Five ways that "Gatwick Oil" could affect UK business

10 April 2015 -

A glug of dark, shiny fluid in the Weald has set off a bout of oil fever. But how excited should bosses really be?

Jermaine Haughton

Rarely does the UK oil industry dominate water-cooler conversation in offices across the country, but the recent discovery of up to 100 billion barrels of oil in Horse Hill near Gatwick Airport, certainly had tongues wagging. AIM-listed UK Oil & Gas Investments (UKOG), part of the discovery team, claims the finds beneath the 55 sq m countryside area of Surrey and Sussex are large enough to supply up to a third of Britain’s needs within 15 years. But what does the discovery actually mean? Less reliance on North Sea or foreign oil supply? A much-needed boost for the manufacturing industry? Cheaper petrol prices for drivers?

Here are five ways business may be affected:

1. UK ECONOMY

UKOG suggests the oil discovery could have a profound effect on the future of the UK economy, describing the find as a “world-class potential resource”. Due to the geology of the Weald region, only 5% to 15% of the oil can be extracted and used commercially. As such, UKOG has predicted that by 2030, between 10% and 30% of the UK’s oil demand would be fulfilled by the Weald site. However, industry analysts have sought to temper the excitement. Mike Jakeman – global commodities analyst at the Economist Intelligence Unit – said that oil from the well was probably too expensive to produce at a time when weak Brent-crude prices mean companies are favouring projects with lower costs. “Although the numbers sound good,” he said, “this discovery is unlikely to prove a significant tonic for the UK energy industry.”

2. OIL PRICES

Unfortunately for consumers, the price of oil won’t be affected by the discovery near Gatwick airport. The UK oil price is linked to the global price of oil and, right now, it bobs around at £34 to £41 per barrel, compared to more than £70 per barrel last year. Despite believing the oil discovery is significant, Ken Odeluga – senior market analyst at City Index – said: “The overall oil market and UK financial market impact will be zero.” Britain is the largest producer of oil in the European Union – but accounts for about 1% of world oil output. While the UK produces 770,000 barrels per day, Saudi Arabia produces 11.7m barrels of oil and the US 11.1m.

3. FRACKING

Shortly after the find was announced, questions were raised from environmentalists, local residents and businesses about the potential for fracking at Horse Hill. The extraction technique has drawn controversy in recent years, as the process of releasing oil and gas from shale by blasting a mixture of sand, chemicals and water into the rock has been linked to air and water pollution. However, UKOG said the oil at Horse Hill is contained in rocks that are naturally fractured, meaning that traditional drilling methods will be used.

4. GATWICK EXPANSION?

The discovery was made two to three miles away from Britain’s second largest airport – but Gatwick officials state that there is no concern that the site will impact or interfere with its bid to open a second runway. Increased aviation capacity is one of the major demands from UK big business. Pro-expansion lobby group Let Britain Fly, comprised mainly of SME bosses, has already petitioned the leading political parties to throw their support behind the cause at the upcoming General Election. According to the Airports Commission, a second runway at Gatwick could boost the economy to the tune of £127 billion, and add around 50,000 jobs. Led by the Royal Bank of Scotland’s chairman-elect Sir Howard Davies, the Commission is set to decide this summer which of Heathrow or Gatwick should be expanded.

5. GREEN ENERGY

Over the past decade, many multi-national and small businesses have accepted and backed the goal to use cleaner, renewable energy, despite the greater expense. But environmentalists have challenged businesses and the public to use the latest oil discovery to show their commitment to tackling climate change. Doug Parr, chief scientist at Greenpeace UK, said: “Dotting the English countryside with drilling rigs and pipelines to squeeze the last drop of oil out of Britain doesn’t make any sense. To gleefully rub your hands at a new fossil fuel discovery you need to turn the clock back to the 19th century and ignore everything we have learned about climate change since. We already have more than enough coal, oil, and gas reserves to fry the planet.”

The moderate view…

Academic and former BP worker Professor David Elmes of Warwick Business School said that the response of the local Weald community to the discovery would play a crucial part in determining the plans for Horse Hill. “How much the local community is affected,” he said, “will depend on how much can be produced that is economically viable. Small fields can be serviced by tankers, but the size suggested here would need a pipeline. All this has yet to be worked out by the developers and we are still at an early stage of understanding what would be needed here.”

Elmes added: “Traditional onshore drilling has taken place in the UK for decades. The Wytch Farm oil field near Poole is the biggest onshore field in Europe and has been in operation since 1979. More analysis needs to be done before we know just how much oil can be extracted from this site near Gatwick … What’s commercial will also depend on the oil price at the time. Global oil prices have fallen dramatically in recent times with no sense of a strong recovery just yet.”

Sounds like the sudden oil discovery calls for some major change-management ideas! For more on that topic, sign up to this forthcoming CMI seminar.