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.

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

A Wry Chuckle to Lighten the Gloom

What could be funnier than this?  Silly Alan Rusbridger launches his 'keep-it-in-the-ground' Grauniad campaign, trying to pressure institutional investors to divest their holdings in hydrocarbon producing companies. 

What happens?  The price of oil promptly rises, and with it - strongly - the stock prices of oil and gas companies, as nicely plotted by FT Alphaville here. "The Guardian as contrarian indicator" - an amusing idea.

As the FT goes on to say, there will of course be more to report on this as the months go by.   Plus, the crude price rebound looks a bit overdone.  All the bank analysts are picking the price to increase steadily through 2015-16, but I'd take that as another contra-indicator (not to say self-interested wishful thinking) and point out that the US shale oil (and gas) producers are undeterred by OPEC's efforts.  There must be the chance of another material down-tick later this year.

ND

Keep It In The Ground? - you can stick that ...

At the first mention of possibly significant oil reserves in the Weald - and not even shale oil, no fracking involved - out come the 'Keep-It-In-The-Grounders'.

What's all this then?  Well, outgoing Grauniad editor Alan Rusbridger, stricken with guilt that he hasn't used his organ more extensively for campaining, has decided to go hell-for-leather for green activism in the run-up to Paris, under the comfortingly simplistic Keep-It-In-The-Ground banner.

This stuff makes me smile.

The discovery of massive oil reserves in south-east England represents a threat, not a bonanza ... the UK’s Climate Change Act commits us to regarding all shares and financial products dependent for their value on fossil resources as unusable “stranded assets”. 

I think not, whatever silliness Mark Carney may indulge in from time to time: although there could (I suppose) eventually be enough of a movement against institutional investing in oil & gas shares to improve the yield for those who see matters a bit more clearly; stranger things have happened.

In the meantime Molly Scott Cato, "professor of green economics at Roehampton University and the Green party's finance speaker", author of the above twaddle, may care to visit the lovely county of Dorset.  There she will find - or rather, she probably won't find because it is essentially invisible - Europe's largest onshore oilfield, Wytch Farm.  Cleverly developed by BP (now owned & operated by Perenco), it is a model of sensitive oil production.  Few Wealden landowners would have any qualms about another of those.

If it's there, it'll not long be kept in the ground.

ND

Putin, Bob Hoskins and a 'New Partner'

Source: Gazprom

The South Stream gas pipeline project had a chequered history.  The southern leg of Russia's classic outflanking manoeuvres to by-pass the Ukraine transit route, it was dogged every step of its way by the EC's preference for an alternative 'Nabucco' scheme, based on supplies from Iraq, Azerbaijan, Turkmenistan et al.  There was never a particular need for both: Nabucco foundered first, and when the EC pulled out the rug from under the Bulgarian section of South Stream as part of the current sanctions, it was only a matter of time before that, too, was scrapped.

So little Volodya has done the inevitable, and South Stream is no more.   But now he has "a new partner", namely Turkey - which is going to get some discounted gas.  Well, it would be a shame to waste all the steel that's already been forged.  Pipeline gas will be a lot safer for Turkey than their previous scheme for satisfying their burgeoning energy needs, viz new nuclear power plants to be built by the Russians in, errrr, an earthquake zone.

Doesn't the new partner thing remind you of Bob Hoskins in The Long Good Friday ?  The aggressive little chap's grandiose plans for redeveloping docklands with an American *consortium* collapse when they lose patience with him for getting into a shooting war he can't control.  But that's OK, he anounces defiantly, because he has a new partner - a German mob.

That's just before his uncomfortable ride in the back of Pierce Brosnan's car ...

ND

Gazprom, Spinning

As oil prices tank ($67 today!), heads must be spinning at our old friend Gazprom, where they still insist on indexing their prices to that of oil.  But they still aren't quite there with the spin management yet.  Here's an amusing presentation for energy & geo-politics buffs, entitled Gazprom for European Market: Reliable Supply in a Changing Environment.

Naturally enough in a presentation on Europe the first slide is about new sales of gas to China, with the claim that these 'are not going to compete with LNG import on Chinese market'.  Well of course not.  A major new source of supply isn't going to have any effect on the international wholesale market, and certainly not on prices.  No Sir.

And so it goes on, a Kremlinologist's delight.  'Major suppliers to Europe have similar contracts' (a subtle one, this, attacking the new federast notion that Europe should buy its gas centrally - and they are right, Europe shouldn't).   'The price of Russian gas are fully competitive and are subject renegotiate' (sic) - well yes, but oil indexation + 'subject renegotiate' is a ludicrously inefficient way of doing things.  'European customers are perfectly protected by long-term oil-indexed contracts against any form on monopoly abuse of power' - an attack on the ongoing EC investigation into Gazrom's behaviour, plus a slide making cryptic, tangled (and wrong-headed) critique of pricing via gas indexation.  Tell that to Eastern European buyers.

And the rather sinister 'After midstream business is dead, nobody is taking responsibility for supplies structuring'.  Midstream dead !  This is a bit harsh - whoever do they mean ?  Would that be, errr, Eon and RWE ?

ND