ALMOST unnoticed and driven by two key factors, the past year has seen a dramatic improvement in the returns now being made from exploration and production (E&P) activities in the North Sea. Such is the extent of this improvement that net returns from oil and gas activities are now comparable with those being made at the time of the last referendum. The first factor involved is that the cost of producing oil has been reduced from $30 per barrel to $15, and the other is the fall in the value of the pound against the US dollar due to Brexit.
To confirm the above contention we need to examine the three key components of gross profit margins in the E&P industry, ie the selling price of oil, the cost of production of the oil, and of course currency fluctuations between the pound and the dollar.
In 2014, the oil price averaged around $90 per barrel with production costs around $30. At an average exchange rate of 1.64, the $60 per barrel gross profit was equivalent to £36.60 per barrel. Today the oil price is around $60 per barrel but the production costs have been reduced by 50 per cent to $15 per barrel. At the present exchange rate of 1.25, the present gross profit of $45 per barrel is now equivalent to £36.
Taking account of estimations and rounding, it can be seen from the above that current gross profit margins from oil are back at near enough 2014 levels, a remarkable turnaround considering all the negative commentaries from those who have been bleating that the fall in the oil price has destroyed the case for independence.
This turnaround isn’t confined only to oil exploration and production. A Scottish niche player in the sector recently announced in its annual accounts that the costs to produce gas from its fields in the Netherlands have fallen to the equivalent of $10 per barrel. The oil price is simply one factor that makes up the total returns from oil and gas activities – the gross profit from production and the currency fluctuations are just as important to the net revenues that Scotland can expect from its oil and gas resources. Because of the likely deleterious effect of Brexit on the pound, and the change of regime in Saudi Arabia, it could also reasonably be argued that existing gross margins in oil and gas are sustainable well into the future, not solely reliant on the price of Brent crude.
All of the above is extremely important in framing the future policy for North Sea oil and gas. Present estimates vary but it is calculated that there are still around 20-30 billion barrels of oil to be extracted from known fields. How much is yet to be discovered in areas such as West of Shetland, etc, is not known at this time but is considerable.
For a nation with a population of 5.3 million these are enormous resources which, if properly utilised, could sustain the economy for many decades. This, however, will only be possible if Scotland is independent and able to husband these resources in the same way as Norway. To this end, an equivalent of Norway’s Statoil would ensure that Scotland fully benefits from future licensing rounds, discoveries, and so on.
Surplus revenues could be accumulated in a sovereign wealth fund and used for further long-term investment in the various industries, in order to provide for a time that oil and gas extraction is either exhausted or no longer seen as an acceptable use of the planet’s resources. In this way Scotland would create a virtuous circle whereby revenues from the old fossil fuel industry would be invested to develop the clean renewable industries of the future. Alternatively we could sit back and watch the birthright of our grandchildren disappear once again into the black hole of the Westminster Treasury!
John Jones
Ayr
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