James Allcock RIP, rogue [2]

Continued from last week

So what disturbed Allcock's stately scam ship as it sailed serenely through the market?  The first issue arose in the mid '80s when the laws of supply / demand / price caught up with him, as they always do eventually.  You can suspend the laws of nature, but only for as long as you are willing to throw money at it.  

What happened was this.  He'd secured vast quantities of gas at ultra low prices (the units don't matter, but it was single-digit pence per therm) in the late '60s and early '70s - see part 1.  This was amply sufficient, right through the 70's.  But by the '80s there had been two oil crises, 1973 and 1979; and the price of oil had risen tenfold (sic).  The prices BG was paying for its gas had jogged upwards a bit with inflation and other adjustments, but nothing on that scale.  So the big producers, who were always oil companies au fond,[1] stopped drilling for gas, concentrating on the still bounteous North Sea oil reserves.  There were whole years in the '80s where not a single gas well was drilled - not for exploration, nor even for extending already-producing gas fields.  A complete gas-investment strike by the producers.  BG did the sums, and correctly assessed they'd be facing a supply crisis in due course.  And new gasfields took an absolute minimum of 2 years to bring onstream[2], often much longer if outright new exploration was to be involved.

Still, BG had a monopoly to go with its monopsony, and they knew who was going to pay for the business of digging them out of that hole - its captive customers!  So Allcock did the rounds of the big producers, intimating that BG was now willing to pay prices above 20 p/th - a huge increase - for any new gas fields they could bring to the table in the next few years.  This, of course, set off a new round of stately and highly enjoyable negotiations I described last time, as the producers dug down into the archives for overlooked gas discoveries, and indeed started drilling again for new resources.  It worked: high prices have that effect.  (I've written before about another, hilarious aspect of this episode as the crazy, artificial boom-and-bust cycle ran its inevitable course.)  Thus did Allcock and his monopoly powers - a dismally blunt instrument indeed - avert the first storm that broke over his head.

The second, however, was to be terminal, albeit a protracted affair.  On purely ideological grounds, Nigel Lawson persuaded Thatcher to privatise BG, a task given to Peter Walker.  To make a long story short, in 1986 he succeeded in getting the public to buy the shares ("Tell Sid", for those with 40-year memories), and the legislation ended BG's de jure monopoly / monopsony.  But it did nothing to eliminate or even, in the short- to medium-term undermine, its de facto stranglehold, not least because in the initial legislation, no regulator was appointed!  

And it was Allcock who commanded BG's first and highly effective line of defence: making sure no other bugger could obtain gas with which to go into competition with the monopoly.  In the next part we'll tell the story of his long, ruthless but ultimately unsuccessful rearguard action.  And, no, I haven't forgotten the promised account of the colourful abuses of its monopoly that BG perpetrated over the years - some of which will feature in part 3 and others in a later episode.

ND

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[1] Gas was always seen as a more-or-less unwanted by-product - something that came up from most oil-wells anyway, or something you discovered, disappointingly, when you'd really been looking for oil.  In some places around the world, by-product gas was simply flared

[2] A lead time as short as 2 years would be for a geologically simple gas field in shallow waters, close to existing infrastructure, that had already been discovered but never developed because the price BG had been willing to pay was just too low - the producer had better uses for its development budget

Rogues I Have Known: James Allcock, part 1

Pic:  Daily Telegraph

There won't be many readers who have heard of James Allcock (died at the age of 90, obit here, which you should maybe read first). De mortuis nil nisi bonum, obviously; and I'll immediately say, he was a very nice guy who commanded tremendous loyalty, which (generally) speaks well for a man.  But he was also, how shall we say, a tough customer.  Being, as he was, the head buyer for the old British Gas when it was a monopoly.  I shall explain.  At length.

BG took on the form we most associate with it when North Sea gas hove into view in the late '60s.  The late (and not very lamented) Dennis Rooke was given responsibility for converting the nation rapidly from town gas to natural gas, in which he succeeded, using methods that left a lasting and very equivocal legacy - a story for another day.   It seems from the above-referenced obit, Allcock (I never knew this) had a hand in it, too.

However, it was in his prime as BG's head buyer of gas from upstream producers that I first met him.  Did I say 'buyer'?  BG enjoyed, not only a statutory monopoly, but also a monopsony, which it enforced zealously.  So if your company had discovered gas in the North Sea (and later, off the west coast, too), you had nowhere to go but to headmaster Allcock's study.  The only question was, how painful the experience was going to be.  He had only two forces providing a weak form of discipline on his rapacity:  (a) some customers (particularly industrials)[1] still had the ability to use alternative fuels, mostly oil of one grade or another; and (b) the Norwegians, at least, had alternative outlets for their gas.  Otherwise, he could generally have his wicked way with you; and he & his opposite numbers in equally monopsonistic European utilities used to swap notes gleefully on how roughly they'd rogered their victims.

That said, he was a perfect gentleman, and built a department consisting of three teams of negotiators to carry out his purchasing policy.  You need to know that these negotiations were for astonishing amounts of gas, since Allcock insisted on buying the entire quantity of gas in a given field, which might be producing the stuff for as many as 50 years[2].  So the amounts of money on the table were correspondingly stupendous; the sellers were very big companies themselves (basically, the '7 Sisters' of yore plus the Norwegians, and various hangers-on); and the negotiations were interminable.  Two years for the sale of a single large field's gas was par for the course. 

Each of his teams was led by another perfect gentleman[3] and some courteous juniors, whose conduct was extremely stylised in the oriental fashion.  There were three juniors to a team, and each had their allotted role.  #2 would occasionally get to speak out loud in the meetings; #3 might get to whisper something to #2; and #4 was silent, taking notes.  There would also always be one or more of BG's exceptionally proprietorial external lawyers, who did all the drafting.  Indeed, all the meetings were held at the offices of BG's lawyers, the then firm of Denton Hall Burgin & Warren.  This was to the advantage of all the participating negotiators, since lunch came in the form of a Fortnum's hamper, and the fridge was well stocked too.

Thus, it was possible to be thoroughly rogered by Allcock and his teams, and enjoy the whole process greatly.   One or two of the juniors might have been redbrick, but inevitably the main players on all sides (whichever oil company was selling its gas) were Oxbridge: even the US sellers, and in some cases the Norwegians, made sure to field the "right people" for this arcane negotiation ritual.  Literary references (which would sometimes find their way into the drafting) and Latin jokes were prized currency.

This stately and splendid abuse of BG's statutory powers lasted from the late '60s to the early 90's.  Allcock had to weather a couple of storms - which he did with panache - before eventually competition started developing for real, as I'll describe in part 2.  I'll also give some examples of the outrageous abuse of its monopoly BG perpetrated when this regime still had the power to do so.  

And, to cut to the chase for part 1, Allcock - in his urbane manner - fought the onset of competition all the way.  Given that BG retained a de facto monopoly/monopsony for years after it lost its statutory rights, and never lost its natural monopoly on the pipeline system until it relinquished it voluntarily by demerger, his powers to do so were baleful and very great.  But when, in the early 90's, it was manifestly almost over for his way of doing business, I had a drink with him one day and asked him this: why this stubborn rearguard defence, when the end-point was clear?  I drew the analogy with Germany's immense WW2 losses on the Eastern front: if they'd called it quits after Kursk, say, and fallen back in good order to the German border, Berlin may never have fallen to Russia[4].  As it was, fighting for every hectare they lost countless men for arguably a much worse result.  Likewise, BG was (at the time I posed the question) still mulishly refusing to concede market share, and using its enduring natural monopoly on the pipeline system to make life as difficult as possible for its new competitors, once they arrived on the scene, even knowing that there was every intention on the part of government to make sure the new entrants succeeded.  If BG had fallen back on its then-remaining de jure monopoly of the residential gas market (which it didn't lose until much later) - devilishly difficult for competitors to make inroads into, and not nearly as profitable as the infinitely more accessible industrial & commercial sectors - it could have held that till kingdom come.

He smiled, poured us another drink, and said: "Every day's delay is another monopoly pound in our pockets."

More to follow.  In the meantime: RIP, James, you old rogue. 

ND

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[1] For a sustained period until the late 1980s it was illegal in the UK, and in most of Europe and the USA, too, to use natural gas for power generation .  Bizarre, but true.

[2] The largest North Sea gas field, Leman, started production in 1969 and is still producing to this day

[3] In the early years, at least - things changed towards the end, but, no names, no packdrill 

[4] A counterfactual for the historians, obviously.  But it served my illustrative purpose.

Oil Price: More Than Just a Glut

Even as a consumer (with an augmented short-oil position), I find it hard to be insouciant about oil prices as low as this.  Something's gonna give.   Politically, economically, socially, all three ...   Saudi, Russia, Nigeria, all three ...

Then there's Shell and its BG gambit.  Trying to emulate John Browne's BP (1998) by cleverly buying assets at the bottom?  A hopelessly mis-timed play.

(Incidentally, in moving on gas-heavy BG they were doubling-up on their already humungous mistake of pouring $$$ into Qatar LNG, which Shell insiders swear they never would have done if they'd seen this coming ...)

Then, there are the legions of very nasty people who've made their 'livings' from quietly skimming off oil profits (which ain't too difficult @ $120, but altogether harder just now).  A bit like when drug dealers can't deal drugs any more, they will be looking for the next source of ill-gotten $$$: and what, do we think, might that be?  We won't enjoy it, whatever it is - because it's our money either way.

'Interesting times' doesn't get close.

ND

Shell and BG: Big Business As Usual

Shell's agreed bid for BG has a nice, conventional feel about it - in the context of the oil-price cycle.  We know how to assess this one. 

The various bits that spun out of the old British Gas at demerger in the mid 1990's - BG, Centrica and Transco - all performed much, much better individually, a great endorsement of the split-up strategy.  And they all stayed British ! - which pleases several hardcore C@W commenters.  Centrica remains independent, and Transco went to National Grid.  The big 'Rough' gas storage facility was sold by Transco at an early stage to Dynegy of the US, but bought back in by Centrica a while later.  Does Shell count as sufficiently British to satisfy this atavistic concern ?  Personally I care rather little.

BG was always an interesting company, with assets all over the place.  Trinidad LNG production was once the jewel in its crown, plus a bunch of North Sea gas assets it was not permitted to manage proactively while still part of Old-Monopoly-BG, so it let Amoco (of Chicago) operate them.  More recently it has done good pioneering work in Brazil.  It has long been a target, periodically: and the logical acquirer is a company that really knows how to manage (and value) this lot.

Shell's move is an attempt to emulate BP circa 1998 and call the bottom of the market.  BP, it will be recalled, triumphantly called that particular bottom at $10 and bought Amoco, Arco and BurmahCastrol before anyone else had settled into the starting-blocks.  I have a feeling Shell have moved just a tad too soon, but they may not much care.  This type of deal is 'business as usual', a bigger version of all the little shale-company acquisitions that will happen when their hedges expire and the banks press for debt to be serviced.  Creative destruction - the reason it's hard to suppress capitalism.

[By the way, Shell missed out altogether in 1998-99 mega-takeover binge.  I can reveal that they seriously considered buying Enron!  - but they couldn't understand the books.  In 1998 those books were still just about comprehensible to those who grasped mark-to-market accounting (not Shell, that's for sure).  Of course, three years later they made no sense to anyone ...]

Centrica is even more interesting.  Gazprom is perenially rumoured to be eyeing it for acquisition, but as I have often written here, that's always been bullshit: they never pay cash for anything (and they have even less of that now than usual).  Of course, Centrica is a midstream+retail business, so depressed hydrocarbon prices don't automatically make it a target.  It's twice peaked at around 400p, in 2007 and again in 2013, but has been on the slide for 18 months now.  

Its portfolio weighting is still UK-heavy, with all manner of daft and complex 'obligations' and regulatory constraints as one of the 'Big 6' retailers and a major player in UK power.  Who can see their way through that minefield?  You can never rule out some middle-eastern SWF or far eastern utility with more money than sense.  It has often been said that HMG would block a Russian bid - an empty observation, see above - but what would they say to Qatar or Malaysia?  I really don't know.  

I'd say - if they are offering the usual 180 cents on the dollar, why ever not? - and I hope my pension fund agrees.

ND