So, being a monopoly and not caring what things cost (they know who's gonna foot the bill, haha!), BG did the rounds, telling everyone that they'd be willing to pay more than 20 p/th - a gigantic price increase - for any new gas supplies that anyone could develop. (The output of an entire field would be sold under a single contract for decades of delivery, years in advance.) This sent every NS producer back into the vaults where they stored their old drilling logs, looking for long-forgotten gas discoveries they’d ignored as being totally uneconomic at those 1960’s prices. Sure enough, new gas fields began to be offered and, true to its word, BG started a price-ramp of several years for new gas that by the mid 1980s saw prices in the high 20s of p/th. A classic sellers' market phase in the great commodities cycle.
Though no gas expert, Archie, headstrong Esso Chairman & CEO, somehow got it into his head there was no end to this ramp. Esso had enjoyed a couple of big sales at stonking prices in this period, and one of his JVs now had a couple more new gas fields to offer BG. Forster decided that he would triumphantly be the first to breach 30 p/th. He convinced the JV partners to go along with an eye-watering opening offer of 34p. Many of us were unconvinced, but were willing to go along for the ride. Unfortunately, thus emboldened, Forster flamboyantly guaranteed to his Exxon overlords that a price in the 30s would in due course be delivered. Sadly, he’d failed to notice the laws of supply and demand grinding slowly into action. High prices bring forth, errr, lots of supply; and he’d not heeded warnings that a glut was coming inexorably down the production-line.
When his hapless negotiators rocked up at BG, in response they got given a long and detailed list of new fields currently on offer. BG stated it would only need to buy a couple of these, and told them to go away and recalibrate their aspirations to less than half of what they’d walked in the door with. Yep, we were now in a buyer's market.
Cue carnage at Esso: was this right? Why didn’t "we" see this coming? Etc etc - the usual search for scapegoats. It would have been fun to be a fly on the wall when Archie broke the fell news to his US masters; but BG was right: it was indeed sitting on a glut, as a bit of belated due diligence readily confirmed. For its new gas fields Esso subsequently settled for 16 p/th**. A salutary tale indeed.
So many life-lessons - as my 11-year old granddaughter would say.
ND
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** There's another lesson here. In order to "justify" asking for 34p/th, the negotiators had been primed to say that detailed engineering confirmed this was nothing more than was needed, based on the ever-rising cost of offshore development. Gosh, yes. The JV had indeed concluded internally that a price in the high '20s was needed, even if 34 was taking the piss. So: how come we didn't pack our bags and just go home, sadder and wiser, and leave the stuff in the ground?
Answer: huge engineering projects build up serious momentum (see HS2, Sizewell C etc etc). Big project teams had already been assembled: plum jobs awarded: a great deal of engineering work already done: we were not about to walk away from these sunk costs. The teams were told to take out their sharpest pencils and bring the costs down - massively. And lo - they succeeded! As I've found many, many times in business life, engineers, like so many of the rest of us, are basically lazy and complacent; and if they think money is no object, they pile it on. ("Safety" is the usual reason given for gold-plating - and who dares to second-guess them on that?) But if they are told their jobs depend on it, suddenly they are capable of amazing innovation and rationalisation! It is ever thus. Only a good kicking does the job.
9 comments:
I repeat my father's view: most men in big business don't deserve to be called businessmen.
Sir Archie, I suspect, deserved to be called Sir Arsie.
Recently involved in a business case to move on-premise compute to public cloud.
Despite the hyper-scalers being quite expensive, the numbers worked assuming that we didn't over-engineer the migration phase.
Of course, by the time all the extra stuff was bolted on by the engineers (not safety, but quality as the argument) it now doesn't wash it's face.
If you've not only sunk a lot of costs but you engaged a huge global IT consultancy to build the damn thing, then you really are stuffed. After around 100m and about six years of development it staggered into existence a couple of years late, and with an architecture (mainframe, nightly batch) that was pretty much obsolete a year before live date... the responsible director wasn't drawn and quartered, but stepped down quietly, having arranged to spend his last year in the Isle of Man, reducing the tax on his hefty severance package...
Anon - as soon as I read your words "engaged a huge global IT consultancy to build the damn thing" I was able to guess the rest!
We've probably had this discussion before: but as someone who set up a co of which the major revenue stream was as vendor of our specialised enterprise software, I can only say - don't get me started. Almost to a man (I can think of only one exception) the big household-name "systems integrator" companies were a shower of bastards and bandits. And the exception boiled down to a single, self-confident project manager we encountered who was swimming against the tide of the pernicious company culture he worked in - very much to the benefit of the project, but probably not his long-term career prospects in said co.
We suffered a bit (because they ate some of our lunch) but we had our niche. The main victims were of course the ultimate clients, who paid - and suffered - biggly. And boy, did they pay, essentially for the privilege of being able to tell the Board that the project was in the hands of a Big Name player.
Consultants come in to tell you what you already know.
Not even in a useful way where the knowledge was hard to extract - no, to cut through politics and arse covering by senior management.
How else could a shiny arsed, wet behind the ears grad, in a nice suit and polished set of PowerPoint slides come up with an answer to the question posed?
He asked the people at the bottom who knows the business but have no voice, then told the useless suits at the top.
Consulting 101:-
Open your wallet, repeat after me 'Help yourself'.
A wise Civil Servant said to me, we only hire you lot as someone to blame when it all goes wrong.
A rule of thumb was that out of 10 jobs, two would go really well, six would go OK and the last two you were lucky to get paid at all and not sued.
"He asked the people at the bottom who know the business but have no voice, then told the useless suits at the top."
That's a pretty accurate summary of the big consultancies modus operandi.
There's a rich irony here because Sir Archie's problem was, he didn't ask a consultant! - either in this story or the earlier one. In fact, plainly, he rarely asked anybody.
On IT and Consultancies...
1. Has anyone plotted a graph between the reduction in productivity and the increase in IT? A rough correlation may form I suspect.
2. Businesses still treat IT like it's the 70's, back when VAX machines were named Gandalf and Merlin, rather than Just Another Department. So when Tracy from Accounts rolls her eyes about being asked some information for a project, she gets sympathetic nods from the rest of the cheap suits, not a verbal warning, and the understanding that if said info isn't supplied with 48 hours, that'll be followed with a written one. Having been in such meetings, and met with a set of eyes I'd last seen when in an abattoir, when pointing out they need that info, I wished to still a have a cattle stunner upon my person.
3. In over 20 years, the rate of failed projects - a dismal 75% - has remained fairly static. On-shore, off-shore, near-shore, sack-everyone-and-bring-in-fresh, the song remains the same. The common denominator - the one paying the piper - still hasn't clocked they're the problem.
4. The big consultancies know all this, and are happily farming the differential between what they charge the client and what they pay the person on site, safe in the knowledge it isn't going to change any time soon and they can hop from one failed system to the next, regardless of it is public or private (they're both equally crap at managing IT projects).
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