The lights won’t go out if UK leaves Europe without a deal
Economic warnings around a no-deal Brexit have reached fever-pitch proportions. If Bank of England Governor Mark Carney’s latest Doomsday portent comes to fruition, house prices will collapse and the streets will be choked by dole queues if the UK unceremoniously crashes out of the European Union. Certainly, the energy industry will also be affected; just don’t expect the petrol pumps to run dry or the lights to go out on March 29 next year.
Based on the evidence at hand, the nation’s vital oil, gas and electricity industries can continue to prosper even in the hardest of hard-brexit scenarios. Firstly, losing jurisdiction over Britain’s oil reserves in the North Sea is theoretically bad for Europe because it pushes up the bloc’s dependence on imported crude from outside the region. The UK and non-eu member Norway currently account for 84pc of all European production, according to the BP Statistical Review of World Energy.
Neither should a weak pound seriously threaten a strategically important industry, which uses the US dollar as its global currency de jure. Labour costs – among the offshore sector’s biggest overheads in the North Sea – should be kept in check by sterling’s depreciation against the greenback.
In terms of licensing and operating regulations on the North Sea, even the most brutal outcome to Britain’s protracted talks with Brussels would have little impact, say experts. “In the event of a no-deal outcome, the licensing and environmental regime relevant to upstream industry in the UK will remain broadly the same and no action needs to be taken by UK or EU companies,” says Julia Derrick, oil and gas partner at law firm Ashurst.
However, the UK’S oil and gas producers remain mostly pessimistic about the prospect of leaving the EU. Their concerns are largely centred on higher operating costs and extra red tape. Shell – the largest oil major listed in London – warned this week about the added hassle of Brexit, but this hardly constitutes a major problem for the company or its shareholders.
“There’s no existential threat around Brexit,” says Sinead Lynch, Shell’s country head. “There is however aggregation of additional costs, administration, complexity, which is completely the wrong direction when you think about what we are trying to do in the industry.”
Lynch’s concerns hardly amount to a catastrophe for an industry that frequently has to adapt to the volatility of fickle oil markets. Nevertheless, industry group Oil & Gas UK has also warned a no-deal and reversion to World Trade Organisation rules could add £500m in trading costs. But for a sector expected to generate $920bn (£703bn) of revenue through to 2035, these additional costs look irrelevant.
The group, which represents an industry employing more than 280,000 workers, went on to argue that additional costs “such as those envisioned in a possible hard-brexit scenario would be potentially detrimental to the ongoing international competitiveness of the UK continental shelf ”. However, its own research suggests the North Sea has become one of the most efficient major oil-producing basins in the world; operating expenditures are down by about 43pc over the last three years. Net imports of crude, natural gas liquids and feedstocks totalled just 0.9 million metric tonnes in the first quarter of this year, one of the lowest levels since 2004, according to the Department for Business, Energy & Industrial Strategy. If this recovery keeps going then the UK in theory could eventually become a net exporter again, albeit briefly.
Oil storage is one area thatwill be
A weak pound combined with a higher euro carbon price could see UK exports of power increase
affected by a juddering hard Brexit. This week the Government advised that Brexit could change the terms under which companies are obliged to hold stockpiles of crude, so the UK can still meet its international obligations to maintain strategic reserves. Cutting through the jargon, a no-deal Brexit may result in the UK requiring companies hold approximately 35m barrels in storage under International Energy Agency rules, instead of about 76m barrels under EU edicts.
In other corners of the UK energy industry, the evidence to support negative consequences of a no-deal Brexit is thin. Although Britain imported 4.8bn cubic metres of the fuel from continental Europe through underwater pipelines in 2017, those flows won’t be endangered by EU negotiator Michel Barnier holding the public’s feet to the fire. Power supply is also secure, with more underwater cables to transmit power across borders planned regardless.
Britain imports less than 10pc of its annual demand from Europe, but also has the capacity to send electricity in the opposite direction. Over the last year demand averaged 33.8 gigawatts, of which imports met less than 3 gigawatts of demand. The UK has 4 gigawatts of subsea cables installed and a further 4.4 gigawatts are being built to France, Belgium and Norway. A weak pound combined with a higher euro carbon price could see UK exports of power increase – giving British thermal generators a last hurrah before 2025.
Even the most hardline Brexiteers cannot in all honesty expect the UK to leave Europe without suffering some economic consequences, at least in the near term. After all, it is entirely reasonable to prepare for the worst-case scenario when dealing with something that has never happened before.
The energy industry – still Britain’s economic lifeblood – should be ready for all eventualities on March 29, but meeting demand for oil, gas and power should remain its most important priority regardless.