Petroleum Contracts and Economics

Answer

Petroleum Contracts and Economics

Over the years, the European Union (EU) has been considered the largest trading partner for the United Kingdom (UK) (Dhingra et al., 2016). UK has consequently enjoyed the benefits of EU membership which include reduced trade costs (Ottaviano et al., 2014). Besides allowing the UK to export more thus increasing its global market share, reduced trade costs have fostered cheaper goods and services for UK consumers thus enhancing their standards of living (Dhingra et al., 2016). The issue of Brexit has, however, brought about controversies regarding the impact of the UK economy upon exiting EU membership. While some of the economists have argued against hard Brexit which entails giving up access to the EU, some have argued towards soft Brexit to safeguard the UK economies (Hobolt, 2016). Nevertheless, the issue remains on the impact of Brexit on the UK’s oil and gas industry. The UK has prevalently remained the largest natural gas market in Europe (Rodgers, 2013). On the contrary, natural gas production has declined in the UK due to increased gas imports and lack of self-sufficiency in the gas industry (Wang et al., 2014). What will be the impact of Brexit on Shale gas development in the UK? This paper analyzes the impact of Brexit on Shale gas development. The paper also illustrates further the impact of soft and hard Brexit on the domestic gas price.

Impact of Brexit on Shale Gas Development in the UK

Issues of climate change, pollution and safety impacts have been associated with shale gas extraction which entails fracking (Vidic et al., (2013). While Cuadrilla Resources, a UK-based oil and gas exploration and Production Company claimed to have identified vast reserves for Shale gas extraction in the UK, the extraction of Shale gas has always been constrained by EU policies (Staddon, Brown & Hayes, 2016). Precisely, the EU has put in place environmental policies which advocate for environmental protection in such aspects as air and water pollution (Golub, 2013). Exiting the EU will, therefore, have a positive impact on the Shale Gas development in the UK for various reasons. Firstly, since the UK will not be affected by the EU environmental policies, Brexit is anticipated to increase Shale gas extraction in the UK (Nugent, 2017). Secondly, Shale gas production has prevalently increased in the United States of America (Hammond & O’Grady, 2017). By 2012, US upstream companies had resolved to horizontal drilling and fracking due to the increased Liquefied Natural Gas (LNG) exports needs (Weijermars, 2014). During that particular year, 2012, Shale gas accounted for 34% of the US natural gas production (Rodgers, 2013). Due to the insufficiency of shale gas in the UK, the Kingdom imported shale gas from the US at lower prices (Evensen, Stedman, & Brown-Steiner, 2017). Exiting the EU will, however, increase the cost of importing shale gas thus enhancing the production of shale gas in the UK (Szolucha, 2016).

While the UK is more likely to benefit from the extraction of shale gas upon exiting the EU, it is more likely to experience environmental problems as a result of shale gas extraction. Shale gas extraction is associated with the risk of carbon dioxide and methane emission during the drilling process, contaminating ground water as well as the physical effects of fracking which include seismic activity. Since EU environmental policies would no longer apply to the UK after Brexit, the issues of water and air pollution are anticipated to rise during the extraction of shale gas (Dhingra et al., 2016).

Attraction of Investments from Europe into Shale Gas Development, Technological Transfer, and Cost Implications

The pound fell lower than the US dollar during the Brexit referendum (Smith, 2016). Even so, if the pound does not devaluate as a result of Brexit, the UK is more likely to attract investors due to the anticipated fall in the prices of UK companies and assets (Kierzenkowski et al., 2016).  Investors are, however, concerned with long-term predictability to counter risk premiums in their investments (Croce, Lettau, & Ludvigson, 2014). Exiting the EU could foster new import taxes in conjunction with other policies such as environmental and economic policies (Lyons, Reader, & Stephan, 2017). While Brexit would enhance shale gas production in the UK, the step will hold back investors who would be uncertain about the new operating environment (Driffield & Karoglou, 2016). What is more is that transfer of technological skills from Europe would be limited since UK technological companies have been observed to employ EU nationals (Crafts, 2017). Exiting the EU will, therefore, imply a shortage of IT skills and preferably high costs of recruitment of IT experts from the EU (McGrattan & Waddle, 2017).

Impact of Soft Brexit on UK Gas Prices

Soft Brexit would foresee close relationships between the EU and the UK (Menon & Fowler, 2016). In a soft Brexit, UK goods and services would still be traded on a tariff-free basis while exports will not be subjected to border checks (Van Reenen, 2016). Due to the continued advantages of trading under the EU, the UK gas would gain competitive bargaining power in the EU market. Shale gas producers are therefore more likely to charge higher prices thus promoting the UK gas and oil industry on the global level (Hunt & Wheeler, 2016).

Impact of Soft and Hard Brexit on Domestic Gas Prices

A soft Brexit will entail maintaining close relationships with the EU. The UK will, therefore, enjoy the benefits of EU members including such aspects as trading UK goods and services at the tariff-free basis. Domestic gases are, therefore, more likely to decline due to lower production costs (Busch & Matthes, 2016). Hard Brexit, on the other hand, entails giving up full access to the EU (Whitman, 2016). Hard Brexit would, however, subject British goods and services to tariffs which would consequently increase domestic gas prices (Barrett, et al., 2015).

Conclusion

The issue of Brexit and the strategies the UK will employ in exiting the EU are still hot debates by economists. While some of the economists have preferred a hard Brexit, some have advocated for soft Brexit to safeguard the UK economy. While shale extraction is more likely to cause environmental problems, the UK is more likely to benefit from shale gas extraction after the Brexit. Firstly, importing natural gas after Brexit is more likely to be expensive which would promote domestic gas extraction. Secondly, the UK would not be constrained by the environmental policies implemented by the EU and will thus enhance its shale production. Nevertheless, the challenges of Brexit in such aspects investments in the UK and domestic prices of natural gas remain a great concern to the economy of the United Kingdom.

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