Drax: criminal charges a possibility

Not before time, the FCA is investigating Drax: 

... covering the period January 2022 to March 2024 relating to certain historical statements regarding Drax's biomass sourcing and the compliance of Drax's 2021, 2022 and 2023 Annual Reports with the Listing Rules and Disclosure Guidance and Transparency Rules.

Needless to say, this hasn't done anything for its share price.

During the period under investigation, Drax was found guilty of misreporting by the pusillanimous Ofgem which let it off with a £25m fine.  In the context of literally billions Drax has received in subsidies, that's a bad joke.  And Ofgem's entire approach was pathetic, they had more than enough to throw the book at it.  But it means the FCA has a fairly robust platform from which to commence its own work, 

What's it all about?  Au fond, the issue is that Drax gets subsidised thus because it says it is saving the planet by burning trees for electricity - and it isn't.  The entire business model is built on a lie.  Living a lie is never good for integrity, personal or corporate.   In lay terms the FCA will be looking at something rather different to Ofgem which was, notwithstanding the proven misreporting, limited to whether Drax technically qualified for its subsidies.  In essence, their finding was, "even though they don't provide accurate info, we can't be sure Drax is in breach - so we'll carry on paying".  Pretty lame. 

The FCA will be looking at whether Drax has misled investors / shareholders / the market.  Here, as in the States, this can be a criminal offence.  When I was an FCA-authorised player (well, FSA in those days) it was "up to 2 years, and/or an unlimited fine" for executives involved.  In the USA, they actually do bang people up for this - see this earlier blog story.  

Who knows where the FCA will come down?  My own two-penn'orth is that (a) Drax's dissembling about its supposed CO2-reducing impact, & exactly what trees they burn, is probably of only peripheral concern to the FCA; (b) the Risk Disclosures in successive Drax annual reports look distinctly questionable.  They know how perilously they are placed via-a-vis regulatory risk, but it's not clear to me that comes across in the ARs (see for yourselves).  They've also spoken with forked tongue over whether they would be a going concern without subsidies at all.   And being already proven as prone to, err, *mis-speaking* - some entertaining stuff came out at an Employment Tribunal earlier this year - won't help Drax's cause.

My guess is that the CEO's future could be under scrutiny when the Board gets round to thinking about how they've got where they are.  But Miliband still depends on Drax to keep the lights on in 2030 - friends in high places.  That's just about their only plea in mitigation.  And it wouldn't stop a handful of execs being made an example of.  We shall see.

Popcorn, please ...

ND 

“Chance favours the prepared mind”: lithium batteries

Citing Pasteur's famous dictum, this article from a couple of years ago tells the remarkable story of the development to commerciality of the lithium-ion battery.  

And it's a classic illustration of just how messy and random much of science and business can be.  In this case, at least a UK organisation made some reasonable money from it! 

A great read.

ND

Where do they hide the budgets?

In the foothills-of-apocalypse position we now occupy, this may seem a prosaic concern: but where do they hide the budgets?   Well, this was always conceived of as basically a business blog, so we can't take responsibility for solving Ukraine, Gaza, Taiwan, small boats, climate change etc.  

Here are a couple of examples.  Firstly, the mighty Afghan refugee cockup.  What do they reckon - £7 billion and counting?  How come no canny forensic budget-bore spotted that one on the HMG books?  Clever old Sir Humphrey, eh?

Second, and you'll permit me my local interests here - I give you Drax plc.  Outwardly just a regular UK listed company going about its chosen mission of incinerating the forests of the world using UK subsidies on the pretence this is helping to solve the aforesaid climate change.   But behind the scenes it has to fight legal action after legal action: that's what happens when you are aggressively living a lie which you've determined to brazen out at all costs.  The other day I happened on some evidence that they are spending tens of millions annually in legal fees for litigation, amounts dwarfing what they spend on their annual statutory audit plus associated consultancy.  The latter, you will find laid out in detail in the Annual Report and Accounts: the former you will not.  The ordinary shareholder would never know.

Finally, and this one won't be even remotely surprising, I've had some correspondence that invites me to believe there is a fairly substantial renaissance getting underway of our nuclear deterrent.  Yes, there are indeed project line-items in the MoD budget for some of this.  But I'm being told it's a fraction of the true total.  Still, this probably goes back at least as far as the two Harolds, Macmillan and Wilson ...  (Maybe those two aircraft carriers didn't cost quite as much as we'd thought?)

Somebody signs off on all this stuff, supposedly with great solemnity and a straight face, with liabilities theoretically involved.  Where's an honest accountant to be found?  On the job market, I suppose. 

ND

Some lawyers know the law: some know the judge ...

Well, someone on Team Trump knows their game: gotta love the symbolism of meeting in Alaska!  Yup, Li'l Volodya / L'il Volodymyr, it's real estate.  Sometimes you wish a former territory was still yours - but sometimes that's just history and we all move on.  Great stuff.

While we await the ghastly prospect of Trump and Putin sitting around the map of Ukraine drawing arbitrary lines (and Putin wetting himself with pleasure at meeting the Great Man again), here's the story I promised you'd get.

*   *   *   *

Many years ago I was working for (*gasp*) an oil & gas company, and had planning responsibility for our ops in a certain African country.  A plum piece of offshore acreage was up for grabs and we wanted it: but another company had a rather more compelling claim.  The acreage was contiguous with a play they'd been working very productively for several years, and their geo-data strongly suggested the oilfield they were producing extended into the new block.  It is technically possible for business to be conducted effectively by two separate developers accessing a single field that straddles a licence-line - you need to negotiate a "unitisation" agreement - but it's messy, not least in primitive jurisdictions (are you allowed to say that? - Ed).  So the incumbent was strongly motivated to pitch hard for the new acreage.  We had some neighbouring acreage, too, which thus far had not yielded any discoveries.  But we weren't deterred: the prize was great.

The minister, replete with tribal hat and fly-whisk, decreed that he would make his determination at the end of a grand meeting where he'd hear each side make its case.  Along came the incumbent with a slick slide-show of all their geo-data: a fine technical presentation that was pretty persuasive - judged on its own terms.

But our chief geologist was a canny Frenchman (Basque, actually - we'll call him Vasco), and this was a Francophone country.  When the incumbent's team had finished their polished performance, he strode up to the table with a large map that he unrolled theatrically and plonked down several paperweights to hold it flat.  It was a simple map of the seabed, with few markings: the lines of the various licence areas; and seabed contours.

Now seabed contours don't have very much to do with what lies thousands of feet beneath (OK: nothing whatsoever).  But they made the plot that was up for grabs look a lot more natural a fit with our existing area, than with the incumbents.  Our man's presentation was short and simple, and he concluded it with a grand, sweeping gallic hand-gesture across the map, indicating the perfect logic of his contour-based argument.  Then he sat down.

The minister pondered all things in his heart, and then rose to the table.  He addressed the assembled host with these words:

Moi, je comprends l'argument de Monsieur Vasco

With this, he grandly replicated the sweeping gesture across the map; turned on his heel; and awarded us the licence.

*   *   *   *   *

I think we can guess what Putin's maps are going to look like.  Heaven help Zelensky on 15th.

ND

Russian strategy revisited

Last year I offered a short account of how evolving Russian practice on the Ukrainian battlefield was starting to show signs of being in pursuit of an identifiable strategy (after two years of unbelievably inept, strategy-free military nonsense); and how that would be viewed - highly critically - through the lens of classic Soviet military doctrine.  The current state of the Trump-triggered "negotiations" makes it useful to revisit that account, and add a bit more salient detail from that Soviet playbook.

Recapping: under Soviet doctrine the offensive should be mounted on a series of broadly parallel axes, simultaneously, across a fairly wide front.  A graphic analogy might be swinging forcefully into the opponent with a heavy club featuring several long, protruding sharp nails.  The desired 'phase 1' effect is inflicting direct damage, plus pinning the enemy into position with much reduced ability to manoeuvre to right, left, or even backwards.  The doctrine prescribes several subsequent phases to deal with what remains, and straighten the line between the multiple puncture-incursions made in phase 1.

That's if the action lasts beyond the first several days of phase 1.  We didn't extend the account in that earlier post: but taking matters a stage beyond the initial phase, the Russians foresaw a contingency in which NATO, reeling from the initial, puncturing blow but for whatever reason unwilling to escalate to nukes, called for a 'freeze' and negotiations.  In such a case, the Russian claim on territory would essentially be delineated by just that straightened line, obtained (more or less) by joining the dots between the furthest point reached of each of the breakthrough axes.  Obviously, there would be some finessing: if they'd over-reached on one axis, they'd be only too happy to 'concede' along that line and fall back to something handily defensible.

Then ... rinse and repeat on a rachet basis twenty years later, or whatever.

The Soviet critique of Russia's performance 2022-25 would be simple: beyond Day 1 back in Feb '22, where's the shock?  The whole strategy is predicated on massive firepower and speed, see the earlier post[1].

However ... perhaps all these lessons have been learned, and Russia intends its 2025 summer campaign to culminate in just such an offensive.  It's not difficult to conceive the current state of play on the  Kharkiv front as being shaped for such a development, and even posit the precise axes that would be involved.  Ditto the front south of Ukraine's 'fortress belt'.

And Trump looks just the man to sit with a map, extend his stumpy finger, and offer Putin the territory east of a straightened line of his own devising [2].  I'd judge Putin's dream outcome for 2025 would be an offensive like the one surmised above over the next several weeks; then a sit-down with Trump and a big map before the autumn rains begin.  Militarily, anything oversimplified in geographical / topographical terms could be an utter disaster for Ukraine.  Out on those open plains, largely devoid of the hills and forests we automatically think of in Western Europe, the only inherent primary obstacles are water-courses, towns and strongpoints.  Failure to factor in the precise geography of the water-courses in particular, and as a defender you're sunk. 

Well, Putin can dream.  Let's see what kind of Soviet-style offensive his army can muster in the next few weeks.  I doubt Stalin would be particularly impressed.  

ND

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[1] Also upon the 3rd of the triad: manoeuvre - see that earlier post - absence of which would be another major criticism of Russia's current venture.

[2] I'll tell another story on that theme next week

What does von der Leyen / Trump 'deal' say about EU?

The French and Germans don't seem best pleased about what she's done, and we can see why.  There might be several theses or lines of thought on this.

1. It's easy to portray it as craven, but it's solid realpolitik, and shows the EC** in a good light: their strategic priorities (bind USA into European defence / maintain support for Ukraine / stay on reasonable talking terms with Trump) were clear and they did the necessary in a decisive & fairly expeditious way. 
2. It's an existential triumph for the EC qua bureaucracy-priesthood, not only on the basis of 1 above, but because von der Leyen's people roundly ignored the national governments and have got clean away with it.  German & French vetoes?  They're history.
3. It's a tactical triumph for those wily EC negotiators: their preferred stratagem is to grind down the other side by dragging negotiations out into endless detail / prevarication / cherry-picking / make-believe governance issues (see Brexit); but when faced with an emergency, they still came up with the goods.  Knowing that Trump just lurves Big Numbers and of course Done Deals, they've "committed" to bizarre amounts of imports from the USA, and there isn't a cat's chance in Hell that these commitments can be honoured.  But the Dumb Donald goes home with his triumph (his own people certainly ain't gonna tell him he's been suckered - and maybe he knows it anyway but just loves the immediate optics)  and life carries on.
4. It suits DE and FR to bellyache and blame von der Leyen, but they know there was little alternative, and have let her do the deed - & front for it.  (But where, ultimately, does 'strategic bellyaching' lead?  Surely, only an ever-growing Euroscepticism across the whole continent?) 

Some of the above are perfectly mutually consistent.  Any other views?

ND

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** I.e. the very real Brussels priesthood, not the abstract political entity known as the EU