Related Articles
Free access
Forward article link
Share PDF with colleagues

The UK is officially leaving the EU. What now for energy?

UK prime minister Theresa May has hailed the dawn of a "Global Britain", but Brexit's critics say it will cripple the economy, kill access to its main market, spark ruinous inflation and shred the country's global influence.

Now that Article 50 has been signed, officially starting the process of the UK leaving the EU, what will it mean for energy? Here are the six main impacts we have identified.

What if Scotland leaves - and takes its oil?

Most Scots voted to remain in the EU and Scotland's first minister Nicola Sturgeon wants to hold a second referendum sometime in the next two years.

About 80% of the UK's oil is produced from Scotland's Exclusive Economic Zone, and the share is rising. If Scotland left, the UK could lose all that.

Now that May has triggered Article 50 officially starting the UK's departure from the EU — the country has two years to sort out the divorce. May says the UK will leave the EU with or without a new trade deal with the bloc place.

Scotland could leave the EU before that happens, if another referendum is held and goes Sturgeon's way. For an upstream province already battered by the oil-price drop, this injection of new risk is a problem for investors.

Adam Davey, market intelligence manager for Oil and Gas UK, says: "From an investor's perspective, it could cause a bit of a headache if Scotland leaves, as there will be so much to sort out, such as the decommissioning liability issue."

UK North Sea output has been falling for a host of reasons that have had nothing to do with Europe and everything to do with a mature upstream, rising costs and weak oil prices.

The plunging pound

Sterling fell hard after last year's Brexit vote. Currency watchers think the negotiations with the EU over the next two years will weaken it further. Roger Hallam, currency chief investment officer at JP Morgan Asset Management predicts the negotiation period will be "troublesome".

What will this do for the oil and gas sector? For upstream players, it's not so bad. Their costs are now cheaper, because they're paid for in sterling, but their output - oil - is still sold in dollars. Each barrel they sell earns them more pounds to sell locally.

And a cheaper pound might cheapen North Sea assets for foreign buyers. Upstream M&A activity since the Brexit vote has been buoyant. Ian Thom, senior research manager at Wood Mackenzie, says this might not be because of Brexit. "It is the best it has been since 2012, in terms of new deals." The quality and range of opportunities, as well as oil prices, have been more important factors than Brexit.

For consumers, the ailing pound is negative and inflationary. Forecourt gasoline could be bought last year, before the referendum, for £1.08 a litre (about $1.50/l then). Now, in dollar terms, that litre still costs $1.56 - but local buyers pay £1.20/l. That's fed through into wider price rises: the Bank of England says inflation will hit 2.7% by the first quarter of 2018, compared with 1.6% in 2016. The more drivers spend on fuel, the less they spend elsewhere in the economy.

A demand hit?

And rising costs will surely affect oil consumption. Despite a short-term demand bump recently, the long-term trend in UK oil demand is down. The less fuel consumers buy, the less the treasury earns in taxes too - a double whammy given that, in the face of rising fuel costs, the government has suspended automatic fuel-tax rises each year to spare consumers (and voters). That said, Brussels-mandated UK policy on climate change measures — everything from EU-agreed emissions targets to the eradication of inefficient lightbulbs — is now up in the air. If the UK steps away from conservation efforts, it might spur demand for dirtier fuels. Strangely, Brexiters rejoiced that the departure from the EU would let consumers now buy wasteful incandescent lightbulbs again.

Oil and gas imports to the UK

The UK will probably leave the Customs Union, an element of the free-trade area. The UK is a net gas importer, so this could add costs to energy it imports across the channel. The UK also buys much gasoil/diesel from within the EU, although Russia and the US are also major suppliers. The UK makes up just 2% of international oil consumption, so any hit to demand because of new border taxes would hardly crash the global market.

More serious might be the impact on electricity flows through interconnectors with the continent. The UK needs to invest be­tween £14bn-19bn ($19bn-25bn) annually over the next five years in infrastructure as interconnectors linking the UK with France and the Netherlands are already operating close to maximum. Many infrastructure and other projects could be frozen, including the proposed nuclear reactor at Hinkley Point

Renewables stunted?

Rachel Nutt, head of renewable and sustainable energy of MHA Macintyre Hudson, says new projects have been stalled due to uncertainty over future subsidies. "The lack of clarity over funding has caused a significant slowdown in the market."

Despite green energy targets and a lack of grid capacity, she says wind and solar needed a new subsidy announcement to gain momentum. The EU handed the UK €13.37bn in energy subsidies between 2008 and 2012. Nevertheless, the UK government forecasts new renewable energy capacity will reach 36 gigawatts by 2030. Does that point to new subsidy announcements?

Decommissioning

Brexit will affect rafts of EU laws and standards, in everything from working hours to health and safety - and oil companies will have to cope. One area probably safe from Brexit is North Sea decommissioning, whatever the uncertainties around Scotland's vote. Cleaning up offshore oil and gas installations and pipelines is a requirement under the UK's Petroleum Act 1998, observing the Convention for the Protection of the Marine Environment of the North East Atlantic - an agreement between 15 governments and the European Community. Brexit should leave the Act untouched.

Still, the UK Chamber of Shipping spies an opportunity and has called for a freeing up of red tape to take advantage of the decommissioning opportunities in the North Sea. Here again, though, the taxes raised from a profitable decommissioning sector might be a boon for an independent Scotland, not the UK.

Also in this section
Caspian contagion risks
17 August 2017
A banking crisis is a short-term risk in a region bursting with energy developments
Nervy times in Kenya's elections
11 August 2017
Oil companies will be hoping that the relatively calm passing of the country's presidential elections will pave the way for faster progress towards pipeline exports
Rosneft vs Sistema brings echoes of Yukos affair
8 August 2017
For long-term investors in Russia, the nightmare unfolding for the privately held conglomerate Sistema gives them a distinct sense of déjà-vu