Choppy, Oily Waters

Brexit and the North Sea

With all eyes on Theresa May’s Brexit deal vote in Parliament, the North Sea oil and gas industry is getting nervous about what is to come.

An official carries a Union Jack flag ahead of a news conference by Britain’s Secretary of State for Exiting the European Union David Davis and European Union’s chief Brexit negotiator Michel Barnier in Brussels, Belgium July 20, 2017. REUTERS/Francois Lenoir

Donald Tusk, President of the European Council, has told the UK in the latest Brexit negotiations that this is “deal or no deal” time.

Theresa May has voiced the same message over the last few days. For many MPs at home, however, that might not be good enough.

While domestic industries will likely be able to continue with business as usual post-Brexit, global sectors might have more to worry about.

One of those is the oil and gas industry operating in the North Sea, and for a business already struggling with difficult price conditions and ageing fields and infrastructure, the added uncertainty is not healthy.

A report published by Aberdeen & Grampian Chamber of Commerce in March this year revealed that 45% of oil and gas companies working in the bitterly cold body of water expect Brexit to have a negative impact on the industry.

The energy sector is hardly an insignificant one for the UK.

With nearly a million barrels of oil equivalent (boe) being produced every day, the industry might not flood the state coffers as much as it once did, but it certainly saves the treasury billions in oil and gas imports for internal consumption. Further, UK exports in oil and gas-related goods and services worldwide was worth around USD92.2 billion in 2016 (USD28.42 billion of which went to the EU), which is about 5% of all UK trade.

How exactly that will be affected by Brexit is anyone’s guess, but the main immediate threats can be predicted with some clarity.

After peaking around the year 2000, Britain’s North Sea oil production has been in decline ever since. So much so that in 2016 the UK cut down oil royalties and taxes in an attempt to give the industry a boost. No doubt investment in exploration and production took a strong hit when the oil price cliff dived in 2014 from over USD110 per barrel to just USD30 in a matter of months, but the high cost of production and the difficult working conditions offered by the North Sea didn’t help either.

In order to revive the industry and delay the production decline, a plan was deployed with the goal of “maximising economic recovery” (MER) of the estimated 20-24 billion recoverable barrels left in the British North Sea.

For that to happen, the country’s oil and gas authority, Oil and Gas UK (OGUK), envisions that over USD631 billion in investment would be necessary over the next 17 years, investment that is threatened by uncertainty.

According to the companies involved in this plan, the timing of this capital injection is also critical. Between now and 2020 is the time to act in order to potentiate the reserves available on the existing assets and guarantee a longer production life for the area. That happens to fall right on top of the implementation period for Brexit, whichever form it takes, and that is bringing a lot of uncertainty for investors.

However, beyond attracting investment, there are more practical concerns to take into account. Around 5% of the professionals working in the British oil and gas industry are European and their situation remains unclear under the current terms of the deal.

Oil and gas is one of the most competitive skilled labor markets of any industry in the world, and companies would be hard pressed if they needed to replace these workers. This is all happening at a time when companies in the North Sea are seeing a renewed surge in activity, boosted by the recovery in oil prices and the successful bidding round for British North Sea Acreage that took place in May.According to the Aberdeen & Grampian Chamber of Commerce survey, two-thirds (65%) of the companies in the sector expect the level of core staff to increase in the next three years. It is unlikely that the UK labor market on its own can provide enough qualified professionals for the industry’s needs.

These are not just oil engineers. Vital services such as Emergency Response and Rescue Vehicles (ERRVs) depend heavily on European staff.

If ERRVs are not available, production platforms will need to shut down. Other issues will have to do with importing parts, for instance. If today, any sort of equipment can cross seamlessly through borders from any provider in Europe, a return to border controls could severely delay the delivery time for these products, which, in an industry that runs 24 hours a day, 365 days a year, could have very costly consequences.

OGUK has voiced its concerns in a recent report and outlined its priorities for the Brexit negotiations: “maintaining frictionless access to markets and labor, maintain a strong voice in Europe for the industry and protect energy trading and the internal energy market,” a job made harder once the UK leaves the European decision centers.

That report also suggests that a hard Brexit, which would see foreign trade rules falling back on the World Trade Organization’s standards, could almost double current trade costs.

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