Energy sector on Brexit – 2018 has been a long year and it isn’t over yet

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Martin Findlay
Opinion by Martin FindlayPartner, KPMG

Martin Findlay, Partner, KPMG LLP (UK), looks at the latest developments around Brexit from an oil and gas sector and business readiness perspective.

June 2016 was a long time ago, and energy industry views on the likely impact of Brexit have certainly evolved since then.  The energy industry is global, and experience of trading overseas has provided many management teams with good insights into the benefits of an open border – an area that has become a real sticking point in the Brexit negotiations over the past week.

However, with many supply chain companies having comparatively few dealings with the EU27, compared with the main territories in the oil-producing world, it is fair to say that many may have taken the benefits of open borders for granted.  That said, those that have been bidding for EU contracts under public procurement rules, including state-funded renewable projects, will be acutely aware of the advantages of a level competitive playing field and the potential challenges of free access to EU markets being removed.

In June 2016, arguably the greatest Brexit concern arose from the sharp overnight decline in Sterling’s value. This was particularly acute for the oil and gas sector, which was still in recovery mode from the market downturn.  The exchange rate impact was significantly negative for unhedged foreign exchange positions, but it did boost some supply chain companies that had a sterling cost base, and were trading in a US dollar environment. Fears of future “Brexit-day” impacts were minor in comparison.

Immediately after the 2016 vote, there were also other concerns across the industry on the impact of cross-border mobilisation of labour, such as efficiently getting labour between Aberdeen and Rotterdam.  There were also concerns about additional trade tariffs and likely delays in clearing goods and equipment through Customs.  However, most took the view that solutions would be found, that we would somehow stay in a Customs Union, and we would benefit from an immigration policy that would continue to allow skilled labour to be hired from beyond our shores.

Fast-forward to the first half of 2018, and many in the industry had started to worry once more about the possibility of friction at the borders and employment restrictions.  Managing this would involve planning for various scenarios. However, many businesses, possibly due to the global trading mind-set, have done virtually no planning, assuming in true British fashion that it will be “alright on the night”.

Looking at where we are now, there continues to be a widely held view that the energy industry, in general, will be relatively unaffected by Brexit. This is mainly because the control of energy policy is more sovereign than some other areas, and because the EU27 does not feature as heavily for many supply chains in the energy industry, as it does in some other industries. But the energy industry, like all others, craves certainty, and for many months during 2018, “certainty” was said to be just a few weeks away.  Yet now, after recent dramatic scenes in Westminster, it seems that 2019 will start with many of the key questions unresolved, and this will undoubtedly create renewed concerns for the energy industry, and indeed many other sectors and industries across the UK.

Let’s hope that certainty comes soon, so that businesses can get back to worrying about growth, profitability and sustainability, rather than worrying about the uncertainty of Brexit’s impact on employee hiring, labour mobility, border friction for goods and equipment and general access to EU markets via public procurement routes and otherwise.