LONDON (Bloomberg) — The UK’s North Sea oil and gas industry, already reeling from low prices and high costs, now faces a worsening investment drought as the nation’s decision to quit the European Union looks set to trigger a second independence vote in Scotland.
A poll on Scottish independence from the UK 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. This leaves the North Sea oil and gas industry, the bulk of which is in Scottish waters, potentially facing years of uncertainty and political paralysis.
The prospect of another Scottish referendum “is not great for the investment climate,” Alan McCrae, UK head of energy tax at PwC, said by phone. “The industry needs both fresh investments and continuation of the existing investments.”
The North Sea has been battered by the slump in oil prices because of its high costs and dwindling resources. Oil and gas producers in the region will spend 40% less this year than in 2014 and by the end of the year an estimated 120,000 jobs will have been lost because of the downturn. The government of Prime Minister David Cameron, who resigned on Friday, supported the industry with tax cuts and the industry’s lobby group said it’s essential that the current political uncertainty be minimized.
“The UK oil and gas industry is at a critical juncture and we need to ensure the UK Continental Shelf continues to attract investment,” industry group Oil & Gas U.K. said in a statement on June 24. It urged the UK government to “clearly” outline the process of leaving the EU in order to “make this transition as smooth as possible.”
There are “silver linings” to the political turmoil in the UK, said PwC’s McCrae. The plunge in the pound to a 31-year low against the dollar will most likely cut costs for oil companies while their sales of crude—denominated in dollars—will benefit. Nevertheless, it remains vital that the government and the industry accelerate their collaboration to work through the current uncertainty, PwC said.
The pound strengthened 0.9% to $1.33 and Brent crude rose 2.2% to $48.18/bbl as of 8:38 a.m. in London, both gaining for the first time since the referendum.
The UK government has sought to mitigate the impact on the oil industry of the drop in crude prices to 12-year lows earlier this year. Chancellor of the Exchequer George Osborne said in March that the Treasury would forgo 1 billion pounds ($1.3 billion) in taxes over the next five years to support the industry. BP Plc received $317.6 million from the UK government in tax credits last year, the company said in a June 24 statement.
Whoever becomes the next UK prime minister, the process of leaving the EU is set to dominate their government’s agenda for several years. Cameron said June 24 that he won’t trigger the start of the secession process under Article 50 of the EU treaty, leaving that to his successor who will be appointed by September. Once Article 50 is set in motion, the UK formally has two years to negotiate its way out of the bloc. Analysts say it’s unlikely that this will be long enough to work out the more complex trading accords.
The industry would face an even longer period of turmoil if the UK’s EU exit were followed by a split with Scotland. That would probably mean reserves of oil and gas would be split, possibly along the so-called median line already used to allocate fishing rights. The division would hand the Scots about 96% of annual oil production and 47% of natural gas, according to estimates for 2012 by the University of Aberdeen’s Alex Kemp and Linda Stephen cited by the Scottish government at the time of the 2014 referendum campaign.
A spokeswoman for BP said the question of the future of Scotland in the U.K. isn’t a question for the company but it will “monitor the situation closely.” Royal Dutch Shell Plc, Europe’s largest energy company, reiterated its position during the 2014 referendum, saying it would prefer to see Scotland remain part of the UK.
There may be a pause in investment while companies assess uncertainties, including the possibility of another Scottish referendum, said Ian Thom, senior research manager at Wood Mackenzie Ltd. The Edinburgh-based consultant estimates that North Sea investment will decline by 79% from 2015 to 2020.
“The main issues remain managing high costs in a low oil price environment and a lack of new investment opportunities,” Thom said.