Brexit: the UK's turning point is just a month away
Whether it remains in or leaves the European Union, there are many consequences, including in terms of energy. Oil companies fear that exiting the EU could jeopardize investments in the British energy industry

In a few weeks’ time, on 23 June to be precise, the United Kingdom will be voting in a referendum to decide whether to stay or leave the European Union. It is probably one of the most important votes to take place in Britain in recent years; and not only for Britain given the international repercussions a vote to leave the EU - the so-called Brexit - could have on the EU itself, on stock and currency markets around the globe, and on trade and migration. The referendum is also tearing apart the country's governing Conservative Party with cabinet ministers, members of parliament, local militants openly insulting each other as they argue feverishly in favor or against leaving the EU. Even after the result of the vote is known - and it looks as if the "remain " campaign now has the edge on the rival "leave" campaign although nothing is certain in what promises to be a highly emotional referendum - the Conservative Party will remain split and divided for months or even years ahead.

What would happen in the energy industry

This is all too evident inside the Energy ministry itself. Amber Rudd, the secretary of state for energy and climate change, has come down heavily in favor of Britain remaining in the EU backing David Cameron, the prime minister, and George Osborne, the chancellor of the exchequer, who have all warned of the severe and lasting damage an exit vote would have on the British economy, household income and home prices, as well as undermining the UK's position on the world stage. In the specific case of energy and its crucial role in the UK economy, Rudd asserted that Brexit could deliver an "electric shock" to the UK energy market warning that UK energy bills would increase by £500 million a year if the UK left the EU. Her number 2 in her department, Energy minister Andrea Leadsom, who is in favor of Brexit and is a member of the Vote Leave campaign committee, wasted little time to contradict sharply her superior. She argued that remaining in the EU carried "big risks" while leaving did not threaten any of the UK's principal energy goals. Indeed, she claimed staying in the EU risked undermining the UK's energy security. "Leaving the EU will give us the freedom to keep bills down, to meet our climate change targets in the cheapest way possible, and of course, keep the lights on," she said in a recent speech in London. On the other hand, continued membership of the EU posed a "real threat" to the UK's energy security especially in view of the European Commission's so-called "Winter Package" proposals. Sharply criticizing these new Brussels proposals, she warned: "First, we will be required in future to ask the Commission for approval before negotiating new gas deals with international partners, leaving us possibly reliant on a group of unelected Eurocrats, further diminishing our freedom to act in our own best interests, and certainly delaying our ability to respond to an emergency. "  But secondly," she went on, "and of deep concern, there is a specific proposal by the Commission to require member states to take on legal responsibility for each other's gas security. To quote directly from the Commission's report: under the so-called solidarity principle, an EU country in trouble would see gas supplies to its households and essential services ensured by neighboring EU countries." In other words, fellow member states would guarantee gas supplies to any of the 28 EU countries facing a cut in gas supplies because of say a political dispute with a big supplier like Russia or expiring contracts. She argued that the UK was on a very secure supply footing for gas with 40% of gas supplies coming from North Sea reserves, and the rest coming mostly from Norway and the Middle East. Unlike other EU members, the UK was not dependent on Russian gas. At the same time, Britain she said was a world leader in the development of new, low carbon technologies and its emissions reduction ambitions were also world leading. Ryan Bourne, head of policy at the Institute of Economic Affairs, backs up this point by arguing that Brexit would enable the UK to review some major regulatory areas, not least on carbon emissions reductions. A lot of nonsense is put about regarding this, he says, claiming that the EU seeks to reduce carbon emissions in a really inefficient way. "Leaving would enable us to revisit these (renewables targets and other EU directives) and replace them with something economically sensible with the same aim." The pro-Brexit energy minister also argued that leaving the EU would also help the UK to get away from the "huge restrictions" of EU state aid rules and the need to receive EU state aid approval whenever the UK wanted to make any policy change about its energy mix.

What the major oil companies think

So who is right and who is wrong, and would Britain leaving the EU be beneficial or negative to its energy industry and market or make little if any difference at all? Right from the beginning, the big oil companies have backed prime minister Cameron's campaign to remain in the EU. Bob Dudley, the CEO of BP, warned that investment in the UK energy sector could suffer if Britain were to leave the EU. Back in January, he said being outside the EU would be "worse" as many of the rules would still apply and Britain would be in danger of losing influence on the world stage. "There are lots of technical tax reasons, trade flows, regulation, that would make it better for our business and the energy business in general, the oil and gas business, if Britain were a part of Europe," he told the BBC. His opposite number at Royal Dutch Shell, CEO Ben van Beurden, echoed similar concerns about a Brexit. "We are a company with a strong heritage in the UK and on the Continent. There would be a real break between the 2 which would affect freedom of movement of staff and trade – we would be impacted. There will be a path of divergence and that will have all sorts of inefficiencies. That is not good for companies like ours that thrive by there being no barriers. That is a fundamental economic aspect of it." Van Beurden signed a pro-EU letter along with other industry leaders saying leaving "would deter investment and threaten jobs." Leaving the EU would indeed make it more challenging to move non-British citizens to the North Sea while making it also difficult to move British workers to the European continent, raising administrative and labor costs and making project planning more complicated. Trade barriers could also raise the cost of importing drilling and other equipment to the UK even though Aberdeen is well provided as an established major oil hub. Another risk would be the impact of Brexit on the value of the UK currency. Analysts of major banks are warning that a vote to leave would probably have the biggest impact on the pound. That would be a mixed blessing for the oil sector. "If that were to happen, upstream operators in the North Sea may benefit from a lower cost base relative to the dollar dominated oil and gas prices," says Wood Mackenzie, the energy research group. At the same time, companies with US dollar debt will see their repayments rise if their revenues are in pounds. All in all, however, the energy sector and in particular the oil and gas industry does not seem particularly alarmed by the referendum for all the campaign hyperbole. Many suggest that oil and gas, as well as renewables and shale, could well benefit from Brexit given any future UK administration would push the development of its own resources, even those that might appear costly in the current oil price environment, to ensure the country's long-term energy security. Even if the UK voted to leave, the regulatory regime of the North Sea oil sector would remain largely unchanged and still under British control. Indeed, Brexit would not change the key fiscal regime for the North Sea and London already has sovereignty over corporation tax, licensing and permits and other regulations that are unlikely to change in the short term. And as lawyers and other advisers to the UK energy industry are pointing out a whole series of deals are currently being done in the North Sea that suggest the sector is not really very concerned about Brexit. For all its chief executive's concerns, BP has nonetheless just doubled its interest in the Culzean development in the UK Central North Sea following the acquisition of an additional 16% interest from JX Nippon. The Maersk-operated Culzean field development is expected to produce enough gas to meet 5% of total UK demand at peak production in 2020-21, according to BP. Discovered in 2008, the gas condensate field has resources estimated at 250-300 million barrels of oil equivalent. Production is expected to begin in 2019 and continue into the 2030s with plateau production of 60,000-90,000 boe per day. At the same time, Total has officially launched its £800 million Shetland gas processing plant that will be supplied by the huge Laggan and Tormore gas and condensate fields west of the Shetland Islands. These fields are also expected to average 90,000 boe per day at peak production. Patrick Pouyanne, Total's chief executive, said the Shetland development demonstrated the French company's "continued commitment to the UK." He also added that "by opening up its third production hub in the frontier offshore waters off the west of Shetland, Total is also improving the UK's long term energy security." Mr. Pouyanne also made a point of saying that there was "no doubt" that there was a future for the North Sea and that Total remained committed to the region. He did not mention the referendum but the message was pretty clear. He paid tribute to the UK government for changes in North Sea taxation saying "Frankly what has happened in the last two years was quite impressive." He also emphasized the industry needed to be "smart" to maximize the UK's continued offshore potential. Elsewhere, construction of the world's largest floating wind farm is about to begin off the Aberdeenshire coast following the go ahead of the Crown Estate granting the necessary lease to the Norwegian gas and oil company Statoil. Royal Dutch Shell has also started the process of selling BG North Sea assets as part of its efforts to reduce its debts following its acquisition of BG earlier this year. And further underlining the continued interest in the UK energy sector despite the uncertainties over the referendum on 23 June was the recent decision of the French oil service group Technip and its new US Texas partner FMC Technologies to establish their joint headquarters on neutral ground in London. If they had been so worried about the referendum they would surely have waited to announce this move until after the vote. The oil and gas industry seems to have been far more alarmed by the Scottish independence vote in September 2014 than with the present Brexit referendum.

Scottish independence: an unresolved question

Two years ago, the industry had campaigned far more noisily and forcefully against Scottish independence compared with its much more muted approach to the 23 June referendum. For the oil industry, the Scottish vote was a far greater threat because if the Scots had voted to split from the UK it would have changed the sovereignty of the North Sea oil fields as well as the tax and possibly the regulatory regime. The issue of Scottish independence has not altogether disappeared. Ironically, it is the industry's main concern over the current Brexit referendum. For should the British vote to leave the EU it could trigger a new vote for Scottish independence given that the Scots are keen to remain in the EU. If they had to choose between the UK and the EU many Scots would probably opt for Europe. That is why the industry is ultimately well in the "remain" camp. The last thing they would like to see is a second Scottish independence vote.