Brad McKay reflects on the implications of Scottish independence for three major industries, the energy, oil, and gas industries, financial services, and defence. In the first of a four part series, Brad introduces his work and turns his attention to the energy and oil and gas sector.
The launch of the white paper by the Scottish government on November 26th is a defining moment in their drive for independence. But what did it mean for business? The answer to this question is likely to differ between sectors and industries. Importantly, its credibility is likely to be predicated on whether or not claims made in the white paper are deliverable by a Scottish government of an independent Scotland. Previously I outlined the ‘big four’ uncertainties for business. They include currency, EU membership, regulation and taxes (of course others also exist, including R&D incentives, support for training etc.). In the white paper each of these uncertainties was addressed. It claims that Scotland would adopt the Sterling, continue as a member of the EU, set up its own, independent regulators, but act in close coordination with the rest of the UK, and that taxes, particularly business taxes, could come down. So how are different sectors likely to receive the claims made? In this blog I’ll present some reflections on its implications for business by focusing on three industries including energy, defence and financial services.
The energy and oil and gas industry
For the oil and gas sector, the white paper argues for a more stable fiscal regime suggesting that currently there are too many changes to it (p. 303). A more stable fiscal regime would almost certainly give a higher degree of certainty, and with it, aid planning, and depending on a range of factors such as access to financial capital to fund projects, the price of oil and gas products and tax rates, investment in the sector. In an independent Scotland the oil and gas sector would become a much more prominent sector with a greater relative contribution to the Scottish GDP, compared to its current standing in the wider UK. One can assume that as a significant ‘enabler’ of the independence enterprise, Scottish ministers would have a vested interest in working closely with the industry to build regulatory capability and ensure that taxes are progressive to encourage increasingly costly investment in the sector, reflecting the changing shape of the industry, which is moving away from the ‘oil majors’, towards smaller companies capable of exploration of and production from the rapidly depleting oil and gas reserves. More attention might also be given to directing resources towards addressing the skills shortage in the sector. This would almost certainly be welcomed by business leaders in the industry.
The creation of a sovereign wealth fund, or energy fund (see p. 305), at such a late stage in the industry‘s life cycle, and just as North Sea oil, production and revenues begin to decline, however, might have been a sensible initiative in the 1970s. Many in the sector will wonder whether setting up such a fund now could realistically be created from existing tax revenues, particularly with so many spending commitments made in the white paper. It will raise questions about whether there could eventually be cost implications for the nearly 2,000 companies, and 200-300 exploration and production companies operating in the sector, and if there were, particularly given that it is likely that tax revenues from the oil and gas sector will be needed for spending commitments, impact on the attractiveness of investing in the sector. Increasing investment in the sector reflects the cost and complexity of exploring for and producing oil and gas from this quickly diminishing North Sea resource. For investment to continue in this frequently volatile sector, taxes must be kept attractive, and often progressive to encourage firms to continue to direct business activity to the North Sea. While Aberdeen has emerged as a world-leading area of excellence in this sector, production and exploration firms are mobile, operate in a global industry, and will continue to look for opportunities that provide the best returns for their business.
A commitment to an integrated UK-wide energy market will be of some comfort to, in particular, the renewables sector (p. 295). Infinis, a major UK renewables company has recently warned publicly in the lead-up to the white paper that the fragmentation of the UK energy market would have a detrimental impact on investment. The white paper gives a clear signal that investment in this sector will continue to be a major initiative in an independent Scotland, which, with a newly established Scottish regulator, would work to ensure a coordinated approach with the rest of the UK, and shared investment, in order to meet Scotland and the UK’s energy needs. This too is, of course, assuming that the UK would be willing to work with Scotland to coordinate the sector. A division between the UK and Scottish electricity market would clearly be of concern to energy companies, and particularly to companies with heavy investment in renewables. Even if, however, a UK-wide energy market were to continue, Scotland would be free to pursue different renewables policies and legislation, which over time could create difficulties in coordinating and maintaining a harmonised electricity market.