Brexit impact on UK oil and gas?

With the referendum rapidly approaching, the question of what Brexit could mean for the UK oil and gas industry has become increasingly intriguing.

As a market broadly regulated in London, many argue that an exit vote would lead to no significant changes – at least in the short term. However, new uncertainties for the energy industry may emerge, should the UK decide to part ways with Europe.

In 2013, the UK became a net importer of petroleum products. Traditionally the main sources of the UK imports are from EU countries including France and the Netherlands. An exit vote, along with increased economic instability could potentially lead to a sterling depreciation, resulting in higher import costs and increased uncertainty over future energy supply.

This scenario could be a double edged sword – UK upstream businesses would see relatively lower operating costs compared to US competitors, yet, companies with revenues in sterling are likely to face higher repayments of dollar denominated debt.

Limited labour and capital mobility is another concern, which would arguably affect the UK’s ability to attract highly skilled oil and gas workers to the North Sea and potentially discourage foreign energy investment in the mid-to-long term. This risk would be exacerbated if a “Leave” vote were to trigger another Scottish Independence referendum.

To ensure free movement of people and goods across borders, the UK could seek membership of the European Economic Area (similar to Norway) – a relatively favorable scenario when compared to the option of bilateral trade agreements (similar to Switzerland). Trade under these agreements is often subject to customs clearance processes, VAT and duties paid by the EU exporting country.

There will undoubtedly be a number of “Brexit” implications for UK oil and gas, however, the current low oil price environment is likely to play a far larger role in shaping the form and structure of the UK energy industry over the coming years. Market recovery may be impacted in part by changes to the UK’s relationship with Europe. Yet, as a mature and expensive play, the future of the UK Continental Shelf will be largely decided by oil price.