What The Brexit Result Means For The UK Oil And Gas Industry
Britain has woken up this morning to the news that it will be leaving the European Union. The decision, won by a majority of just four percent, is not just the result of months of campaigning by Brexit supporters, but four decades of latent Euroscepticism. The populist will of the people has overruled warnings from politicians, economists, historians and all manner of other experts and set Britain on an uncertain course.
Britain’s exit from the EU has so far got off to a fairly poor start with shares plunging, knocking more than £100bn off the FTSE 100 as the pound plummeted to a 31-year low as panicked traders reacted to the vote and the prospect of recession amid months of market turmoil. Outside the UK, the repercussions of the referendum have been felt across the continent, with the main index in Germany down 10 percent, along with the main share index in France falling 7 percent. Even as far as Japan, global ramifications for markets have been felt following the announcement of Britain’s leave vote.
Amid the Friday morning chaos of the referendum result across markets, global oil prices also fell. The global benchmark of Brent, was trading at $48.30 a barrel. Its U.S. counterpart, West Texas Intermediate, also dropped 5 percent at $47.57 a barrel.
But oil analysts and traders were in agreement that this decline in price was likely to hold only for the short-term. With the pound falling against the U.S. dollar oil prices were expected to fall slightly, with a strong dollar tending to suppress oil prices, as oil is priced in dollars and a stronger dollar makes oil more expensive for holders of foreign currencies.
In the long-term, a greater question mark now looms over the prospects of the UK oil and gas industry, which was already seeing market challenges. Outside of the EU, the UK could seebarriers to trade. There is no clear indication yet of what sort of movement and trade deals a non-EU UK would be able to establish with the European Union. One prospect that will not appeal to multinational oil and gas companies is a possible loss of the free travel arrangement between the UK and EU. Without the free movement of labour, companies could see an increase in bureaucracy and a knock-on costs at a time when the industry is trying to minimise expenses to reduce operating costs.
A possible outcome to the loss of free movement could mean UK workers being confined to the super-mature North Sea industry by EU companies in favour of EU workers. Alternatively, UK workers could seek moves to resource-rich commonwealth countries, including Canada, Australia and Nigeria. This could offer an outlet to a highly trained workforce in the North East, which has struggled recently with the falling price in oil causing disastrous consequences to the local economy, with job losses evident, potentially followed a drop in house prices.
An exit from the EU also raises questions over a second Scottish Independence referendum. The re-emergence of a second ‘Indy Ref’ could create further uncertainty for the industry, potentially resulting in companies delaying or cancelling projects until any outcome is determined. The issues discussed at the time of the first Scottish Independence referendum would likely be revisited, namely, the UK and Scottish Governments would need to determine how to divide the North Sea’s Exclusive Economic Zone, reach agreement as to responsibility for the basin’s significant decommissioning needs and decide how the industry should be regulated going forward.
Regardless of the challenges ahead, many analysts predict that the UK’s oil and natural gas industry are in a better position to weather the storm than utilities providers and alternative-energy developers. In upstream oil and gas, Brexit would not change the most important things – taxation, licensing and regulation. The UK has sovereignty over these areas, not Brussels.
Provided the transition to new trade deals are negotiated smoothly, and quickly, trade flows are unlikely to be disrupted. Assimilating to new regulations are also unlikely to cause too much upset to current working practices. Oil companies are well versed in working within far more hostile and volatile political environments than a United Kingdom outside the EU. A declining price in oil, ageing infrastructure, high operating costs and declining oil reserves remain the primary challenges of the UK oil and gas industry.