Reality checking the oil gauge

There are many ways to look at the oil and gas accounts from a Holyrood perspective. Throw in enough numbers, ideally counted in the billions, take five different scenarios, publish it as MSPs are about to head off on their summer holidays, and, well, to borrow a phrase, this was a good day to bury bad news.

Except that it wasn't news. The Scottish government's take on the oil and gas industry had very little new to say that hadn't already been picked over by others.

It was significant as a political event, because it forced ministers to publish a document that conceded what their opponents have been saying for some time - that the estimates for oil and gas revenue, as deployed in the referendum campaign, were somewhat over-optimistic.

As the independence cause moved to the case for full fiscal autonomy, the price of a barrel of Brent crude oil sank from $115 to $63 (the level at which it's been trading this week).

You could argue that all this is merely academic if Scotland is not to get full fiscal autonomy. The way things are, the lowered tax take from offshore oil and gas is absorbed into the UK Treasury accounts, and because of the scale of the UK, the fall in funding has roughly a tenth of the impact.

Indeed, the UK ought to be benefit more than Scotland from cheaper energy, because it has a relatively smaller hydrocarbon sector, so the net gain is from cheaper fuel boosting growth and the tax take.

Output up, costs down

As I've noted before, the Treasury approach to taxing offshore energy has moved from cash cow to donkey work, with government providing sufficient tax carrots to keep the industry drilling and pumping. Because most reserves are increasingly expensive to exploit, there's much less of a windfall liable to tax.

So which numbers are most useful to understand what the Scottish government has published? You can add them up over four years, getting to a total of £2.4bn rising through five scenarios to £10.8bn.

The lowest sum comes from the assumptions of the Office for Budget Responsibility, citing its 5% per year decline in production (drawn from recent experience).

To get to the latter, you have to assume production picks up as a consequence of recent investment, the industry hits its targets for around 30% lower costs, and the price goes up again to $100 per barrel.

I choose not to put much store by the sums added up over four years. It's easy to add a fifth year, and make them look better. What matters is how the tax take in any one year compares with the size of the gap between onshore tax take and spending.

As the Institute of Fiscal Studies calculated, that would - this year - be £7.6bn more than the share of the deficit that the UK is already running. And while George Osborne plans to bring the UK deficit down to zero, the IFS reckons the additional deficit resulting from Scotland's higher tax take would grow towards £10bn per year.

Even the rosiest scenarios from the Scottish government's most recent oil and gas bulletin get nowhere close to plugging that scale of deficit.

Exuberant

So what might be more helpful or meaningful is to focus on one year - for instance next fiscal year, 2016-17. If you take the assumption of a $70 price, the particularly negative Office for Budget Responsibliity trend towards falling production then feeds through to £500m in Scottish tax take.

If production picks up due to recent investment, the tax take rises to £900m. If the industry boosts profits by cutting its costs, you get to £700m. If you add higher production and lower cost factors together, make that £1.1bn.

Or in the most exuberant scenario, you could put the price up to $100, and get to £2.8bn in Scottish tax take.

To simplify things for Reporting Scotland, I've taken the mid-point between the 2016-17 scenarios based on a $70 barrel, at £800m.

The Office for Budget Responsibility has run its own numbers, and come up with between £600m and £800m in each of the next few years. Its pessimism on production trends is the key difference.

(There are, remember, plenty people who argue that the most pessimistic outcome from all this is the precise opposite, that the maximum amount of climate-changing oil and gas is extracted and burned).

Unsurprisingly uncomfortable

The Scottish government's bulletin is impossible to compare directly with last year's edition, as the scenarios were constructed differently.

One of them foresaw rising production but also rising costs, a price of $110, and tax take in 2016-17 of £4.5bn.

Another scenario assumes investment would pick up and production would hit the top end of the industry's own forecasts, leading to production of 2m barrels of oil per day (it's now around 1.4m). That would give Holyrood £7.5bn next financial year - rather close, as it happens, to the IFS figure about the Scottish deficit.

So this is uncomfortable for Scottish government ministers, but unsurprisingly so. It was a reckoning they had to reach some time.

Does this suggest they got things wrong last year? Well, the bulletin goes into some detail about how others were getting it just as wrong, with none of the leading forecasts factoring in the sharp fall in the oil price since last summer.

It also reminds us that there are billions of barrels yet to be extracted. But for all the referendum campaign talk of 24 billion barrels, it's clear from this bulletin how much that lies at the top end of possibilities. A year on, and many barrels having flowed, we're now talking about 23 billion barrels. Of those, 3.5 billion are not currently viable, for either technical or financial reasons, and 9 billion of those barrels are in the 'yet-to-find' category.

Nicola Sturgeon now wants the UK Treasury to introduce new tax breaks to encourage exploratory drilling, which is at very low levels. Whitehall economic boffins are reported to be crunching the numbers on that.

That would, of course, take yet more tax revenue out of the equation, at least for the years until any successful drilling goes into production.