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No deal Brexit and the UK oil and gas industry

30 November 2018

This article was first published on Lexis®PSL Energy on 13 November 2018. Click for a free trial of Lexis®PSL

Energy analysis: Selina Hinchliffe, partner, and Andrew Douglas, member of the energy sector team, from Browne Jacobson, consider the potential implications of a ‘no deal’ Brexit in relation to the oil and gas industry. The government has recently published guidance on this topic.

Original news:

Brexit bulletin—UK government publishes second tranche of technical notices on no deal Brexit, LNB News 13/09/2018 113

The Department for Exiting the European Union has published the second tranche of technical notices designed to inform individuals, businesses and public bodies in the UK of the implications of exiting the EU in March 2019 without a deal in place. One notice looks at running an oil or gas business if there’s no Brexit deal—setting out implications for oil and gas energy businesses including oil and gas licensing, exploration and production, environmental protection relating to relevant energy sectors and oil stocking arrangements.

What is the likely impact to the oil and gas industry of a no deal Brexit? Which areas of the oil and gas business will likely be more affected and which ones will likely be less affected? Are there any potential upsides possible?

The supply of oil and gas from interconnectors from EU and non-EU countries are likely to be unaffected by Brexit, at least initially, due to Brexit not directly affecting the sourcing and supply of oil and gas from those countries. If the UK and the EU cannot come to a consensus on Brexit, the UK will have to revert to the current arrangements under the World Trade Organization (WTO) framework.

This issue, however, is not the major issue it is perceived to be. Firstly, these tariffs are expected to be very modest and secondly, the UK is not as reliant as some may think on EU countries for oil and gas. Half of the UK’s gas needs are produced from the North and Irish Seas, and a significant amount comes from Norway, a non-EU country. There are also liquefied natural gas imports from Qatar, not to mention the fracking potential throughout the UK itself. See ‘Where does UK gas come from?’.

A larger concern for the oil and gas sector for the UK should not be sourcing oil and gas but securing a labour force. Theresa May has made it unequivocally clear that the UK will regain control over its borders thus ending free movement of labour from the EU. The oil and gas sector in the UK is dependent on access to international labour— approximately 5% of the workforce consists of non-UK citizens (see ‘Economic Report 2018’). Although, not a high statistic, this is exacerbated by recent reports indicating that the UK oil and gas industry needs to employ 40,000 staff over the next 20 years (see ‘UKCS Work force Dynamics Review’).

Oil and gas companies should ensure that the business has:

  • a strong understanding of its international arrangements, movements of good and services
  • a grasp on the location of their workers and the movement of them between the UK and the EU

This can be done by checking the dependency of the business on foreign workers and implementing strategies to protect the workforce through offering support with visa applications.

Is a lack of supply (as predicted by the US Energy Information Administration (EIA) and backed by PricewaterhouseCoopers (PwC) likely? Could Brexit exacerbate that?

The supply crush predicted by EIA and backed by PwC is without doubt a strong possibility and a no deal Brexit is likely to exacerbate a potential lack of supply of oil and gas. This is because companies may become risk averse, as a result of the overall uncertainty within the sector that comes along with a no deal Brexit and this is likely to affect the volatility of prices.

It should be noted that, while the lack of supply of oil and gas is likely to be exacerbated by Brexit in the UK, the supply implications for the Republic of Ireland is arguably more problematic. It has been widely reported that the major hurdle on current negotiations between the UK and the EU is the border with the Republic of Ireland. In terms of the oil and gas sector in the EU, the UK and Ireland are the most intertwined of any neighbouring EU countries.

According to the British and Irish Chamber of Commerce, Ireland imports 90% of its oil and gas from the UK. Any forecasted supply crush, coupled with the implications of Brexit, could severely worsen the accessibility of oil and gas from the UK, for Ireland. It is unlikely to mean that the lights will be extinguished but it is more likely that price volatility will occur, leading to wholesale increase in oil and gas prices that will ultimately be passed on to the consumer. In order to prevent this possibility, the UK and EU need to come to a solution quickly to mitigate the potential uncertainty regarding oil and gas prices.

Data shows that investments in the oil and gas sector collapsed from 2014–15. Will Brexit further prevent and threaten the much-needed investment in the sector? Or will the recent increase in oil prices likely counteract any meaningful impact of Brexit?

Although the UK has had a long history of involvement in the oil and gas industry, it was sparked into action by the industrial revolution in the 19th century. Since this period, the oil and gas sector has been through all kinds of political and economic uncertainty, from the great depression, the global financial crisis and now a potential no-deal Brexit. It is evident from history that the oil and gas sector is able to bounce back. Recent increases in oil prices will assist with investment and, if the price level is sustained, this could help promote investment in the sector. Having said this, it would be unwise to assume this price increase is likely to remain in light of Brexit, especially if there is a no deal ahead of us.

But in the short term, if Brexit negatively affects the supply of oil and gas and there is a similar correlation with the price, there may be a reduction in the level of investment and innovation in the industry. Those proponents of Brexit have commented that breaking away from the EU, in the long-run, could help stimulate the UK’s energy sector through investment in domestic oil and gas reserves.

The department for Business, Energy and Industrial Strategy on 11 October 2018 provided their guidance on fracking in the UK, commenting on the UK’s promising shale reserves—in particular the 1300 trillion cubic feet of gas in a site in northern England. While these reserves are undeniably lucrative for the UK and helpful in mitigating any potential gas tariff costs incurred through interconnectors with Belgium and the Netherlands, a balancing act may be require between the possible civil discord as a result of the potential negative externalities associated with fracking and the economic viability of the shale gas.

Interviewed by Alex Heshmaty. 

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