With an uncertain future spawning from the Brexit referendum, the British government is seeking to maintain as much consistency in its energy policy as possible. A representative from the British Consulate of Houston said there will be changes to the way goods, services, and people move from the UK to the EU, and while very few concrete statements can be made about how Brexit will impact the oil and gas industry, investment in Britain’s offshore and onshore assets will be critical for the country moving forward.
In a presentation hosted by the SPE Gulf Coast Section’s International Study Group, Cynthia Conner examined the potential challenges and opportunities facing the oil and gas industry in the wake of Brexit. Conner is a senior policy lead at the British Consulate of Houston and a member of the Global and Economic Policy Group at the British Embassy in Washington, DC.
Conner said the specific impacts of Brexit on UK energy policy remain to be seen, as the UK government determines which regulations from the EU it will retain and which ones it will seek to replace. However, she said leaving the EU will allow the country to better address its “energy trilemma,” a combination of sustainability, affordability, and security concerns. Sustainability likely will remain a government priority—Conner said companies should expect the UK to maintain its carbon emissions reduction policies—but affordability of natural gas, and security through energy independence are issues that must be addressed in the post-Brexit landscape.
The steady decline of oil and gas production in the UK North Sea has forced the country to rely on outside sources to meet its energy needs. The UK has been a net importer of natural gas since 2004 and a net importer of crude oil since 2005. Last July, National Grid released a report forecasting that the country would import 80% of its gas supplies by 2030 and 93% by 2040 without strong economic growth and steady investment in domestic gas production.
Despite the drop in production, the North Sea will be crucial to any energy initiatives in the UK. Production from the UK Continental Shelf increased from 2014 to 2015, the first such increase in 15 years. Production in the first half of 2016 was 5.7% higher than in the first half of 2015.
Conner said the government is focused on ensuring that its North Sea assets are in the right hands, and that it puts the right systems in place to provide operators with proper access to infrastructure and capital.
“We would far prefer to be a net exporter and meet our needs from domestic sources,” Conner said. “We think that there is still a strong place in a portfolio certainly for North Sea production, particularly for the right producers. A lot of assets in the North Sea right now are owned by the supermajors, and so we’re still having good success.”
Shale development will also be critical to bolstering UK production. Conner cited Cuadrilla’s plans to drill exploration wells at a site in Lancashire—the first hydraulic fracturing activity in the UK in 6 years—as a key milestone. Cuadrilla received a drilling permit from the UK Secretary of State for Communities and Local Government in October 2016 following a lengthy negotiation, and it began work on the site in January. The company plans to drill a 3,500-m pilot well along with two horizontal wells this year, with the goal of determining the economic viability of extracting shale gas from the area. Gas production could start in early 2018.
Conner said the UK may not see significant production from shale until “further down the line” despite the progress coming from Lancashire. She said it will be difficult for the UK to become a net exporter of shale gas given the low oil price market and the ample supply currently available, but that difficulty will not discourage the government from promoting investment.
“The shale development is in much earlier days, so that is further down the line. But, it is something where we know we have excellent resources if we are able to economically get them off the ground. It is certainly something we understand is going to be challenging, particularly as we have so much availability of supply and with prices being where they are right now, but we want to do everything we can to position ourselves to be in the best place to take advantage when prices rise,” Conner said.
The UK and the EU are currently in the early stages of negotiating trade agreements. The UK government has yet to trigger Article 50, which would formally notify the EU of Britain’s intention to withdraw, but UK Prime Minister Theresa May said the formal Brexit negotiation process would begin no later than the end of March. Triggering Article 50 would establish a 2-year deadline for exiting the EU, meaning the UK’s departure may be finalized by the spring of 2019.
Conner said that companies should expect an intensive intergovernmental negotiation process and that they should closely monitor developments in the negotiations as they occur. As Brexit negotiations progress, the companies with contracts to operate in UK territory beyond 2019 should examine those contracts for any potentially troublesome language, such as clauses that may conflict with changing UK trade law. They should assess any potential impacts of a new law across all disciplines and directly engage with the government should it find anything problematic.
“We want to know if we are making a decision that’s going to be negatively impacting a company operating in the UK,” Conner said. “It’s important to us to have the right systems and regulations in place in order to encourage investment that will benefit the UK economy. So, that’s something that we want to be hearing.”