BrexitEnergy: what is changing

BrexitEnergy: what is changing

Giancarlo Strocchia
Everything will depend on the outcome of the biennial negotiations that advance Great Britain's exit from the European Union. However, while the major oil companies will almost certainly be able to handle the blow, the end consumers could be most at risk

Thousands of questions fill the minds of European bureaucrats, businessmen and European officials ahead of the Great Britain’s certain exit from the European Union, as established by the popular vote that emerged from the referendum of June 2016. Brexit will involve months, if not years, of general reinstatements of the Elizabeth II’s kingdom, which could face a complicated economic upheaval, a further depreciation of pound, a slowdown in growth and the “escape” of certain major banking, insurance and industrial groups. In order to deal with these situations and many unknowns from a stronger position, Prime Minister Theresa May, has announced a snap election in June, in hope that a clear Conservative victory will enable an easier transition.
In terms of energy, negotiations will be held that will establish whether and how the United Kingdom will continue to be part of the institutions that implement and coordinate the EU’s energy regulations, i.e., the ACER (Agency for the Cooperation of Energy Regulators), ENTSO-E (European Network of Transmission System Operators for Electricity) and ENTSO-G (European Network of Transmission System Operators for Gas), which would enable London to participate in continental energy decisions. An alternative to this prospect could be that the United Kingdom remains linked to the European Union’s directives as regards the energy industry and the climate change measures, governed by globally signed agreements, but without being able to intervene in the political and business decisions that the Union makes in the industry following London’s exit. This model would partly reflect the current position of Norway, which has, however, managed to create a flourishing oil & gas industry without being part of the Union, whist signing the European Free Trade Agreement.

Energy costs and taxation

Brexit’s first “energy” effect could be a substantial rise in energy costs for her Majesty’s subjects, resulting from the weakening of the pound. Despite the devaluation of the currency being less evident than expected, the current loss is significant enough to cause effects on the energy resource supply chain. This is particularly true as regards oil imports into the United Kingdom. London is a net oil importer, despite the North Sea’s production having recorded a 13.4% increase in 2015 (45.3 million tons), against the market trend compared with the past, partly due to the operation of new oil fields, such as the Golden Eagle. The expected post-Brexit increases in energy costs to hit consumers could be offset due to a possible decrease in VAT, an option that is currently under discussion in the country. As regards the “downstream” energy effects, the possible expulsion of Great Britain from the Union bodies could also cause an increase in electricity imported by the country, especially from the Netherlands and France, via two interconnectors: IFA (2GW) and BritNed (1GW). From Netherlands and Norway, London also imports a large amount of the gas it consumes.

In terms of energy, negotiations will be held that will establish whether and how the United Kingdom will continue to be part of the institutions that implement and coordinate the EU's energy regulations

Major players and demand

As regards the major oil & gas industry operators, those surely likely to suffer the most from Brexit are the small, less diversified, supplier companies. Large groups are more capable of withstanding change. It should not be underestimated, however, that any restrictions on the movement of workers could negatively affect British companies with "off-shored" teams or those that use service centers that are currently shared with the other Union countries. Moreover, many workers in the United Kingdom are employed by European oil companies in EU countries and vice versa. On completion of Great Britain’s exit from the Union, the prospect of these workers acquiring non-EU citizen status could make bureaucratic employment practices more complex and, consequently, increase employer costs – an effect that the oil and gas industry intends to avoid, at a time when budgets are drastically affected. The CEO of Shell, Ben Van Beurden, recently emphasized that any growth in trade barriers that may be built as a result of Brexit would have a negative impact on many oil companies. On the other hand, this prospect could cause a huge movement by British industry workers to other Commonwealth countries rich in energy resources, such as Canada, Australia and Nigeria. For workers and energy companies, India offers much higher growth margins and employment compared with much more mature markets, such as Norway. London also already holds sovereignty over corporate taxation and operating licenses in the North Sea, which would safeguard the tax received by the United Kingdom.