Blog: The impact of the Scotland Act on the oil and gas sector

David Ridley

David Ridley  looks at what the Scotland Act means for the oil and gas sector.

The Scotland Act 2016 received Royal Assent on 23 March 2016. It provides for a range of devolved powers to Scotland. It is important that those working in the UK energy industry are aware of what aspects of energy policy are becoming devolved and the practical impact this may have on Scotland’s oil and gas sector.

The licensing of offshore oil and gas extraction will continue to be a reserved matter for the UK government following the Act’s implementation. The power to require consideration for the grant of a licence (such as royalty payments) also remains reserved as this would, in effect, levy an additional tax, and all aspects of taxation of oil and gas receipts remain reserved.

Legislative competence for health and safety and its enforcement likewise remains largely within the power of the UK government. Lord Smith did, however, recommend in the ‘next steps’ segment of the draft legislation that the Scottish and UK governments “work together to review the functions and operations of the Health and Safety Executive in Scotland”, indicating that these matters might become devolved in the future.

So what is now devolved to the Scottish Parliament? The biggest impact that the Scotland Act will have on oil and gas relates to the country’s onshore regime. Section 47 of the Act will devolve the regime for licensing onshore exploration and extraction of oil and gas. The Act does this by defining a Scottish ‘onshore area’. Scottish Ministers will be able to exercise powers under Part 1 of the Petroleum Act 1998 in respect of this area, thus permitting the granting of licences to “search and bore for and get” petroleum onshore. As exploration is only permitted by parties awarded licences in the government’s licensing rounds, this is an important right. It means that the Scottish government will have the ability to decide upon the application process for licencing and any conditions that should be imposed.

Scottish Ministers and the Scottish Parliament already had substantial control of onshore oil and gas activities through planning controls and environmental regulation, which are fully devolved. Nonetheless, by devolving the regime for licensing onshore exploration and extraction of oil and gas, Scottish Ministers have the ability to consider all planning applications for projects onshore and refuse permission for activities in the locations proposed. Regulations regarding the appropriate controls to prevent pollution and protect the environment in respect of onshore production will now also be a matter decided by the Scottish government. Further ancillary powers include the power of inspection and powers to set out model clauses to be incorporated into licences.

The evolution of fracking in countries like the US has led to a great deal of scrutiny into onshore oil and gas production in the UK. This scrutiny is likely to intensify given the approval of fracking in North Yorkshire and Lancashire in 2016. So will the newly granted powers under the Scotland Act mean that onshore drilling will soon commence in Scotland? For a number of reasons such projects are unlikely in the near future. The Scottish government have adopted an approach to unconventional oil and gas that they label as being “cautious and evidence-based”, resulting in a moratorium on onshore unconventional oil and gas (UOG) development. This prevents hydraulic fracturing for shale oil and gas, and coal bed methane extraction taking place until further notice.

Currently, only boreholes to take core samples are permitted onshore in Scotland. The Scottish government’s consultation seeks the views of the public and stakeholders on the findings of its research and whether UOG development should be permitted. Even if UOG development is approved in Scotland in the next few years, the historically low global price of oil and gas means that developing UOG resources in the country is not commercially attractive at present. Complications also exist due to the fact that Scotland’s commercially viable reserves are located predominantly in the densely-populated central belt (between Glasgow and Edinburgh). If development is approved it could theoretically then take 2-6 years for the initial phases of exploration and appraisal of a site before production drilling commences. Production could however last for 15 years if the right site is found, before a decommissioning period of 2-5 years to return the site to its previous state.

The aforementioned consultation closes on 31 May 2017. The Scottish government will then review the responses and evidence and ask Parliament to vote on its recommended approach. A final decision on the future of onshore oil and gas in Scotland is expected by the end of 2017. Whilst it will be very interesting to discover the government’s official standpoint, it is unlikely that the country will witness a boost in onshore development for a number of years.

  • David Ridley is a trainee at Stronachs.