Oil & Gas UK has painted a grim picture for the British oil industry of what is popularly called a "Hard Brexit", with the cost of trade in oil and oil products with the world doubling from the current US$775.92 million (600 million pounds).
The Hard Brexit scenario refers to the UK being unable to negotiate preferential trade terms with the EU, such as minimum tariffs, and similar bilateral trade terms with non-EU economies. For the time being, it seems much more likely than the soft option, with verbal exchanges between PM Theresa May and EC chief Jean-Claude Juncker suggesting that neither side is willing to make compromises.
According to Oil & Gas UK, which commissioned a study of the effects of the country's exit from the European Union and then sent the key findings to Downing Street 10, a soft Brexit will actually be beneficial for the industry. Under this scenario, the cost of oil and fuel trade will drop by US$129.32 million (100 million pounds). There is, as noted, little hope of that, however.
The UK oil and gas industry has a global trade turnover—oil, gas, fuels, and other products—of US$94.4 billion (73 billion pounds). The bulk of this, US$78.9 billion (61 billion pounds), is products, which are subject to international tariffs. The rest is filed under "Services". The current cost of trade accounts for 2 percent of the product part of the turnover, UGUK noted.
In the letter to Theresa May, the industry body's chef executive noted that the UK oil and gas industry is becoming increasingly competitive on a global scale, working on improving efficiency and lowering operating costs. This is all good, but if any hurdles in the form of tariffs or obstacles to the free movement of personnel could hinder this growth at a time when there are other hefty bills looming over UK oil and gas companies, namely, the costs of decommissioning mature fields in the continental shelf.
There are still up to 20 billion barrels of untapped oil reserves in the North Sea, but there are also a lot of depleted fields that need to be decommissioned, with the cost of this endeavor to be shared between the government and the industry.
In January, Wood Mackenzie estimated that the total decommissioning bill will come in at US$64.6 billion (53 billion pounds), to be shared by the platform operators and the UK government. The government's share will take the form of tax relief. Although the process will take decades, things could get complicated for the government because its share for the next five years is a fifth of the total US$29 billion (24 billion pounds) that falls on it.
A government faced with such a complication, and a government that is more likely than not to go through a Hard Brexit, might have to share some of the load with the business world, and that will be another drag on UK oil and gas, which during the price crisis benefited from stimulus measures, including lower taxes. It may be time for UK oil and gas players to double down on efficiency gains and operating cost cuts.
By Irina Slav from Oilprice.com