January 25, 2017

Brexit update: Supreme Court decision - Implications for the energy sector

In a landmark ruling, the Supreme Court yesterday ruled against the UK Government’s appeal, by an 8-3 majority. As a result, the Government cannot trigger Article 50 without an Act of Parliament. In this update, we set out a brief overview of the decision, and comment on its potential impact on the energy sector.

the uncertainty caused by Brexit is exacerbating existing challenges to the North Sea oil and gas industry

Article 50 cannot be invoked without parliamentary authorisation

Following the result of the EU Referendum in June 2016, the UK Government announced that it would exercise its prerogative powers to bring the UK's membership to an end by triggering Article 50 of the Treaty on the European Union. Article 50 provides that if a Member State decides to withdraw from the EU, it must serve a notice of intention. The treaties governing the EU will cease to apply to that Member States within a two year period.

The Brexit legal challenge was launched by Gina Millar, Deir Tozetti Dos Santos and the People's Challenge Group, backed by crowd funding. The claimants argued that notification to the European Council under Article 50 of the European Communities Act 1972 could not lawfully be given unless an Act of Parliament authorises it to do so. They argued that invoking Article 50(2) would alter domestic law and destroy statutory rights, as it would result in EU treaties ceasing to apply to the UK. In the Government's defence, the Secretary of State for Exiting the EU, David Davis, stated that the decision could be lawfully taken by the Crown in the exercise of its prerogative powers. He argued that giving notification under Article 50(2) would not in itself alter any laws in the UK, but merely initiate a process of negotiation.

In the first instance, the Divisional Court ruled in favour of the claimants. That decision was appealed by the Government to the Supreme Court.

The question before the Supreme Court was what steps are required, as a matter of UK law, before the process of leaving the EU can be initiated. In particular, the Court considered whether formal notice under Article 50 can be given without legislation first being passed in both Houses of Parliament, and thereafter given assent by HM the Queen.

By a majority decision, the Supreme Court dismissed the Government's appeal. Parliamentary authorisation must therefore be obtained prior to the Government triggering Article 50. The Supreme Court did not make any prescription as to the form that the legislation should take. Additionally, the Supreme Court imposed no requirement that the devolved administrations of Scotland, Wales and Northern Ireland should have any vote or say in the process.

Reaction to the decision and delay to Brexit?

The Supreme Court's ruling was not unexpected. The Attorney General, Jeremy Wright, has stated that the Government "will comply with the judgment of the court and do all that is necessary to implement it."

In his statement yesterday, David Davis said that the Court's decision "does not change the fact that the UK will be leaving the European Union". He added that a Brexit bill would be put forward in the next few days, the focus of which will be triggering Article 50. A Parliamentary bill could be introduced as early as tomorrow, and debated in Parliament next week. Whilst there is no requirement for the Government to obtain approval from devolved administrations, David Davis stated that he will consult key figures in Scotland, Wales and Northern Ireland.

In practice, the Court's decision could result in delays to Brexit as both the House of Commons and House of Lords will have to vote in favour of the proposed legislation, before it is approved for assent by HM the Queen. This will result in additional steps and debate in Parliament.

Following calls from MP’s, the Government has today agreed to publish its plan for Brexit in the form of a White Paper. Theresa May has already set out her plan for Brexit, which includes leaving the single market and customs union.

Labour and the Scottish National Party both intend to seek to make amendments to the proposed legislation, which may slow down the process. Keir Starmer, Shadow Brexit Secretary, has stated that Labour will not attempt to frustrate Brexit but will seek amendments to the legislation, to "ensure proper scrutiny and accountability throughout the process". The SNP has indicated that it has 50 amendments "ready to go" and expects to be consulted on the issues on an "equal basis".

David Davis has stated that he is confident that the Government will trigger Article 50 by the end of March this year, in line with its previously outlined timetable.

In any event, there remains a great deal of uncertainty concerning how the process will work, how long it will take, and what the terms of the exit will be. The UK will be the first country to exercise Article 50, which only came into force in December 2009.   

In addition, once Article 50 has been invoked, the terms of the exit will have to be agreed by the National Parliaments of every EU Member State.

Possible impact on the UK Energy Sector

The biggest potential impact of this decision is the further delays to Brexit which this is likely to occasion. The extended period of uncertainty may result in long-term investment decisions being postponed. The low value of the pound is set to continue for the foreseeable future. In terms of the UK energy industry, given that the UK has largely retained control of its energy policy, including the development of its oil and gas reserves, many consider that Brexit is unlikely – in itself – to have a major effect on the regulation of the UK’s energy industry.  The regulatory regime which has been in place for many years in the UK will remain largely unchanged by Brexit.

However, the uncertainty caused by Brexit is exacerbating existing challenges to the North Sea oil and gas industry, caused by continued low oil and gas prices and depleting UKCS reserves. This has resulted in projects being cancelled or shelved. The lack of stability may make companies less likely to invest in the North Sea, and increase the trend for decommissioning. The Article 50 decision may also increase the likelihood of a second Scottish independence referendum, which will cause further uncertainty.

Some commentators take a less pessimistic view and point to new opportunities. The potential loss of traditional ties with the EU would have an impact on the UK’s security of energy supply, to which the North Sea remains vital. This may encourage the government to put in further measures to encourage investment in the North Sea and slow down decommissioning. Equally, this situation is likely to open up opportunities in the UK shale and renewables industries.

The most obvious effect of yesterday’s decision is that the period of uncertainty is set to continue. Whilst this will doubtless exacerbate existing challenges, there are opportunities for the industry if it adapts to the changing landscape.