Brexit one year on: Energy

United Kingdom

Over the past year, investment into the energy sector in the UK has remained both broadly robust and driven more by policy decisions than by Brexit-related matters. The very high value and highly competitive sale of National Grid’s gas distribution networks to a consortium of international bidders is an example of the confidence demonstrated by investors in the sector. Nevertheless, one year on from the referendum on EU membership, the lack of clarity on the form that Brexit may take remains a hindrance to effective forward planning for the energy sector.

Following the prime minister’s Lancaster House speech on 17th January and the publication of the Brexit White Paper on 17th February, we thought we knew that we would be leaving both the single market and the customs union but the general election result has cast doubt on even those certainties.  As noted by Alasdair Steele references to “hard” and “soft” Brexit are over-simplifications of what is inevitably a complex and nuanced picture. However, whatever the impact on policy, it is clear that the election result will have an effect on process.

First, the predicted reliance of the government on the DUP for its majority will put issues relating to Northern Ireland front and centre. Related to the issue of the land border for customs and immigration purposes is the fact that the island of Ireland operates a single electricity market. There is scant support from any quarter for dismantling the SEM. Assuming then that it will be maintained, it becomes a microcosm for the analysis of the myriad issues that will need to be settled, and difficult nuts cracked, to allow key elements of the internal energy market to be maintained within the UK after Brexit.

Second, it appears that the government’s weakened position will force it to be more consultative regarding the detail of its negotiating position in relation to Brexit, and in relation to the transitional provisions that will be put in place for business continuity. Perversely, while work has been underway for some time, it may now take longer before we are clear as to what the government proposes in policy terms, or before it is able to consult on the detail of the Repeal Bill’s provisions relating to the energy sector. This is because there is an expectation of a more cross-party approach to Brexit matters. While adding more accountability and oversight, it could strain the already tight timeframe for Brexit negotiations.

Looking more broadly, in the downstream energy sectors, over the past year we have seen Brexit-related concerns raised over the viability of the UK’s biggest infrastructure project, Hinkley Point C.  The apparent intention of the government to exit Euratom in parallel has added more uncertainty into the mix. While non-EU gas supplies provide confidence on security of supply, the impact on sterling is likely to mean that gas prices begin to creep up. Meanwhile, notwithstanding the US intention to withdraw from the Paris Accord, the European Commission is pushing a so-called “fourth package” to help close the gaps in the internal energy market and provide “clean energy for all Europeans”. The legislative package shows the direction of travel in Europe, which may become rules that the UK must observe in any event, depending on the form Brexit finally takes.

From the perspective of the upstream oil and gas sector dealing with the challenges of a low oil price, Brexit considerations have taken a distant second place to more immediate and sometimes existential concerns. However, the industry trade association, Oil & Gas UK, wrote to the prime minister in May highlighting the findings of a research study commissioned by the body into the potential impact and opportunities of Brexit on the sector.

The study showed that trade in oil and gas related goods into and out of the UK is valued at approximately £61 billion.  Currently, with the UK as part of the EU, the total cost of this trade is around £600m per annum (less than 2% of the total value of trade subject to tariffs). Under a worst-case scenario where the UK reverts to WTO rules with the EU and the rest of the world, the likely cost of trade will almost double to around £1.1 billion per annum, assuming trading behaviours remain unchanged.  However, if the UK can negotiate minimal tariffs with the EU and improved tariffs with the rest of the world, the total cost of trade could fall by around £100m per annum to £500m.

On labour movement, the data shows that of those directly employed by the oil and gas industry in the UK, around 5% are EU workers from countries other than the UK and 5% are non-EU. Many of the EU workers are skilled, holding managerial roles which are often critical for projects.

To minimise any Brexit cost burden and maximise opportunity, Oil & Gas UK’s recipe was that in its negotiations with the EU the UK government should prioritise frictionless access to markets and labour, maintaining a strong voice in Europe and protecting energy trading and the internal energy market. It is unlikely anyone in the energy sector would disagree.