The recent concerns raised by the chief executives of BP and Shell, Bob Dudley and Ben van Beurden, about a possible “yes” outcome in the Scottish referendum might seem a bit puzzling given their huge size and global reach.
Often called “super-majors”, they are more powerful and influential than the companies that traditionally dominated the oil markets many years ago.
With large-scale operations in Nigeria and Russia, both countries near the top of the Corruption Perceptions Index and notoriously difficult to do business in according to independent indicators, we might wonder what kind of Scotland these experienced CEOs see emerging in the near future that concerns them so much they need to share their worries with us.
Expectations of the future are part of the economic modelling that most businesses typically do, and because of the referendum they now have to factor in some additional uncertainty. But for an international company with most of its operations outside of the UK North Sea, why should it matter?
There is an answer and an issue here. The answer lies in the kind of industry that oil has become. These days there are scores of companies with an appetite for risk operating in well over a hundred countries around the world. Political risk is way down their list of concerns, long after rising costs.
Modern oil exploration
The former head of BP, Tony Hayward, is currently leading his new company into Somaliland in East Africa, a secessionist statelet, in which the exploration rights are somewhat uncertain. Bob Dudley had several challenging years at the head of the company’s Russian operation, TNK-BP. Many other oil companies have taken significant risks in Africa in recent years and essentially opened up East Africa to the oil business.
Why might they worry about the Scots doing a Braveheart? The short answer is probably that in all of these international operations it helps to have a relatively strong home state to call on to promote your interests on the international stage from time to time. The UK just about fits the role; an independent Scotland would be less convincing.
Closer to home, the recent Wood Review demonstrates how progress in the UK North Sea will require a completely different approach to regulation to ensure that the economics remain attractive to investors no matter what the outcome of the September vote. Change has to happen if we are to recover much of what is left (and for commercial reasons, oil companies tend to leave a lot in the ground).
The report, whose proposals are largely being backed by the government, is essentially saying that cooperation between government and industry is the order of the day. It wants a new regulatory body set up to ensure that developments are timed and costs are shared so that space is left for a substantial tax take.
What yes means for North Sea reform
If the vote is yes in September, the new regime is going to be a lot more complicated to develop. How is tax relief on new infrastructure going to be implemented when two jurisdictions are “working together”, for instance?
And what about the need to remove ageing platforms from the North Sea? The UK government is currently working out a scheme to address tax relief on decommissioning. Companies must be concerned that whatever emerges will be a scheme that any new Scottish government might be less enthusiastic to sign up to, still less to take over.
So there is an issue: what kind of regulatory system can be developed for the North Sea’s next phase that meets investors’ expectations and needs but fits into the emerging new governance structure? In this area of our economy, change seems to be inevitable if we are to maximise our resources. It will be a source of uncertainties.
Yet for the largest companies the concerns are likely to be different – and this may be the real trigger for the statements from our BP and Shell CEOs. The North Sea is a mature province. For these companies its best years are in the past.
It makes more sense to sell out to new investors, to smaller companies with lower costs. The impending regulatory changes are likely to make the business of find an eager buyer for their North Sea assets a challenging one. But finding a buyer in the current political climate is likely to be even more so.