Few could have predicted the sequence of events triggered by former Prime Minister David Cameron, when in February 2016 he made his announcement on the steps of Downing Street that the Brexit referendum would indeed take place. Irrespective of the way people then voted on June 23rd 2016, very few would have wagered that the FTSE 100 index of leading shares would now be at a record high and that the UK would be one of the fastest growing economies in the developed world.
The government is expected to trigger Article 50 of the Treaty of Lisbon in the next few days to formally commence the Brexit process. This will also signal the start of the process to establish new trade arrangements with countries and trade blocs around the world. After Article 50 is triggered, the UK will be leaving the European Union (EU) and the Customs Union within a two year period, although it is currently still unclear what will happen after this two year time window runs out and what transition arrangements should be put in place to ensure business continuity.
If the UK is not able to negotiate new trade agreements within the two year window or is not able to extend the timeframe, then one of the likely fall-back options will be for the UK to apply the rules set out by the World Trade Organisation (WTO). The WTO rules provide a common framework for the overall trade in goods and services between WTO members.
So what does this all mean for the UK oil and gas industry? Unfortunately the road ahead is far from clear as no country has ever withdrawn from the EU before and the process for doing so is likely to be complex and time-consuming. However there a few areas where there will be an impact for the UK oil and gas industry.
Although the UKCS will remain an important hydrocarbon producing basin, the UK will become increasingly dependent on imports to meet demand for oil and gas. By 2030 it is anticipated that over 60% of oil and gas demand will be met by imports. It is expected that the majority of new gas imports will come from outside the EU, with Norway and Liquefied Natural Gas tankers accounting for the lion’s share. The existing interconnectors between the UK and the EU will provide the remaining balance. In terms of oil, it is likely that the majority of crude for the UK market will also originate outside the EU. The impact of Brexit on oil and gas imports to the UK is likely to be relatively modest.
Where there is likely to be a more material Brexit impact is in the supply chain and particularly in relation to those companies who export goods and services from the UK to other oil and gas basins around the world. In the absence of any clear and/or new trade agreements, the supply chain could be exposed to additional tariffs. Comparing the relevant sections of the current EU and WTO trade agreements, RGU’s Oil and Gas Institute estimates that moving to the WTO framework could result in up to £200 million extra cost per year for the UK’s oil and gas supply chain (based on 2015 oil and gas exports of c. £14 billion in terms of goods and services).
In terms of regulation and policy for the upstream oil and gas industry, much of the EU legislation and directives were either based on established UK customs and practices or are already enshrined in UK law. Although it will take some considerable time to untangle the complex regulatory and policy frameworks, the impact for the oil and gas industry is likely to be modest. In terms of the UK oil and gas tax system, little is expected to change as a result of Brexit as the EU has no remit over the UK’s fiscal regime for the industry.
In relation to the freedom of movement in the labour market, Prime Minister Theresa May made it clear in January 2017 that the UK will withdraw from both the Single Market and from the Customs Union and will secure full control over the UK borders and therefore immigration. This will have a direct impact on the movement of people. With the oil and gas industry relying heavily on access to international skills and capabilities, this may be one of the more challenging areas to be addressed.
It is clear that Brexit will have a profound impact on the UK as a whole, but it will likely affect different industry sectors in very different ways. The oil and gas industry has gone through a number of very tough cycles recently and has successfully managed to weather the storms. Brexit will inevitably bring new challenges, but we can be confident that the industry’s determination and resilience will ultimately overcome whatever comes its way.
Professor Paul de Leeuw is the director of the Oil and Gas Institute at Robert Gordon University.