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Brexit: What Could it Mean for the North Sea’s Oil

May 9, 2016

In less than two months UK citizens will make one of their biggest political decisions in more than 40 years: whether to remain or leave the EU trading bloc they have been part of since 1973.

While an exit from the EU could mark a major milestone for the UK economy — the government fears GDP could suffer by over 6% after 15 years — a leave vote is seen having a limited impact on the UK upstream sector. For a start, North Sea oil has been regulated by London since before the UK joined the EU. Offshore safety laws were tweaked by Brussels in the wake of the 2010 US Gulf of Mexico spill, but their scope is limited.

In the short term at least, it is seen as unlikely that there would be any back-peddling on EU legislation which has already been implemented into domestic law. Existing rules, whether originating in Brussels or not, would not fall away on Brexit (British exit from the EU) and it is unlikely that they would simply be repealed.

Further down the road the UK would be free set its own offshore rules, which could diverge with EU legislation. In upstream oil and gas, Brexit would not change the key fiscal regime for the North Sea. London already has sovereignty over corporation tax, licensing and other regulations would not be affected in the short term.

There is also little sense of urgency over an exit vote in the industry. Any changes to the operating environment would be years down the line. Some predict it would take a decade or more for the UK to fully disengage from the EU.

“Is Brexit at the forefront of people’s minds right now as they are doing (North Sea related) deals? No is the answer,” said Julian Nichol, a lawyer at Bracewell which advises energy companies on legal issues. “From a legal perceptive, there is going to be a minimum impact on existing contracts. Brexit per se is not likely to trigger defaults.”

Most multi-national firms support the UK remaining in the EU and Big Oil is also in favor of the status quo. BP’s boss Bob Dudley has said Britain’s role would be “much diminished” if it exits while Shell’s CEO has signed a pro-EU letter saying leaving “would deter investment and threaten jobs.”

Some have suggested that a UK decision to leave could trigger a new vote for Scottish independence, with Scots likely plump for alliance to Brussels rather than London. If Scotland decides to break ties with the UK to keep access to EU markets, uncertainties may resurface over the progress of reforms needed streamline offshore rules.

Labor mobility concerns

Operators could also be forced to comply with two sets of regulations, some suggest.

Ahead of the Scotland’s vote to remain part of the UK in late 2014, industry group Oil & Gas UK flagged implications for the North Sea industry on costs and red tape should London and Edinburgh part ways. North Sea producers, it said, were also vexed over attracting skilled workers to the UK’s highly mobile offshore workforce should Scotland leave. Those same concerns are likely to hold sway for producers in the UK’s current choice over Europe.

The UK would be quick to sidestep any labor supply hiccups, many believe, forging labor migration deals with EU members to replace the bloc’s core free movement of workers principle. One risk of a UK exit is currency depreciation.

The pound could plummet in value, the theory goes, dragged down by uncertainties over the fate of the British economy.

“If that were to happen, upstream operators may benefit from a lower cost base relative to the dollar denominated oil and gas prices,” energy research group Wood Mackenzie said.

On the flip side, companies with US dollar debt will see their repayments rise if their revenue is in sterling and some will need to hedge against this effect, according to Bracewell.

The answers to many of the questions over a Brexit depend on the nature of the UK’s post-EU relationship with Brussels and the level of participation in the EU’s single market.

A withdrawal deal must be negotiated with the EU after two years or when such an agreement would come into force—which could take much longer. Non-EU members Norway and Switzerland both hold trade agreements with the EU. The Norwegian model would guarantee UK access to the single market, including free movement of workers. It would also mean the UK is bound by most EU legislation.

“The devil is in the detail,” said Nichol. “Brexit will be whatever the trade deal is negotiated by ‘UK PLC’ and the European Commission, and that will take a very long time.”

 

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