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Dr Robert D McIntyre
Chapter 25 - Itís Scotlandís Oil


Future economic and political historians will have the task of examining the merits and demerits of the handling of the UK energy resources, in the period after the passing of the Continental Shelf Act in 1964.

What the Act did was to vest in the Crown, under the provisions of the Geneva Convention of 1958, the property in petroleum and natural gas in designated areas of the Continental Shelf of the UK and to grant licences to search and bore for these resources and to produce them. In effect, this was possibly the largest piece of public ownership ever undertaken by a British government - Tory in 1964.

The licence system was devised by Angus Beckett, an extremely shrewd civil servant, who became knowledgeable about oil company affairs - some suggested too knowledgeable! No matter what may be said on this account, the general framework of the licensing system has stood the test of time, with the area of the Continental Shelf being divided into blocks and, initially, licences being granted on a discretionary basis to oil companies to search for oil and gas.

Gas was first found in the southern section of the North Sea, and this was extremely beneficial in ensuring that Britain moved away from the production of gas for domestic and industrial purposes from coal to the use of offshore gas from its own resources.

Doubts which were expressed about the UK Continental Shelf bearing oil were dispersed with the discovery of fields by BP and Shell in the early 1970ís. It was then that the North Sea began to get interesting, not only in terms of oil and gas, but also in evaluating what these resources could mean to the future economic development of the UK.

The rounds of licences had been completed on a discretionary basis but, in the Fourth round in 1971, an "auction" system was tried for a number of blocks. A total of £135 ml was put up by the oil companies, £21ml by Shell for one block (211/21 Cormorant). This alerted at least some politicians as to the value of the resources offshore.

A powerful Public Accounts Committee of the House of Commons began to examine the matter, initially under the chairmanship of Harold Lever and, later, under Edmund Dell, a highly intelligent former Labour Minister, who was mainly responsible for the PACís final report.

What the PAC showed was that, though the UK would derive substantial benefits from offshore oil production, the existing regime for taxation of these resources would produce no benefits, due to the fact that the major oil companies would be able to offset overseas tax "losses" against North Sea profits and thus avoid tax payments in the UK. As the PAC report put it, "... although the major oil companies incurred world-wide tax of thousands of millions of dollars, hardly any of this money was paid to the UK Exchequer". The size of this relief meant that huge tax losses of the order of £1,500 ml had been accumulated for some companies, which could be carried forward indefinitely to be set against taxable profits, and these losses were continuing to accumulate.

What was recommended was that the government should take action substantially to improve the effective tax yield from operation on the Continental Shelf and should consider, among other methods, the possibility of imposing a system of quantity taxation and, additionally, before any further round of licences was undertaken, the whole licence system should be reviewed.

Obviously, the Committee was putting forward the suggestion of a barrelage tax and this struck most directly at the oil companiesí interests and they began intense lobbying to convince politicians and civil servants of the demerits of such a system, in that it would inhibit the pace of exploration and production and delay the day when the UK could be self-sufficient in oil. Occasionally, this lobbying had its humorous as well as educational impact especially for the Scots. On one occasion, Shell gave a "briefing" to a number of Labour MPs. Those who were English were most annoyed to have Shellís case presented to them by four of Shellís top executives, including the then Sir Frank McFadszean, the Chairman, plus three other Scots. The MPs complained that they were getting a biased case both ways from the Scots, claiming that, no matter what happened, the Scots would get benefits from the oil either through political or commercial pressures. But pressures of other sorts were taking hold. Throughout the post-war period, the middle east oil producing nations campaigned to obtain a high share of the revenues from their oil. Oil prices were a fiction, in that what was fixed was a "posted price" set by the oil companies. Against this price was set royalties and production costs, and the balance was divided between the companies and the producing nations.

As oil companies made profits in downstream activities (e.g. refining), it was in their interests to have this posted price set low, while it was in the interests of the producing nations to obtain a high share of the oil benefits through royalties and a high posted price.

Major oil companies throughout their existence have had a tendency to appear to conduct an intense competitive battle with each other while, behind the scene, their leaders have sought to come together in order to agree on a mutuality of interest. One good illustration of the latter tendency was the agreement between the forces of Shell, Standard Oil and Anglo-Persian (BP) when their leaders, Henri Deterding, Walter Teagle and Sir John Cadman met in Cameron of Locheilís place at Achnacarry, Invernessshire in 1928 to conclude what is known as the "AS IS" Agreement which was a "pool" arrangement designed to control the costs of production and to ensure that aspiring market competitors would have to face considerable penalties to enter the field - if they desired to be outwith the arrangement.

As the oil companies could combine, so did the producing countries, forming OPEC (Organisation of Petroleum Exporting Countries) in the 1960ís.

The great expansion of oil demand of western industrialised countries, and particularly the fact that the US position in the world market became one of a major importer, gave OPEC considerable bargaining power, and this meant that the discipline of the oil companies in setting prices and the share of the take offered to governments was eroded.

At a press conference in London in December, 1973, Sheikh Ahmed Zaki Yamani, Saudi Arabiaís Oil Minister, put it succinctly to one inquirer who complained about the effect of price hypes by OPEC on the economies of western industrialised nations. The Sheikhís reply was a gentle but effective put-down, "What do you want me to do if some one offers me $l5 for a barrel of oil. Say, No, I only want $10?" There may be an effective reply to this but the West could not think of one at the time.

Oil prices over a short period rocketed increasing six-fold. It was in these favourable conditions that the SNP began playing its trump card, "IT'S SCOTLAND'S OIL"


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