The Times They Are A-Changin’: Missed Opportunities

 

‘Non, je ne regrette rien C’est payé, balayé, oublié’ ⁽¹⁾

 

 

As a result of Trump wanting to “drill baby, drill”, and the oils shock caused by his Iran War, North Sea oil has become a hot topic for our wannabe Trumps.

 

The Tory leader, Kemi Badenoch, wants to “get Britain drilling”, opening new oil and gas fields in the North Sea, to maximise production, as a means of cutting energy bills.

Previously, the party seemed to understand that the oil and gas produced in our waters is sold by private companies on international markets, which set the price, meaning there is no discount or advantage for UK consumers.

Now, they have moved on, new drilling along with tax reforms is the basis of their plans for energy bill savings of £200 per household.

Their logic behind this is rather convoluted, as they propose to scrap one of the major sources of tax revenue: the energy profits levy, which, to date has raised C.£12bn. The levy was instigated by Rishi Sunak after Russia’s 2022 invasion of Ukraine led to fuel prices soaring.

There are also claims about job retention and creation, however, new drilling isn’t likely to mean a jobs bonanza, given the rapid depletion of reserves.

Instead, the future is for workers to turn their skills to renewable energy sources, such as offshore windfarms, and potentially carbon capture and storage, and green hydrogen production.

 

‘the future is for workers to turn their skills to renewable energy sources’

 

CBI research shows that our net zero green economy supports over 1.1 million full-time equivalent jobs, whereas the declining North Sea oil and gas basin provides roughly 60,000 direct jobs plus C.100,000 indirect and supply chain roles. https://www.cbi.org.uk/articles/net-gains-the-uks-net-zero-economy-in-2025/

So much for the future, the big story lies in the past.

Reserves in the North Sea Basin were split between us and Norway.

One used the opportunity to benefit the nation, the other, based on free-market dogma, squandered them on the lucky few.

Analysis of official government statistics show that the U.K. generated $470 billion in revenues whilst Norway has generated $1,197 billion since 1971 in real (2014) terms.

Unlike Norway, who established a sovereign wealth fund to invest its oil windfalls for future generations, we chose to distribute the profits in two main ways:

The Thatcher government used the income to fund the costs of mass unemployment, cushion the impacts of deindustrialisation, and finance tax cuts. Successive governments integrated these revenues into day-to-day public spending rather than creating a lasting national endowment.

Secondly, the vast majority of extraction was handled by private oil companies. BP and Shell, alongside American operators, generated massive profits from fields licensed on relatively generous terms. Over time, a significant amount of these assets and revenues has remained in the hands of global private investors and foreign state-owned entities.

The U.K. and Norway both began offshore exploration and production in the mid-1960s with the first oil discoveries made in 1969. Since then, both countries have produced similar amounts: the U.K. 42.8 billion barrels of oil equivalent (boe) and Norway 40 billion boe.

There are however significant differences in the production strategy and governance of the sector.

The U.K. government continued its Thatcherite free-market approach, putting the ownership of production with private business, as a result, our only source of revenue was taxation.

Norway, clearly understanding that the reserves were the states asset for the benefit of all, ensured that over 50% of production was through Statoil (of which the state owns a majority) and state ownership of assets via the State Direct Financial Interest (SDFI), held through Petoro (wholly owned by the state).

The results show that, in monetary terms, the U.K. generated $11.0 per barrels of oil equivalent (boe) compared to Norway’s $29.8 per boe in 2014 prices, $18.8 per boe more in revenue for the state.

 

‘in monetary terms, the U.K. generated $11.0 per barrels of oil equivalent (boe) compared to Norway’s $29.8 per boe in 2014 prices’

 

“The $18.8 per barrel extra government revenue Norway enjoyed equates to $727 billion in money of the day terms, equivalent to 35% percent of the U.K.’s national debt in 2014.”

There is a lesson here for all free-marketers; “given political stability and competent institutions, a state can have both a relatively high tax burden on its industry and direct ownership of assets, and deliver more revenue for its citizens and still attract investment.”

In fairness, the UK figures are slightly distorted as they exclude earnings from oil company privatisations in the early 1980s of C.£1.2 billion in money of the day terms, and the privatisation of British Gas beyond its oil assets.

As a summary, Norway’s governance model, based on direct state equity and a higher tax burden generated significantly higher revenues. By comparison, we have failed to gain much value from our North Sea assets. https://resourcegovernance.org/articles/did-uk-miss-out-ps400-billion-worth-oil-revenue

Looking forward, almost 30% of North Sea equity licences are held by private equity-backed ventures or former private equity backed companies that entered the market following the crash in oil prices in 2014. What we are now seeing, is that private equity owners are less likely to be aligned with net-zero.

Alongside the fact that only the tax revenue from their profits benefit us, is the fact that most of the oil is exported, leaving us dependent on global market rates for our energy needs.

 

‘most of the oil is exported, leaving us dependent on global market rates for our energy needs’

 

Research by campaign group “Uplift” found that private producers exports 80% of our reserves. In addition, citing research from the UK Climate Change Committee, Uplift argues that even if all proven UK reserves and resources from new fields were extracted, it would only add up to around 1% of European gas demand each year until 2050.

Given that it takes around 28 years from discovery to extraction, it would also likely be at least 2050 – the year the UK has pledged to be net zero – before consumers would benefit.

In addition, production costs are high; normally we rely on competitive imports to keep gas prices down. As a result, rather than UK production reducing gas prices, the opposite is more likely.

Referring to net-zero, right-wing parties are arguing that plans for oil and gas licensing are compatible with that strategy.

However, research from US-based non-profit Global Energy Monitor, shows that “if we were to exploit all remaining reserves in undiscovered and undeveloped fields, in addition to active and planned fields, the expected 7.6 billion tonnes of CO2 equivalent (btCO2e) in emissions would be more than twice the UK’s share of 3.33btCO2e of the remaining global carbon budget for 1.5°C.” https://www.energymonitor.ai/sectors/weekly-data-at-least-40-of-north-sea-oil-and-gas-licences-owned-by-foreign-investors-new-research/?cf-view&cf-closed

As a conclusion, this is just another example of neoliberalism championing the private sector for the benefit of the few at the expense of the majority.

Our North Sea resources were a one-off opportunity, based on finite resources.

 

‘neoliberalism championing the private sector for the benefit of the few at the expense of the majority’

 

Norway capitalised, creating a Government Pension Fund Global, with C.$1.5 to $2 trillion of assets. We have none!

The impact of our mistake is illustrated by their GDP per capita, which is C.1.6 to 1.7x higher than ours. In monetary terms their per capita GDP > $94,000, compared tour C.$38,000 to $54,000.

What else is there to say!?

 

 

“Regrets, I’ve had a few But then again, too few to mention” (1)

 

 hadn’t intended to write this piece, but data showing how well Norway is doing as a result of North Sea oil made me consider what might have been.

It is often said that timing is everything in life. I would add that recognising an opportunity and capitalising on it is equally important.

We saw the opportunity in the North Sea, but deliberately chose not to capitalise on it.

Norway decided to benefit the country and all its people, by ensuring they owned as much of the means of production as possible. As a result they reaped maximum benefit.

The investment gains made by their sovereign wealth fund pay for the majority of their costs. As a result:

·       The average wage is considerably higher, and their working hours shorter.

·       Public investment and their benefits regime is greater,

·       Unemployment is lower.

As a result they are one of the happiest countries.

They also understood risk and reward and were prepared to fund the exploration, which became sunk costs in the early years.

We, addled by free-market neoliberals couldn’t wait to sell the production rights cheaply to private business. Some of that business wasn’t even British.

Of course, the few—the shareholders in these businesses—did incredibly well. The rest of us? Well, it’s the usual story.

Musically, it’s about regrets, unfortunately I suspect the right have none!

We start with “Non, je ne regrette rien” by Édith Piaf, and end with “My Way”, by just about everyone!

Read it and weep!

Philip.

 

 

 

 

 

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

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