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  • 2018/09/24
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To be, or not to be hard Brexit: that is the question facing the British oil industry

 

 

With less than 200 days to go until the United Kingdom officially leaves the European Union, the risks of failing to reach a trade agreement and of a return to WTO rules and tariffs are worrying the British oil sector. These risks are known to UK authorities, who had the opportunity to hear leading representatives of the UK oil industry in October 2016[1]. However, through their “Oil and Gas UK” organization, firms in the UK oil and para-oil sectors reminded British politicians at the beginning of September of the potential financial and operational consequences of a no-deal withdrawal from the European Union (EU).

The oil industry is not opposed to Brexit in principle. It has opportunistically taken advantage of the fall in sterling to improve the competitiveness of North Sea operations. According to its mouthpiece, Oil and Gas UK, Brexit could even prove beneficial to the industry if the United Kingdom were to regain its independence as regards trade policy, as long as import tariffs with the EU were minimal. The introduction of trade agreements between the UK and its partners with minimal import tariffs could cut customs duties on oil products, equipment and services by £100 million (€113 million at the current exchange rate). Conversely, in the event of a no-deal Brexit, the imposition of WTO import tariffs could on its own trigger a £500 million (€565 million) increase in import tariffs. These figures look very modest given the UK’s £73 billion (€89 billion at the 2016 exchange rate) in imports and exports of oil products, equipment and services in 2016. Furthermore, some British Members of Parliament seem to doubt that the imposition of WTO rules on oil products could threaten the UK’s refining industry[2].

However, a no-deal Brexit would probably harm the country’s industrial supply chain and expertise in oil and natural gas exploration and production, built up over a number of decades. In 2016, the United Kingdom was a net exporter of oil equipment, goods and services. The imposition of customs duties on UK services and equipment would be another blow to an industry that has recently seen its operating margins decline as oil companies have cut their investment; the competitiveness of UK companies had been deteriorating relative to their continental European competitors. A no-deal Brexit would mean tax cuts and tax incentives agreed by the UK government to make the North Sea more competitive would be offset by higher costs (customs duties; administrative checks). Many services companies keen to rationalise their costs could decide to pull out of the UK market. This would compromise plans to maintain and develop Aberdeen, Scotland as a global centre of expertise in the oil sector.

In addition, withdrawal from the European Economic Area with no agreement on the free movement of people would make things worse for British oil and para-oil companies. With recruitment restricted, the UK oil industry & oilfield services would find it hard to hire qualified personnel to ensure the smooth running of its operations. Currently, 5-7% of the 280,000 UK oil industry employees come from continental European countries. If no agreement is reached on the free movement of people, the oil industry expects wages to increase; there are even fears that platforms could halt production for lack of sufficient qualified personnel on support vessels to ensure their safety.

Logistical operations would become more complicated to manage in the event of a no-deal Brexit. Delivery times for more expensive equipment and material from Europe would lengthen, with major consequences for operating costs. Worse still, longer delivery times could delay the time needed for facilities to come back on stream, thus causing substantial loss of revenue. To avoid this, UK firms will have to plan their equipment purchases ahead of time and set aside larger stocks of critical equipment to avoid longer than average production halts.

These uncertainties over regulatory and customs aspects are perhaps coming to light at the worst possible time for the UK oil industry. While UK oil production has increased thanks to investment agreed before oil prices plummeted in 2014, the oil industry needs new investment to revive oil and natural gas production. But oil companies, which often operate in many countries, could choose to invest in their non-UK assets in the event of a no-deal Brexit. This could push the UK into a vicious cycle, with declining oil and gas production prompting services and equipment companies to pull out faster. Such a withdrawal could also be harmful to new markets like the offshore wind energy sector, where development has been partly supported by many companies working in the oil sector.

Has the UK government been sensitive to the complaints of the country’s oil industry? On 13 September, the authorities published a memorandum[3] for companies in the oil industry & oilfield services on certain regulatory aspects in the event of a no-deal Brexit on 29 March 2019. According to this memorandum, a no-deal Brexit will have no impact on the allocation of concessions, environmental protection regulations or strategic oil reserve requirements. The rules currently in force will continue to apply after 29 March. This clarification of certain regulatory issues by the authorities is a first step for companies in the sector, who say a stable regulatory framework is needed to attract investors. However, the memorandum provides no further information on the free movement of people desired by the UK oil sector. Sector representatives will undoubtedly continue to defend the UK oil industry, which is a pioneer in exploiting marine oil fields.

 

[1] The Select Committee on the European Union, External Affairs Sub-Committee, corrected oral evidence: “Brexit: Future trade between the UK and the EU in goods”, Evidence Session No. 4, 27 October 2016.

[2] House of Lords, European Union Committee, 16th Report of Session 2016-17: “Brexit: Trade in goods”, 14 March 2017

[3] Department for Business, Energy and Industrial Strategy: “Running an oil and gas business if there’s no Brexit deal”, 13 September 2018.

 

Stéphane Ferdrin

stephane.ferdrin@credit-agricole-sa.fr

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