Scotland faces up to life after oil

When the UK was preparing to bring the first barrels of North Sea oil ashore almost 50 years ago, Gavin McCrone was quietly drawing up what would turn out to be an incendiary warning for government ministers. The Ayr-born civil servant, who served as chief economic adviser to successive secretaries of state for Scotland for more than 20 years, thought they had failed to appreciate the sheer scale of the tax revenues that would be available from this newfound industry that was starting off the coast of Aberdeen.

But it was his warning on Scottish independence in the confidential briefing paper that would resonate down the years. Scotland would enjoy a budget surplus “to a quite embarrassing degree” if an oil-fuelled independence movement was to win control of the country, McCrone wrote in 1974. Its currency “would become the hardest in Europe” and a safe haven to rival the Swiss franc for “deposed monarchs and African leaders”.

The briefing paper, just one of dozens regularly prepared for ministers and never intended for public view, would achieve quasi-mythical status after it was made public by a freedom of information request in 2005. Nationalists believed the Westminster government kept the McCrone report’s findings secret from Scottish voters.

Now 88 and long since retired, McCrone is wryly amused at the totemic status his paper achieved in nationalist circles. Speaking from his home in Edinburgh, he stands by its conclusions. “Part of my reason for writing the briefing paper was to say to ministers, ‘You can no longer argue that Scotland could not afford to be independent – these oil revenues will change everything,’” he says. “You can’t just go on telling people you’d be too poor.”

McCrone was right about the money. It poured in over the decades: the UK North Sea oil and gas industry has paid about £360bn to the UK treasury in production taxes since 1970. The boom also shifted Scotland’s economic centre of gravity from west to east.

As Aberdeen boomed in the 1980s, some argue it allowed the Conservative government to speed the demise of heavy manufacturing once dominant in the west; oil revenues ultimately subsidised unemployment benefits to newly laid-off workers in Scotland and the wider UK. There was another effect of oil, too: the transformation of the Scottish National Party from a fringe independence movement into the dominant force in Scottish politics in the 21st century.

From the 1970s the SNP rode behind the wave of black gold that poured out of the North Sea, championing the claim that “It’s Scotland’s oil”. In the failed independence vote of 2014, Alex Salmond, then SNP leader, invoked McCrone’s paper as evidence of what he called Westminster’s “fibs” about oil’s remaining potential, arguing it would comfortably plug Scotland’s budget deficit for years to come. It was seen as the ticket to soothing voters’ concerns that Scotland could end up free but poorer, outside of the union, with the industry still then the biggest corporate taxpayer in the UK.

Almost all parts of that equation have changed in the past seven years. A slump in prices after 2014, projections for steep falls in production in the coming decade and a wish to make Scotland a renewable energy powerhouse have made the SNP’s renewed push for independence under Nicola Sturgeon a near oil-free zone. Already in 2020, more than 97 per cent of Scotland’s electricity demand was met by renewable resources such as wind and hydropower (although transport, heating and agriculture are still reliant on fossil fuels).

“Scotland’s politics are almost post-oil now — it’s really been put to one side,” says Professor Sir Tom Devine, one of Scotland’s most eminent historians. “If you asked the man in the street, he’d probably think oil was almost already over as an industry; that’s the perception, but it’s far from the reality.”

Scotland is certainly not yet a post-oil economy. The oil and gas industry, including associated services, still makes up more than 10 per cent of GDP and the growth in the country’s budget deficit since the last referendum is thanks largely to declining hydrocarbon taxes. The challenge, both for supporters of independence and those who hope Scotland stays in the union, will be deciding what kind of energy sector the country can create in its place.

It is not just about technology, although engineers and manufacturers will be needed to develop Scotland’s wind power capacity and new industries such as hydrogen and carbon capture. It also involves helping those from the old oil world move into the new green world — while preventing the social damage that accompanied the closure of mines, steelworks and shipyards during the late 1980s and early 1990s.

Now, as the subject of independence once again hoves into view, Scottish parliament elections loom and concerns about climate change turn the world off hydrocarbons, Scotland is considering the fate of an industry that has played a major role not just in the economy, but in the politics of the country for almost 50 years.

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Nowhere is that question more pertinent than Aberdeen, the city on Scotland’s northeast coast that became the heart of the UK’s oil and gas industry. From the early 1970s, the quiet, unassuming university city two hours north of Edinburgh, famed for its granite buildings and ties to the fishing and farming industries, was inundated with international oil companies chasing a source of supplies as the Arab oil embargoes upended their industry.

Today, Aberdeen still wears its riches relatively lightly. It’s a city not easily given over to ostentatious display, though by some measures it has the highest concentration of millionaires outside London and the southeast of England and and average salaries well above the UK norm. 

But the oil and gas industry is not confident about the future. Production peaked more than 20 years ago at 4.7 million barrels a day. Under siege from investors worried about the environment and the prospect of diminishing demand, ageing basins such as the North Sea, where large discoveries are vanishingly rare, have fallen out of favour. By 2030, output from the UK portion of the North Sea is expected to fall by more than a third, according to UK government forecasts.

The fear of what comes next for Aberdeen gnaws at Sir Ian Wood, who is one of Scotland’s richest men. Wood epitomises the transformational effect of the oil industry on Aberdeen: a psychology graduate, he turned his family’s small engineering and fishing company into a multi-billion-dollar oil services business with a global reach.

“My nightmare, and I’ve had it for quite a long time, is that generations down the road will look back and say, ‘Well, you guys were incredibly lucky, you had all the benefits of oil and gas, and look what you’ve left for us,’” Wood says. These were “halcyon days” of oil production, he says, when “Aberdeen and Bentley [cars] were having a really good time”.

To avoid this fate Wood, who retired in 2012, has become something of a booster for his home city, chairing a group called Opportunity North East and attracting UK government funding for an Energy Transition Zone, designed to attract renewable energy companies to invest in the region.

While he maintains oil and gas will have a long future in Aberdeen, he is a convert to clean energy, believing offshore wind and hydrogen can not only reduce greenhouse-gas emissions, but provide a second life for Scotland’s energy sector. He says that if he were a 35-year old today, he would build a renewable energy company: “There’s no point going full blast into oil and gas as it’s got a limited life. But I would go full blast into renewables and, frankly, that’s what we’re doing.”

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In blustery waters 27km off the coast of Angus, a rural county that borders Dundee, energy companies SSE and Total are preparing in the second half of this year to install wind turbine foundations for what will become Scotland’s biggest single source of renewable energy. With 114 turbines, the Seagreen offshore wind farm is the country’s most ambitious yet and will be able to supply enough clean electricity for 1.6 million homes after it enters commercial operation in 2022-23.

Scotland has an abundance of natural resources, including thousands of kilometres of coastline well-suited to offshore wind farms. Old oil and gas fields can be repurposed for sequestration of CO2 beneath the sea.

Hydrogen could be one of Scotland’s low-emission fuels, too. It has become the hot topic in the energy industry for its potential to decarbonise areas such as long-distance transport and heavy industry that are not easy to electrify. “Hydrogen could start from nothing to be a £25bn per annum industry [for Scotland] by 2045,” says Paul Wheelhouse, the Scottish energy minister. Scotland has set a target to achieve net-zero emissions by 2045, five years earlier than the UK as a whole.

When I told people I was leaving, their first question was: ‘How much are you taking a cut?’

One of the frequent criticisms of renewable energy versus hydrocarbons is that electricity is not so readily exported. But Wheelhouse’s ambition goes beyond supplying the domestic market. Hydrogen, he believes, could be different given it can be stored and transported. “We do have a chance to generate a new source of wealth,” he says. “In a world that’s needing increasing amounts of offshore wind, to have that huge sea area to manage, it’s a huge opportunity for us. I think most countries would bite your hand off if you said you’ve got all these assets to play with for a population of just over 5.4 million.”

Some oil and gas workers are already making the transition, but not without trepidation. Eva Hymers started her career as an offshore electrical technician with BP, but in February she moved to SSE to work on its Beatrice offshore wind project 13km off the Caithness coast on mainland Scotland’s northerly tip. “We did a lot of renewables in school so I always knew if I wanted to do a job like this for ever, I would have to transition at some point,” says the 25-year-old, who comes from a farming background.

But for older colleagues, she says, taking a drop in money is a concern. The average base salary for an offshore North Sea worker is nearly £62,000 but they can receive almost 30 per cent of that on top in allowances, according to industry data, partly to compensate for the long hours, cramped conditions and weeks at a time away from home. “When I told people I was leaving, their first question was: ‘How much are you taking a cut?’” says Hymers.

The benefit for the renewable industry, she says, is a ready-made pool of skilled employees. Companies such as BP that are stalwarts of the North Sea are pushing into offshore wind, hydrogen and carbon capture in the UK. But a risk is that the number of people needed to maintain wind farms is lower than that needed to keep oil platforms running. Before last year, OGUK, a trade body, estimated the North Sea supported around 150,000 roles including in the supply chain, although it fears up to 30,000 jobs were lost in the pandemic. The UK’s offshore wind industry employs 26,000.

Older workers are acutely aware of these fears. Ollie Folayan, 46, is an engineering consultant who moved up to Aberdeen from London in 2010 and has worked for a number of producers in the North Sea, including France’s Total. “Between 2010 and 2013 there was still a lot going,” Folayan says, laughing as he recalls “how expensive [taxis in Aberdeen] were compared with even London”.

Last year the hydrocarbon project he was working on was shut down and while he’s found new employment, he says the instability is driving others to consider a future in clean energy. Since the pandemic hit oil prices a year ago oil rigs have stacked up near ports in Dundee and the Cromarty Firth as activity has slowed. “Most of our skills are actually industry-agnostic,” says Folayan. But he worries that he doesn’t see enough measures to grow new industries in the northeast of Scotland and to help oil and gas workers transition: “I don’t see that there is enough of a coherent plan.”

Nor is Scotland the only part of the UK with the potential to be a centre of renewable energy. Locations south of the border are vying to be in pole position too. “There is a risk,” says Dick Winchester, former subsea engineer and an adviser to the Scottish government on the energy transition, “that Yorkshire becomes the new Aberdeen.”

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Some think that both the Westminster government and a Scotland with eyes on independence might be too quick to write off the oil and gas sector. While UK output is forecast to slide by an estimated 5-7 per cent a year from current levels of about 1.6 million barrels of oil equivalent per day (boepd), according to OGUK, it could still be producing close to one million boepd in 2030.

Neither the UK nor Scottish governments have shown any appetite for curbing oil exploration, despite net-zero targets and smaller producers such as Denmark doing so. That is partly down to hopes that smaller “satellite” fields close to existing infrastructure can be tapped to slow the decline without the need for big investments.

Phil Kirk, 54, the chairman of Harbour Energy, now the largest producer in the UK North Sea, says the industry will be around for decades more. “I don’t think I will see a Scotland without oil in my lifetime,” Kirk says. “We talk internally about what the company will be doing in 20 years’ time and that is still producing hydrocarbons from the North Sea and internationally.”

That has raised the question of whether either the UK government or an independent Scotland might look to tax the industry more heavily, to help fund investments in cleaner energy sources or to plug budget gaps.

Changes to tax law made in 2015-16, when oil prices were lower, have left the UK with one of the lowest effective tax rates in the world for oil extraction. In 2019 Royal Dutch Shell paid the Norwegian government almost $1.8bn in taxes. In the UK, it received a rebate of almost $100m.

The most idiotic thing that happened in the entire development of the UK North Sea was not starting a national oil company

“I find it hard to believe that a newly independent Scotland wouldn’t look long and hard at maximising government revenues, as might the UK,” says Graham Kellas, head of fiscal research at Wood Mackenzie, a global energy consultancy that started in Scotland. An FT analysis of the Scottish fiscal position suggests that if spending was to be maintained at current projected levels it would face a persistent deficit of almost 10 per cent of GDP.

The oil industry has argued that the current set-up is necessary, as it faces large costs for decommissioning old fields in the UK and production is not as profitable as it once was. It also insists the sector’s economic contribution stretches far beyond just the direct tax take. Wood believes that any change to taxation of the industry would, at this stage, still speed the industry’s demise: “They [raise taxes] and what happens is they stop the oil and gas production fairly quickly, and then they need to start importing [for domestic consumption].”

But some energy experts think this warning is overstated. Peter Cameron, director of the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee, says that in his years advising international governments and the World Bank he has heard all the arguments before. “Frankly, this industry is a big, seriously bullshitty industry — I’m not against oil and gas, but they really come out with nonsense and you’ve always got to have that in your head,” Cameron says.

The SNP says major changes to the tax system are not in its plans as it wants to support oil companies transitioning to renewable energy. “We’re not being avaricious, we’re not looking at the oil and gas sector as soon as we become independent becoming a cash cow,” says energy minister Wheelhouse. “We’ve moved well on from that position.”

Alexander Burnett, the Scottish Conservatives’ shadow energy minister, who represents Aberdeenshire West, says the risk of over-taxing the industry must be kept in mind. “The danger is that if you see [renewables] as a golden goose and pull out all its feathers, well — its nest is not tied here like the oil industry was.”

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Andrew Wilson, a former SNP politician who chaired the Scottish government’s Sustainable Growth Commission, says focusing too much on oil in 2014 was a mistake. “There’s no doubt that the oil campaign galvanised things in the 1970s, but by the last referendum it had stopped changing hearts and minds.

“Oil should have been treated solely as a bonus and has to be treated that way in the future,” he says. “That shift has been liberating for the party’s thinking.”

Whatever happens with independence, the importance of a proper oil — or post-oil — strategy is going to be paramount. For Devine, the historian, Scotland’s first energy windfall was grievously misused. He argues that the oil revenues the government received in the 1980s allowed Margaret Thatcher’s government to kill off heavy industry (and the associated unions) across much of Scotland and the UK “without bankrupting the British state or creating social catastrophe to the point of revolution”.

McCrone agrees that the oil revenues he helped the UK Treasury secure “ended up financing unemployment, which is a tragedy”. He also believes a lot of the oil taxes should have instead been directed to a sovereign wealth fund, pointing to Norway, where the country’s “oil fund” has accumulated $1.3tn in assets since its establishment in 1990. “Back then was the time when the money should have gone into a special fund for the future,” McCrone says. “In the end it drove up the exchange rate and made other industries uncompetitive.”

But while both men are critical of the policies of the 1980s, Devine believes they inadvertently laid the groundwork for Scotland’s independence movement today by giving the country the confidence of a more modern and diverse economy once other industries expanded in the 1990s. “We’ve come out of the end of deindustrialisation,” says Devine, “and the result is we have a firm foundation of a modern economy.”

Whether independent or not, critics say the country needs to avoid squandering new opportunities in renewables. “Scotland needs to be looking very carefully at a national energy company,” says Winchester, the government adviser, “as the most idiotic thing that happened in the entire development of the UK North Sea was not starting a national oil company.”

Winchester points to Norway, where Equinor – formerly Statoil – “has been a champion of its entire supply chain” creating a commercially run state energy company whose value goes far beyond its publicly listed market capitalisation of $62bn. Denmark’s own state oil company transformed into Orsted, a renewable energy company, back in 2017 and is the world’s largest offshore wind operator.

McCrone says that if Scotland became independent today without significant oil and gas revenues, “it would be able to manage” but could face “a very difficult period,” though he thinks eventually “it might do better if it was independent and could rejoin the European market”. But he believes the country needs to learn the lessons of the past. “It’s a very different era,” he says. “But we certainly missed a lot of opportunities. The issue now is how we deal with the future.”

David Sheppard runs the FT’s oil, gas and energy transition coverage. Nathalie Thomas is the FT’s energy correspondent

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