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Brexit -- Commodities Implications: A Platts news and analysis feature



Brexit factbox: Energy aspects of the UK's departure from the EU

By Nick Coleman in London


March 28, 2017: As the UK gives notice of its intention to leave the EU, the oil and gas industry along with the rest of the country is considering possible consequences.


Watch our related video: How much is the Brexit-related weaker pound impacting energy costs?


One prevalent high-level view is that Brexit is just one of the perennial stresses and strains to be faced by the industry.


While Brexit symbolizes heightened risks in the developed world, alongside the EU's general fragility and policy uncertainty in the US, Europe is not a growth area in terms of supply or demand and thus the impact should be limited.


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An enduring mutual dependence between the UK and the rest of the EU should also encourage cooperation.


Prime Minister Theresa May's plans to transpose all EU law into UK national law as a starting point suggest a desire for continuity.


But Brexit is still unsettling, particularly as the UK hosts the executive and trading offices of numerous oil companies and is a center of expertize, supported by a liberal EU migration regime.


Brexit also comes as the North Sea oil industry faces an investment drought.



TRADE TERMS


There seems little chance of the EU introducing tariff barriers on imports of UK crude oil and gas.


The EU's energy dependence means imports of raw energy are generally not taxed -- its dependence on Russian energy is likely to remain a greater concern.


Despite the UK's own energy dependence, it is a significant exporter of crude oil to other EU countries, particularly Germany, which imported about 200,000 b/d of UK crude in 2015.


This reflects the high quality of UK crude oil and UK refiners' preference for cheaper crude from elsewhere.


Similarly, EU member Ireland remains dependent on the UK for gas imports, despite the republic's progress developing its own supplies with the recent startup of the Corrib gas field.


As for oil products, the EU has waived tariffs on imports of fuels in short supply such as jet fuel, while a modest 3.5% tariff applies to diesel, for example.


UK fuel exports are mostly to the US, not the EU. However Europe's downstream fuel sector is prone to become politicized, as seen last year when strikes occurred across France's refining and ports sector.


In terms of the UK's energy needs, the country relies on Norway, a member of the EU "economic area," particularly for gas.


But it is hard to see a disentanglement of the two countries' oil and gas sectors occurring any time soon, or the political will to do this.


The sole pipeline outlet for Norway's Ekofisk crude stream, for example, is not in Norway, but in northeast England. In March, Norway's government called for a bilateral trade deal with the UK that "must be far more comprehensive than the provisions of the World Trade Organization or a traditional trade agreement."



INDUSTRY BACKDROP


A general concern is for the continuity of the financial and legal services in London that support the industry in the UK and internationally, along with academic and engineering centers of expertize around the country.


A renewed push for Scottish independence, occasioned by Brexit, is adding to uncertainty at a time of record-low investment in the UK oil and gas industry.


As the prime minister tries to keep the Scottish nationalists at bay, high profile industry figures in the industry have voiced confidence in the UK, encouraged by the resilience of its economy since last year's vote to leave the EU, and the enthusiasm investors have shown for UK oil and gas companies, thanks partly to the weakness of the pound.


Commenting in February, Shell chief executive Ben van Beurden appeared sanguine, in contrast with the company's warnings before the referendum.


"I am confident that we will also be able to thrive in an environment called Brexit whatever the outcome of the negotiations," Van Beurden said. "I don't perceive any significant implications for our footprint in the UK, nor for our investment level in the UK."


The optimistic view is that with UK oil and gas production on the rise -- despite 120,000 job losses since 2014 -- the country's oil industry is in better shape to adapt.


This may mean greater international collaboration, efficiency and digitization.


Offshore facilities can increasingly be monitored and managed remotely from elsewhere in the world, reducing the need for on-site staff.


High levels of expertize within the UK should help, amid a greater emphasis on employing UK staff.


However the North Sea sector has come to rely on other EU countries for some skills, a point highlighted by the chief executive of lobby group Oil and Gas UK, Deirdre Michie, at a parliamentary meeting last December.


She stressed both the need to trade gas into mainland Europe in summer and the ability to access EU staff, particularly for sub-sea engineering roles, for which French companies Total and Technip have been a source.


While the UK's low-tax oil industry has "one of the most competitive fiscal regimes globally...we do need to see continued movement of goods and services and people, and obviously limiting any tariffs or non-tariff barriers is very important," Michie said.


In the downstream segment, industry lobby group UK PIA has welcomed government promises of an industrial strategy as a potential support for the sector, but also stressed the need for barrier-free trade, stability and predictability.



ECONOMIC IMPACT


Another issue is what Brexit means for oil demand. EU oil demand has been relatively strong in the last couple of years, helped by low prices and greater optimism about the EU economy.


UK oil demand rose by 2.5% in 2016. However a recent jump in UK fuel costs, in part due to global oil price trends but also the weakness of the pound since the Brexit vote, has raised worries.


The UK economy has looked robust, but higher fuel price lifted inflation to 2.3% in February, raising fears of a slowdown.


Overall UK transport prices rose by 6.9% over the past 12 months and prices of transport fuel and lubricants by 19.4%.


Air travel prices may have further to rise since they have been immune so far due partly to airlines' hedging strategies.



GIBRALTARIAN UNCERTAINTY


One overlooked aspect is the future of Gibraltar's bunker fuel trade.


The British overseas territory claims to be the largest bunkering port in the Mediterranean, but relies on storage facilities in Spain, as well as free movement of parts, provisions and labor.


Any hardening of Spain's treatment of Gibraltar, could spell problems.








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