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BMI View: The UK's vote to leave the EU has not affected our oil and gas
production forecasts as the strong project pipeline will ensure that the UK
experiences a provisional uptick in oil and gas output. The long-term trend of
decline will also remain in place, as high operating costs, capex reductions and
a lack of significant new discoveries limit investment into the mature basin. A
depreciated sterling offers a measure of upside risk as North Sea investment
becomes cheaper to international operators; however we note that the uncertainty
surrounding the terms of the UK's exit and a possible Scottish secession will
mitigate most if not all of the favourable currency swings.
The main trends and developments we highlight in the UK oil and gas sector are:
-Our already bearish view for North Sea oil and gas exploration has only been
compounded by the investor uncertainty surrounding the terms of the UK's
departure from the EU. The possibility of a Scottish secession means that the
fiscal and regulatory framework might change, resulting in 2016 performing worse
than the woeful exploratory efforts of 2015. On the upside, a weaker pound could
attract back international investors that can take advantage of lower operating
and production costs.
-The impact of the tax reductions for all E&Ps operating in the North Sea will
have a negligible impact on exploration levels as companies focus on maximising
production rather than expanding their resource base.
-The British parliament passed regulations permitting drilling underneath
protected areas that include national parks, Areas of Outstanding National
Beauty (AONB), the Norfolk and Suffolk Broads and World Heritage Sites.
Companies will be allowed to drill wellheads outside of protected areas and
drill horizontally beneath the parks at a minimum depth of 1,200m.