We’re two years on from the historic Brexit vote but with negotiations still ongoing there is not yet clarity around how the UK’s withdrawal will happen and what will be the impact. Uncertainty is an oft used word as far as Brexit is concerned. That said, as our Head of Brexit Andrew Gray set out in his recent blog, the boundaries of the potential scenarios for our future relationship with the EU are clear enough for meaningful scenario plans to be prepared now. And the Government’s recently released technical papers give more clarity on how business should prepare for a potential No Deal scenario. Given the lead times for some of the mitigation activities needed to address potential Brexit related risks, for many sectors, the impetus to act is growing.
So what about the Oil & Gas sector? In the conversations I have had with many clients across the UK and EU, it’s frequently been said that the oil & gas industry considers itself a global industry, more focussed on macro issues such as commodity price and cost reduction rather than more regional affairs. As we are starting to see, geo-political events can have a significant market influence, however, and, as such, the potential impact of Brexit needs to be taken into account. Moreover, whilst the strategic focus of international oil & gas companies might be at a global level, management teams in the UK will be judged on local performance, and therefore it is vital that the potential ramifications of Brexit are planned for and addressed.
There are three reasons why I think those of us passionate about the future success of the UK oil and gas industry should pause to think deeply about the implications.
First, for an industry concerned about production costs, the potential increased costs of trade post-Brexit merit proper consideration. The most often voiced concern around Brexit is that of how tariffs may impact trade. A report commissioned by Oil & Gas UK last summer suggested that WTO style tariffs could add something in the region of £500m, doubling the annual trade bill with the EU. With so much still to be agreed regarding the future of customs, and no guarantees about future customs procedures and reliefs for the sector, there are also other often hidden administrative costs associated with cross-border trade that are often overlooked. Furthermore, increased red tape for customs procedures could be an issue. Often the equipment is critical for safety or production and is needed urgently therefore any delays and extra costs could give rise to major issues if not properly planned for. And, whilst some of this might be offset by favourable exchange rates on selling oil, which is priced in USD, there is a desire to avoid anything which may take the industry back to the days of cost escalation. Taking stock of the potential cost implications of different scenarios offers the opportunity to put in place plans to avoid or minimise those costs.
Second, one of the drivers of success of oil & gas as a global industry is a highly-skilled and mobile workforce. One of the consequences of Brexit is likely to be a level of increased restrictions on the movement of people between the UK and EU, and vice versa. This could potentially impact specialist labour groups in the UK oil & gas industry as well as the movement of UK nationals around Europe for business travel. Oil & Gas UK’s Brexit report considers that c 5% of workers employed in the UK oil & gas industry are EU nationals and many of these are highly skilled - addressing this issue is key. And it would be reasonable to assume the converse is also true given the UK’s role in developing the oil & gas industry in Europe and further afield. The risk here is not necessarily one of losing skilled workers, more it is likely to involve increased levels of administration and cost to keep them, and to hire in the future. As my colleague Julia Onslow-Cole set out in her recent blog, in other key sectors where competition for talent is fierce, we are starting to see larger employers take pre-emptive action to reassure, support and ultimately retain their EU workers in the UK as a priority in their workforce planning.
Finally, the influence of the UK’s oil & gas industry on European regulation is worth considering. Historically, UK legislation has much of the basis for EU regulation, with the regulatory systems across the Single Gas Market in particular now deeply interwoven. Whilst there are ambitions in both the UK and the EU for harmonisation of regulation, and different options being considered for achieving this for heavily regulated industries in particular, how regulatory alignment will work in practice following our exit from the EU are not yet agreed. The influence of the UK in the future regulation of oil & gas production and transmission is most likely to be reduced from today, and as the EU’s largest producer of hydrocarbons leaves, there will be few advocates of the industry left behind in Brussels. Moreover, the transition to a lower carbon future requires regulation to be effective and realistic. The departure of the EU’s biggest producer could remove access for people with practical experience of the issues. This could lead to EU countries finding hydrocarbon related exemptions harder to come by and increasing pressure to follow the lead of countries like France and Holland, and an accelerated march towards renewables and alternative energy sources. These political changes have the potential to become powerful market forces for the UK oil & gas industry.
I am firmly of the belief that the oil & gas industry will continue in the UK for the foreseeable future regardless of Brexit. However, I also believe that it is vital for its success, particularly in a world of cost reduction, that the industry maintains frictionless access to markets and labour beyond the UK. Moreover, the industry needs to maintain a strong voice in Europe whilst there remains a demand for its product and to be clear with UK government on the protections needed for energy trading and the internal energy market in the UK.
So, while the oil & gas sector is likely to be impacted differently to some others, it would be wrong to say it is immune to the risk and uncertainty which lies ahead. The industry cannot afford to ignore the key issues and should ensure that it is well briefed on them and their associated challenges as we head towards the exit door.