The Taxman and the Corporate Oil Investor

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I read this years GERS yesterday. GERS stands for Government Expenditure Revenue Scotland and is an analysis of tax flowing from Scotland to the UK Treasury.  As a supporter and promoter of Scottish independence I was very pleased by the contents (or as pleased as you can be taking the source of that document).  It told two very clear stories.

1. The oil revenues were down; no surprise there, well it wasn’t that the oil revenues were down per se, the companies that are investing heavily in the North Sea and have been for the last two years, offset their profits against the costs of that investment, hence the smaller amount being passed to the UK Treasury.

2. The oil revenues were down by £12 billion which should have resulted in a £19 – £20 billion deficit but it didn’t. It ended up as £12.1 billion.  This is very heartening to people like me and supports the argument that Scotland would have a similar economy when independent to the rUK without the oil.  If we had been entirely dependent on the oil, the defecit would be sitting at the £19 – 20 billion figure.  In other words our economy is diverse enough to take “a knock” and handle the resultant wobble.

Now lets simplify some of that because I appreciate that not all of you are closet economists;-

Lets say a businessman has several shops and several garages all doing good business.  He happens upon a great idea to produce a new product, it’s a product where there is a ready enormous market.  All he has to do is build a factory, fill it with equipment and people to make that product and the sales will follow.  Most businessmen would have to have their smile removed under anesthetic when faced with those circumstances.  

All the costs of equipment, building, training of people and anything else you could think of would be offset against the tax he has to pay.  For example, if on previous years he paid £1,000,000 to the taxman then this year he would pay £1,000,000 minus a good proportion of those setup costs.  This is a normal state of affairs.  Most forms of investment are tax deductible.

Now lets relate that to the reality of North Sea investment.  The BBC reported the investment like this;-

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“Investment in the North Sea is the highest for 30 years and rising, according to a report by an oil and gas trade body.  

Companies looking for offshore energy invested £11.4bn in 2012, said Oil and Gas UK, which comprises more than 320 companies active in the area.  

That will rise to £13bn this year (2013), it predicted.

It credited the recent introduction of tax relief to encourage investment in “difficult projects”.

“Here is some really good news for the UK,” said Malcolm Webb, Oil and Gas UK’s chief executive. “After two disappointing years brought about by tax uncertainty (author’s note : tax uncertainty caused by the UK govt) and consequent low investment, the UK continental shelf is now benefitting from record investment in new developments and in existing assets and infrastructure, the strongest for more than three decades.”

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And here is an interesting sub-quote that was added by Douglas Fraser…… 

“Oil and Gas UK, representing the sector and carrying out this survey, links the sharp drop in production over the past couple of years to tax raids by Gordon Brown last decade and by George Osborne in 2011”

image of Douglas Fraser Douglas Fraser Business and economy editor, BBC Scotland

“Chancellor George Osborne (also) passed new relief measures last year so that gas fields in shallow waters will be exempt from a 32% tax on the first £500m of income.”

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So, here we see the “businessman’s factory” being built.  We know why it’s being built, we now understand that it takes a lot of investment, that much is obvious.  In a couple of years the investment will largely be over and the factory will be spilling out product and making lots of profit.  Also the businessman will start paying a lot more money to the taxman, a lot more. 

So there you have it, you now understand why the revenues shown on GERS is low this year and we would expect to see that picture repeated next year with continuing investment taking place right now.

By the time Scotland has regained its independence in 2016, a second oil boom will be taking place and the revenues this time will be flowing into the Scottish treasury where they’ll be put to work for the people of Scotland.

The epilogue….

Last night I watched those like Labour’s Ian Gray on TV prattle on about the oil reserves dwindling and that it’s far too expensive to extract the oil these days and that’s why the revenues to the taxman are diminishing.  Well after the above simple, factual, logical explanation, we know who to avoid for soundbytes next time, don’t we.  (ahem).

Oil exploration and extraction in Scotland’s waters will take us well into the middle (and beyond) of the century.  We have an estimate of 28 billion barrels of oil to come out of there and that doesn’t take the huge fields to the West of Shetland into account and even the awaiting oil boom on the Clyde estuary (we’re only waiting to get rid of the Trident subs first) as you can read about in my blog on the subject in ” https://ncdiblog.wordpress.com/2013/12/09/did-the-mod-block-an-oil-boom-on-the-clyde-they-certainly-did/ “.

As Hanibal in the A-Team says, “I love it when a good plan comes together”.

Kindest regards,

David Milligan Lvss 

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2 thoughts on “The Taxman and the Corporate Oil Investor

  1. Reblogged this on The Babel Fish and commented:
    Have you been hearing the BritNats crowing about how North Sea oil revenues are down in the latest GERS report? Giving it as yet another reason we can’t make it alone? Fed up with all the politicians’ rhetoric? Want to know what it REALLY means? My learned friend David Milligan Lvss explains in plain English.

  2. It just shows, how that they think the people are not clever enough, to work this out!! It’s a basic business plan, investment of setting the tax, It makes me so angery that the better together camp , could and would think, we are so THICK NO TO WORK THIS OUT?????

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