Many might have thought the vote to leave the EU would be another significant blow to the UK’s beleaguered oil and gas sector, which has been facing up to many of its own challenges in recent months. The result has raised the future prospect of political, financial and constitutional turmoil cross the UK and beyond but its impact on the North Sea may, however, prove slightly less dramatic.
With the dust slowly beginning to settle after last week’s referendum result, it seems questionable whether the ‘leave’ vote will have much bearing on the sector in the short term. In terms of changes to the law, much of the regulation governing North Sea operations is UK, not EU, originated. It is also unlikely that there would be any urgent amendments to those areas including employment, environmental or health and safety regulation which are based on EU legislation and have already been implemented into domestic law.
As with all things to do with Brexit, the longer term picture is less clear. The UK would be free to set its own offshore legislation including employment-related laws, which could diverge with EU legislation. However, importantly in upstream oil and gas, withdrawal from the EU would not change the key fiscal regime for the North Sea, over which the UK has sovereignty. The key risk over time is that laws such as employment, competition law etc. begin to diverge, leading to additional complexity and difficulties in crossover areas.
In trying to speculate on the economic impact of Brexit on the North Sea, you need to consider worst and best case scenarios. Over the longer term there is potential to see a fall in inward investment and the possible flight of capital from the sector. However, much of this will depend on the outcome of any exit negotiations with the EU. Norway has managed to build a successful oil and gas sector without ever having been an EU member state, although it is signed up to the European Free Trade Agreement.
The other possible outcome to Brexit is that it could support inward investment as a result of a weakening pound. At the moment key challenges for the upstream oil and gas sector revolve around managing high costs against a low oil price, and a lack of new investment opportunities as many fields are currently not economically viable. The fall in UK currency value could therefore benefit North Sea operators who spend in pounds but receive value for production in dollars, although companies with dollar debt will fare less well as their repayment costs increase. This benefit will however need to be balanced against the likely increased nervousness around wider economic stability and the brake that this could put on further investment from oil companies.
Another important post-Brexit factor for the North Sea to consider is the potential for a second Scottish independence referendum. Many of the operators and service companies with Scottish operations are global by nature and one of the reasons they maintain interests in the North Sea is the commercial stability compared with other oil reserves. Independence would certainly result in Scotland securing the majority share of UK offshore reserves which has the potential to impact on future investment into the sector, at least in the short to medium term, while clarity was sought on an independent Scottish Government’s approach to all aspects of oil and gas (and related) regulation.
Since last Friday we have seen the oil price slide by five per cent and then make a slight recovery. Going forward it will be much wider social and geopolitical factors, and not Brexit, that will influence the price, albeit that a potentially weakened Europe as a result of Britain’s EU withdrawal is one factor likely to impact on the oil price as well as demand. Generally speaking, financial instability tends to affect the oil price negatively.
The key priority now, as it was before the Brexit vote, is for the Government and the industry to accelerate their collaboration work and keep the focus firmly on how this can help steer the sector thought the current uncertainty it is facing. A long-term commitment of support from whatever Government is in place going forward will serve to allay some of the sectors instability fears after last week’s vote.The future of the UK Continental Shelf will undoubtedly be dependent on this level of Governmental support and, more importantly, the oil price.