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Opinion: Low oil price has bigger impact than Brexit will

Andrew Reid
Douglas-Westwood managing director Andrew Reid

This morning the UK woke up to the news that it is to leave the EU, as 52% majority supported the leave campaign.

The question of what the future holds for the UK economy, and the oil & gas industry as part of it, is now a practical reality. The stock market slumped as the news broke early yesterday morning with the value of the pound reaching 1985 lows, falling to $1.338 and Brent tumbling 5% to $48./bbl.

The exit vote was strongly influenced by voters in England (53.4%) and Wales (52.5%), whilst the majority of Scotland (62%) and Northern Ireland (55.8%) voted to remain in the union.

A “divorce settlement” with the EU is to take place in the next two years, however in the meantime there will be a huge amount of economic instability and uncertainty, which will inevitably impact the UK economy.

As a market broadly regulated in London, many argue that the exit vote would lead to no significant changes in the oil & gas industry – at least in the short term. However, new uncertainties for the energy industry are likely to emerge, as the UK decides to part ways with Europe.

Furthermore, the impact of Brexit has clearly been felt across the world from Asia to the US and energy demand is likely to weaken if Brexit triggers a slowdown in global economic growth.

In 2013, the UK became a net importer of petroleum products.

Traditionally the main sources of the UK imports are from EU countries including France and the Netherlands. The exit vote, along with increased economic instability has already lead to sterling depreciation, resulting in higher import costs and increased uncertainty over future energy supply.

This scenario could be a double edged sword – UK upstream businesses would see relatively lower operating costs compared to US competitors, yet, companies with revenues in sterling are likely to face higher repayments of dollar denominated debt.

Scotland’s clear preference for Remain (all 32 areas voted this way) is likely to pave the way for a second Scottish Independence referendum. The reaction to the referendum this time around could be very different in the context of facing exit from the EU.

Limited labour and capital mobility is another concern, which would arguably affect the UK’s ability to attract highly skilled oil and gas workers to the North Sea and potentially discourage foreign energy investment in the mid-to-long term.

To ensure free movement of people and goods across borders, the UK could seek membership of the European Economic Area (similar to Norway) – a relatively favorable scenario when compared to the option of bilateral trade agreements (similar to Switzerland). Trade under these agreements is often subject to customs clearance processes, VAT and duties paid by the EU exporting country.

There will undoubtedly be a number of “Brexit” implications for UK oil & gas, however, the current low oil price environment is likely to play a far larger role in shaping the form and structure of the UK energy industry over the coming years.

Andrew Reid is a managing director at Douglas Westwood

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