UK, EU agree to provisional post-Brexit trade agreement
The UK and EU have reached a provisional deal over their future trading relationship, avoiding the prospect of the two sides imposing tariffs on billions of dollars worth of imported goods from next year.
A deal covering the UK-EU trading relationship, valued at some $900 billion annually, comes as a relief to business sectors after months of fraught negotiations between London and Brussels.
The deal provides for trade free from tariffs and quotas as the UK breaks away from the EU’s single market and customs union.
The UK government called it “the first free trade agreement based on zero tariffs and zero quotas that has ever been achieved with the EU.”
EU officials also confirmed an agreement had been reached.
The UK parliament is expected to be recalled to vote on the deal before the end of the Brexit transition period on Dec 31 and the European Parliament has said they will not have time to ratify a deal before January 1.
The UK’s Office for Budget Responsibility had forecast that a no-deal Brexit could wipe 2% off the UK’s gross domestic product in 2021, in addition to the impact on the economy caused by the pandemic.
The prospect of a disorderly separation of the UK from the EU had threatened long-established trade in commodities such as oil, and disruption in areas such as power. Ahead of the end of Brexit transition period which concludes on Dec. 31, the main implications for the trade talks on oil and gas included:
The UK and EU have a sizeable fuel trade, with 40% of the UK’s 35 million mt of oil product imports coming from the EU and 61% of the UK’s 22 million mt in oil product exports going to the EU in 2018; the Amsterdam-Rotterdam-Antwerp hub dominates shipments.
In 2019, petroleum and petroleum products were the UK’s single largest export to the EU by value, at GBP20 billion ($27 billion), amounting to 12% of all UK goods exports to the EU.
The EU and UK both produce more gasoline than they consume, but rely on imports to cover shortfalls of diesel, gasoil and jet fuel; Russia is a big source of diesel imports and the Middle East a major jet fuel source.
Almost all EU jet fuel is imported, while UK production of jet fuel and kerosene for heating covers almost half the country’s needs.
Diesel and gasoil account for almost half the EU’s 13 million b/d oil consumption and 40% of the UK’s 1.5 million b/d oil consumption. In 2019, UK diesel and gasoil production covered roughly two-thirds of domestic demand, which totaled 32 million mt.
The UK, with the bloc’s fifth largest refining sector, would have faced a 4.7% tariff on gasoline exports to the EU without a trade agreement, but zero tariffs for jet fuel, diesel and gasoil.
Brexit is unlikely to affect crude oil trade as EU dependence on imported crude means imports are tariff-free. The North Sea upstream industry is concerned about access to talent, technology and capital; industry group Oil & Gas UK has estimated reversion to World Trade Organization rules could cost the sector GBP500 million.
The removal of duties could see a flood of imports into the UK to the detriment of domestic producers. Challenging market conditions have already resulted in the shutdown of two major UK ethanol producers and the shape of Brexit will be a critical factor for any potential restart. Until an E10 roll-out supports domestic demand, exports are essential for UK ethanol producers and an EU duty would likely be prohibitive.
No Brexit impact was expected for European gas markets, including in a ‘no-deal’ scenario, according to gas grid operator National Grid, with no operational challenges anticipated and commercial arrangements across interconnectors expected to remain the same.
The UK imported around 2 Bcm of gas from continental Europe via the BBL and IUK pipelines in 2019, according to S&P Global Platts Analytics, around 3% of UK gas demand. It also exported some 9 Bcm of gas — to Ireland, and via the BBL and IUK pipelines, to the Netherlands and Belgium.
Government guidance says interconnector owners/operators will need to engage with EU national regulators to ensure approved access rules are in place and transmission system operator certifications valid. UK market participants will need to register with an EU regulatory authority under the Regulation on Energy Market Integrity and Transparency (REMIT) for the purposes of market monitoring and avoiding disruption.
Brexit could boost the Netherlands’ TTF hub, which is the most liquid in Europe having moved ahead of the UK NBP. Twenty-seven countries trading at the TTF under common rules make it a more attractive venue than one governed by the rules of a single country in a different currency.
Traders expected only a limited impact on the LNG markets. However, a divergence in pricing signals from the UK and continental Europe could alter existing trade flows. LNG trade between the UK and other EU states is rare.
The EU does not impose tariffs or restrictions on LNG from non-member countries that export to the single market such as Algeria, Qatar, Russia, Trinidad & Tobago and the US.