The Fuse

Why a “Brexit” Could Spell Trouble for the North Sea Oil Industry

by Nick Cunningham | May 12, 2016

British Prime Minister David Cameron made headlines this week when he said that if the UK votes to withdraw from the European Union on June 23, it could endanger peace on the continent. Citing major European wars over the past two centuries, the Prime Minister warned that “isolationism has never served this country well.”

For Britain’s oil sector, the possibility of a “Brexit” has not raised alarm bells as of yet, but there could be higher costs for the industry if Britain breaks up with Europe.

His hand-wringing may be just a bit hyperbolic, but there could be real costs of a withdrawal from the Europe. The Chancellor of the Exchequer George Osborne said that a Brexit will cause lasting damage to the British economy, leading to GDP being 6 percent lower in 2030 than it would be if the UK remains in the EU. “Britain would be permanently poorer if it left the European Union. Under any alternative, we’d trade less, do less business and receive less investment,” Osborne said in a speech in April. ​Osborne stepped up his warnings in May, claiming that “tens of thousands” of finance-related jobs in London could be at risk if the UK cut ties with Europe.

For Britain’s oil sector, the possibility of a “Brexit” has not raised alarm bells as of yet. But even if oil producers in the North Sea have much bigger concerns—operating expensive and mature oilfields during a period of low oil prices, for example—there could be higher costs for the industry if Britain breaks up with Europe.

Few regulatory changes

Oil companies operating in the North Sea have not exactly conducted a full-court press to convince the British public to vote to stay in the EU. That is because there are few major changes that would result immediately following an exit from the EU. The oil industry in the North Sea is currently regulated by the British government, so the regulatory regime would largely stay the same. The British government also has control over taxes, as well as permitting and licensing.

Europe does, however, impose some safety standards on offshore drilling. Britain would gain some leeway to depart from these regulations, if it chose to do so. But that would take time and there is little sign that the government has plans to move in that direction.

“Is Brexit at the forefront of people’s minds right now as they are doing (North Sea related) deals? No is the answer,” Julian Nichol, a lawyer at Bracewell, told Platts. “From a legal perceptive, there is going to be a minimum impact on existing contracts. Brexit per se is not likely to trigger defaults.”

“There will be a path of divergence, and that will have all sorts of inefficiencies. That’s not good for companies like ours that thrive by there being no barriers.”

But if the oil industry is not alarmed at the Brexit, it is not exactly sanguine either. In January, the CEO of Royal Dutch Shell, Ben van Beurden, said that his company would be negatively impacted by Britain’s withdrawal from the EU. “We are a company with a strong heritage in the UK and on the Continent. There would be a real break between the two, which would affect freedom of movement of staff, trade—we would be impacted,” van Beurden told the Sunday Times. “There will be a path of divergence, and that will have all sorts of inefficiencies. That’s not good for companies like ours that thrive by there being no barriers.” In February, Shell joined dozens of other companies who collectively represent about one-third of the firms listed on the FTSE 100 in co-writing a letter of support for the UK remaining in the EU.

More red tape

One of the chief concerns of a Brexit for the oil industry would be the free movement of oil workers. Large oil producers such as Shell or BP, two key players in the North Sea, are multinational companies at their core. Although BP is based in the UK and Shell is often described as an Anglo-Dutch oil major, those descriptors mean less and less in the 21st Century. Any sizable oil project involves workers from different countries. Withdrawing from the EU and the common labor market could make it more difficult for oil companies to move workers around. It could make it more challenging for companies to move non-British citizens to the North Sea, and likewise, make it difficult to move British workers to any oil projects on the European continent. This would raise administrative and labor costs, and possibly make planning projects more complicated.

One of the chief concerns of a Brexit for the oil industry would be the free movement of oil workers.

Similarly, the movement of equipment would be a concern. Aberdeen, Scotland is already a major oil hub, so companies in the North Sea may not have too much trouble finding rigs and equipment domestically. But a Brexit could raise the cost of importing drilling kit since new trade barriers might be instituted.

Many of these issues could be solved with new trade agreements with Europe. Perhaps the UK would follow the Norwegian model. The Scandinavian country is granted access to the internal economic market that allows for the free flow of goods and people with Europe while not actually being a member state of the EU. However, a similar arrangement for Britain would amount to giving up substantial influence in European policymaking while not significantly changing the economic relationship. If British voters achieve an exit from the EU, this slightly downgraded relationship would not likely be a popular route forward. After all, the influx of non-British workers into the UK is one of the most contentious aspects of the Brexit debate, so the ability of the British government to forge a new labor migration deal with Brussels post-Brexit is not guaranteed.

Scottish independence

The fallout from the Brexit for North Sea oil producers appears to be manageable, as the regulatory regime of the North Sea oil sector would remain largely unchanged, and still under British control. But there is a complicated set of political ramifications that could result from the vote as it pertains to the UK’s relationship with Scotland.

A vote to breakup with Europe could be a catalyst for a second push for Scottish independence. That would be a much more significant event for North Sea oil and gas than a Brexit.

A vote to breakup with Europe could be a catalyst for a second push for Scottish independence. That would be a much more significant event for North Sea oil and gas than a Brexit. Following the UK’s withdrawal from Europe, Scotland may want to remain within the EU to hold onto access to the massive European common market. A Brexit could essentially force Scotland to choose between Europe and London—in order to stay in Europe, Scotland may have to ditch Britain.

The Scottish independence vote in September 2014 was clearly a greater threat to the oil industry than the upcoming Brexit vote. It would have changed sovereignty of North Sea oil fields, subjected the industry to a new tax system, and the prospect of a different regulatory regime. Openly worried, North Sea oil producers weighed in very heavily during the campaign, urging Scottish voters to reject independence. They listened, voting to stay in the UK by a 55 percent to 45 percent vote. But the pro-independence movement vowed to revisit the issue.

There have already been murmurings of a rerun of the Scottish independence campaign recently, although the crash in oil prices since the 2014 vote has dampened enthusiasm for establishing a newly independent country that would be heavily dependent on oil for government revenues. But a Brexit could upend that calculus, raising the costs for Scotland to remain inside Britain.

If a Brexit does not worry North Sea oil producers, a subsequent Scottish independence campaign probably should.

 

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