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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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  • Fat_Man

    Less yak about Scotland voting for independence. Scotland won’t vote for independence. Scotland is Greece without sunshine. West Virgina without the Federal Government. Scotland is deeply socialist, and socialism can not exist without other peoples money. Right now Scotland lives off England. If they declare independence who will take the burden on? Certainly not the EU which cannot afford its current litter of PIGS. Also EU countries with centrifugal ethnic regions, such as Spain would object deeply to the precedent.

    • Kevin

      This is all true.

      But the SNP gov’t would much rather be heads of an impoverished independent country than just provincial hacks in the UK. Can they convince a majority of their compatriots to jump off the cuff with them?

      The other issue is Terresa May. Will she allow a plebiscite? If so will she insist on the rights if Scots living in England to vote? Will she give the rest if the UK the right to vote in a referendum to break up the country? She seems a much sharper cookie than Cameron was…

      • f1b0nacc1

        I rather doubt that May will take any serious risks unless she is sure to come out on the ‘right’ side of them. She is indeed a very sharp cookie, and much, much tougher than Cameron ever dreamed of being.

        With that said, I wonder if she won’t let the plebiscite go through. After all, once you get rid of the parasite Scots, the Labour party is essentially dead forever as a national force, and the English part of the UK (a Tory stronghold) becomes far, far more consequential.

        • Andrew Allison

          Exactly. Meanwhile, we have the least popular President in the history of the Fifth Republic publicly lecturing the British PM on Brexit. I’d love to have been a fly on the wall at their meeting, where I suspect she told him exactly what he could do with his opinion [grin].

          • f1b0nacc1

            I have a very close friend who is connected to May, and she tells me that a few stories that actually made me feel sorry for the people on the wrong side of them. Put simply, this is not a lady you want to cross

    • f1b0nacc1

      We also have some evidence to support this belief, i.e. the last referendum on independence where the Scots chose to remain. They may not be smart, but they aren’t entirely delusional…

    • Andrew Allison

      Scotland may well vote for independence; as Kevin points out, the SNP would rather govern an impoverished independent country. If Scotland does vote for independence, it will get the government it deserves.

      • Didn’t the SNP just lose their electoral majority?

        • Andrew Allison

          They lost the absolute majority, but the rest of the seats were spread among four other parties. (,_2016)

          • Well, yes, that is how you get a minority government. When a majority party is returned to government but now as a minority, it’s a reasonable interpretation to say that this party, and its main ideological cause, is now weakened.

            If snap elections could be called right now, would they benefit or hurt the SNP?

          • Andrew Allison

            A very good question. I suspect, given the chaos in their party, that most of the Labour seats would go to SNP, returning them their absolute majority.

          • f1b0nacc1

            Almost certainly the SNP would benefit. The Scots were deeply opposed to the Brexit (though in typical Scots fashion, they couldn’t be troubled to vote on it, Scotland’s participation ran behind the rest of the UK), and the SNP (whose leadership is quite capable, if utterly delusional) would have little trouble exploiting that in an election. Labour is such a mess right now that the SNP wouldn’t have any difficulty peeling off the few remaining Labour MPs.

          • Josephbleau

            As an ethnic Scott, i am somewhat amused.

          • f1b0nacc1

            No personal offense intended, of course….

  • Josephbleau

    Like the Quebecois rebels, they only want to leave if you want them to stay.

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