Exclusively For Offshore Post: Declan is an internationally recognised journalist of more than two decades, having worked for the BBC and ABC News, focusing on all things business and global economics.

Declan Curry

The Costs Of Saying No

Published at 10:05AM - 28/06/16

Oil is one of the most intensely political industries on the face of the planet. Six decades ago, in a bungled attempt to secure Britain’s oil imports, the UK connived with France and Israel to invade Egypt and seize control the Suez Canal. The United States and Russia put a stop to that military adventure. It was the last time Britain could act as the world’s dominant power.

It was a staggering shock to the British political system. The Prime Minister resigned, humiliated and broken. British foreign policy was torn up. It became less imperial, and eventually more European. The waters of Suez arguably washed Britain into what became the European Union. 

Brexit Vote

Last Thursday British voters instructed their leaders to leave that European Union; a decision dubbed “Brexit”. A generation of British foreign, economic, industrial, agricultural, legal and social policy was rejected. It was the biggest political reversal to convulse Britain since Suez; as with Suez, the Prime Minister resigned. 

Britain’s European vote was more than a little local difficulty; it was an event of global political and financial significance. Share prices fell in markets around the world – caused, perhaps, more by fears that the British vote might trigger similar plebiscites in the rest of Europe, unravelling the entire EU project, than worries about the fate of Britain’s domestic economy. 

The price of oil fell to its lowest in 7 weeks; sterling dropped and kept dropping; gold rose in value. Central banks promised action, if required. International economic organisations like the IMF oozed caution and reassurance.

The early market reaction was discussed in an excellent article on this site yesterday.

Oil Supermajors To Stay Put

Yet despite the tumult and turmoil, Britain’s oil industry remained unstirred in the aftermath of the Brexit vote. BP – which had hinted in January that it might reconsider future investment in the North Sea if Britain voted to leave the EU – now noted calmly that it was “too early to understand the implications”. It added that it did not expect a “significant impact” on its UK investments. Shell meekly said it would “work with the UK government and European institutions on any implications.” So no immediate Brexit bonanza for other basins around the world.

BP CEO Bob Dudley (r) With UK Chancellor George Osbourne (l)
BP CEO Bob Dudley (r) With UK Chancellor George Osbourne (l)

There are, in truth, few instant operational implications. Deciding to leave the EU is just the start. The terms of the divorce now have to be negotiated, and that will take years – without any guarantee of a successful outcome.

The two critical questions are – does the UK want to keep a free-trading agreement with Europe, and what price will have it have to pay to do so? From the leaders of the Leave campaign – the new powers in the land after David Cameron announced his departure as Prime Minister – there is little clarity. The likely next-Prime Minister, Boris Johnson, says he expects to stay in the Single Market, even if that means allowing Europeans the right to work freely in the UK. Many of his key lieutenants suggest that freedom of movement is an unacceptable price; many voters cited control over immigration as their primary reason for backing Brexit. Only once that difference is resolved will the oil industry have an answer to one of its important issues – the ability to move workers as needed within the UK and Europe. 

International Investment

The more immediate consequences are likely to be economic and financial. While the trade negotiations drag on, it’s feared that major international companies are unlikely to approve new, big, bold investments in the UK. Specialists in foreign direct investment estimate that around 40 percent of multinational manufacturing projects in Britain were drawn – in part – because a UK base gave them tariff-free access to European customers. We’re unlikely to see existing manufacturing plants uprooted, but they may be denied fresh investment in the future and planned new projects may be relocated to the Continent. 

Any drop in business investment will soon feed through the supply chain and may reduce job creation, curb wage rises and hurt consumer confidence and spending. The major international credit ratings agencies have already cut the UK’s national credit worthiness since the vote to leave the EU. One of them, Fitch, fears an “abrupt slowdown” in growth “as businesses defer investment”. 

A slowdown in the wider British economy could damage the North Sea if it curbs domestic demand for oil and fuel from industry and motorists. Those cuts in credit ratings could also make it more difficult and expensive for smaller oil & gas companies to get the capital they need for future exploration in the UK Continental Shelf.

Second Referendum?

And then there is Scotland. While the people of the UK as a whole voted for Brexit, most electors in Scotland were in favour of remaining in the European Union. Scotland’s government wants talks with Brussels to “protect its position” in the EU. The leader of the Scottish National Party’s group in the UK’s national parliament at Westminster said in a debate on Monday that the party had “no intention whatsoever of seeing Scotland taken out of the European Union”, adding that if it required a second referendum in Scotland on independence, “so be it”. 

That doesn’t mean there will be a second Scottish referendum. Who knows ? – the terms of separation from the EU may be generous enough to keep Scotland sweetly within the UK, without the voters being troubled again. But the SNP has a fresh mandate in the Scottish Parliament since it lost the last referendum, and it is arguing that circumstances have been changed utterly by the Brexit vote. Slowly, oh so slowly, the box that seemed firmly shut just two years ago is creaking open, with all the uncertainty that could create about the ownership, governance and financial status of the UK North Sea. 

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