The impact of Brexit on the oil and gas industry
Friday, July 08, 2016
The decision by the British people to exit the European Union two weeks ago was for many a surprise and sparked turmoil in global markets.
The British pound dropped to a 31-year low, while investors poured money into the dollar, yen and gold — whose price increased by around 20 percent. An estimated $2 trillion was wiped off equity markets worldwide.
Brexit, the term that was coined to describe the "British exit," has also affected the oil and gas market — not only in the UK and Europe, but also globally with expected repercussions on the U.S. oil and gas sector.
The day following the referendum, Brent crude had fallen 6 percent while U.S. crude fell by 5 percent, its largest one-day decline since February.
Impact in the UK
Among the global oil and gas players, North Sea oil producers suffered the worst cutbacks with shares of Royal Dutch Shell falling by 5.35 percent, Statoil by 6.15 percent and BP dropping by 4.1 percent.
At a closer look, however, market specialists are not certain about near-to long-term impacts of Brexit on the sector based in the UK. An analysis by the energy intelligence group Douglas-Westwood, for instance, points out that the Brexit and the resulting depreciation of the pound can have gains and costs for the sector in the UK.
On the one hand, UK upstream businesses could gain through lower operating costs compared to their U.S. competitors. On the other hand, companies with revenues in sterling would face higher repayment costs for their debt denominated in dollars. And the possibility of limited labor and capital mobility following the renegotiation of trade regulations with the EU could repel skilled oil and gas workers and discourage foreign energy investment.
Moreover, according to the legal intelligence Norton Rose, the UK enjoyed about 3.5 billion euros of investment into energy projects from the European Investment Bank. Following the exit from the EU, the future of these EU-funded projects is in limbo. This is because it would be unlawful to support these projects depending on their nature and whether they would still be in line with the EU's policy objectives.
Still, the overall economic impacts of the Brexit will depend on the decisions made in the years to come — the renegotiation of trading agreements with the EU are exacted to take at least two years.
For instance, to ensure free movement of people and goods across borders, the UK could choose the to stay in the European Economic Area (like Norway) — a favorable scenario compared to bilateral trade agreements like Switzerland.
Impact on global markets
Despite the negative prospects for the sector in the UK, most commentators argue that the global impact of Brexit on the industry should not be overestimated. In fact, according to Goldman Sachs, an expected decrease of 16,000 barrels per day in UK oil demand would decrease global demand only by 0.016 percent.
Equally, the International Energy Agency also doesn't expect fundamentals of the global oil industry to shift significantly following Brexit. After all, the largest chunk of demand pertains to emerging countries, especially Asia.
Yet again, expectations of the global impacts are not clear cut. Morgan Stanley, for instance, warns about larger economic repercussion that could hit the markets, stating, "Europe is a big trading partner for the United States and China, which could lead to knock on global effects, and a stronger dollar is generally unhelpful for demand ... In a high-stress case, our economists see global GDP slowing to 2.7 percent in 2017."
Impact in the U.S.
According to PricewaterhouseCoopers (PwC), U.S. companies will be mostly hit by the currency volatility in the short term — though this economic uncertainty could be extensive depending on how long it will take the UK to negotiate with the EU. U.S. companies engaged in transactions with UK companies will have to hedge against these volatilities and reassess the terms and agreements of cooperating with these companies.
As already stated, market fundamentals might not change in the long term, given that the U.K. market share of oil and gas demand is small. However, a possible snowballing effect could affect the political stability of other EU member countries and weaken their their economies significantly.
Slower UK and EU growth would reduce oil and gas demand and impact U.S. companies operating in the oil and gas sector.
Moreover, a possible long-term appreciation of the dollar could put a downward pressure on U.S. exports of refined products, which have already suffered following the increase of supplies of refined products by Asian businesses over the past months.
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