The possible impact of Brexit on the UK’s oil and gas industry13th Dec 2018
- Oil and gas prices dropped considerably between 2014 and 2017, but the market has since stabilised
- Brexit is unlikely to have a direct effect on the oil and gas market given the UK government’s exclusive competence over the market
- The likely consequences of Brexit are most likely to affect the labour market and external trade in oil and gas; however, exploration and development appears not to have been affected at the present time
In mid-2014, the oil and gas industry was heading into a significant global price crash which was to last for the next 3 years whilst the issue of an “in-out” referendum was being debated in the House of Commons. Brexit became a deciding issue in the election in May 2015 though at the time, its possible impact on oil and gas was given a light touch in the media.
Between 2014 and 2017, companies operating in the UK continental shelf focused on improving production efficiency and on pumping additional oil from existing reserves, cutting their exploration and development budgets substantially. However, oil and gas prices have now largely recovered.
There is debate as to whether development investment had slowed due to the scars left by the oil price crash or companies’ uncertainty over the Brexit deal – or a combination of the two.
After the “no-confidence” vote, rumours of a second referendum and even a possible general election, most would be forgiven for assuming the worst in terms of investment in industry.
However, the recent investment decisions of the Norwegian state-backed energy company, Equinor, formerly known as Statoil, BP, Total SA and Royal Dutch Shell would suggest that the lack of investment up until 2017 was not caused by uncertainty over Brexit. All these companies have in the last year approved long-term projects in the North Sea or around UK coast lines– at a time when the type of Brexit, and indeed most recently whether there would be a Brexit at all, was uncertain. While these decisions would have been made before the outcome of the Referendum was known in 2016, Brexit did not cause enough of a shock to these companies to shelve such investment plans.
Since energy policy, including licensing and taxation of exploration and development of reserves was always within the UK government’s sole competency (the Petroleum Act 1998) Brexit is unlikely to have a material effect on regulation of the industry.
However, there is a possible impact on labour resources and trade.
In 2017, the trade body for the UK oil and gas industry commissioned research into the likely impact of Brexit and found “of those directly employed by the oil and gas industry in the UK, 90% are UK national, 5% are EU workers from countries other than the UK and 5% are non-EU.” These percentages may seem small but the report points out that within that 5% of EU workers, “70% are skilled, with one in two holding managerial roles”. The loss of these individuals may well provide a disincentive to take on new development projects without these skilled individuals in place.
On trade, the UK oil and gas industry’s report stated that the UK presently does “around £73 billion worth of oil and gas related trade (fuel and non-fuel)” with the rest of world, where “approximately £61 billion of this…related to traded goods, which may be subject to tariffs”.
As a member of the EU, the tariff costs for the UK are around £600 million. The costs of these tariffs will change post-Brexit. How they change depends on the deals struck.
The “Norway model” which has been repeatedly rejected by the Prime Minster would allow to Britain maintain tariff-free access to the single market but would require compliance with the “four freedoms” which former UK Foreign Secretary, Sir Malcolm Rifkind views as “humiliating and indefensible” such that it “creates an impenetrable barrier to remaining in the Single Market.” The Norway model would also not permit Britain the same freedom to negotiate trade deals on its own terms with the rest of the world.
Another possible model is Switzerland. Switzerland does not incur EU tariffs and is free to negotiate trade deals with the rest of the world. However, the network of bilateral agreements governing its relationship with the EU means that Switzerland also had to accept free movement of people and make contributions into the EU budget.
A “hard” or “no deal” Brexit, which the UK oil and gas industry refers to as the “worst case scenario”, would mean the UK reverts to World Trade Organisation rules for importing and exporting. Practically, this would mean double the current tariff costs (around £1.1 billion per annum, assuming trading behaviours remain unchanged). However, this assumes the UK entirely fails to negotiate any improved tariffs with the rest of the world which is unlikely given the new, unfettered independence to negotiate trade deals.
Some commentators believe that Brexit could ultimately bring a financial benefit to the oil and gas industry, as a result of this new negotiating freedom. However, the potential (and in any event, modest) financial gain is unlikely to be the sole, or even the most important, driver in determining the level of development investment in the industry.
Despite the uncertain political landscape, 12 big new developments have been planned and approved for U.K. waters (an increase from the two in 2017) showing the industry’s renewed confidence in the profitable extraction of between 10 to 20 billion barrels of oil equivalent in the UK (see the Oil and Gas Authority’s (OGA) report “UK Oil and Gas: Reserves and Resources” as at end of 2016).
This increase in large-scale investment fortunately comes at a time where other industries are refusing to commit until the Brexit deal is agreed and offers significant labour opportunities for workers in the UK whatever happens in the next 3 years.
Lauren Adams specialises in all aspects of chambers work, including in the areas of construction, engineering, energy, oil and gas, information technology and professional negligence.
Lauren has gained experience of bespoke and standard form contracts, and is familiar with the JCT, NEC and FIDIC forms as well as LOGIC CRINE terms.
Lauren’s domestic practice involves advising on private residential work and large commercial projects, happily undertaking both adjudication and arbitration work. She also is enjoying developing an international practice in arbitration under the ICC, LCIA, DIAC and HKIAC rules, and provides non-contentious advice on prospective construction contracts. She has a special interest in how guarantees and bonds are used in the construction industry, and has written both a Hudson paper and a collaborative paper comparing English and Italian law on the subject.