Shetland’s second oil boom

Opinion by Energy Voice

I ENJOY visiting Shetland; I spent a lot of time there in the 1970s when the Sullom Voe oil terminal was being built and have been back many times since.

Scotland’s oil and gas industry has become increasingly concentrated in the Aberdeen area over the last decade. The main reason has been the closure of the big fabrication yards at Nigg, Ardersier, Methil and Clydebank, but various smaller facilities in other areas have also shut or relocated, which is to be regretted.

There has also been a decline in Shetland’s oil-related activity, notably with regard to the numbers of supply ships and helicopters.

Nevertheless, the industry remains a very important and well-established part of the local economy, particularly Sullom Voe terminal. Other oil-related facilities include the oil supply and decommissioning base in Lerwick and Sumburgh Airport.

Fortunately for the islands, it seems that a second oil boom is gathering pace, which will not only deliver a short-term construction boost but extend the life of Sullom Voe by another 20-plus years.

The main catalyst is the new developments in the West of Shetland sector; however, there is also a surprising level of new activity in the long-established East Shetland Basin.

I estimate that Shetland’s economic output in 2010 was approximately £385million and that the oil industry accounted for about 15% of that. Taking account of local multiplier effects and the share was just over 20%. Other important industries include fishing, salmon farming and the Shetland Islands Council.

Shetland again has the lowest unemployment rate in the country of just 1.2%, well below the Scottish average of 4.0% and the Glasgow rate of 5.9%. Most of the other local economic indicators are similarly encouraging.

The largest current development is the construction of a £500million gas plant at Sullom Voe to handle gas and condensate from the Laggan and Tormore fields.

There is currently about £9billion investment under way in the West of Shetland area, including Laggan-Tormore (£2.5billion), Clair Ridge (£2.7billion), the redevelopment of Schiehallion and Loyal in Quad 204 (£3billion) and Solan (£750million).

One of the notable features of the industry in Shetland is that the Council established an Oil Fund – known officially as the Shetland Reserve Fund – which is a smaller scale version of what First Minister Alex Salmond wants for Scotland and the State Pension Fund in Norway.

However, I believe that Salmond is too late to achieve his objective, unfortunately. But Shetland set a precedent many years ago, which with hindsight was visionary. There is a similar arrangement in Orkney with the Flotta oil terminal.

The oil money basically goes into three separate funds – the Reserve Fund, the Shetland Charitable Trust and the SIC Pension Fund. The combined value of these three funds is currently about £650million, equivalent to £29,000 per Shetland resident.

The Oil Funds are financed by what can realistically be called a tax on every barrel of oil passing through the Sullom Voe terminal. That was initially deemed illegal by the then Scottish Office in Edinburgh and the UK government in London but forced through by the then Zetland County Council after lengthy negotiations.

They were led by Ian Clark, the legendary chief executive who later became a director of the British National Oil Corporation (BNOC). Ian and I had various differences of opinion in the 1970s about development policies in Shetland but not about the establishment of the Oil Funds.

What has impressed me most about the Shetland Oil Funds over the decades is the sensible use of the money. Similar funds elsewhere have been ravaged by corruption or drained by governments for short-term financial purposes. The basic approach in Shetland has been to build up the capital reserves and only spend the interest earned.

There have been a few problems but most have been minor. The Funds have been badly let down by some of their financial managers, giving very poor returns in some years, but are still very strong. That is likely to continue for at least the next 20 years, given the new West of Shetland developments. From the economic perspective, I have been particularly impressed by the sensible local spending.

Much of that has gone into assisting other local industries such as fishing and salmon farming, and avoiding overdependence on the oil industry, as has occurred in places like Kuwait. Many oil-affected communities around the world can learn lessons from the Shetland model.

Tony Mackay is the MD of energy economists Mackay Consultants