Battling the Brexit blues
The UK's planned withdrawal from the EU in 2019 is causing uncertainties for the North Sea industry at a time when it could do without them
Just as the UK oil and gas industry starts feeling the rejuvenating effects of an oil-price recovery, the threat of a "hard" Brexit is adding a significant dimension of risk for an industry fighting to extend its life.
Aberdeen, the main base for the North Sea industry, has always been international in its outlook. UK exports in oil and gas-related goods and services worldwide was worth around £73bn in 2016, representing about 5% of all UK trade. The sub-sea sector alone, which is entrenched in a corridor to the west of Aberdeen, exports £7.5bn worth of goods and services a year. And wherever in the world there's an oil and gas hub, there's a good chance the native accent of north-east Scotland will be heard.
Trade with Europe is far from being the only game in town, but it still comprises a significant chunk of business. According to industry body, Oil & Gas UK (OGUK), exports of fuel, supply-chain products and services to the EU were worth just over a third of the total—around £22.5bn. Meanwhile, the UK imported about £10bn of the same from its continental partners.
The UK North Sea sector also employs an estimated 15,000 EU workers—around 5% of the total—mostly offering specific, high-value skills essential to projects both in the UK and across the world.
Given these close ties, it's unsurprising that OGUK has been working on behalf of the industry to smooth a path through Brexit with the Treasury, the Department of Business, Energy and Industry, and the Department for Exiting the EU, since the UK's referendum vote in favour of leaving the EU in 2016.
Top of OGUK's wish list—and that of other exporting sectors—is the achievement of frictionless trade in both markets and labour.
In its most recent economic report, OGUK modelled a somewhat unlikely best-case scenario involving minimal tariffs with the EU and improved tariffs with non-EU nations that would deliver a £100m-a-year cut in current trade costs to £500m/y. At the other end of the scale, a Brexit that resulted in no agreement with the EU, leaving the UK to fall back on World Trade Organisation trade rules after March 2019 could see trade costs soar to £1.1bn, according to the report.
"The key thing about Brexit is we don't yet know exactly what the terms of any agreement, if we get one, will be. But we are working on the assumption there will be an agreement of some sort and there will be a transition period," Gareth Wynn, stakeholder and communications director at OGUK, said.
The bulk of raw hydrocarbons from the North Sea are exported outside Europe—the US has been the biggest taker of Brent Crude since 2010, according to Bloomberg. But value-added products make up the bulk of European trade in oil and gas products, leaving UK refiners vulnerable to added costs. Brexit could also hit the supply chain, particularly where there's integration with European companies or subsidiaries.
Wynn gives an example of one unnamed OGUK member company that uses an operationally critical pump on a platform, which needs to be replaced quickly if it fails. In an environment where the supply chain doesn't often keep spares to hand, the platform operator relies on speedy dispatch of a new pump or parts from the manufacturer's operation in Rome.
Brexit could upset this process, he says. The imposition of tariffs could push costs up, while delays could be caused by customs or—if technical standards diverge—certification and testing requirements.
As a result, either operators will have to factor in extending a shutdown or the supply chain will have to store more parts. "It's not insurmountable as an issue, but it potentially introduces complexity and cost," Wynn says.
Another risk facing the North Sea sector is what happens when the UK loses its place at the table where European energy policy is decided. Wynn points out that, while the UK is the largest supplier of oil and gas in the EU, it won't contribute to the shape of European energy policy in the future.
On the other hand, he insists neither the UK nor the North Sea oil and gas sector will be giving up commitments to Paris Agreement climate-change targets. The UK was among the first to enshrine carbon emission targets into law and most think it unlikely this will be unravelled post-Brexit.
However, the government could gain more flexibility in which measures it can take to stimulate further investment in the UK's maturing offshore basins.
"The political emphasis in many governments around Europe is in different energy sources, either in renewables or nuclear. There's a risk that policy and regulation is skewed more in the interest of those other sources that could be detrimental to oil and gas, not even just neutral," Wynn says. "The flip side is that, once we leave the EU, the UK government might have more flexibility to do what's necessary to ensure the ongoing investment in the UK continental shelf."
MER at risk?
In the short term, uncertainty surrounding the outcome of Brexit is as big a problem as anything else. Companies in the sector and their backers need to know what lies ahead in order to keep the investment rolling in. Otherwise, the country's goal of "maximising economic recovery" (MER) of the estimated 20-24bn recoverable barrels left in the North Sea is at risk.
Paul de Leeuw, director of the Oil and Gas Institute at Aberdeen's Robert Gordon University, is concerned that the sector risks a repeat of the aftermath of the 2014 oil-price crash, when exploration activity nearly stopped, unless the uncertainties surrounding Brexit are resolved. "As an industry we need clarity," he says. "The criticality of the industry is that production is forecast to decline from beginning of next decade onwards. We need to get investment to happen between now and early 2020, which is the middle of the Brexit [transition] window." he says.
"We can deal with volatility of tariffs and exchange rates—it is manageable in the world we live in," de Leeuw adds. "What we can't deal with is the structural change of confidence of investing in the UK. That's what I worry about—how do we, as an industry, sustain investment in an area of high uncertainty."
M&A still buoyant
Yet a recent characteristic of the North Sea has been an uplift in mergers and acquisition activity. Swathes of assets have been changing hands for relatively healthy prices—witness Maersk's sale of its North Sea-focused oil and gas business to Total for $7.5bn, or Chrysaor's purchase of nearly $4bn worth of Shell's UK North Sea assets in 2017 to name but two high-profile examples.
Martin Ewan, partner at law firm Pinsent Mason, says transactions activity has been brisk rather than bleak. "We are seeing a big uptick in deal activity in parallel with the oil price rise, frankly without reference to any other constraining factors. Brexit may add a notional [one] percent onto cost base or risk factors, but M&A activity in exploration and production is driven directly by the oil price."
"I could see there being bumps, but frankly people in board rooms in Aberdeen aren't sitting wringing their hands in horror about Brexit," he adds. "As long as the oil price is going in the right direction they will work around Brexit."