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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 1970’s. 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 PAC’s 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 companies’ 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 Shell’s case presented to them by four of
Shell’s 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 Locheil’s 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 1960’s.
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 Arabia’s 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 Sheikh’s 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" |
