Last Thursday's vote has already claimed the UK Prime Minister, and may trigger a UK general election. Implications for the UK economy are severe, but the turmoil will spill into the EU and global economy with ramifications for commodity markets.
After a drop in the oil price last week, the risk of further EU fracturing could strengthen the dollar against the pound. A UK slowdown or recession in itself may not materially reduce oil and gas demand, but more widespread economic weakness in the EU could affect consumption.
When will the UK leave the EU? What are the implications for the UK economy and how will it affect the EU? Read more from our Chief Economist, Ed Rawle, in his latest blog: 5 implications of Brexit.
Companies will continue to cut jobs
Brexit won’t make much difference to the bigger international players. Companies will still produce and sell UK oil and gas on international markets – irrespective of tariffs. However, organisational downsizing will continue and Brexit may be used as a justification for ongoing cuts.
How will UK projects be affected?
UK project costs are high, but a weakening of sterling will boost cost reduction efforts. Major political and macro uncertainties mean companies may put investment on hold, even if returns are robust.
In an interview with The Wall Street Journal, Chief Analyst Simon Flowers said "The U.K. could be subject to some tariffs on oil and gas from the EU as part of any new trade deal. However, global markets for both resources are oversupplied and there is enough competition for the U.K. to ensure it still gets a good deal."
North Sea M&A will stall
Appetite among potential buyers will wane further, whilst raising finance to do deals will be harder. Don’t expect new entrants to the North Sea in the current climate, and private equity may pause for thought.
UKCS fiscal deficit
Funding the incremental deficit caused by Brexit will force the Government to cut spend or raise taxes across the board. The scale of job losses has also underlined the fragile nature of the North Sea oil and gas sector– the government is more likely to maintain its focus on stimulating investment, hard as that may be.
UK/EU energy relationships won't change
Even with trade tariffs, the UK/EU relationship will remain strong. But import costs of energy will increase due to sterling depreciation (oil and US LNG are denominated in US$), eroding competitiveness, stoking inflation and impacting consumers’ purchasing power.
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Climate change efforts will continue, renewable power is less certain
Energy policy is unlikely to change in light of Brexit. The UK Climate Change Act governing long-term emissions reductions consistent with EU climate-energy targets will support UK steps to become an individual signatory to the COP21 treaty. Moving away from EU state aid control will likely influence the scope of environmental subsidies, although budget constraints will remain a controlling factor.
In order to protect price increase on renewable energies, the government follows the Levy Control Framework (LCF), which set a budget of £7.9 billion in 2019/20. Forecasts of an emerging overspend prompted the government to reassess which technologies it was willing to continue supporting, shifting the focus to offshore wind. These changes raised concern about renewable power investment and highlighted the lack of clarity around post-2020 arrangements (specifically the incentive budget). EU exit will be likely to add further uncertainty.
The emissions costs of the UK industry are determined by the EU ETS and the Carbon Price Support (CPS). It seems unlikely that the UK will remove itself from the ETS as Norway and other non-EU states participate. The CPS has supported a move away from coal-fired generation and increased power imports. The role of the CPS is less certain and little detail about the post-2020 operation of the measure exists.
Wall Street Journal: ‘Brexit’ Unlikely to Have Big Impact on U.K. Oil and Gas Market
Bloomberg: North Sea Oil Faces Worsening Investment Drought After Brexit