Brexit – Possible impact on the UK oil and gas industry

”Brexit” has dominated the news in the UK and much of Europe for the last two years. With less than a year now until Brexit takes place on 29 March 2019, matters are becoming much more real for everyone with a connection, business or personal, to the UK, including those operating in the offshore sector, or involved in exploration on the UK continental shelf. This, in turn has raised some questions in relation to the effect, if any, this will have on P&I insurance. In this issue of The Field, we look at some areas where Brexit may impact upon the offshore industry in the UK and Europe, and for an assured’s P&I cover.

Tariffs

In 2017, Oil and Gas UK, the trade body for the industry, commissioned a special report, which looked into the potential economic impact and, crucially, the opportunities that may arise, as a result of Brexit.  The results of the research were presented for the British Prime Minister.

On the Oil and Gas UK numbers, the UK presently does an annual total of around £73 billion of oil and gas-related trade with the rest of the world.  Of this amount, £63 billion relates to traded goods which may be subject to tariffs.  Under the current regime (EU membership), tariff costs are around £600 million.  Depending upon the outcome of the ongoing negotiations between the UK and the EU, a ‘hard Brexit’, pretty much a straight ‘cutting of the cord’, would result in the UK reverting to World Trade Organisation rules for import/export and the cost of trade rising to double the current tariff costs.

A more gentle departure agreement with the EU could however allow Britain to continue to benefit from some of the upside of the European ties while also freeing it to negotiate independently on the global scene. This in turn could result in a beneficial, albeit modest, reduction in tariffs.

Free movement of workers

It is estimated that EU countries currently provide around 5% of total oil and gas supply chain workers in the UK sector, with the majority of those being in skilled or managerial positions.  A tightening of immigration rules could hamper the service sector workforce, at least in the short term.  However, as with so much surrounding Brexit, the ultimate outcome still remains very uncertain.

Regulation and policy

The UK has been a leader in the area of regulation of the upstream oil and gas industry for the last 30 years.  Important elements such as licensing and taxation have always been principally dealt with by the UK government.  This will not change. 

The European Union (Withdrawal) Bill, repeals the 1972 European Communities Act (which originally took the UK into the EEC) and ends the jurisdiction of the European Court of Justice over the UK.  However, it will also copy all existing EU legislation applicable to the UK into domestic UK law to ensure a smooth transition. The intention is to avoid a “black hole” and for the UK to review individual laws as necessary.

Further, much of the existing EU law in the oil and gas industry, particularly the regulatory regime, is based on pioneering work in the UK or is already enshrined in the UK’s legislation.  Areas like Health and Safety are therefore unlikely to be significantly impacted.

A global industry

The global oil and gas industry is starting to emerge from one of the most significant downturns in its history.  This had an impact worldwide but was particularly significant in affecting business in mature basins like the UK Continental Shelf.  The European oil industry has therefore had considerable focus on production efficiency, with unit operating costs falling dramatically.

There is an argument that macro economic factors affecting the whole industry or, at a more basic analytical level, what the oil price is doing, are more important to the UK oil industry than whatever regime is in place following Brexit (hard or soft).

For major international players, the potential cost of different regulatory regimes may to some extent already be factored in.  They are used to dealing with a multitude of regulatory frameworks globally, so the mere fact of Brexit is unlikely to block any serious future investment.  The oil price will drive the desire to commit investment into continuing production but also, crucially for the longer term, exploration to realise what is estimated at a further 20 billion BOE(1) in the UK Continental Shelf. 

When that is tied to the UK government’s commitment to Maximum Economic Recovery(2), there is reason to remain hopeful that, whatever the Brexit weather, the industry (and therefore its participants) will be given the opportunity to thrive again.

The P&I perspective

While Brexit has caused a great deal of uncertainty for businesses primarily based in the UK, for those, such as Skuld, which are seated elsewhere in Europe, that worry is significantly less pronounced. Skuld Offshore will continue to be able to write business in the way that it has to date, with no noticeable effect for our members, clients and assureds expected.

In terms of service, Skuld Offshore will continue to operate from offices in Oslo, London and Singapore, with underwriting, documentation and claims serviced in exactly the same way as always. With no need to establish an office in another part of Europe for passporting rights, there will also be no upheavals in terms of office moves.

In short, at Skuld, things will very much be “business as usual”.