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Brexit casts dark cloud over UK's North Sea industry

The UK's oil and gas sector has been the focus of some sizeable asset acquisitions recently, but uncertainty over the terms of the country's withdrawal from the EU is confusing the outlook

Chrysaor's $3.8bn acquisition of Shell-owned North Sea assets, completed in November, and Total's impending $7.45bn purchase of Maersk Oil both indicate a vote of confidence in the UK continental shelf. But these could prove to be part of the basin's last hurrah, if Brexit negotiations leave the industry high and dry.

After six months of to-and-fro between the UK and the European Commission in Brussels, the industry is still in the dark over where it will stand in March 2019, when a Brexit deal is supposed to be in place. As it waits for clarity, the industry may keep its wallet firmly closed. "Up to $40bn worth of potential investment opportunities currently sit in company business plans," trade body UK Oil & Gas suggested in a report published in August.

The main Brexit risks hovering over the industry are a significant increase in the cost of doing business with the rest of Europe, such as in the provision and purchase of goods and services and in hiring talent from the EU.

UK Oil & Gas estimated that the cost of trade for the industry could rise by as much as £0.5bn ($0.66bn) a year to £1.1bn if Britain is forced to move to World Trade Organisation rules in the event of a hard Brexit. But that's a worst-case scenario. If negotiators can avoid a punitive deal, the cost of trade could actually fall by around £100m "under optimal trading agreements", UK Oil & Gas said—a difference of £0.6bn between the two extremes.

In the absence of a formal settlement on trade terms with the EU, UK exports to the bloc would probably come under the "most-favoured nation" tariff arrangements that bestow the best trade deal available under WTO rules.

It looks likely that the UK would have to pull out of the EU's Internal Energy Market, which aims to ensure harmonised, tariff-free trading of gas and electricity across Europe. However, a replacement arrangement will probably need to be negotiated, not least to address gas supply security issues.

£0.5bn - Increase in industry trade costs in event of hard Brexit

"Brexit could lead to the exclusion of the UK from the solidarity principles under which EU member states undertake to supply gas to their neighbours in the event of a gas supply crisis," Leo Kabouche, an analyst writing for Global Risks Insight, noted in a recent report on the industry.

Brussels runs all matters of EU gas security, so the UK could not do a deal with any EU member without involving the Commission. However, energy security concerns may well trump politics, ensuring that the two sides forge an agreement on supply. The UK gas sector is highly integrated with that of the EU-Ireland, for instance, relies almost entirely on the UK for its gas supply.

In terms of recruitment, while only 5% of the UK North Sea's workforce comes from other EU states, about 50% of them hold senior positions. If it became difficult to recruit expert staff because of restrictive immigration laws, that would add to post-Brexit difficulties.

However, a post-Brexit UK could re-write restrictive EU directives on holidays and working-time and other issues that impact the offshore sector, possibly benefitting the industry.

Norway, which is not a member of the EU, has had a running battle with Brussels over the Offshore Directive on health, safety and environmental matters. Norway's Ministry of Petroleum and Energy, noting that the country has an outstanding safety record, has said bluntly. "The government does not consider the directive relevant."

While Brexit itself may harm the industry, the weakening of the pound, resulting from the UK's decision to leave has been beneficial to some extent, helping aspects of trade with the EU and the rest of the world. As UK Oil & Gas notes, this was particularly the case for "producers with a local cost base and supply-chain companies with a propensity to export".

The North Sea industry itself has done much to mitigate Brexit risks. In the last three years the basin's players have collectively cut unit operating costs faster than in any other of the world's main exploration areas. For example, Chrysaor has reduced them to $15 a barrel—a strong platform on which to implement its plans to boost production by 80,000 barrels a day.

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