We may be about to enter a period of intrigue in Scotland comparable to the events that Shakespeare poured into "Macbeth". Amid a push for increased autonomy for his country from England, Scottish First Minister Alex Salmond announced recently that Scotland will conduct a referendum in 18 months seeking to abolish its three-centuries-old union with the English.
It doesn't take an intellect comparable to that of the Bard of Avon to conclude that the proposed separation is tied to oil and gas in the North Sea. The vast majority of British hydrocarbons emanate from waters closest to Scotland. Indeed, as Austin-based geopolitical consultants at Stratfor have noted, Scotland is responsible for fully "90% of British offshore oil production and more than half its offshore natural gas production. "
A Scottish fortune looming?
Given that balance -- or lack thereof -- Salmond has said that, if separated from the other United Kingdom countries, Scotland could generate in excess of 50 billion pounds (about $76 billion) within five years. He also believes that the resulting tax revenue would permit the country to establish its own sovereign wealth funds, much as Norway has been able to accomplish from its own North Sea tax receipts.
But there are those who believe that the Scottish take on its likely proceeds may be excessive. For starters, past revenues from North Sea waters have been volatile, to say the least. As the 20th century came to an end, with crude prices hunkering around $10 per barrel, the country took in about 2.5 billion pounds in production-related taxes. And then, with that same black gold commanding up to $147 per barrel in 2008, the tax yield rose to nearly $13 billion pounds.
Dangerously dipping production
Trepidations exist in a number of quarters, however, about future North Sea production volumes. Unlike such venues as the U.S. Gulf of Mexico, Brazil, Angola, or Iraq, output from the waters surrounding the British Isles is sliding. From 2.7 million barrels a day in 2001, production from the sector tumbled to 1.5 million daily barrels in 2010. Further, British oil output in 2011 reached a low not seen since the 1970s.
None of this is to imply that asset trading and hydrocarbon discoveries by the producers have all but ceased in the North Sea. As recently as 2010, for example, Norway's Statoil (EQNR 0.75%) uncovered the John Sverdrup field -- which may contain 3.3 billion barrels of oil -- in its country's sector. And Apache (APA 3.88%) appears to be perpetually shopping in North Sea waters. About a decade ago, it bought BP's (BP -0.34%) Forties field. And in 2011, it paid $1.75 billion for ExxonMobil's (XOM 0.98%) North Sea assets, including the sizable Beryl field.
Both Apache acquisitions are in waters that would almost certainly be accorded to Scotland in the event of a separation from England. In November, Royal Dutch Shell (RDS.B) boosted its stake in the Schiehallion field to 55%, when it acquired Murphy Oil's stake in the play. Schiehallion lies to the west of Scotland's Shetland Islands.
Attending to necessities
But before we assume that Scotland will become separated from England once its citizens complete their referendum, which, is slated for Sept. 18, 2014, there are several issues that would necessitate attention:
- Scotland's success at sustaining itself financially, largely through hydrocarbons taxation, would depend upon trends in oil and gas production, future energy prices, and a satisfactory accord with London over claims to the U.K. Continental Shelf.
- The northern country would need to establish its own military.
- Its ability to gain separate European Union membership and to establish separate international trade agreements.
Were I willing to wager on the future relationship between England and Scotland, I'd likely predict that England will, somewhat grudgingly, permit increased Scottish autonomy, without a granting full-scale independence. Such a compromise would clearly benefit both countries in a variety of ways.
Nevertheless, along with a number of energy-related geopolitical issues taking shape across our globe, this quietly percolating one warrants attentive monitoring, especially among Fools with a taste for oil and gas investments.