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* Scotland seeks Britain's North Sea oil if it breaks away
* Independent Scotland may face 20 bln pound tax relief cost
* North Sea production in decline, harder to extract
* BP, Shell express concern on Scotland's independence bid
By Karolin Schaps
ABERDEEN, Scotland, March 10 (Reuters) - Scottishnationalists are betting $2.5 trillion of hydrocarbons trappedmiles beneath the North Sea could bankroll an independentScotland, but winning control of the European Union's largestoil reserves would be no blank cheque.
Scotland says the bulk of Britain's North Sea oil and gasreserves are in its waters, while London says any division wouldbe subject to negotiations should Scots vote to end their307-year-old union with England in a referendum on Sept. 18.
Oil is the punch in Scottish First Minister Alex Salmond'spitch for independence: he accuses London of squandering theNorth Sea's mineral wealth and says Scotland would be one of theworld's richest countries if it took control of its own destiny.
But North Sea production is in decline, and an independentScotland would face tens of billions of dollars in reducedrevenues because of the tax relief companies need todecommission 6,200 miles (10,000 kilometres) of pipeline, 5,000wells and 475 rigs and platforms in future decades.
"I think it could be a problem," said Gavin McCrone, aformer British civil servant who has written a book about theconsequences of independence.
McCrone, who warned in a confidential brief for Britishministers in 1974 that North Sea oil would strengthen thenationalist economic case for breaking the union, argues thatwhile an independent Scotland could be viable economically, itcould be in for a bumpy ride for a number of years, depending onits currency, fiscal position and how North Sea revenue ishandled.
The British government has told Scots they will not be ableto keep the pound if they break away and that the size of theUnited Kingdom - whose economy is 10 times the size ofScotland's - puts it in a better position to supportincreasingly expensive North Sea production.
Prime Minister David Cameron, while visiting a BP platform last month in the ETAP fields 150 miles east of theScottish oil city of Aberdeen, made the case for togetherness.
"We can afford the tax allowances, the investment, thelong-term structure that is necessary to ensure we recover asmuch from the North Sea as possible," he said.
Half a century after the first exploration licences weregranted, the prospect of carving up one of the world's mostmature offshore oil and gas basins has prompted a reassessmentof Britain's North Sea oil bonanza and what it would mean for anindependent Scotland.
BRENT
Since Queen Elizabeth pressed a gold-plated BP button tobring the first oil ashore in 1975, the oil and gas trapped inthe ancient valleys below the North Sea has cushioned Britishmanufacturing decline, supported sterling and earned at leasthalf a trillion dollars for the British taxpayer.
Over 42 billion barrels of oil equivalent, enough to satisfyworld oil demand for more than a year, has been extracted fromthe UK Continental Shelf, a vast patchwork of basins where theremains of planktonic algae and rain forests turned into oil andgas over hundreds of millions of years.
Brent, the name of a Shell field that beganproduction in 1975, symbolised Britain's North Sea success:Brent has produced 4 billion barrels of oil equivalent and itbecame one of the world's dominant oil benchmarks.
Aberdeen, formerly a struggling city nestled on the eastcoast of Scotland around 120 miles (200 km) north of the capitalEdinburgh, boomed as the oil flowed, and 137,000 locals, or 60percent of the working population, are now supported by theindustry.
But production in Britain's North Sea peaked in 1999, andthe Brent Delta platform stopped production in 2011.Decommissioning Brent facilities alone will cost several billionpounds, according to Shell.
With depleted reserves, companies have to pay more toextract each barrel, and they face hefty costs to seal wells,dispose of pipelines, and bring rigs back to shore.
The decommissioning will cost the British taxpayer 20billion pounds in tax relief over coming decades. But if Scotsvote for independence, Scotland's taxpayers will have toshoulder at least some of those costs.
"The UK government is obliged to pay a percentage of thedecommissioning cost through tax relief; I am unsure how theScottish Government will meet this liability," said SarahHillyear, operations manager at Decom North Sea, anAberdeen-based industry group focused on oil and gasdecommissioning.
'300,000 POUNDS PER SCOT'
The Scottish government said decommissioning costs should beseen in the context of its 1.5 trillion pound ($2.5 trillion)valuation for reserves, that costs would be relatively small incomparison to forecast tax revenue and that it would also seek acontribution from Britain.
But Britain's statistics office has valued the reserves atonly 120 billion pounds, and while North Sea revenues make upjust 2 percent of the United Kingdom's tax take, they would makeup 16 percent of Scotland's, according to the British Treasury.
Nationalist leader Salmond, a former oil economist at RoyalBank of Scotland, has said North Sea reserves are worth300,000 pounds for each man, woman and child in Scotland.
In an effort to underscore his argument that London hasmismanaged the North Sea's wealth, Salmond has pledged to createNorwegian-style stabilisation and sovereign wealth funds toinsulate public finances and invest for future generations.
But decomissioning costs and Scotland's spending projectionsindicate there is likely to be little oil money left over tobuild that cushion.
Given that an independent Scotland would run a budgetdeficit on its 63.7 billion pound budget, any reductions to oiland gas revenues from tax relief or production declines couldhave a significant impact.
"Scotland's higher dependency on oil and gas revenues couldlimit its fiscal flexibility in the absence of a fund set up topreserve these," Standard & Poor's said. "A new Scottish statewould presumably begin life with a high stock of government debtand revenues highly sensitive to the price of oil."
'BLACK GOLD'
Oil majors such as BP and Shell invested heavily in theearly years of North Sea exploration, but as the basin matured,smaller firms such as Premier Oil or EnQuest nowalso operate fields.
BP Chief Executive Bob Dudley said last month that he wantedthe United Kingdom to stay together, a view echoed by ShellChief Executive Ben van Beurden.
"We're used to operating in uncertain political and economicenvironments. But, given a choice, we want to know as accuratelyas possible what investment conditions will look like 10 or 20years from now," van Beurden said.
Though no companies have yet publicly said they would holdoff on further investment, the uncertainty over Scotland'sfuture fiscal policy could give some investors pause.
"This pretty much guarantees a dip in production down theline," said an energy industry expert who asked not to be named.
Whatever the fiscal challenges, Aberdeen oozes oil wealth:BMW and Mercedes cars nose along roads with names such as BrentRoad or Wellheads Drive; five exclusive golf clubs surround thecity; and a 12-bedroom mansion is on sale for 3 million pounds.
Engineering students at Aberdeen's Robert Gordon Universityare swimming in job offers as oil companies bid for the beststudents. Specialist engineers can earn 800 pounds a day.
"It's just kind of in the air. Most people here work in theindustry," said Jenny McConnachie, subject leader for mechanicalengineering at the university, whose engineering departmentboasts gigantic replicas of Total oil rigs.
For some in Aberdeen, such as Kenny Anderson, the55-year-old owner of a construction firm that receives aroundhalf its business from oil and gas companies, the risks ofindependence should be embraced, not feared.
"Independence will make us more dynamic; we will have tobehave like grown-ups, we will have to take responsibility," hesaid.
