Oil and Gas industry could lose £8bn with new EU regulation

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By a Newsnet reporter
 
The Oil and Gas sectors in the North Sea and other EU waters could lose up to £8 billion as a result of changes to safety regulations being considered by the European Union.
 
The claims were contained in a report by global financial agency Fitch Ratings who yesterday published its findings on the impact of the proposed new laws.

By a Newsnet reporter
 
The Oil and Gas sectors in the North Sea and other EU waters could lose up to £8 billion as a result of changes to safety regulations being considered by the European Union.
 
The claims were contained in a report by global financial agency Fitch Ratings who yesterday published its findings on the impact of the proposed new laws.

In its analysis Fitch said the Elgin Gas Field leak makes it more likely the Commission will implement stricter licensing and safety requirements on oil and gas companies.

There would be financial consequences for all companies, with significant consequences for those with low investment grade or non-investment grade ratings.

Alyn Smith MEP, SNP member of the European Parliament’s Energy Committee, stressed his view that the proposals are very much capable of improvement, but admitted that the Elgin incident has made his job “considerably harder”.

Commenting on the analysis by Fitch Ratings, Mr Smith said:

“This analysis is credible and timely, and is a wake-up call, should one have been needed, of just how serious a job of work we have on our hands.  While I support the aims of the legislation, after all, safety concerns must remain paramount, we must ensure the package is workable and at present it is simply not fit for purpose.

“I find little in the analysis to disagree with.  As presently drafted the EU proposals, and they are just proposals, could dramatically increase the size and scope of companies’ environmental liabilities, potentially resulting in companies segregating up to £8bn to obtain operating licenses. 

“That in turn would seriously affect the credit ratings of companies operating in the North Sea and other EU territorial waters.

“However, I must emphasise that we are currently talking about EU proposals, not EU law, and the European Parliament will be going through them line by line.  We have ample opportunities to improve these proposals, but as this report makes clear in the light of the Elgin incident we must be wary of our tone and credibility.  My job on this has been made considerably harder and I’ll need all the help I can get.”

As clear up operations on the Elgin incident remain underway, Mr Smith called on the industry in Scotland to “work together” in order underline Scotland’s world leading safety standards and added:

“I have been pleased with the support thus far and by just how keen the Scottish industry is to engage.  With a view to improving the package I have held a series of successful stakeholder meetings, including a recent roundtable discussion co-hosted by Aberdeen Chamber of Commerce with representatives from the oil and gas sector. 

“I have met with the European Commission, including technical experts, and I will be meeting with Energy Commissioner Oettinger imminently.”

A summary of the Fitch’s analysis on its website read:

The European Commission proposed requirements in October 2011 for the licensing authorities in member states to ensure that only operators with “proven sufficient financial capacities” necessary for environmental protection are allowed to explore for, and produce oil and gas in EU waters.

We would likely view any funds earmarked by offshore operators to satisfy a financial means test as segregated and regard them as blocked cash in our financial calculations. This approach could have negative liquidity or cash flow consequences for even the highest investment grade oil and gas companies operating in EU territorial waters. This may be even more significant for companies with low investment grade or non-investment grade ratings.

The latest North Sea incident could affect the debate over EU proposals to strengthen safety requirements for offshore drilling, in Fitch’s opinion. The draft legislation still requires approval from the European parliament and EU member states. This could be several months away, but we consider that the chances of formal adoption of some or all of the proposed EU-level standards are growing despite evidence of UK opposition.

The Fitch Ratings report can be viewed here:
http://www.fitchratings.com/web/en/dynamic/articles/Rising-Credit-Risk-for-EU-Offshore-Oil-and-Gas-Production.jsp

For further information on the Commission’s proposals:
http://ec.europa.eu/energy/oil/offshore/standards_en.htm