Oil industry assesses Brexit risk

24 September 2018
20 September 2018, Week 37, Issue 467

A no-deal Brexit would cause some disruption to the UK oil industry, but would not pose an existential threat, writes Helen Castell in London.

WHAT: The government has stressed it will be business as usual after Brexit. 

WHY: There are concerns about hiring skilled workers from abroad.

WHAT NEXT: A no-deal scenario would cause the value of the pound to sink further, which would reduce North Sea operating costs.

The UK government has sought to reassure the oil and gas industry it will be business as usual after Brexit, even if a deal on trade is not reached.

“The established regime for hydrocarbon licensing and environmental issues will continue to operate [and] the government will amend the relevant legislation to ensure broad continuity,” the government said in a statement on September 13. 

“The government will amend the relevant legislation to ensure broad continuity,” it added. “The legislative changes will have to impact on energy sector businesses, whose residual obligations under the legislations covered will remain unaltered.”

Julia Derrick, oil and gas partner at law firm Ashurst, agreed. Even under the worst-case scenario of a no-deal Brexit, “the licensing and environmental regime relevant to the upstream industry will remain broadly the same” and “no action needs to be taken by UK or EU countries,” she said.  

The UK will also remain a member of the IEA and will still be obliged to stockpile 90 days’ worth of net oil imports.

The government has advised that the terms under which companies are obliged to hold oil stockpiles to meet IEA rules could change under Brexit, potentially resulting in the UK requiring firms to store around 35 million barrels rather than around 76 million barrels under EU rules.

This could weaken the country’s energy security and make consumers and industry more vulnerable to any future oil price spikes.

The government’s comments follow hard on Oil and Gas UK’s (OGUK’s) 2018 economic report, which was much more pessimistic than Whitehall’s view. According to the trade body, oil and gas platforms in the UK could face complete shutdown if the shape of any Brexit deal – or lack of one – creates complications with hiring skilled workers from abroad.

In particular, any difficulties in recruiting skilled engineers to operate emergency response and rescue vessels could force operators to close down operations and production at oil and gas platforms, it warned.

Despite government assertions that UK oil and gas companies would be able to continue hiring EU workers as normal until 2020, OGUK argued it was “vital that arrangements are in place between the UK and EU to allow the continued frictionless movement of people.”

To achieve this, Whitehall must maintain a voice in Europe and to negotiate smooth access to EU markets and labour, the organisation said. Workers from EU countries other than the UK account for about 5% of workers in the British oil and gas industry.

OGUK also warned a no-deal Brexit and the reversion to WTO rules could add up to GBP500 million (US$662 million) to the oil and gas industry’s trading costs, although this is by far its worst-case scenario.

Sinead Lynch, Royal Dutch Shell’s country head for the UK, has flagged “additional costs” that the oil major expects to experience following Brexit but has not detailed what these would be. Combine these with expectations of an additional administrative burden and more complexity, this is “completely the wrong direction when you think about what we are trying to do in the industry,” she said, before stressing “there is no existential threat around Brexit.”

Deal or no deal

There are some ways in which Brexit – deal or no-deal – might actually be good for energy companies operating in the UK, albeit to a modest degree. 

Any further depreciation in the British pound against the US dollar, in which oil revenue is priced, would reduce North Sea operating costs, which have already been trimmed aggressively since the 2014 oil price crash. It is now around 30% cheaper to produce a barrel of oil from the North Sea than pre-2014, and while the number of wells being drilled is lower, they are operating more efficiently. Local labour in particular would become cheaper relative to potential revenue.

And while reserves in mature UK basins are becoming harder to reach, the country remains an important source of oil and gas that the EU will have no jurisdiction over. Output is forecast to hit 1.75 million boepd this year – up 7% on 2017. 

According to BP’s latest Statistical Review, UK and fellow non-EU member Norway currently account for 84% of all production in the continent. This gives the industry some leverage.

Ultimately, any negative impact from Brexit on the UK oil and gas industry will likely pale into insignificance compared with the multiple risks the industry factors in on a daily basis. Yes, administrative costs may creep up and trading complexities will emerge – and eventually be ironed out; but in an industry where a US$10 slide in the global oil price can make multi-million dollar projects unfeasible and cost thousands of jobs, the industry has bigger reasons to stay awake at night.

Edited by

Ryan Stevenson

Managing Editor

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