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Brexit schmexit

A UK vote to leave the EU wouldn’t much affect the North Sea. It has bigger fish to fry

A British exit from the EU would not bring significant upheaval to the UK’s oil and natural gas industry, and would probably create more uncertainty for utilities and alternative-energy developers.

In upstream oil and gas, Brexit would not change the most important things – taxation, licensing and regulation. The UK, not Brussels, already has sovereignty over these areas.

It might, though, create some minor practical problems for oil and gas operators. It would, for instance, make freedom of movement between the UK and other EU countries slightly more difficult for Europeans – a logistical consideration for companies with internationally mobile workforces. Unless new trade agreements with the EU and other countries were negotiated quickly and smoothly, it might disrupt trade flows. And it would mean assimilating some new regulations in areas such as working practices.

All of that would add to the workload of legal and logistics departments, but hardly seems likely to faze oil companies. They are used to much more hostile and volatile political environments than Britain outside the EU. In any case, they have much more worrying problems to deal with, like surviving the punishing downturn in oil prices.

Still, Brexit does represent a degree of uncertainty, which affects the perceived stability of the investment environment. Both Shell and BP have expressed a preference for the UK to stay in the EU. “We want to know as accurately as possible what investment conditions will look like 10 or 20 years from now,” says Ben van Beurden, Shell’s boss. Staying in amounts to greater certainty, he argues.

If Brexit itself isn’t likely to change much in the UK oil industry, though, its indirect consequences might. For example, a vote for Brexit would probably trigger another Scottish referendum on independence because most Scottish voters want to stay in the EU. A vote to break up the UK would mean upheaval for the UK North Sea: Scotland and England would need to divvy up the Continental Shelf, agree on who would pay what for the basin’s extensive decommissioning needs and decide how the industry should be regulated in future.

Another indirect effect of Brexit on the UK oil industry might come from a sustained fall in the value of sterling, which would almost certainly ensue, as investors abandoned UK assets. For consumers, a weaker pound would make buying oil priced in dollars slightly more expensive (although, in the light of the recent fall in oil prices and the market’s familiarity with commodity-price volatility, that hardly seems too worrisome). For operators, a weaker pound might actually trim operating costs; yet any foreign-exchange relief would be marginal – and insufficient to tempt big upstream investors back to the North Sea’s ageing, high-cost fields. The government might also seek to raise more revenue by putting up North Sea taxes, if prolonged sterling weakness were to result in a major deterioration of the country’s fiscal position.

If those outcomes seem intangible now, the gas and power markets, and alternative-energy companies, might feel the impact of Brexit more directly and more keenly. Gas and electricity connections between the UK and continental Europe – developed in parallel with the EU’s attempts to open its energy markets to competition – have enhanced market liquidity, lowered prices and reinforced the UK’s energy-supply security. As one of the driving forces behind the EU’s liberalisation process, the UK would wish to keep these arrangements, and their considerable benefits, and maintain its cooperation with with the EU’s internal energy market. But it would find itself doing so from a position of relative weakness, with greatly diminished influence on EU energy policy and regulation – if any at all.

Brexit would have implications for environmental policy too. Although the UK’s climate-change goals are defined under its own 1998 Climate Change Act, a non-EU UK would need to disentangle its emissions-reduction commitments from the EU target established under the UN. And the UK would have to decide whether or not to continue to participate in the EU Emissions Trading Scheme.

The method of achieving climate-change goals could change too. Depending on the terms of Brexit – whether or not the country remains part of the European Economic Area and the European Free Trade Association – the UK could be released from its targets for developing renewable energy under the EU Renewable Energy Directive. That could be advantageous if the UK can find cheaper ways of cutting emissions than building more offshore wind plants – such as greater switching from coal to gas or building more nuclear power stations.

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