The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

Brexit: full steam to uncertainty

With the referendum on the UK’s membership of the EU looming, Critical Resource’s senior advisors look at what Brexit would mean for UK energy and resource companies.

By Critical Resource Senior Advisors Chris Huhne, Edward Bickham and Robert Court (biographies below) and Penelope Curwen, Analyst

 

Flags of the United Kingdom and the European Union. UK Flag and EU Flag. British Union Jack flag

An ever closer union?

As the UK referendum on EU membership draws closer, questions around the advantages and disadvantages of ‘remaining’ or ‘leaving’ are becoming increasingly pertinent. Debate within the extractives and energy sectors has centred on free trade and the free movement of people, the UK’s energy supply and its affordability, and the impacts on general macroeconomic stability. There are also questions around how leaving the EU would affect the UK’s climate policy and its progress against the COP21 targets, and whether Brexit would trigger renewed moves towards Scottish independence.

Critical Resource has been looking at how leaving the EU might affect British and UK-listed companies in the extractives and energy industries. Publicly, the general mood amongst these firms appears to be one of concern. Earlier this year, Ben van Beurden, the CEO of British-Dutch oil giant Shell announced that the company would be ‘impaired’ if Britain were to leave the EU, citing the losses of barrier-free trade and free movement of staff as significant concerns. Andrew Mackenzie, CEO of BHP Billiton, similarly warned against Brexit amid fears that leaving the EU would damage Britain’s relationship with China. Fellow miner Rio Tinto recently signed a letter backing Britain to remain in the EU, whilst Centrica’s Ian Conn has said that staying in the EU will help to keep energy prices competitive for consumers.

Below, some of Critical Resource’s Senior Advisors give their views on what Brexit would mean for these and other British and UK-listed extractives and energy companies.


Chris Huhne croppedChris Huhne, former UK Secretary of State for Energy and Climate Change

“Leaving the EU is likely to present uncertainty, as well as challenges, for energy investors. The EU is currently committed to creating an efficient single energy market, and it is unclear what level of access the UK would have to this market from outside the Union. For example, energy companies which operate both in the UK and on the continent may come to require separately constituted companies in order to maintain business in both markets.

For power producers operating in the UK, the expected devaluation of the British pound following Brexit would likely create significant financial pressures. Companies which buy dollar-denominated commodities (whether oil, gas, coal or biomass) are likely to see a sharp rise in their costs while their sterling revenues will in many cases stay stable (particularly where government supported schemes have fixed prices).

Meanwhile, for renewables investors, leaving the EU would also call into question the future of renewable energy in the UK, both in terms of policy commitment and funding. The UK currently has an EU-legislated target to source 15% of its energy from renewables by 2020; however, Brexit would mean that that the country is no longer required to meet this target.

It is therefore unclear how committed to renewable energy the UK would be, particularly given past populist stances against wind farms, the cheapest renewable. Brexit could lead investors to scale down or even scrap existing renewables programmes. There is also concern around what Brexit means for the financing of large-scale UK renewables projects, since it is unclear whether current financing from the European Investment Bank would continue in the event of Brexit.”

 

Edward Bickham photo - croppedEdward Bickham, former Special Advisor to the UK Foreign Secretary and former EVP External Affairs at Anglo American

“Energy and extractive companies will face fewer short-term impacts as a result of a Brexit than companies whose core businesses depend on shaping the rules governing access to the single market. However, a Brexit vote would certainly create turbulence. Amongst the initial generic challenges are likely to be a significant fall in the stock market and in Sterling vis-a-vis dollar denominated commodities.

Thereafter, UK-based energy companies may miss out on some opportunities arising from shaping the long-awaited completion of the single energy market. They may also come to regret the loss of the generally pro-business British voice in influencing the shape of EU environmental and social regulations. This will matter because of the EU’s normative regulatory influence and in relation to the making of the rules applying in the single market. Given the presence of several climate change sceptics in the ranks of the Leave campaign, it will be interesting to see the extent to which a post-Cameron British government would regard itself as bound by the commitments made by the EU at Paris. May such multilateral commitments be seen as unwelcome shackles for a newly unbound, unilateralist Britain?

UK-based multinationals may encounter problems in bringing foreign nationals in to fill key roles given that a Leave campaign would have strongly featured pledges to reduce migration. Finally, companies relying on the UK’s diplomatic heft to protect their interests may find Britain’s stock in the world somewhat diminished and a foreign service distracted by the need to negotiate huge numbers of trade agreements around the world in short order.”


Robert Court photo - croppedRobert Court,
former Global Head of External Affairs for Rio Tinto and former senior UK diplomat

“Business is resilient and can cope with both ‘good’ and ‘bad’ scenarios, however defined. What it finds harder to manage is swirling uncertainty. In the case of a major matter like the future of the EU and the UK’s relationship with it, this uncertainty affects multiple key variables for business – confidence, growth, investment, currencies, trade flows, innovation, talent management, and more besides.

The run-up to the referendum is already causing distraction: the endless scenarios of whether the UK will be either a little or a lot better off or worse off in or out are generating broad currents of uncertainty, and it is hard to sort fact from rhetoric in the current campaigning. If the vote is followed by years of renegotiation with unpredictable outcomes, the impacts of uncertainty will be far greater.

I sympathise with executives trying to make sense of all this for their businesses. The key for me is to resolve the atmosphere of uncertainty and introspection as quickly as possible. The UK, and the EU, can then turn their attention to the positive global agendas of growth, employment, skills, development, innovation and competitiveness that are of benefit to the many miners headquartered in the UK and their shareholders.”

 

Biographies of Critical Resource senior advisors:

Chris Huhne was Secretary of State for Energy and Climate Change under the previous UK government. During this time, he initiated the first energy-saving act and the low-carbon electricity market reform from 2010 to 2012. Before this, Chris was a Member of the European Parliament (1999-2005). Chris has also been a regular contributor to The Guardian and Prospect, and continues to advise on energy and climate change.

Edward Bickham was Executive Vice President of External Affairs for Anglo American between 2000 and 2009. In this role he was responsible for communication; public policy, government relations and political risk; social development in mining communities; and corporate ethics, including anti-corruption and human rights. He has also been closely involved with the development of the Extractive Industries Transparency Initiative (Board Member 2006-13) and on the Steering Board for the Voluntary Principles on Security and Human Rights. Edward was previously Special Advisor to the UK Foreign Secretary (Rt Hon Douglas Hurd) from 1990 to 1993, including during the negotiation of the Maastricht Treaty.

Robert Court was Global Head of External Affairs for Rio Tinto from 2009 until 2015, during which time he managed geo-political and stakeholder risk, and led the company’s global partnerships, CSR programmes, human rights work and reputation strategies. Prior to this, Robert was Vice President of Government Affairs International for GlaxoSmithKline. Robert has also worked with the UK Diplomatic Service for several years, and his postings have included London, Bangkok, Brussels (NATO and the European Union) and in Canberra as Deputy High Commissioner.

[N.B. photo copyright belongs to respective advisors]