A curious look at a curious cat

A curious look at a curious cat

by William Ross
article from Monday 30, October, 2017

WHEN I HEARD Nicola Sturgeon state during the SNP conference that she proposes to launch a new public Scottish Energy Corporation (SEC) to provide cheap energy to help those 900,0000 Scots in energy poverty, I saw it immediately as being yet another car-crash. I still do. Brian Monteith has written about the subject (I thought convincingly) in The Scotsman and recently Jim Sillars has written a thought-provoking piece on the subject for ThinkScotland. Lastly, Eben Wilson has published a critique of Jim's position on ThinkScotland also. Writing as someone who has been in UK and international oil and gas for over thirty years, I would like to add my own take on the debate.

By way of introduction, I am very pleased that Jim is open to debating ideas with a market-oriented website like ThinkScotland. I also applaud ThinkScotland for its openness. We do not need to agree on everything!  One of the most negative consequences of our recent fraught constitutional history is that we are a deeply divided society. We are broken into "clans" who barely speak to one another except through insults. Frankly, I am terrified about how free speech itself is under constant threat here in the UK. I rejoice in the ability to debate ideas and treat one another with respect. I am glad that I am not the only YES supporter who reads a combination of the Daily Telegraph, the National and the Spectator!

First to the SEC as Nicola described it. Its function will be to provide cheap energy to Scottish households. There will be no more considerations of "profit" and "shareholders". To put this in context, the SEC must deliver something meaningful by the next Holyrood elections in 2021 or it will become a rod for the First Minister’s back. Think what needs to be done before that happens.

To start with the SEC must generate or acquire energy on a mass scale. It is theoretically possible that a Scottish state company could go around building lots of windfarms, but such a company could have no advantages over the private sector. It would have to compete with other developers and obtain permits. It would need skilled employees. Would these employees accept civil servant wages? Why would landowners favour an SEC over private developers? Alternatively, the Scottish government could try to acquire existing windfarm operations (as Commonspace envisages) but developers would only sell for market prices. Any concept of state aid would run right into the rules of the EU Commission.  And Nicola wants to remain in the Single Market even after Brexit, so, logically, we would be stuck with EU state aid rules. (Yes, I know it`s all a fantasy but let’s play along)

I am assuming that the SEC would not wish to go into or acquire fossil fuel based generation. That would be destroying the planet, except that electricity from windfarms is only viable because of the constant back-up from inefficient gas and diesel generators. But let’s not spoil the party…

Off course, there would be nothing to stop SEC from buying electricity from existing generators  and selling it on  to individuals but any original sales would be at market prices. How could SEC then sell cheap electricity to families in fuel poverty? If could do so at a loss but who would finance such a loss?

Coming from an energy background, I find the focus on energy costs to be extraordinary. The principal question that a Conservative Government should be asking is whether the retail energy market is properly open to competition. Our regulatory authorities repeatedly find that it is a competitive market. Are there other reasons for energy costs being so high?

The answer of course can be found in green levies. According to an August 2017 report by the Office for Budget Responsibility, "decarbonisation" costs amount to 20% of the average electric bill. Assuming the mindless Climate Change Act of 2008 is not amended, the UK will be paying a whopping £13.5 billion in green energy levies by 2021-22. That is not far off the entire gross amount we shell out to Brussels every year. These levies hurt the poorest people and destroy British industry. Needless to say, Nicola has no desire to reduce the green burdens. She is, after all, only kept in office by the Greens!

I am, therefore, not hopeful about Nicola`s new hobby horse.

But what about Jim’s idea, to expand the role of SEC to involve it in upstream oil and gas and onshore fracking etc?  Eben has a much better grasp of market economics than me and I enjoyed his theoretical analysis very much. However, I think that he does miss one very vital factor. Eben says that Jim over-values "the advantage of natural resources" and rejects the "national interest" monopoly argument often associated with such resources.  Eben fails to recognise that at least in respect of offshore oil and gas, there is no known or workable regime of independent private ownership. The Exclusive Economic Zone is naturally under the dominion of the littoral state. While Eben would no doubt argue (as would I) for private ownership of onshore oil and gas rights, only one significant world jurisdiction allows such rights, the USA.

There is therefore a "natural" state monopoly in the allocation of "upstream" rights to explore and produce hydrocarbons. Blocks allocated to oil companies under licence constitute monopolistic grants giving the licensee the exclusive right, for a given time, and over a certain very clearly defined area, to carry out exploration.  If a discovery is made, the licensee will have an exclusive right to produce the field until it is exhausted.  In the wake of the 2014 Wood Review, we have in the UK seen the emergence of a new regulatory regime that emphasises the maximisation of economic recovery, and gives a new regulatory body, the Oil & Gas Authority unprecedented powers over the UKCS regime.

The new regime treats the activities of licenses offshore, the vital infrastructure that they build and the knowledge that they acquire as being held for the benefit of the Province (UKCS) and nation as a whole. Such activities must thus be co-ordinated in the national interest in a way that would be pointless in general commercial circumstances. Oil companies, in other words, are not Chinese restaurants or furniture manufacturers. For an industry so important to Scotland as offshore oil, I find that our society has virtually no real knowledge of it.

What is the point of this argument? It is just this: Jim may have a case in principle for the allocation of oil and gas licence rights to an SEC. Had Scotland been independent in the 1970s, there would have been a case for the emergence of a "Scotoil" to parallel "Statoil". But the circumstances would have been very particular. A relatively poor European country, Norway, was suddenly faced in 1969 with the wonderful news that Phillips had discovered Ekofisk, a World class oilfield. This was the first oil discovery made in the entire North Sea.

Unlike the UK, in the wake of the Forties and Brent discoveries, Norway did not face a serious energy security threat or see itself as the "Sick man of Europe". The small needs of Norway were to be met with (comparative) oceans of oil. Statoil, and the much later Norwegian Sovereign Wealth Fund, developed in this very favourable environment. And the Norwegians could write the legal rules. They did not need "to take back control". In this respect we should note that the UK did formerly have a regime of UK local content for offshore licences but this ran afoul of the rules of the EU Commission.

In Scotland today, as Jim rightly accepts, an SEC would have to compete with private companies for new licences in regular bidding rounds. Jim suggests that an SEC could acquire existing production, with private finance being made available through security over the asset. There is nothing to say that this cannot be done. National oil companies such as OMV (Austria) and MOL (Hungary) and many others do precisely this sort of thing. The only problem is that UKCS production deals are expensive and difficult to conclude (let me assure you, I know.) If any production deal looks cheap it is because it has a brutal decommissioning cost lurking. Frankly, it is hard to see how a new state company with no track record would be seen as an attractive option for this kind of business. Could such an SEC attract the ambitious oilmen who are required to make a go of a risky venture?  

But let’s assume that an SEC did acquire UKCS production. What would be the consequences? Firstly, it would pay the same taxes as any other licensee. Presently, that means ring-fenced Corporate Tax at 30% and Supplementary Charge at 10 per cent. These taxes are of course calculated on gross profit after all business costs are deducted. The fiscal advantage that the Scottish state would derive  from a successful  SEC would be the right to receive dividends from post-tax profits. Would all this be worthwhile?  Would it be important enough to make a real difference? Personally I think not. But it is an interesting idea.

Jim gives welcome support to fracking. I see that Professor Alex Russell of Robert Gordon University not only supports the fracking ban but also wants to slap a 300 per cent tariff on imports of "shale gas"!  See "Fracking ban is welcome but we also need to take the lead on US shale gas imports", in The National of 26 October. The mind boggles. Does he know, one wonders, that the Ineos tankers are shipping ethane to Grangemouth? Ethane is the vital basic feedstock for petro-chemicals.   What would the Ineos employees in Grangemouth think when their jobs disappear? Remarkably, the good professor is also in favour of cracking down generally on sea-bound trade: "..reducing drastically the volume of shipping across all oceans should be a priority for any nation with pretensions about caring for the environment". Forget about people`s livelihoods. Let’s bring on a new Great Depression!

Perhaps Professor Russell has been advising Nicola on the SEC concept?

You couldn’t make it up!

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