With politics roiling Westminster, a no-deal Brexit remains possible. And after three politically incendiary years of preparation for British withdrawal from the European Union, a bust-out’s ramifications for the oil market and UK oil and gas industry remain murky.
Boris Johnson, the UK’s third prime minister since the June 2016 referendum supporting Brexit, wants a clean break on Oct. 31 if the EU doesn’t resume negotiations. On Aug. 26, he scheduled a suspension of Parliament to deprive opponents time to intervene. But after losing his one-vote majority and a vote that cost him parliamentary control, he said he’d seek a snap election if defied with another Brexit delay. On Sept. 4, the early version of a delay bill was passed.
If the UK eventually leaves the EU with no deal, its now-unencumbered exports to EU members will become subject to border regulation and most-favored-nation tariffs. According to Council on Foreign Relations analysts, those levies average just below 6% but can be much higher, especially on agricultural products.
Little else is certain. Some economists warn of contraction of the British economy and the possibility of recession. The distress might spread beyond the UK, threatening a global economy with growth prospects already clouded by the US-China trade war. A widespread economic slowdown would weaken demand for oil and natural gas.
After its departure, the UK would have to negotiate a new relationship with the EU. It might, like Norway, become part of the European Economic Area with access to the single market along with financial and regulatory obligations but no influence over EU law. It might, like Switzerland, negotiate bilateral agreements covering goods but not services. Or it might, like Turkey, form a customs union providing market freedom for goods but not services.
Each of those options has drawbacks for the UK. Norway and Switzerland must accept the free movement of people from anywhere in the EU. That obligation is distasteful to Brexit supporters in the UK, where concern is high about immigration and terrorism in Europe. And trade agreements not covering services would omit much of the British economy. Whatever UK-EU relationship emerged, the essential negotiations would require time.
Prominent among Brexit’s many border issues is status of the boundary between Ireland, an EU member, and Northern Ireland. Another worry is residency of 3.2 million EU citizens living in the UK and 1.3 UK citizens living elsewhere in the EU. The cross-border movement of workers, like that of goods and services, holds obvious importance for the oil and gas industry. The industry also must consider the possibility of resurgent separatism in Scotland, where voters defeated an independence referendum in 2014 and where support for EU membership is strong.
Earlier this year, Oil & Gas UK (OGUK) provided a useful lens through which to analyze Brexit developments important to the oil and gas industry. It listed these post-Brexit priorities:
• Protecting the offshore industry from future EU regulatory changes. The UK is the largest EU producer of oil and gas, the group noted, requesting a mechanism “that provides support to the [UK Continental Shelf] in relation to future EU rules.”
• Maintaining a strong voice in Europe. Whatever the UK role in EU governance, energy policy must “recognize that oil and gas will remain a key part of both the UK and the EU’s energy mix for decades to come.”
• Minimal friction between the UK and EU. “Ensuring the efficient and frictionless movement of goods, services, and capital must remain a priority,” OGUK said.
• Protecting energy trading and the internal energy market. The group hoped governments “will maintain the commercial and regulatory integrity of any new internal energy market spanning the EU and UK.”
• Protecting the industry’s license to operate. With or without a foregoing deal, and whenever it happens (if it does), Brexit will be disruptive. But it need not be calamitous. Eventually, events dispel uncertainty, which can be the biggest problem.