Brexit: The possible implications for the UK oil & gas industry

How Brexit has affected the Oil & Gas Industry so far

Whilst the strength of the pound declined dramatically following the ‘leave’ vote, it appears that it is showing signs of recovery from the initial shock of Brexit. Meanwhile, we have seen the price of oil dip below $50 per barrel and the rally in share prices in oil and gas companies looks to be coming to an end too. That said, the dip in the oil price was not as a result of Brexit but as a result of the strengthening US dollar and, most importantly, the basic economics of supply and demand.

The North Sea oil and gas industry (“North Sea O&G”) also appears to be facing further uncertainty and a challenging period ahead, which will be compounded by speculation that Scotland may hold a second independence referendum. This uncertainty is not likely to be resolved at any time soon.

North Sea O&G

North Sea O&G has had a rough time over recent years with increasing operational costs, the fluctuating price of oil (currently Brent Crude oil is priced at around $50 per barrel, less than half its price around two years ago), decreasing investment and significant job cuts. Unfortunately, most of these issues are likely to be amplified by Brexit.

In recent years, North Sea O&G has seen an increase in the decommissioning of oil rigs. It is probable that the outcome of Brexit will result in oil and gas companies being less willing to invest in the North Sea as a result of the shrouding uncertainty. Therefore, it would appear that the growing trend to decommission North Sea oil rigs could continue at a quicker rate.

However, it’s not all doom and gloom. Despite the cloud of political uncertainty hanging over North Sea O&G, it may be able to benefit from the challenging situation it finds itself in. For example, if the strength of the pound post-Brexit doesn’t recover in the short to medium term, this could help reduce some of North Sea O&G’s costs as it sells its oil in US dollars but pays its workers and the lion’s share of its costs in sterling.

Scottish Independence Referendum

As mentioned above, Brexit has reignited talks of a second referendum for an independent Scotland. Such speculation has added further uncertainty to the fate of North Sea O&G and the post-Brexit position in relation to the UK oil and gas industry. But it’s debatable, given the drop in the price of oil and drop in oil and gas revenue since Scotland’s previous referendum, whether Scotland has the economic capacity to survive independently from the rest of the UK.

A split from the UK would also call into question the ownership of oil and gas reserves off its north coast. Scottish independence would most likely result in a division of these reserves, the only real question being how that division should occur.  If oil and gas reserves were allocated in the same way as fishing rights, Scotland would receive the majority of the annual oil production and around half of the natural gas.

There has also been debate over whether an independent Scotland could join the EU. Whilst this seemed unlikely following the 2014 independence referendum, it is possible that the UK’s decision to leave the EU could, if a second independence referendum was timed appropriately, theoretically give Scotland a chance to obtain its own membership. However, given the EU’s reluctance to accept new members, in particular the likelihood of Spain and Belgium blocking any such application, and its preference for the Euro, the probability of this happening is open to doubt.

Summary

There is no doubt that Brexit has caused upheaval in the UK and it is apparent that the UK oil and gas industry is a victim of the ambiguity which has emerged as a result. The current future of the UK oil and gas industry is uncertain and it is likely that there will be challenges ahead. It will certainly be interesting to see how the industry evolves in response to these changes, especially if Scotland votes to say ‘goodbye’ to the UK too.

If you operate in the UK oil and gas industry and would like to discuss the impact of Brexit on your business please get in touch with us.

Anne McMahon
Emily Parker

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