Brexit economic and energy implications – Wood Mackenzie

Energy policy unlikely to change, UK has Climate Change Act that governs long-term emissions reductions

EDINBURGH/LONDON – The post-Brexit world is likely to include increased economic uncertainty and higher energy import costs, but the structure of the UK energy sector will remain unchanged, according to international consultancy Wood Mackenzie.

On June 23, the UK voted to leave the European Union. A majority of 51.9 per cent voted to end the 43-year membership in the EU.

Wood Mackenzie said in press release that it will be reviewing their macroeconomic outlook for the UK and EU over the summer on the basis of the Brexit referendum, which is not binding on the national government. The UK must notify the European Council of its intent to leave, opening a two-year window to negotiate the terms of exit. It is unclear when this will happen because there is no precedent.

The negotiations will determine the long-term economic impact, setting out whether the UK retains free trade of goods and services; retains free movement of people and capital; remains subject to EU policies and regulations, and a whole host of other issues.

The negotiation period itself will create uncertainty, according to Wood Mackenzie, which will adversely impact confidence and economic growth through deferred investment and lower consumption. Prime Minister David Cameron has resigned (leaving office before Oct.) adding to the political uncertainty. A negative, short-term shock seems unavoidable for the UK economy, and likely for the wider global economy; for example, markets have reacted badly.

Financial market turbulence is not confined to the UK; risk aversion is spiking globally. We have seen safe-haven assets like gold and the US dollar rally, while equity and commodity markets fall – Brent is down 4.5 per cent. Commodity currencies have also fallen, adding to Wood Mackenzie concerns about economies such as South Africa and Brazil.

 

Energy impact

As a net importer of energy since 2004 and with import dependency expected to grow (to reach 55 per cent by 2030), the UK now faces higher energy costs arising from a weaker pound. With oil traded in US dollars, a weaker pound against the US dollar will increase the cost of oil imported into the UK. This could feed down the supply chain to higher consumer prices.

Gas contracts/ imports from Norway, the Netherlands and Qatar — accounting for more than 90 per cent of total imports in 2015 — are stipulated in GBP, therefore sellers bear an exchange rate risk.

However, LNG imports from the US, denominated in dollars, will have a increasing role in the UK gas supply mix.

Energy policy is unlikely to change greatly. The UK has stand alone legislation, in the form of the Climate Change Act, governing long-term emissions reductions (at least an 80 per cent reduction in 2050 from 1990 levels).

 

In the UK upstream sector, Wood Mackenzie expects the impact to be limited. The sector is fully regulated by the UK government. However, the exchange rate may impact costs and margins. A sustained depreciation of GBP may benefit upstream operators from a lower cost base relative to the US dollar-denominated oil and gas prices.

There may be a pause in new investment while companies assess the uncertainties around commodity prices, foreign exchange rates, potential tariffs and politics.