Crude Economics
What Brexit Means for North Sea Oil

The decision made by the British people to leave the European Union could open the door to development of onshore shale gas reserves (that door has, despite David Cameron’s best efforts, remained wedged shut in recent years), but industry observers are keeping a close eye on what has changed—and what hasn’t—for the UK’s beleaguered North Sea oil industry in the wake of the Brexit referendum. As the Wall Street Journal reports, the newly-weakened pound could be a lifeline for some offshore operators:

The fall of the British pound to a 31-year low after the June 23 referendum has lowered labor, equipment and engineering costs for companies that have major operations in Scotland, the main base for North-Sea outfits. These companies sell oil in dollars but pay employees and the majority of their costs in the weakened British currency.

Tony Durrant, the CEO of the North Sea producer Premier Oil, was sanguine on Brexit’s effects on the industry. “I don’t really see any negatives, other than general market uncertainty,” he said. ““Our dollar income is going to buy more and it’s going to reduce our costs.”

But general market uncertainty shouldn’t be dismissed out of hand. Bloomberg explains:

While oil prices have rebounded, the U.K.’s June 23 vote to leave the EU has further clouded the investment climate as the potential for a second independence vote looms in Scotland, which holds the bulk of Britain’s oil fields. A poll on Scottish independence from the U.K. was defeated in 2014, but after voters there overwhelmingly backed the losing side in the referendum on EU membership, a new vote is “very much on the table,” Scotland’s First Minister Nicola Sturgeon said on June 26.

“Uncertainty may impact investment levels and lower investment can in turn potentially bring decommissioning forward for some fields,” said Kimberley Wood, a partner at law firm Norton Rose Fulbright LLP in London.

It looks like a mixed bag, then. On the one hand, favorable exchange rates are helping to lower costs for companies that have already been pushed to the brink of profitability by the collapse in crude prices and the maturation of the fields they’re plumbing. On the other, the Brexit vote has reignited the debate over Scottish independence, and with so much North Sea production in Scottish territory, that possibility is looming large for investors. Brexit has brought down costs in some tangible ways, but it’s also introduced a new world of uncertainty that now hangs over an industry already well into its decline. Time to tap that shale, Britain.

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