Scotland business

Warning over oil production drop

crude oil
Image caption The price of crude oil by the barrel has seen a degree of volatility in recent weeks

An expert in the economics of Britain's oil and gas industry has warned of sharp falls in production over the next five years.

Tony Mackay said disputes over whether Edinburgh or Whitehall controls oil revenue was distracting attention from the challenge of slowing the decline.

He said a study he was preparing estimated the drop could run to 7% per year on average.

That follows a reduction in oil production of 8% during 2011.

Gas production fell 4%, taking the flow of oil and gas last year to only half of its peak, which occurred in 1999 for oil and two years later for gas.

In an update on the Scottish economy, Mr Mackay, who runs Mackay Consultants, said his preliminary estimates of falling production were based on forecasts for each oil and gas field in UK waters, including those under development and possible new fields.

"Such a decline, as in 2011, will have serious implications for the Scottish and UK economies," he wrote.

Higher oil prices in recent months have reduced the impact of the falling volume of oil and gas coming from North Sea fields.

Mr Mackay stated: "However, continuing high oil prices cannot be guaranteed. Capital and operating costs are also rising (in the UK sector), so the operating profit and government revenue per barrel are likely to decline in future."

The economist said it was welcome that oil industry firms in the Aberdeen area had done well at diversifying into overseas markets.

But he added: "Both the UK and Scottish governments should give serious consideration to the implications of the continuing decline in production.

"I believe that the arguments about the control of future oil revenues have become a distraction from sensible discussion about how to slow down that decline."

Earlier this month, the Office of Budget Responsibility issued a revised estimate of what government could expect to earn from UK oil and gas over the next 30 years, saying it would be about half of what the official advisers had projected last year.

This is due to changed assumptions about oil price, with lower prices making it less attractive to oil firms to extract from hard-to-reach reserves.

The UK government's official budget adviser also warned the Treasury will have to give up some of its oil tax revenue as companies write off the costs of decommissioning platforms and pipelines.

Mr Mackay has been criticised in the past for pessimistic forecasts on oil and gas production, but he claimed to have been more accurate than more upbeat projections from the industry itself, and from the UK government.

His comments came as the price of a barrel of crude oil has been volatile in recent weeks.

A Scottish government spokewoman said it had published an oil & gas industry strategy for Scotland in May, aimed at targeting higher long-term recovery rates, greater exports and £30bn annual sales by 2020.

She said: "Clearly the industry requires a stable taxation and regulatory regime to provide confidence and encourage long-term investments, something the Scottish government has consistently supported.

"We will continue to work closely with the sector to deliver excellent services, drive growth and support the on-going success of an industry that has powered the economies of Scotland and the UK over the last 40 years, and which can continue to be a key driver of prosperity in these islands well into the middle of this century."