major business in a strategic area would have been granted a repayment scheme, but not UK. He somehow managed to keep going (thankfully, for us) but promptly relocated his HQ from UK to Switzerland. In Norway a business can ask for losses to be offset against tax if there is no profit in a tax year.

  9. “a body foreign to basic competence or even self-interest: a British Government. ”

    I wouldn’t say that the British Government is foreign to self-interest. Every individual member is there purely out of self interest, they just don’t have any interest in the Government doing well; only themselves.

  10. This is a well judged article. The Yes campaign must simply ignore the torrent of negative claims coming from Westminster (all based on the same premiss of contrasting increasingly fantastical problems supposedly facing an independent Scotland with the perfection and stability of the current UK). We have wasted enough time on responding to these deliberayely crafted attacks, and we must shift the weight of the campaign to exposing the terrible situation of the UK itself and the sheer poverty and corruption of its governance.

  11. If as they say the oil is running out why are we sharing it.

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