LONDON (Reuters) - A British vote to leave the European Union next week would make UK energy infrastructure investment costlier and delay new projects at a time when the country needs to plug a looming electricity supply gap.
Energy has been far from central to debates about whether to leave the EU - a move dubbed "Brexit" - but the sector would still be impacted by a decision in the June 23 referendum to quit the 28-nation bloc.
After a Brexit vote, all EU laws apply in Britain until two years after London starts the process to leave. Then none would apply but Britain could try to stay part of some frameworks through negotiations, a process that could take years.
Uncertainty about the type of relationship Britain would have with the EU after Brexit would make energy investors demand higher returns for the risk of less favourable conditions.
Oil and gas majors BP and Shell are among several energy companies that say leaving the EU would affect them and the sector negatively.
"I can't see any upside for the energy sector of the UK coming out of the EU. The risk premium going up will increase the cost of capital," Ian Simm, chief executive of UK-based Impax Asset Management, said.
"We have mostly run our power assets down over the past 25 years. Therefore, we do need investors to be confident enough to put their hands in their pockets and commit to the next wave of power plants," he added.
UK-based consultancy Vivid Economics has estimated the cost of exclusion from the internal energy market, excluding impacts on investment, could be up to 500 million pounds ($708 million) a year by the early 2020s.
"The scale of planned infrastructure investment in the electricity sector over the next decade means that even small increases in the cost of financing could have large consequences for total investment costs," it said in a report.
"Further upwards pressure on costs would result from the likely devaluation of the pound, given the role imported goods and services play in UK energy supply."
According to a Reuters poll this month, the British pound would sink 9 percent against the dollar after Brexit. [GBP/POLL]
Britain faces serious energy supply difficulties over the next few years as coal plants have to close by 2025, the nuclear fleet is aging and weak economic conditions curb investment in new gas-fired power plants.
Renewable energy is growing, but more interconnections and energy storage are needed. The British government has estimated that the required energy infrastructure will cost 275 billion pounds by 2020-2021.
French utility EDF's plan to build two huge nuclear reactors at Hinkley Point in Britain would help plug the supply gap. The company's chief executive said earlier this year that Brexit would not change its plans, but it has not yet made a final investment decision.
"The 3.2-gigawatt Hinkley nuclear project looks to be a financing headache in any scenario, given the parlous state of EDF's share price and balance sheet," Michael Liebreich, chairman of the advisory board of Bloomberg New Energy Finance, said in a blog post.
Investment in inter connectors is also important for Britain. UK wholesale power prices are higher than the EU average, partly because interconnections with other countries are able only to supply around 6 percent of peak electricity demand.
However, efforts to link the UK's electricity grid with other European power networks could be set back due to Brexit, with some projects likely to be put on hold because Britain would no longer automatically have a say in the formulation of EU energy regulations, Norton Rose Fulbright lawyers said.
Investment in renewables could be hampered. Changes by the government over the past couple of years to renewable-energy subsidies have already dented investment in clean energy.
"There is investor uncertainty already but the only thing that gives it any kind of framing is through the UK's obligations to the EU. If I was a cleantech investor I would be concerned," said Anthony Hobley, chief executive of think-tank Carbon Tracker Initiative.
Britain could also lose access to funding for renewables, particularly offshore wind, from EU institutions such as the European Investment Bank, said Charlie Thomas, manager of Jupiter Asset Management's Ecology Fund. Such assistance last year totalled around 7 billion euros.
"But at the same time, our view is that there is significant appetite from private-sector institutional investors to step in to any funding gap," he added.
($1 = 0.7060 pounds)
By Nina Chestney
(Editing by Dale Hudson)
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It was shaping up to yet another dull OPEC+ meeting. Cut and dry. Copy and paste. Rubber-stamping yet another monthly increase in production quotas by 432,000 b/d. Month after month of resisting pressure from the largest economies in the world to accelerate supply easing had inured markets to expectations of swift action by OPEC and its wider brethren in OPEC+.
And then, just two days before the meeting, chatter began that suggested something big was brewing. Whispers that Russia could be suspended made the rounds, an about-face for a group that has steadfastly avoided reference to the war in Ukraine, calling it a matter of politics not markets. If Russia was indeed removed from the production quotas, that would allow other OPEC+ producers to fill in the gap in volumes constrained internationally due to sanctions.
That didn’t happen. In fact, OPEC+ Joint Technical Committee commented that suspension of Russia’s quota was not discussed at all and not on the table. Instead, the JTC reduced its global oil demand forecast for 2022 by 200,000 b/d, expecting global oil demand to grow by 3.4 mmb/d this year instead with the downside being volatility linked to ‘geopolitical situations and Covid developments.’ Ordinarily, that would be a sign for OPEC+ to hold to its usual supply easing schedule. After all, the group has been claiming that oil markets have ‘been in balance’ for much of the first five months of 2022. Instead, the group surprised traders by announcing an increase in its monthly oil supply hike for July and August, adding 648,000 b/d each month for a 50% rise from the previous baseline.
The increase will be divided proportionally across OPEC+, as has been since the landmark supply deal in spring 2020. Crucially this includes Russia, where the new quota will be a paper one, since Western sanctions means that any additional Russian crude is unlikely to make it to the market. And that too goes for other members that haven’t even met their previous lower quotas, including Iraq, Angola and Nigeria. The oil ministers know this and the market knows this. Which is why the surprise announcement didn’t budge crude prices by very much at all.
In fact, there are only two countries within OPEC+ that have enough spare capacity to be ramped up quickly. The United Arab Emirates, which was responsible for recent turmoil within the group by arguing for higher quotas should be happy. But it will be a measure of backtracking for the only other country in that position, Saudi Arabia. After publicly stating that it had ‘done all it can for the oil market’ and blaming a lack of refining capacity for high fuel prices, the Kingdom’s change of heart seems to be linked to some external pressure. But it could seemingly resist no more. But that spotlight on the UAE and Saudi Arabia will allow both to wrench some market share, as both countries have been long preparing to increase their production. Abu Dhabi recently made three sizable onshore oil discoveries at Bu Hasa, Onshore Block 3 and the Al Dhafra Petroleum Concession, that adds some 650 million barrels to its reserves, which would help lift the ceiling for oil production from 4 to 5 mmb/d by 2030. Meanwhile, Saudi Aramco is expected to contract over 30 offshore rigs in 2022 alone, targeting the Marjan and Zuluf fields to increase production from 12 to 13 mmb/d by 2027.
The UAE wants to ramp up, certainly. But does Saudi Arabia too? As the dominant power of OPEC, what Saudi Arabia wants it usually gets. The signals all along were that the Kingdom wanted to remain prudent. It is not that it cannot, there is about a million barrels per day of extra production capacity that Saudi Arabia can open up immediately but that it does not want to. Bringing those extra volume on means that spare capacity drops down to critical levels, eliminating options if extra crises emerge. One is already starting up again in Libya, where internal political discord for years has led to an on-off, stop-start rhythm in Libyan crude. If Saudi Arabia uses up all its spare capacity, oil prices could jump even higher if new emergencies emerge with no avenue to tackle them. That the Saudis have given in (slightly) must mean that political pressure is heating up. That the announcement was made at the OPEC+ meeting and not a summit between US and Saudi leaders must mean that a façade of independence must be maintained around the crucial decisions to raise supply quotas.
But that increase is not going to be enough, especially with Russia’s absence. Markets largely shrugged off the announcement, keeping Brent crude at US$120/b levels. Consumption is booming, as the world rushes to enjoy its first summer with a high degree of freedom since Covid-19 hit. Which is why global leaders are looking at other ways to tackle high energy prices and mitigate soaring inflation. In Germany, low-priced monthly public transport are intended to wean drivers off cars. In the UK, a windfall tax on energy companies should yield US$6 billion to be used for insulating consumers. And in the US, Joe Biden has been busy.
With the Permian Basin focusing on fiscal prudence instead of wanton drilling, US shale output has not responded to lucrative oil prices that way it used to. American rig counts are only inching up, with some shale basins even losing rigs. So the White House is trying more creative ways. Though the suggestion of an ‘oil consumer cartel’ as an analogue to OPEC by Italian Prime Minister Mario Draghi is likely dead on arrival, the US is looking to unlock supply and tame fuel prices through other ways. Regular releases from the US Strategic Petroleum Reserve has so far done little to bring prices down, but easing sanctions on Venezuelan crude that could be exported to the US and Europe, as well as working with the refining industry to restart recently idled refineries could. Inflation levels above 8% and gasoline prices at all-time highs could lead to a bloody outcome in this year’s midterm elections, and Joe Biden knows that.
But oil (and natural gas) supply/demand dynamics cannot truly start returning to normal as long as the war in Ukraine rages on. And the far-ranging sanctions impacting Russian energy exports will take even longer to be lifted depending on how the war goes. Yes, some Russian crude is making it to the market. China, for example, has been quietly refilling its petroleum reserves with Russian crude (at a discount, of course). India continues to buy from Moscow, as are smaller nations like Sri Lanka where an economic crisis limits options. Selling the crude is one thing, transporting it is another. With most international insurers blacklisting Russian shippers, Russian oil producers can still turn to local insurance and tankers from the once-derided state tanker firm Sovcomflot PJSC to deliver crude to the few customers they still have.
A 50% hike in OPEC’s monthly supply easing targets might seem like a lot. But it isn’t enough. Especially since actual production will fall short of that quota. The entire OPEC system, and the illusion of control it provides has broken down. Russian oil is still trickling out to global buyers but even if it returned in full, there is still not enough refining capacity to absorb those volumes. Doctors speak of long Covid symptoms in patients, and the world energy complex is experiencing long Covid, now with a touch with geopolitical germs as well. It’ll take a long time to recover, so brace yourselves.
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