Preparations are under way for a referendum on independence for Scotland to be held on Sept. 18, 2014. The legal implications for the UK oil and gas industry of an independent Scotland can be expected to take center stage in the debate. The prospect of an independent Scotland raises a whole range of complex and unprecedented legal issues, both domestically and internationally.

Domestic legal implications

Regardless of whether one views the ultimate outcome of independence as positive or negative, it is inevitable that independence would lead to a period of uncertainty until the regulatory regime applicable in Scotland became clear. A vote for independence would trigger the negotiation of an independence statute or treaty. To avoid a legal vacuum, in previous cases the independence statute has provided that, with exceptions, all Westminster legislation in force immediately before independence should continue in force unless and until repealed by the legislature of the newly independent state. The UK Petroleum Act of 1998 and licenses issued under it would therefore be likely to continue to apply unless and until the Scottish government chose to alter them. However, particular issues would arise regarding the transfer of rights and obligations in relation to those licenses (and in particular, producing fields) that straddled any putative delimitation line between the UK and a new Scottish state.

For those cross-border fields a new treaty would be required between the UK and Scotland similar to the existing UK/ Norway treaty addressing issues such as jurisdiction, consenting, HSE standards, and decommissioning. A double taxation treaty between the two nations would also be required. While these were being negotiated, investment in cross-border fields would likely be inhibited.

A new Scottish administration would presumably not wish to unsettle the industry by making precipitate changes to regulation; indeed, Scottish National Party (SNP) ministers have stated that no changes in the fiscal regime would be made without consultation. However, given statements from SNP ministers about the significance and potential of the oil and gas industry for the Scottish economy, a new Scottish government might in due course seek to increase obligations on operators though license terms or the tax system. Any uncertainty as to future policy in this area could have a significant chilling effect on investment.

Critical in this respect would be clarity with respect to tax relief on decommissioning of infrastructure. A two-year consultation process between industry and government leaders is due to culminate in the introduction of a finance bill addressing the necessary legislative changes to allow the UK government to issue decommissioning relief deeds and provide certainty on tax relief. However, many of the more expensive installations to be decommissioned in future years are in the Scottish sector. The SNP has indicated that it supports this project and would honor the deeds, but this would be subject to the negotiation of an agreement with Westminster regarding the sharing of the liability. A successful outcome to this negotiation would be critical to avoid a return to pretax security (which in turn could trigger defaults under security agreements) and possibly premature decommissioning.

One urgent task for an incoming administration would be to replicate the various UK regulatory bodies, such as the Department of Energy and Climate Control and the Health and Safety Executive, which likely would require significant additional recruitment. Recruitment is a challenge for these regulators today given that they compete for staff with a high-paying industry. There would be the potential for a significant chilling effect as a new administration struggled to find the staff to address matters such as license applications, transfers, drilling consents, safety cases, and the like.

International law implications

The prospect of Scottish independence also raises a wide variety of international law issues. The international community can be expected to treat the remainder of the UK as continuing the UK’s treaty rights and obligations, including the constituent treaties of international organizations of which the UK is a member. The question of Scottish membership of such organizations is primarily governed by the rules concerning acquisition of membership and any other relevant rules of the organization concerned. As regards EU membership, Scottish secession from the UK, which is an EU member state, would trigger an unprecedented situation – one that is not expressly foreseen within the EU legal framework. As a result, the procedure for Scottish accession to the EU could be cumbersome. The rest of the UK can be expected to remain a member of the United Nations and its 16 specialized agencies – including the international financial institutions. Scotland would have to apply for membership in such bodies, similar to the situation that South Sudan faced after it seceded from the Republic of the Sudan following an independence referendum in January 2011.

Scottish independence would affect the status of the nearly 14,000 treaties, multilateral and bilateral, currently in force for the UK, including Scotland. In accordance with the rule of nontransmissibility and similar to South Sudan, an independent Scotland would not automatically be a party to such treaties except if they define boundaries or contain rules that are generally accepted as declaratory of general international law (such rules would continue to bind a new Scottish state). As regards offshore oil and gas production, the rule of nontransmissibility raises particular issues under the UN Convention on the Law of the Sea and the Convention for the Protection of the Marine Environment of the Northeast Atlantic, both of which address liabilities arising from decommissioning of offshore installations and the maintenance of pipelines.

Where to draw the boundaries?

An independent Scotland would need to agree to its boundaries with the rest of the UK in accordance with international law. Any boundary treaties in force for the UK would bind an independent Scotland. An independent Scottish government and Westminster can be expected to advance competing maritime claims affecting licensed areas in the North Sea, while the western boundary would present its own complexities. If the Orkney Islands or the Shetland Islands did not join an independent Scotland, the resulting situation would greatly complicate the post-independence boundaries.

Assuming an independent Scotland and Westminster would consent to having the International Court of Justice (ICJ) decide the course of their disputed boundary, ICJ boundary cases have taken at least three, and sometimes more than 10, years to conclude – resulting in uncertainty in the intervening period. In drawing the Anglo-Scottish maritime boundary based on international law, a competent court or tribunal is likely to apply the equidistance method, which if strictly applied would result in a line that cuts through licensed areas and favors Westminster in the North Sea given the geographical configuration of the relevant coast. While Edinburgh and Westminster could, alternatively, agree to create a joint development zone or international unitization in the North Sea as the UK and Norway have done, it is not certain that an arrangement that is workable and sufficient to convince existing investors not to abandon their blocks is feasible in the Anglo-Scottish case.