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What Would Be The Effect Of A Brexit On The UK Upstream Oil And Gas Sector?

What Would Be The Effect Of A Brexit On The UK Upstream Oil And Gas Sector?

In the event that the UK votes to leave the European Union, it seems unlikely that this will have a major impact on the upstream oil and gas sector.  This is a sector into which the EU has largely not strayed, and the UK government remains very much at the helm with respect to the exploitation of its offshore oil and gas assets.

Indeed, the UK government already has responsibility for petroleum licensing and regulation, including the decommissioning of offshore installations and pipelines, as well as enforcement of environmental legislation as it applies to upstream oil and gas activities.  The taxation regime that applies to the profits derived from oil and gas production in the UK and its territorial waters is, similarly, also under the control of the UK government.  With respect to those EU Directives that do relate to oil and gas activities, the UK would have to decide whether to continue to apply EU law or whether to develop its own domestic policies.  If the UK does develop its own regulatory framework, there is the potential that oil and gas companies could find themselves subject to two different regulatory regimes.  However, as EU law relating to oil and gas activities has generally been embraced by the industry, it seems unlikely that the UK will stray too far from the current regulatory regime.

Freedom of Movement

Whilst it is unlikely that a vote to leave to the EU would have a significant detrimental impact on the UK upstream oil and gas sector, it would affect freedom of movement of people, goods and capital.  The EU Single Market allows EU businesses to transfer staff, goods and capital freely across the EU.  Large multi-national oil and gas companies thrive by there being no barriers to trade.  Any Brexit would therefore make freedom of movement between the UK and other EU countries more difficult, presenting a logistical problem for upstream oil and gas companies which benefit from having an internationally mobile workforce and the ability to freely move goods and capital within the EU.  Any exit from the EU would undoubtedly disrupt trade flows unless new trade agreements with the EU, and other countries, were negotiated quickly.  However, this is unlikely to be viewed as an insurmountable problem by oil and gas companies that are accustomed to operating in considerably more politically unstable jurisdictions, than the UK outside of the EU. 

Re-emergence of the Question of Scottish Independence

Of perhaps more impact to the UK upstream oil and gas sector is the fact that the First Minister of Scotland has warned that a vote to leave the EU would almost certainly lead to another Scottish independence referendum.  The re-emergence of the question of Scottish independence could create uncertainty for the industry, potentially resulting in companies delaying or cancelling projects until any outcome is determined.  It would likely result in a revisiting of those issues that were discussed at the time of the independence referendum last year- the UK and Scottish Governments would need to determine how to divide the North Sea’s Exclusive Economic Zone, reach agreement as to responsibility for the basin’s significant decommissioning needs and decide how the industry should be regulated going forward.  With the current depressed oil price already impacting confidence in the UK oil and gas sector, any re-emergence of the question of Scottish independence could add to the pressures that the industry is already facing.

Conclusion

As a mature basin with higher operating costs than many other jurisdictions, coupled with the current depressed oil price, the UK upstream oil and gas sector is already struggling.  As such, anything that impacts the desirability of multi-national oil and gas companies to base their businesses in the UK would be a negative thing.  Indeed, the CEO of Royal Dutch Shell, Ben van Beurden, has already stated that if the UK was to vote to leave the EU, freedom of movement of staff and trade would be affected.  Van Beurden believes that this would lead to path of divergence between the UK and Europe which is “not good for companies like ours that thrive by there being no barriers.”

Although Brexit may not initially have a significant impact on the upstream oil and gas sector, what it does create is a climate of uncertainty, affecting the perceived stability of the investment environment.  Coupled with the potential for re-emergence of the question of Scottish independence, there could very well be stormy times ahead for the UK’s upstream oil and gas sector.

We have examined various facts around the EU referendum process, links to which can be found here.  Over the coming weeks prior to 23 June, our specialists will be publishing further analysis of how their sectors may be affected if the UK votes to leave the EU, to help you understand the areas of uncertainty and assess the potential risks to your business.

Please do get in touch if you have any queries over how your business could be affected by the UK voting to leave the EU.

Laura Fraser

LChalmers