The Sea of Lost Opportunity: North Sea Oil and Gas, British Industry and the Offshore Supplies Office

By Norman J. Smith

This book is a contribution to the history of a vital stage of UK technical and economic development, perhaps the most important since the Second World War. It shows, from an industrial viewpoint, how the British handled the exploitation of their most significant natural resource gain of the 20th century. Notwithstanding the nearly 30 years of government support through the Offshore Supplies Office, the UK has not reaped the full benefit of the North Sea discoveries; this book attempts to explain why. It will assist governments and industries faced with future instances of unforeseen, specialist and large-scale new demand to manage their reactions more effectively. It also throws light on how governments can pursue strategic industrial objectives while leaving market mechanisms to function with minimal interference, something some administrations – perhaps even the British – may wish to do now or in the future.

• Covers the entire period from the first well offshore Britain until the dismantling of the specific British industrial policy measures for offshore supplies
• Based in large measure upon archives not previously accessed and the private testimony/papers of participants
• 'Drills down' to the level of individual company decisions through case study and other material
• The only properly researched description of how the world’s first major local content initiative developed

• Language: English
• Publisher: Elsevier Science
• Release date: Apr 13, 2011
• ISBN: 9780444536464

Norman J. Smith

Norman Smith holds degrees from Oxford University (M.A.), the City University (M. Phil.) and Aberdeen University (Ph.D.). He has also participated in development programmes at Harvard and INSEAD/CEDEP. He is a Fellow of the Energy Institute and of the Society of Business Economists. His career began in engineering manufacture where he first became involved with the offshore oil and gas industry. After a spell in merchant banking, he was seconded to the Department of Energy. On his return to the private sector, he co-founded and managed an energy consulting company, Smith Rea Energy Associates Ltd (SREA) , and served as director of eight private companies in the oil and gas industry, becoming chairman of three. After retirement, he researched and authored this extensive study of the British supply chain supporting exploration and production activities in the North Sea: The Sea of Lost Opportunity: North Sea Oil and Gas, British Industry and the Offshore Supplies Office. He felt it was important that the story of this extraordinary episode in British economic and technological history should be chronicled by somebody who had been closely involved in it and that he was well qualified to undertake the task. Though now formally retired, he continues to write and would always consider a speaking engagement or even a tantalisingly interesting piece of advisory work. His website is http://normanjsmith.wordpress.com/

Book preview

Dedication

For my wife and family, who saw so little of me for so many years.

List of Tables

Chapter 1

Table 1.1 UK Oil Trade 1964–1974 (Money of the Day) 5

Table 1.2 Summary of Potential Balance of Payments Effects from North Sea Oil (or Oil and Gas) for 1980 (£ billion) 7

Table 1.3 Excess Costs and Programme Delays in Major UK Projects (Late 1950s to Late 1960s) 15

Table 1.4 Attributed Causes of Delay in Construction of Large Industrial Sites 16

Chapter 2

Table 2.1 Some Key Offshore Innovations 1949–1963 34

Chapter 3

Table 3.1 Important Offshore Legislation 1964–1978 68

Table 3.2 Relative Weight of Factors Influencing Government Policy 79

Chapter 5

Table 5.1 UK–U.S. Joint Ventures with Probable OSO Involvement 149

Table 5.2 Some Early British Offshore Champions and Entrepreneurs 154

Table 5.3 Companies Founded by Former Vickers Personnel During the 1970s and 1980s 168

Chapter 7

Table 7.1 Policies Employed in the UK, Norway, and France and Their Beneficiaries 206

Chapter 8

Table 8.1 Public Sector Group’s View of the Main Constraints Faced by British New Entrants to the Offshore Service and Supply Sector 240

Table 8.2 Private Sector Group’s View of the Main Constraints Faced by British New Entrants to the Offshore Service and Supply Sector 241

Table 8.3 Opinions on British Government Support Policies for the Offshore Industry 242

Chapter 10

Table 10.1 Some Post-1998 Initiatives 269

Table 10.2 Recent Foreign Takeovers of British Private Firms with Proprietary Technology and/or Strategic Market Positions 275

List of Charts

Chapter 4

Chart 4.1UKCS Expenditure (2008 prices) 1970–1993 94

Chart 4.2 UKCS Drilling Activity 1964–1993 102

Chapter 6

Chart 6.1 Median Rates of Return on Capital Investment (per cent) 1985–1989 192

Chart 6.2 Profitability Trends 1985–1990 193

Chapter 7

Chart 7.1 UK Content Comparison 215

Chapter 10

Chart 10.1 UKCS Expenditure (2008 prices) 1994–2008 267

Chart 10.2 UKCS Drilling Activity 1994–2009 268

List of Figures

Chapter 2

Figure 2.1 ADMA’s Das Island Base 39

Figure 2.2 Early ADMA well-head platform installation 41

Chapter 3

Figure 3.1 The jack-up drilling rig Sea Gem 63

Figure 3.2 Shell’s Leman Field Alpha Complex 65

Chapter 4

Figure 4.1 The semi-submersible drilling rig Sea Quest 96

Figure 4.2 West Sole gas field 96

Figure 4.3 Forties oil field Alpha production platform 106

Chapter 5

Figure 5.1 Central Cormorant UMC at Rotterdam 132

Figure 5.2 Hutton TLP in the Moray Firth 133

Figure 5.3 End of an Era: Thistle jacket at Laing Offshore Yard 144

Figure 5.4 The Viking Piper Pipelay Barge 151

Figure 5.5 ‘Jim’ atmospheric diving suit 158

Figure 5.6Stadive MSV 161

Figure 5.7Pisces 2 VOL-operated Canadian-built submersible 163

Figure 5.8 Slingsby-built LR class submersible 167

Chapter 8

Figure 8.1 Consub 2 ROV 226

Acknowledgements

Publisher Summary

This chapter acknowledges the people who have contribute to volume seven of the book Handbook of Petroleum Exploration and Production—The Sea of Lost Opportunity, such as Professor Alex Kemp, Dr. Richard Perren, Professor Roger Wootton, and others.

This book could never have been written without the help, assistance, and encouragement of many people. During the research phase, Professor Alex Kemp and Dr. Richard Perren of the University of Aberdeen gave unstinting help and advice, while Professor Roger Wootton of the City University was generous with ideas and sources. Mr. John Westwood of Douglas–Westwood Associates kindly read the draft.

I must also thank the libraries to which I paid so many visits, in particular, the Queen Mother at the University of Aberdeen, the Templeman at the University of Kent, the London Business School, the Energy Institute, and the British Library. In all cases, the staff gave freely of their time and expertise. The same is also true of the staff at The National Archives, the BP Archive, Lloyds Register, and UKOOA (now Oil and Gas UK) where much of my research was conducted. Many veterans of the North Sea oil and gas industry, mainly now in retirement, contributed to the work. Without their knowledge and opinions, so freely given, the content would have been very much the poorer.

Finally, I must thank my wife, Valerie, for her self-sacrifice in allowing this endeavour to over-shadow the early years of our retirement and my daughter, Gail, and her husband, Allan Graham, for helping when my IT skills proved inadequate for the task.

Preface

Norman J. Smith

November, 2010

Publisher Summary

This chapter introduces volume seven of the book Handbook of Petroleum Exploration and Production—The Sea of Lost Opportunity. The book document the great scale, scope, and urgency of the effort required, mainly in the decade beginning in 1965, to come to terms with the unprecedented technical challenges posed by the exploitation of North Sea oil and gas. In addition to organizations individually identified, many other government agencies, professional bodies, academic and research institutions, and individual companies also contributed to the resolution.

I was a member of the generation in Britain that came to maturity in the 1960s. Many of us were less concerned with the pleasures of ‘the swinging sixties’ than with what appeared to be a steady and irreversible decline in our country’s economic and industrial fortunes. We felt that – unless ‘something unforeseen’ turned up – the country lacked an escape route from a future offering more of the depressing same. Many decided to emigrate. This was the era of the ‘ten pound pom’ when a cross-section of a million mainly young people moved to Australia, while the better qualified joined the ‘brain-drain’ to the United States, then excitingly engaged in a ‘space race’ with the USSR. My own new wife and I thought of joining them, but the ‘something’ unforeseen did turn up and we decided to stay.

That ‘something’ was North Sea oil and gas. Suddenly, the United Kingdom had become the possessor of a major new energy source, one that offered the prospect of injecting a massive new source of wealth into the economy at exactly the points where it was most needed – the balance of payments, government revenue, and as a regeneration opportunity for declining regions of the country and whole industrial sectors.

It was this last point which excited me, employed as I was then by a leading producer of capital goods, itself in need of new markets. As I saw it, with its strong oil companies, powerful shipping interests, and an unrivalled history of engineering innovation, the United Kingdom would surely not only be able to satisfy the new domestic demand for offshore goods and services but also go on to take a large share of the overseas offshore markets that were sure to emerge. The British government seemed bound to recognise and encourage this process. I determined to make my career in the offshore oil and gas industry, and for the next 35 or more years that is what I did.

My dreams were not to be fully realised. To be sure, the macroeconomic benefits of North Sea oil and gas duly arrived, facilitating the restructuring of the British economy; even now, they continue to contribute very substantially to the economy. Despite again being mired in an economic crisis, Britain is no longer singled out as ‘the sick man of Europe’; after the ‘credit crunch’ crisis, others now are in much the ‘same boat’ as she is.

However, British-owned firms generally failed to emerge as leading players in the world market for offshore goods and services or even to succeed in unequivocally dominating the domestic market. Despite the fact that for many years the UK Continental Shelf represented the largest and sometimes also the most technically advanced segment of global demand for the goods and services required for the exploitation of offshore oil and gas, few indigenous offshore service and supply businesses of truly international scale developed, leaving the United Kingdom badly placed to gain a significant share of overseas markets.

To that extent, the United Kingdom has not enjoyed the full benefit of the North Sea discoveries, notwithstanding some 25 years of government support through its Offshore Supplies Office (OSO). The task of this book is to attempt to try to explain why. To the best of my knowledge, it is not something that has been attempted for 25 years, if really at all. In other words, it has not been a matter of concern except to those directly engaged in the industry.

Perhaps it should be, and for several reasons. Firstly, it is a contribution to the history of a vital stage of the UK technical and economic development, perhaps the most important since Second World War. Secondly, it shows, from an industrial viewpoint, how the British handled the exploitation of their most significant natural resource gain of the twentieth century. Thirdly, it may assist governments and industries faced with future instances of unforeseen, specialist, and large-scale new demand to manage their reactions more effectively. Fourthly, it throws light on how governments can pursue strategic industrial objectives whilst leaving market mechanisms to function with minimal interference, something some administrations – perhaps even the British – may wish to do now or in the future.

The book does not attempt to fully document the great scale, scope, and urgency of the effort required, mainly in the decade beginning in 1965, to come to terms with the unprecedented technical challenges posed by the exploitation of North Sea oil and gas. In addition to organisations individually identified, many other government agencies, professional bodies, academic and research institutions, and indeed individual companies also contributed to their resolution.

The main focus is upon British-owned businesses; deliberately so, though perhaps British-headquartered would have been a better criterion to adopt. This would recognize that some companies (although in reality only a very small minority) develop a shareholder register in which nationals of the country of origin become a minority, largely as a result of the activities of international institutional investors. However, the operational head office usually remains in the same place along with a decision-making process still rooted in the local culture and thus subject to local pressures.

Few major countries have had as open an attitude towards foreign inward investment or the foreign takeover of established domestic businesses as the United Kingdom, where virtually everything has been permissible, save possibly foreign takeovers of the major companies in the ultimate strategic industry, defence. While foreign direct investment is almost universally welcomed in developed countries, there is often much less enthusiasm for foreign takeovers of existing businesses, particularly where these are deemed to be of strategic importance, a term which itself can be interpreted in different ways. In France, it appears that it extends even to some consumer goods but many other countries take a more restrictive stance, confining controls to activities that affect national security. In most cases, these would include energy supply and its supporting activities where many would seek to ensure that foreign ownership did not come to predominate. Serious scope for disagreement exists on where the balance should correctly lie, making reciprocity difficult to achieve.

Foreign takeovers are usually justified (purely ideological free trade arguments apart) on the basis that they improve productivity and profitability through the introduction of new management techniques and inward technology transfer. As generalisations, there may be some truth in these assertions. However, many British companies in the energy support industry have been acquired, often before having reached maturity, because they offer opportunities for outward technology transfer as well as entry to new markets. Few attempts seem to have been made to assess the effect of foreign takeovers on the tax base (bearing in mind that most acquirers are multinationals with more opportunities for tax planning and transfer pricing than purely local firms) or on employment, particularly on how these extend to supply chains. Taking such factors into account over and above improved capital efficiency (itself primarily a benefit for the new owners), it is not obvious that foreign takeovers always increase the GNP, let alone the tax base.

Moreover, only the most extreme proponents of openness towards foreign-ownership will deny that it can sometimes bring disadvantages extending beyond the ownership of assets and income streams, though still falling short of threats to national security. For instance, major decisions relating to international investment, marketing, research, development, and design are almost always made in the country of control, usually also that of ownership. Employees who are non-nationals may also sometimes have additional obstacles to overcome to reach the most senior management positions in the controlling entity.

In the case of industries dependent on the exploitation of a non-renewable natural resource, the eventual decline of local activity is more likely to lead to the ultimate withdrawal of a foreign rather than a domestic owner, which will normally maintain its corporate functions and can seek additional overseas business without fear of intragroup conflict.

The period covered by the main chronological narrative begins with the drilling of the first well offshore the United Kingdom in 1963 and ends in 1993 the year of implementation of the European Single Market Act, which effectively ended government support for the British offshore service and supply industry. The main emphasis is on the industry’s formative years, broadly 1965–1980. In addition to the introductory and chronological narratives, industry segment and corporate case studies are presented, giving some insight into the factors driving the decisions of individual managements and to the outcomes. A postscript deals very briefly with events since1993.

Trying to assess OSO is a thankless task as it is impossible to know what would have happened in its absence. Inevitably, an attempt must be made to explain why the overall outcome was what it was and to suggest how British industrial performance might have been improved in the conditions then pertaining.

As far as the economic background to the period studied is concerned, the published sources employed were extensive. Official publications apart, the works of Robinson and Morgan (1976 and 1978) provided the most comprehensive coverage of the implications of the North Sea to the balance of payments. With respect to Britain’s perceived economic decline, no parallel existed, with diverse opinions offered by many different authors. Explanations ranged from the very broad, such as the inherited institutional failings postulated by Elbaum and Lazonick (1986), to the very narrow, such as the social attitudes of the upper classes suggested by Wiener (1981).

North Sea oil and gas also generated a very large literature of its own, most in paper format but Internet and recorded speech resources were also involved. Only a small proportion of the material was of more than peripheral relevance to the issues of central concern to this work. A few of the general ‘overview’ works, particularly Arnold (1978) and Harvie (1994), did provide some useful material and there were additionally a small number of publications directly dealing with government industrial support policies, namely Jenkin (1981), Cook and Surrey (1983), and Cameron (1986). Hallwood (1986 and 1990) had published material bearing specifically on offshore supply business issues from both theoretical and practical standpoints, but his scope was narrow, focusing on service companies in the Aberdeen area. An unpublished PhD thesis (Pike 1991) took a rather broader view but still suffered from having a Scottish rather than a UK-wide focus.

Overall, a publications’ review encouraged me to believe that his work would fill a gap in the North Sea literature by offering an integration of public policy concerns with ‘hands-on’ business issues, drawing in part on my own experience at a senior level both in OSO and the private sector. Nothing of this nature was identified in the literature.

Archive work was of more importance than the literature review and much of the previously unpublished content derives from the National and BP Archives and from United Kingdom Offshore Operators Association (UKOOA) records. The last had the added benefit of opening a ‘window’ to the records of bodies where UKOOA was a corporate member, such as minutes of the Oil Industry Liaison Committee (OILCO). In the first two cases, there was a ‘thirty year’ disclosure rule, but UKOOA granted access up to 1995. This obviated the need to make more than limited use of the Freedom of Information Act, a decision facilitated by the knowledge that relatively few of the files of the government department of most interest, OSO, had been preserved and that those that had seemed unrepresentative in character.

With respect to National Archive files, it was decided to try to identify the main themes that seemed to be present irrespective of the party in power. How to do this effectively presented a difficult problem given the large amount of material available from a variety of official sources. It is most unlikely that everything of relevance was unearthed. Parliamentary debates and political party policy statements were largely, though not entirely, ignored.

Over 30 participants in events were consulted directly, the majority by face-to-face interview and/or questionnaire, although there were also telephone and e-mail enquiries. A few people also provided me with private papers, in one case specially prepared. The respondents are characterised in the text by type of position rather than individually identified. Although not a statistical sample, it is believed that the informants were reasonably representative of decision takers and managers. They included ministers, senior civil servants both within and outside OSO, entrepreneurs and executives of oil and contracting companies, with US, French, and Norwegian nationals among them. My own recollections, as a participant, have been included, as far as possible without drawing attention to their origin. This last point raises the question of how objective I have been, particularly about OSO, which I had the privilege to direct for a short but exciting period. It is a fair question but one for the reader to answer. I can only say that I have done my best to avoid an autobiographical bias and to be as accurate as I can. Nevertheless, I must ask readers to accept that recollections stretching back 40 or more years may not always be entirely correct, an observation that applies to my kind respondents as well as me. If bias and errors arise from overreliance on my personal recollection, they are likely to be concentrated in Chapter 5.

Where considered necessary for comparative purposes, monetary values are shown in both ‘money of the day’ and constant (2008) price terms, the adjustment being made by use of the Gross Domestic Product (GDP) deflator calculators developed for the £ sterling by L. H. Officer and for the US $ by S. H. Williamson. I must thank the originators for their agreement to this. The oil price is always given in US $, whether at current or constant prices.

Finally, with reference to the book’s illustrations, I was surprised to discover that even reputable image suppliers such as those I have used cannot always be absolutely certain that they are the copyright holders of a particular image. In such cases, I have made an effort to identify possible alternative copyright holders. However, if I have nonetheless been guilty of any inadvertent infringement, I can only apologise and invite the copyright holders to contact me.

Chapter 1

In Europe’s Sick Bay

Britain before North Sea Oil

Norman J. Smith

Abstract

This chapter ‘sets the scene’ in terms of the difficult UK Economic and Industrial Environment prior to the discovery of offshore oil and the expectations the latter engendered. The questions of how to catalyse a British offshore supply industry and to measure the effectiveness of government policy are raised.

Keywords

economic difficulties; industrial decline; balance of payments; major projects; supply sector

Although it may seem strange to devote the opening pages of a book about the North Sea offshore oil and gas industry to broad economic and industrial issues, it is important to do so. Appreciating the circumstances and perceptions of the time offers the prospect of an insight into the mind-sets of those who made the policy decisions 50 or so years ago.

When the offshore industry reached the United Kingdom (UK) in the 1960s, the country already had a well-developed industrial base and much prior experience in the exploitation of oil and gas. It was the domicile of some of the world’s largest exploration and production companies.

At the same time the British economy was facing considerable difficulties. It was inflexible in character – a result of government industrial policies, poor management, entrenched trade union power and a scarcity of venture capital. Governments became increasingly pre-occupied with a range of negative economic indicators such as balance of payment deficits, the public finances, poor productivity growth, strikes, increasing unemployment and rising inflation. There was a widespread perception that Britain was in relative economic decline. It became commonplace to speak of the combination of negative trends in terms of a ‘British disease’, which – unless cured – would condemn the UK to grow at a slower rate than its peers.

The long-term outlook appeared to be one of over-extension and continued relative decline, with short-term policy driven by the balance of payments and exchange rate considerations. Inevitably, once it became clear that this newly arrived industry was likely to add a significant increment to the nation’s resources and to make its most substantial impact by easing the balance of payments constraint, it became the focus of political attention. This attention was to be heightened by the hope that substantial economic benefits would flow to the areas closest to the oil and gas fields, many characterised by declining heavy industries and rising unemployment. From the early 1970s, government concern over security of oil supply – shared by the oil companies, whose interests were otherwise purely commercial – added another powerful driver.

Whilst there are grounds to criticise British government policies towards the offshore supplies industry, such criticisms need to recognise that, in addition to immediate crises such as the 1972 and 1974 coal miners’ strikes and the 1973 oil price hike, governments were heavily constrained by what were seen at the time as long-term economic problems of a structural nature. For investors in what was from the outset a costly and risky endeavour, having to address the high expectations of the government and the public whilst seeking to meet their own business objectives was challenging. It was not made easier by the fact that the very British industries to which it would be natural to turn to as suppliers, such as shipbuilding and major capital project construction, were clearly already facing great difficulties.

1.1 The british balance of payments problem

In the then world of fixed exchange rates and with the pound sterling still having the status of a reserve currency for many of the UK’s former dependencies, the most pressing of the constraints faced by British governments was usually the balance of payments. The balance of payments was thus commonly perceived as the main ‘driver’ of short-term government economic policy. Thus, the importance of the shift from being a net oil importer to being a net exporter, which followed the development of the United Kingdom Continental Shelf (UKCS), should not be underestimated, particularly because it also brought security of oil supply and increased government revenues in its wake.

During the period from 1947 to 1976, Kirby (1991, p. 23) recognised no less than eight cycles of boom and slump, a pattern that became known as the ‘stop–go’ cycle. Two of these, 1964–1967 and 1973–1976, respectively, saw the genesis of the British offshore gas industry and the most active phase of British offshore oil development. Conditions in both these periods were ‘extreme’ in terms of factors other than their protracted length, with correspondingly ‘extreme’ implications for government policy. The first was characterised by a perceived speculative severity that led to sterling devaluation in November 1967, although the current account was actually close to balance (Thirwall and Gibson 1992, p. 238).

The second period, during which the pound sterling was already floating freely, combined a domestic crisis with the international one that followed the Yom Kippur War of 1973, the associated steep increase in oil prices and the Arab oil embargo. At home, a government lacking a clear Parliamentary majority faced industrial unrest, a depreciating currency and rising inflation. On this occasion, the British government was unable to contain the crisis by its own efforts. In June 1976, it was announced that a Group of Ten Nations had loaned it $5.3 billion (Thirwall and Gibson p. 249), roughly $16.2 billion in 2008 terms. This loan formed part of Britain’s growing medium- and long-term foreign currency borrowings, which by November 1976 totalled about $18.5 billion (Arnold 1978, p. 327), over $56.5 billion in 2008 values.

Accumulated mainly in the previous 3 years, with the main repayments falling due in the 1980s when it was believed North Sea oil production would be at its peak, even this level of borrowing did not prove sufficient. At the end of the year Britain provided the International Monetary Fund (IMF) with a Letter of Intent containing commitments about the conduct of economic policy. In return, the IMF and the Group of Ten granted the country standby credits of $3.5 billion, or some $10.7 billion in 2008 terms, although these facilities never needed to be fully implemented (Wass 2008, p. 306).

Typically, balance of payment crises brought periods of economic expansion to a premature end through interest rate increases and associated fiscal and monetary tightening; sometimes more direct action was taken, such as the imposition of the import surcharge in October 1964. The resultant contraction in domestic demand reduced imports and took the pressure off the exchange rate without the need – except in 1949 and 1967 – to devalue the pound sterling. Even after the pound was floated in 1972, the fear of a deteriorating balance of payments being followed by the inflationary consequences of a weakening exchange rate was slow to disappear.

Although the improvement in the balance of payments permitted the reversal of the ‘stop’ measures and the resumption of ‘go’, the cycle reduced the long-term rate of economic growth and the productive potential of the UK because, in the view of Pollard (1984), the reduction of demand during ‘stop’ phases bore particularly hard on investment expenditure.

Pollard saw the origins of the ‘stop–go’ cycle in the legacy of Britain’s position as a victorious power in 1945. The government itself was responsible, in his view, because of its slowness to adjust to Britain’s reduced status in the post-war world when it ceased to be a global imperial power, leading to at least two pretensions.

The first was the maintenance during the period of fixed exchange rates of the Sterling Area, an arrangement through which countries – mainly former British dependencies and including a number of oil producers – used sterling as their international trading currency and held their foreign exchange reserves in London in the form of Sterling Balances. Although it need not always have worked to Britain’s disadvantage, commentators such as Pollard mainly regarded the existence of the Sterling Area and sterling’s status as an international trading currency as sources of weakness, amplifying cyclical balance of payment problems and constraining exchange rate policy by making the maintenance of a fixed parity a guiding principle of economic strategy.

The second was the government’s own expenditure abroad on military expenses, foreign aid, and the servicing of overseas loans required to finance earlier deficits. In this analysis, the underlying cause of the balance of payments problem lay in the inability of the private sector to generate sufficiently large surpluses to finance the official sector’s overseas deficits. Pollard (1992, p. 307) noted the total private balance was in surplus in every individual year between 1961 and 1970. Overall, its surplus for the decade totalled £6.45 billion. By contrast, the total current government balance was in deficit in every individual year and accumulated a total deficit for the decade of £6.14 billion. The position deteriorated in the next decade. Between 1971 and 1980 the total private balance was in deficit in three of the 10 years, although it returned a cumulative surplus of £17.44 billion. The total current government balance remained in deficit in every year, returning a cumulative deficit of £19.45 billion.

1.2 Oil and the balance of payments

By far and away the worst deficit in the total private balance was that of nearly £2.08 billion (about £16.2 billion in 2008 terms) recorded for 1974, the year following the quadrupling of oil prices in late 1973 and to which in large measure it was due.

After the Second World War, the British economy had moved away from its dependence on domestically produced coal towards increasing reliance on imported oil, exposing the visible trade balance to events in world oil markets, as was dramatically illustrated in 1973–1974. Between 1968 and 1972 alone, oil increased its share in primary energy use in the UK from little more than 40% to approaching 50%. Although much of the increase reflected the growth of private motoring, there were also other factors, such as replacement of coal by refined petroleum products in the gas and railway industries and the construction of oil-fired power stations.

As long as oil was cheap (long the case prior to 1973), the growth in imports gave relatively little cause for concern – particularly as British-owned oil and shipping companies earned profits from the trade such that it could be estimated that even at 1974 prices, the foreign exchange cost of imported oil was only about 85% of the total cost (Baring Brothers 1974, p. 56). Moreover, Reddaway (1968) calculated that between 1956 and 1964 the annual post-tax profits of overseas subsidiaries of British oil companies averaged about £120 million, perhaps of the order of £2 billion a year in 2008 terms.

Oil imports grew steadily but did not increase their share of total visible imports much until the effects of the 1973 ‘oil shock’ became apparent in 1974 (see Table 1.1).

Table 1.1

UK Oil Trade 1964–1974 (Money of the Day)

BP (2010), Statistical Review of World Energy.

aArabian Light Crude.

Sources: Treasury (1975), United Kingdom Balance of Payments.

In 1974, the visible deficit on the petroleum trade rose sharply to reach over £3.4 billion (about £26.5 billion in 2008 terms), more than three and a half times greater than the figure for the previous year. The deficit was almost entirely accounted for by crude imports, since trade in oil products was almost in balance.

It is worth noting that, by this time, substantial benefits were already accruing to the UK economy from the production of natural gas, which had begun to flow from the southern North Sea basin in 1967. However, Robinson and Morgan (1978, p. 148) concluded that this did not seem to have much effect on national economic performance, although by 1976 natural gas production should have been yielding a visible trade balance saving of around £1.7 billion (or over £9 billion in 2008 terms). This estimate was based on natural gas production substituting for about 34 million tonnes of oil at the then current oil price. An earlier official estimate – Treasury (1976) – had suggested slightly larger effects, but provided no details of its assumptions, a failing noted later in the same year in Robinson and Morgan (1976, p. 15).

Although the effects of southern North Sea gas production on the economy and on the balance of payments in particular were far from insignificant, they failed to excite the interest generated by North Sea oil, probably because they were not associated in the public mind with potential relief from the ‘oil crisis’ or with an awareness of great technological feats. Indeed, the main impact on the general population of southern North Sea gas was the progressive conversion of virtually all gas appliances to natural gas, itself a successful industrial project of considerable scale.

Even prior to the oil price increases of 1973, it had become apparent that North Sea oil reserves were significant and that there would certainly be production and hence import savings. After the price increases, interest escalated both for commercial and strategic reasons, for the effects were now clearly going to be magnified and almost certainly much larger than those emanating from the southern North Sea basin gas production. As Robinson and Morgan (1978, p. 147) pointed out, with the Saudi Arabian government revenues per barrel of light crude having risen from $0.90 in 1970 to over $11 by late 1975, striking oil at this particular represented ‘remarkable good fortune’ for Britain.

Whilst the oil companies saw the potential of politically secure investments and improved supply flexibility, the government saw the prospect of an immediate improvement in credit-worthiness and a medium-term escape from the balance of payments constraint that had come to dominate its economic policies. The Bank of England (1980, p. 451) recognised that even if North Sea oil did not necessarily prove to be a large windfall gain, it would allow the UK to escape the big losses experienced by other countries.

Although the government necessarily had unpublished internal forecasts, much of the official financing activity undertaken during this period took place prior to the publication of official estimates of the potential effects of oil production on the balance of payments. In any case, with so many other more immediate issues also to consider, it would be wrong to over-estimate the role of prospective North Sea oil revenues in the thinking of those tasked with British economic management in the 1970s. That much is made clear by Wass (2008), a member of this small group. Nonetheless, in his account of the events of 1974–1977, he makes references to the anticipated effect of North Sea oil on the balance of payments, as well as one (p. 333) to its position as a ‘security’ for borrowings.

Forecasts could only be attempted on the basis of comparing the position of a Britain with the North Sea with that of a ‘non-North Sea’ Britain. This required making assessments of a range of industry-specific issues, such as the extent to which foreign financing would offset the cost of imports required for development, or to which the anticipated repatriation of the associated interest, profits and dividends would eat into the visible trade benefits – see Treasury (1977a). Additionally, it demanded a continuation of traditional macro-economic forecasting. None of these could be predicted with much pretence of accuracy, a state of affairs that did not deter many from attempting the calculation.

Many projections of the potential balance of payments effects were produced. Seven, three official and four independent, are compared in Table 1.2 below for 1980, the year in which oil self-sufficiency was achieved. Although the ‘interest rate effect’ (the interest savings/earnings from reductions in official overseas liabilities/increases in overseas official assets) has been removed where explicitly present, other ‘consistency’ alterations could still be made to adjust for differences in approach. Even then, the time (and hence informational) differences would preclude any absolutely direct comparisons.

Table 1.2

Summary of Potential Balance of Payments Effects from North Sea Oil (or Oil and Gas) for 1980 (£ billion)

aAdjusted by GDP deflator at market prices.

bLess interest rate effect.

It would have been asking too much of the forecasters to have expected them to predict the oil price and the sterling/dollar exchange rate with either accuracy or consistency. After the near quadrupling in 1973, the oil price rose slowly in nominal U.S. dollar terms for the rest of the decade before more than doubling in 1979 and rising somewhat further the following year. Until it strengthened sharply at the turn of the decade as the UK approached net self-sufficiency in oil, sterling progressively weakened against the U.S. dollar. Such movements favoured North Sea development and enhanced the size of the prospective balance of payments benefits.

Nevertheless, adjusted by the Gross Domestic Product (GDP) price deflator, only two of the other six forecasts remain outside the plausible range suggested in Robinson and Morgan (1978) and then only narrowly so. Such a ‘consensus’ would have no doubt reinforced the view among decision makers that great balance of payments gains were to be had from a rapid development of North Sea oil.

Space precludes more than a brief mention of the seven individual forecasts or of the differing definitions and assumptions employed. The earliest of the estimates was produced for circulation to clients of a merchant bank in early 1974 – Baring Brothers (1974, pp. 37–40, 51–59). While it made no attempt to consider the indirect balance of payments effects, such as resource displacement, it did address the full range of other issues considered by later forecasters, including both oil and gas effects – making some attempt to distinguish between them – and quantified one factor often ignored elsewhere, loss of earnings from producing oil overseas and shipping it to the UK. It was also highly specific in setting out the assumptions underlying its