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| Grangemouth/Forties Update: Forties pipeline remains shut down (Thread 2) | The Oil Drum: Europe | Forties - Grangemouth: the failure of a complex tightly coupled system | |
Grangemouth strike: Anglo Disease in action?
Posted by Jerome a Paris on April 27, 2008 - 7:51pm in The Oil Drum: Europe
Extended from the European Tribune version, which was itself inspired by earlier coverage here on TOD. More relevant background can be found in these two articles from a few months ago: UK Energy security and The European Gas Market, both by Euan Mearns.
Now that the news that the Forties pipeline has to close down is known, the blame game has started:
UK resists fuel curbs despite strike The UK is “nowhere near” having to impose emergency powers to restrict fuel supplies to essential users, the government insisted on Sunday, despite a strike forcing the closure of a pipeline that carries nearly half of Britain’s North Sea oil. (...) But the Conservatives sought to make political capital from the unrest. On Sunday, they argued that the strike was a byproduct of his weakness. “Whether it is teachers or whether it is oil workers or whoever else, they’re actually saying we can push this guy around,” David Cameron told the BBC. The Tory leader argued that Mr Brown was indirectly to blame for the dispute because of his changes as chancellor to employer pension schemes. “Who is the man who wrecked the British pension system? He is the prime minister,” Mr Cameron said. The Grangemouth workers are protesting over the company’s intention to close their final-salary pension scheme to new employees from August 1. Ineos has offered to suspend plans to make existing employees start making contributions, pending further talks.
I'd like to flag just a few points that seem to be typical of our times, and maybe warrant making this a symptom of the Anglo Disease, ie the wholesale domination of our economies by reckless financial capitalism:
- the strike is about company-provided pensions (the unions are fighting a plan by the owners to not provide the same pensions to new hires as existing workers have, and to change rules on existing ones). With falling or stagnant stockmarkets, market-based pension funds, especially those run by corporations on behalf of their workers, are in trouble and force those corporations to provide top-ups to meet their obligations. Companies are looking for ways to reduce their liabilities, and pension funds and contributions are high on the list of "fat" to be trimmed in the never-ending quest for "efficiency" at the expense of workers;
- in line with that, you can of course read outraged quotes from corporate shills blaming unions for "holding the economy to ransom." The problem is always unions, and workers, and never management and their decisions - whether to cut "fat" or to run the company in ways that make it vulnerable to changes in the value of its pension funds because of stock market movements; in other words, the legitimacy of cutting on pensions (and effectively reneging on obligations to workers) is taken as a given in all public discourse on the economy;
- typically, the strike is taking place in a bit of infrastructure that was spun off by BP: the Forties pipeline system, built initially for the Forties oil field, and the refinery it fed, but now extended to many other offshore fields and onshore facilities. BP has kept the pipeline system but sold the Forties field to Apache and the refinery to a private equity fund. But these bits still operate together as they are all still part of a coordinated industrial complex that needs to be run, in practice, as a whole. Losing power or capacity in one bit can trigger closures in other activities, with knock-on effects. Separating ownership of various bits is all the rage these days (whether it's called deregulation, unbundling, promoting competition, breaking monopolies, etc...) and it's been a favorite hunting ground of investment funds, and in particular highly leveraged private equity firms. Ineos, the owner of the refinery, is the happy carrier of several billion pounds of debt along with it... Resilience, and industrial common sense have lost out to short term financial return requirements...
- amongst the knock-on effects in this case are the consequences not just on oil markets, but also on natural gas markets. Lost production amounts to 700,000 b/d of oil, and 2mcfd of gas, just under 1% of world production in each case. Oil markets are already strained, and that lost capacity is further inflating things. But shortages would be localised, and are actually unlikely given the available stocks in the area, unless panic spreads.
On the gas side, on the other hand, it's a different story: the UK market has been built around the assumption that there would be permanent oversupply, and supply would "competitively" adapt to demand to provide market balance. Now, however, the country's production is declining sharply and it needs to import increasing volumes. With very little storage capacity, a legacy of the days when you just had to turn gas fields on or off, lost production will translate rapidly into shortages and have immediate impact on natural gas prices. The markets will "provide", in the form of demand destruction from industrial users with interruptible contracts, but is that a serious way to run an economy in the long term?
- finally, it is worth noting that a small local conflict by just a thousand workers will have a global impact, pushing prices of our most precious commodity up worldwide (the run-up in the past few days was already linked to expectations surrounding this strike). This is both a sign of our increased vulnerability to a tight oil supply/demand balance, and possibly a sign of hope that the balance of power between financiers and the rest of the world is finally changing as reality (and in particular physical and human bottlenecks) reasserts itself against the mad rush for short term profit.
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New in the Wall Street Journal
Has the Financial Industry's Heyday Come and Gone?
It has taken an amazingly long time for the world to figure out that finance is a very small piece of what businesses need to know. The world still hasn't figured out that quite a bit of what people in finance think they know is based on the infinite growth paradigm, which unfortunately isn't true over the long term.
TPTB will only give up the 20-25% rates of return they get on these financial dealings when you pry them from their cold, dead hands. Or possibly when all the central banks run out of money to bail them out.
I cannot agree strongly enough with the original post framing this as an especially Anglo problem. Control over the mass media in Anglo countries has allowed TPTB to drive the consensus rightward to the extent that workers demanding basic benefits are now demonized.
Hi Gail,
it will be 'interesting' to see the impact of this on the UK if it does happen as we are highly leveraged to this Industry. As manufacturing has declined and oil/gas has ebbed, finance is pretty much the only bright spark GDP wise in an otherwise increasingly darkening outlook.
Having said that though the UK is in a good position to enable all those Petrodollars flooding in to be re-distributed into other assets so I wouldn't write us off just yet... [Think: ME, Russia, India, Hong Kong/China]
Nick.
I think this dispute is a sign of what is to come in relations between workers and owners in the future.
I am working on a self-help (for me) paper with the working title of: "Inter-class Issues In the Post-Peak Oil world"
Here are some of my thoughts so far on one aspect of the process of controlling the working class.
The labour of this class is essential to the prosperity of the ruling elite. Without value added labour capital cannot be applied or expanded. This fact makes this class both indispensable and something to be feared and controlled. Traditionally much effort has been put into suppressing the working class on one hand and on the other, exploring ways to diminish, if not eliminate, their importance to the rich. It is not surprising that much effort has been made to eliminate working class consciousness and isolate individuals within the working class. In industrial societies the importance of the working class has been reduced by the existence of “energy slaves”, that is the ability of fossil fuel to do the work equivalent to many thousands of humans. With wealth and growth based upon cheap oil it has been possible to replace the old tools of violent repression, which themselves solidified working class cohesion, with monetary measures that weaken this solidarity. Ironically personal debt proffered to individuals has been used to buy off the debtors without using (in fact enhancing) the existing wealth of the elite. This system has been very effective in the industrialized world since the middle of the 20th century as exemplified by the systemic weakening of the labour movement. However as the 21st century unfolds with the loss of cheap resources, especially energy, this is approach is becoming harder to support and it is likely that violent repression will once again be the norm.
Agreed. Personally, I believe that real estate boom was artificially created KNOWING that we are going into oil decline. I don't think the elite is very well aware of peak oil and its probable consequences.
As real estate deflates with time, borrowers will have a sour choice: repay with interest for property, whose value is falling, or forget about prior payments and send jingle mail.
OTOH, if working class were naive enough to buy McMansions for million dollars and more, they deserve to get punished. I have no sympathy towards those, who enrich the elite through their absolute consumerism. Now that I read TOD I know that people just can't make rational decisions (thanks Nate, though I noticed it before, haha).
I'm waiting for John Robb at GlobalGuerillas to post a comparison of the leverage exerted by the union at Grangemouth with MEND or the groups that blew up the pipelines in Mexico. There are others too. At what point do they start to coordinate efforts against the "Anglo Disease"?
I'm going to be surprised if this doesn't turn into "terrorism".
cfm in Gray, ME
Its an OUTRAGE that workers expect the employer, or government for that matter, to provide a pension. People must save and invest in their own future.
The cost of the pension is embedded in wages, so the employee is paying for the pension anyway. Why not control those funds coming out of the check?
The company should replace the workers with someone willing to work and take personal responsibility for their own retirement instead of asking the company to do it for them.
I'm not sure whether this is a bit of trolling, so I'll just take it seriously and thus frame my reply.
Part of what all unions, and for that matter, all workers including management and CEOs, negotiate for nowadays is some sort of retirement benefit. The company benefits by giving an incentive for experienced well-trained personnel to stay on for as long as they can, so that the company is not constantly training new people for positions in the company, and undergoing the loss in efficiency and increase in labor cost due to mistakes made by inexperienced personnel. The worker benefits by not having to worry about the vagaries of the stock and bond markets with respect to his or her retirement money. This becomes more important as the average educational level of the employee decreases, and the physical demands of his or her position increase, and the likelihood of work-related injury (chronic and acute) increases. The company benefits also from the good will and loyalty thus engendered, and also the fact that the worker now has a stake in good outcomes for the company and could presumably be encouraged to work towards those good outcomes.
The other alternative is to have a business with high labor turnover and low employee satisfaction, such as in fast food, service industry (like restaurants) and retail, which tend to be paid at or near the minimum wage. If however the work is dangerous or requires expertise and experience, it's wise to have a contented workforce which will not walk out or quit suddenly. Oil drilling and refining is a good example of the latter.
When a company makes a formal written contract with an employee or the employee's agent, the usual master-servant employment-at-will doctrines do not apply, namely that one receives a day's pay for a day's work, and that one can be fired for a good reason, a bad reason, or for no reason at all. Instead, the law created by the contract now controls the relationship and the outcomes. If the employee contracts with an employer for an old-age insurance policy which will vest in a given finite amount of time and pay out a sum certain over a period of time and such other benefits as may be contracted for, as partial compensation in exchange for the labor of the employee, the company is obligated to provide such insurance and to pay on it, or be liable for its breach.
Ineos appears to be in an increasingly difficult financial position which could mean a long strike at Grangemouth refinery.
Ineos pursued an ambitious growth strategy primarily by aggressive acquisition funded by low cost debt, shown below.
Source:
http://www.ineos.com/index.php
http://www.ineos.com/pdf/INE_FF_2008_08_web.pdf (84 pages)
Ineos has to be able to pay the interest on the debt to continue operating. The chart below shows some recent financial numbers. The year 2006 shows an earnings before interest and tax (EBIT) of EUR922m, net financing costs of EUR728m and an after tax profit of EUR115m which is a very low 0.4% margin on sales.
The financial position shows severe deterioration in Q3 2007 with net financing costs almost equal to EBIT and an extremely disappointing after tax profit of a miniscule EUR1m.
click to enlarge
Source
http://www.finanzaonline.com/forum/attachment.php?attachmentid=830206&d=... Dec 11, 2007
This increased financial risk is reflected in the market price of the Ineos bond INEGRP 7.875% 15-02-2016 shown below. In early 2007 the bond price was about EUR100. In late 2007 it has fallen to about EUR83. The early April 2008 price of the bond has fallen even more to EUR74, representing a high yield to maturity of over 13%/year.
http://www.jyskebank.dk/finansnyt/obligationer/virksomhedsobligationer/a...
http://www.jyskebank.dk/_jb/commoninc/bin.asp?id=223656&src=200803mnedss...
click to enlarge
Source
http://www.finanzaonline.com/forum/attachment.php?attachmentid=830206&d=... Dec 11, 2007
Ineos should be lodging their 2007 financial statements with Companies House which will probably provide further cause for the falling bond price.
http://www.companieshouse.gov.uk/
Ineos had significant difficulty with their loan facility early in 2007.
http://uk.reuters.com/article/UK_SMALLCAPSRPT/idUKL022462420070502
Fortunately, Ineos found a solution to its refinancing.
http://us.ft.com/ftgateway/superpage.ft?news_id=fto052120071614317039
http://us.ft.com/ftgateway/superpage.ft?news_id=fto052120071614317039&pa...
The highly leveraged position of Ineos means that it will seek to increase its profit margins by all means possible including increasing prices to customers and cutting costs. One area of cost reduction is employee pensions. Ineos wants to change the pensions from defined benefit (or final salary scheme) to defined contribution for which the retirement payout is linked to the fortunes of the stock market, unlike the final salary scheme which is linked to employee’s salary at the time of retirement and also the employee’s longevity.
http://www.timesonline.co.uk/tol/news/uk/scotland/article3819055.ece
http://www.finance-glossary.com/terms/final-salary-scheme-(defined-benefit-scheme).htm?id=549&ginPtrCode=00000&PopupMode=
If Ineos is unable to increase its profitability then it will not be able to generate sufficient free cash flow to maintain all the plant and equipment and ensure proper operation of their assets. For example, Ineos needs a further £750m to invest in the Grangemouth refinery.
http://www.guardian.co.uk/business/2008/apr/27/oil.transport
What is extremely unfortunate, in the case of Ineos, is that the assets, including essential infrastructure, affected by the strike are critical to the economic prosperity of the UK. The Grangemouth refinery strike has affected not only petrol and diesel prices/supply but has also shut down 700,000 barrels of oil production from the North Sea. Gordon Brown and his Labour Party desperately need to exercise some strong leadership immediately.
Let’s hope that the Ineos employees at Runcorn chlorine plant don’t strike because then Britain might run out of drinking water in three days. Wonder how Gordon Brown would respond to a drinking water crisis?
http://business.timesonline.co.uk/tol/business/movers_and_shakers/articl...
Ace,
Many thanks for digging out these facts, it seems clear that the company is not in great health and with the current credit crunch will find it more expensive and difficult to finance their loans to keep the business running.
If you stop and think about it, this is precisely the situation we would expect with declining oil production, if declining oil production has an adverse impact on Ineos' refinery production (since Ineos has lots of fixed costs, including debt). If Ineos were part of BP, it would be part of a larger group, and would not have so much leverage, so the declining profitability would not be as evident. BP would probably have been able to continue BAU for a while longer. With its structure, and declining oil production, Ineos is almost certain to run into troubles again in the not too distant future, even if its problems with the union are worked out.
One "solution" for the situation would be for Ineos to default on its debt, and one of the other companies who are closely involved with the situation to purchase Ineos for a much reduced price (and virtually no debt). The combined company would then be profitable for a while longer, and the world would have the oil.
Well Jerome, I cannot argue with any of what you say.
You could summarise: 'Somethings are just to strategically important to be left to the market'
Rail
Electricity Generation
Water
N-Power.
etc.
The UK broke all of these up for short term gain disguised as 'free market efficiency'
Jerome,
i didn't realise that UBS, Credit Suisse, Soc Gen, BNP, DZ, Deutsche Bank, Mitsubishi are Anglo companies:-)
Interesting that every time Ineos acquires a new business, 10% of the equity is offered up for sale to employees.
Last week Ineos offered to suspend all changes to all pensions for all existing staff at the Grangemouth site, pending an independent appraisal of their pension scheme. The strike is now about non-existent workers.
From the T&G union website:
Q. Why is this proposal unacceptable to the union?
A. The company can afford to continue this scheme. Since the scheme opened, despite dropping contributions, the surplus of the scheme has grown. It is funded now at 120%. There is no question to us that this scheme can afford to sustain the current and new members.
Not that I want to agree with Ineos management, but it stands to reason that in a sunset industry like North Sea oil and gas, it's structurally impossible to ensure lifetime job security and fat pensions to new hires.
I explained the origins of the "Anglo Disease" term in one of the stories posted in the link near the top of this story. I think it's quite fair to say that finance is predominantly centered around the City of London and Wall Street, and the the underlying ideology of financial capitalism is pushed hardest out of these two countries, for that very reason.
As to Ineos, they gave up at the last minute on their attempt to change the existing pensions scheme for current workers (but probably too late), but not on their proposal for future workers. Given that pensions are an indirect portion of workers' pay in the UK system, this is just a way to lower wages for future hires and cut more "fat." I don't think it's unreasonable for unions to fight for the rights of workers that will be alongside them in the future (create two categories and see how one, the costlier one, gets eliminated as quickly as possible and replaced by the other).
Jerome's excellent article is another good reason never to miss TOD. One caveat, though:
I'm not sure about the 'sign of hope' and whether reality will prevail over the 'mad rush for short-term profit'. The 'mad rush' (in non-judgemental terms: human nature in action) might even get madder – if not with an eye to short term profits, then in the hope of cutting one's losses. The situation is so disastrous that most investors would be quite happy just to break even. And I don't think Jerome's tone of moral indignation will move the ball down the field. Moral indignation, even when justified, tends to cloud judgement and foster a good-guy bad-guy approach to the human predicament. Do I detect a sense of glee that 'reality' will drag down the financiers and 'corporate shrills' along with the rest of us?
After all, what are the striking workers' aspirations but to max out and, if necessary, let the devil take the hindmost? When it comes to being 'shrills', trade unions are well able to match the other side of industry. In my view they are neither more deserving, nor less deserving, than their employer. No doubt most of us would do the same in their position. I wish them luck but remember that if they win, others will lose. Not just the fat cats and managers, but also the future beneficiaries of pension funds that have invested in the Grangemouth company. We are entering the age of zero-sum games and so not all will have prizes.
Your point about moral indignation is a fair one, and duly noted.
I also agree that the mad rush is "human nature in action" but would add the proviso: "when encouraged rather than limited by institutions, rules and societal norms. Today's financial capitalism is clearly striking a different balance than the one the USA enjoyed 40 years ago, and it's hard to say that today's is creating prosperity, or to say that thoe one 40 years ago was communism (and yet that's what today's discourse essentially claims).
The discourse has moved so far in one direction that one needs to be a bit shrill to re-create the reality of an alternative to today's common wisdom.
As a financier myself, I'd rather live in a system which is fair and sustainable and less likely to be toppled by a revolution. anything that brings financiers down today appears to me to be a good thing overall, even if not entirely so for me personally in the short term.
Thanks for your reply, Jerome.
Well, I hope you will be one of the few who doesn't end up in the sans-culottes department as soon as the merde hits the fan. :-)
Sacrebleu! I'm surpised that there aren't more financiers out there spilling the beans like yourself, on a par with those repentant (and retired) petroleum geologists who put peak oil on the agenda some years ago. Quel dommage. There must be at least some of them who have an inkling of the impossibility of exponential growth outside the domain of pure mathematics, even if they have never heard of Garrett Hardin, Georgescu-Roegen and co because they were too busy making money to read anything more intellectually demanding than Paris Match. I mean old guys who have no financial worries and who might win brownie points for the next world by raising consciousness about the upcoming Grand Guignol. But obviously mankind's ability to deceive itself is unlimited.
As to pension-related contractual obligations. I wonder whether the term 'contractual' is le mot juste. Aren't we now entering the world of force majeure, where contracts will hardly be worth the paper they are printed on, like those German banknotes after WWI?
And pardon my French.
It seem to me that there is a much bigger issue here than the balance of power between financiers and ordinary folks. The question is how is finance going to take place at all in a society where composite economic growth comes to an end? Of course even without composite growth we must keep investing in infrastructure and capital stocks or our productive power will decay away. However, in a society without growth the process of seeking investment income is a zero sum game. If a class of investors exists who are consistently increasing their purchasing power by financing manufacturing infrastructure then somebody else is losing purchasing power. I do not see how a market for capital investments can work effectively as a means of maintaining wealth as opposed to increasing wealth. My belief is that without growth some form of interest free community investment will be required. Professional investors, in the sense of people who evaluate proposed projects and decide which are most likely to be successful, could still exist, but such people would receive salaries for services rendered and not investment income proportional to the size of the loans which they floated. I do not see how the desire of money to make money, even in a restrained and regulated form, can be the driving force behind infrastructure investments in a post-growth world.
Of course maybe you believe that some combination of increased efficiency and improvements in the cost of alternate energy sources will allow moderate levels of growth for many decades into the future, so that it will be our great grand children who will have to deal with the end of growth. My best engineering judgment (for what it is worth) tells me that such an assumption is incorrect. But even if it turns out to be true my concern is that if growth in per capita income remains our unvarying economic goal for many decades into the future, the resulting ecological damage will leave a very grim world indeed to our descendants.