The results are in, and, in a vote that has sent shockwaves around the country, and across the world for that matter, the 23 June 2016 will forever mark the historic moment that Britain chose to leave the European Union, in the first UK-wide EU Referendum since 1975.
Following an intense period of campaigning that has inspired citizens, politicians, world leaders, industries, organisations and companies, ranging from small business owners to multi-national corporations, to fight animatedly for their chosen camp, be it ‘Leave’ or ‘Remain’, voters backed ‘Brexit’ by a margin of 51.9% to 48.1%.
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While ‘Leave’ supporters rejoiced, as UK Independence Party (UKIP) leader Nigel Farage dubbed 23 June as Britain’s ‘Independence Day’, in the hours before this issue was sent to press, the news was saturated with economic horror stories. As the referendum outcome emerged on 24 June, the value of the pound plummeted, at one stage reaching US$1.3236, a fall of more than 10%, which has not been seen since 1985, according to BBC News Market Data. Furthermore, the London stock market experienced a significant hit, falling by more than 8%. BBC statistics showed that, during the opening minutes of trade, the FTSE 100 Index fell more than 500 points before regaining some ground.
So, while there is currently a large question mark hanging over the UK’s economic health, what implications will this historic vote have upon the oil and gas industry?
In the run up to the referendum, many argued that a ‘Brexit’ vote would have no significant impact on the oil and gas sector, at least in the short term. In the Aberdeen & Grampian Chamber of Commerce’s 24th Oil and Gas Survey, 45% of respondents noted that it was difficult to reach a clear view about whether a vote for 'Brexit' would be a positive development for the sector or not, and a further 20% said it would make little difference. “One thing about which the majority of the industry is united is the impact of the European referendum. Most are ‘unfazed’ at the outcome,” noted Uisdean Vass, Oil and Gas Partner at Bond Dickinson.
Despite this somewhat nonchalant attitude, uncertainties for the energy industry are undoubtedly clear, as Douglas-Westwood (DW) notes. In 2013, the UK became a net importer of petroleum products – traditionally, the predominant sources of UK imports are from EU countries. The depreciation of the pound, which has already become dramatically apparent, could result in increased uncertainty over future energy supply, due to higher import costs. According to DW, this scenario could be a ‘double edged sword’: UK oil and gas businesses would see relatively lower operating costs compared to US competitors; however, companies with revenues in sterling will most likely face elevated repayments of dollar denominated debt.
Skilled labour is also a major concern. Following the vote, the Institution of Engineering and Technology (IET) called for an urgent discussion to mitigate the impacts of leaving the EU on the engineering sector. The IET previously stressed that a vote to leave could result in an exacerbation of the UK’s engineering and technology skills shortage by making it more difficult for companies to recruit from other EU countries. Access to global markets and companies, a decline in funding for engineering and science research, and a weakening of the UK’s influence on global engineering standards, were also identified as key issues.
In terms of foreign trade, the outlook is currently unclear. David Johnson, Managing Director of Tudor International Freight, highlighted three alternative trade scenarios following the 'Brexit' vote: a Norwegian-style free trade agreement with the union; a series of bilateral trade treaties with it on the Swiss model; and the UK and EU nations charging each other the import duties they apply to other countries in the World Trade Organisation, with which they lack free trade agreements. “Whatever new system results, however, administration, time or cost increases for oil and gas sector companies trading with EU-based organisations are certain,” Johnson said.
The current climate is one of marked uncertainty. There will, of course, be implications for the UK oil and gas industry; however, according to DW, the current low oil price environment is likely to play a much larger role in shaping the energy industry over the coming years.