Any other business

Cheap oil has finally arrived – and it looks like being a disaster

Plus: A corporate morality tale about reward and achievement

6 December 2014

9:00 AM

6 December 2014

9:00 AM

This oil price slump is turning into a ‘black swan’: one of those economic events that seem to come from nowhere with strange and unforeseen effects. As Brent Crude dips below $70 a barrel and Opec sits on its hands, major banks face losses on financings for US energy companies that must have looked like the safest borrowers in the field in an earlier phase of the shale gas boom. As the rouble plunges and the Russian economy implodes, anyone holding debt paper issued by a Siberian oil giant or a contract to build an oligarch’s superyacht may end up lighting the fire with it. The only thing that has barely flickered is the price of petrol at the pump, so consumers are feeling scant benefit. Markets already nervous about global debt problems and deflation risks become daily more jittery. The world has learned to live with oil in the $80–$100 range, and the industry has invested and restructured with that as its breakeven target. A prolonged trough ought to be a cost-saving boost to growth, But oddly this swan feels more like a harbinger of uncertainty, and of consequences we really don’t need.

Norwegian hotshot

In Kazakhstan in 2003 I met a BG Group crew running a huge gas-field venture in the frozen Steppes. I knew little of BG — a FTSE100 company which is the former exploration arm of British Gas, separated from the utility Centrica in 1997 — but gained the impression of a tough-nut business doing its bit for Britain in some of the energy world’s nastiest locations. Canny investors thought so too, and the shares rose fourfold during the 12-year tenure as chief executive of Sir Frank Chapman, an unsung hero who should rank alongside Sir John Rose of Rolls-Royce but was far less often saluted.

After the autocratic Chapman retired in poor health at the end of 2012, BG seemed to go pear-shaped. His successor, ex-Shell man Chris Finlayson, lasted 16 months before stepping down amid a flurry of profit warnings and missed production targets; the share price fell by a third. A new chief was found — Helge Lund from Statoil of Norway — but was offered such fat terms (worth up to £14 million a year, which was ten times his Statoil salary and outside BG’s own agreed remuneration policy) that shareholders threatened revolt. Now that package has been scaled back, but the company is under fiercer media scrutiny than ever and no mention of Lund, however good he turns out to be, will ever omit a jibe at his pay.

In effect, BG has turned itself from a model of frontline industrial enterprise into a corporate morality tale. When Chapman was promoted internally to chief executive in 2000, he was paid £407,000 a year; a decade later that figure was £11 million (four times the pay of Tony Hayward at BP) but no one objected because he had delivered real shareholder value. After he left, I suspect the company turned in on itself, executives obsessed with reward or survival, non-executives incapable of steering the focus back to business priorities. When hotshot Helge Lund came onto their radar screen, they felt the need to throw sackloads of cash at him to make sure he accepted their offer.

And they’re still doing that even after shrinking the sacks. The complexity of the revised deal tells us how many boardroom hours have been absorbed by it at a time when BG has urgent operating challenges across the globe: a £4.7 million share award, £1.5 million salary plus £450,000 in lieu of pension, long-term incentives, short-term bonuses, a buyout of forfeited Statoil pay, and a £480,000 ‘relocation allowance’. That’s an awful lot of Norwegian removal vans. Is he worth it? I doubt it. Will the share price climb back from £9 to £15 despite the falling oil price? I doubt that too. ‘We have to pay up because we’re buyers in a global market for talent,’ chorus the boardrooms of Britain. That can’t be denied; but it’s a market that has lost touch with reality, distracted business from its core purposes, and lost the respect of the rest of us. Golden reward should only ever follow golden achievement.

Tunnel out of trouble

What with all the pre-Autumn Statement flak about failing to bring down the deficit, George Osborne must have been tempted to hide in a tunnel. Instead he prompted the announcement of a new road tunnel under Stonehenge and possibly another under the Pennines between Manchester and Sheffield. These were just two of ‘100 new road schemes, 84 of which are brand new today’ adding up to £15 billion, alongside £2.3 billion worth of flood defences in 1,400 locations and a new garden city at Bicester. There was even £100 million for cycle paths. It all sounded so Keynes-ian that I wondered whether the Chancellor had cut out my recent item about the ‘New Deal’ impact of the Hoover Dam and circulated it at cabinet.

Of course almost all these sums of money had been previously announced, even if ‘brand new’ details had not — and the Treasury famously loves to keep lots of road schemes on the drawing board because hardly anyone objects when they’re cancelled to ease budgets at a later date. But voters often judge governments by whether infrastructure is in good order: value for money is easier to see in civil engineering than in welfare distribution. The promise of wider motorways, and even ‘smart’ ones, is a small consolation for more austerity to come — and perhaps for the fact that high-speed rail may never arrive at all.

Blank Friday

You were probably all busy last Friday wrestling cut-price televisions out of each other’s supermarket trolleys, and had to spend the weekend recovering; or perhaps there really are very few major companies that pass the reputational test I set last week of ‘getting the basics right’. Either way, nominations to were disappointingly sparse — but I feel sure there are good companies out there you’d like to tell me about: the mailbox remains open, and I’ll list the results in our New Year issue.

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Show comments
  • i know you don’t write the headlines, but have you really demonstrated that ‘cheap oil looks like being a disaster’? according to the economist this week, at the pump prices were less than $2 a gallon in the US for first time for 4 years. so, yes, bad news for superyacht makers, premier league footballers and oil companies, but for the rest of us, surely, it’s good to have cheaper commodities.

    • Blindsideflanker

      Indeed, what we have here is a cry of anguish from loaded.

      The economy has been skewed to the interests of a small section of society. Low oil prices are a cost of living cut for the majority, in light of what has gone on in recent years that can’t be a bad thing.

  • davidofkent

    Where is the disaster? There is uncertainty, as is often the case. So what? The fact is that reduced oil prices have always been good for the world’s economy. Some oil exploration will have to be put on hold. Shale oil exploration can wait. The shale will still be there in a couple of years when the oil price has recovered. Better that economies get a boost when they need it – right now.

    • La Fold

      I can actually see Shale gas exploration and production rise due to its relatively low cost of extraction.

  • Ed  

    In Canada gasoline prices have dropped by a quarter in a month, They’re now down to levels we haven’t seen in five or more years, and there’s almost nothing bad about it. While the oil industry in Alberta and Newfoundland is certainly retrenching, it’s by no means gutted.

    Meanwhile, commodity prices across the country have stalled or slid. Basics like food are no longer under upward pressure. The media has tried a couple of “oil prices cause damage” stories, but it’s just not washing. This is a profound good news story.

    As a very pleasant aside, it’s also causing serious problems for Iran and Saudi Arabia.

    It’s almost unalloyed good news. The media hates it. Frack on!

    • JohnCrichton89

      It’s not causing problems for Saudi Arabia, their extraction costs are quite low and they could survive and thrive on much less than we currently pay them per barrel. In fact, the falling oil prices almost insure that fracking will be put on the back burner for their main clients………. us.

      They would just have to go easy on the solid gold palaces and buying rows of houses in regent street…….. they could still push out their brand of Islam and fund terrorism quite easily.

      • Ed  

        I’ll take what I can get in the way of harm to the oil terrorists. I do know that marginal production is being mothballed in Alberta particularly, but that’s all it is; mothballed. It’ll come back online if (when) the price rises again. I’m not too worried. Cheap oil is also wonderful for the Western economy overall, particularly the working class and the poor. I know the media desperately wants to find the cloud around the silver lining, but it’s not really there.

        • JohnCrichton89

          I could, quite easily, find that cloud. Russia.
          With it’s economy on dire straights, Putin will become desperate and unpredictable………. we are talking about a guy who just annexed part of his neighbours country becoming desperate.
          Even if Putin didn’t do anything too rash in his desperation, we will not be better off if/when Russia enters a depression. We can only hope he scapegoats someone else, preferably some Muslim theocracy with a lot of oil that he might take.

          • MountainousIpswich


            Better to have a bomb go off than sit for years under your house giving out deadly radiation.

            Let him make his move, openly and find the whole world turning against him, not just America.

          • Ed  

            Good point. Putin was already behaving badly, however, and the less money he has to do it with, the better. Also, the more domestic pressure on him to go. Of course, we should in eastern Europe be displaying much more backbone than we are, but again, that was already a problem before the oil price drop.

            Overall, I’ll take the low oil prices.

  • The Hun

    If cheap oil is bad then the logical conclusion is that the higher the oil price the better. Would you prefer a price of 200$ or higher? Why just limit it to oil? Let us do everything to increase prices of food, clothing, industrial products, etc. If a loaf of bread would cost 10 times more than now it would do wonders to the economy! Pull the other one.

  • berosos_bubos

    Let the private sector build a load of toll roads then hand them back when paid for in future years.

    • EricHobsbawmtwit

      The sounds like PFI to me. We don’t like PFI, do we.

  • Blindsideflanker

    Those decrying the uncertainty that low oil prices may bring are those who are alright thank you very much and don’t want the boat rocked in their comfortable world.

    One of the forces of the markets is forcing renewal on the complacent. Just as a rising oil market price forced those who had become complacent about low energy prices to change their habits, the reverse is now true, and that some lessons are being imparted on those who had become accustomed to an easy living high energy prices gave them should not be protected from the lessons they now have to learn.

    As for the argument that low energy prices with bring deflation, well I think that a load of baloney, as is the argument of job losses for people attending to the needs of the oligarchs, for more people are likely to find work as a result of the boost to the economy low oil prices gives us than will lose them servicing oligarchs.

  • Blindsideflanker

    Its bad news for the SNP and Salmond, who without a high oil price underwriting their socialist ambitions find themselves shorn of an economic argument.

    Salmond may also find he re enters Westminster without any power to influence anything, for his independence threat is now all bluff and no substance.

    • La Fold

      yes the 45er zoomers are being particularly quiet about this. Close shave for the Fat Tartan Duce.

      • Blindsideflanker

        I am surprised those who were arguing in favour of the Union aren’t hammering home this economic lesson. They seem to be treating the ‘fat tartan dunce’ with respect, rather than taking this opportunity to flatten him and his agenda.

        • La Fold

          Dont worry, some of us have. But we’re dealing with Nationalism and not common sense here. It genuinely worries now whe nI see people fawning over charismatic leaders and attnding “rallies” to celebrate nationalism.

        • La Fold

          In fact just had this doozy on facebook

          ” la fold, tax revenue from a $70 barrel (althogh OPEC are telling us it’ll rise back to the $100+ mark in 2015) spread over 4.5M people or 60M people? I assume you can do the maths on that?

          Add to that our Utopia never NEEDED oil revenue to make it work.”
          Yes, he did indeed think that a $70 barrel made $70 in profit but he also now tells us that they didnt need oil at all. Strange bunch.

          • Blindsideflanker

            Indeed, the fiscal sums of the nats are a very flexible commodity, which are manipulated to suggest that their socialist paradise is there to be had under any scenario.

            I wouldn’t be at all surprise to hear the nats claim that Scotland was a contributor to England’s finances the day we handed over money to pay off Scotland’s Darien debts.

  • La Fold

    I have worked in the oil and gas industry for the last 15
    years, from slinging tools into crates to being self employed and running crews
    on jobs in the North Sea.

    The funny thing about this oil “crash” is that in reality
    this is returning to jus the pre 2008 levels expected of oil (in real terms it
    has dropped further than 2008 levels due to inflation caused by the huge amount
    of QE we done, so in comparative terms its about $42-45 dpb)

    Brent crude is just under 70 dpb while WTI is somewhat lower at just under 65 dpb. The drop has been caused by a number of reasons. The obvious one is that production has
    exceeded demand.

    Demand from Western Europe has dropped significantly as
    these countries try to adapt more green energy. However the biggest drops in
    demand have come from China and India as their industrial and manufacturing
    demand has finally started to plateau. Put in that Saudi Arabia and Qatar are
    refusing to turn their taps off as well as giving discounted prices to their
    Asian customers only compounds matters. They are protecting their market share
    instead of shoring up the inflated price of oil. (The tinfoil hatist inside me also
    believes the Sauds and the Qataris are doing this as this will inflict economic hardship on
    Russia who supported the Shiite-Alawite Assads in Syria and most likely with the support of the States)

    Add into the fact that Brazil, South Sudan, Mexico and Venezuela are not closing their taps
    either its easy to see how we have came to a glut.

    The UK north sea sector average breakeven cost for a brownfield site is around the $50 per barrel mark however there is the high tax placed on oil company profits and the
    fact that as North sea oil is becoming ever more expensive to produce making it
    less likely a place for investment. We have to drill deeper, further aware from
    the shore and develop new technologies. Norway will suffer as it relies heavily
    on its oil exports. The Norwegian sector is over twice as expensive to operate
    in and already had seen billions of dollars of further investment already

    The South China sea is already shaping up to be the next big
    oil boom. Operating costs are so low there due to the cost of labour and the
    low costs of hydrocarbon retrieval that all the big players have been
    scrambling over there for the last 3 or 4 years and why China has been so
    aggressive it asserting its territorial claim over the region.

    The highest that most fields have produced is around 33% of
    their reserves. We simply cannot get to the rest of it. Previously before technologies
    like Artificial Lift, Water Injection and directional drilling, the average
    yield would be less than 20% of the entire well reserve.

    However with the low price of oil this investment into
    exploration, new infrastructure such as rigs and pipelines and probably most
    important new techonology will simply not happen. The EPCs will simply turn the
    tap off to a trickle, try and keep their reserves stored and wait for price to
    return up, assuming that they do by any significant margin.

    The biggest reason you wont see huge immediately drops at
    the pump is because much like fuel gas that energy companies use, they buy
    their oil in huge tranches at a time so even though the price of a barrel may
    have dropped around 40 odd percent, they are still selling oil tha had cost
    them 115 dollars per barrel.)

    In the long run, lower oil prices are essentially a good
    thing. Its not just for car owners but for everyone. The cost of everything
    should become significantly lower. The number of industries that rely on
    hydrocarbons to produce such things as pharmacuticals, plastics, fertilizers,
    chemicals, roads etc. Also manufacturing costs will drop as will the cost of
    exporting and importing as the cost of freight forwarding by air, road and rail
    will drop. In fact sea freight may even see a return to form as the prohibitive
    fuel costs will have been negated.

    Saying that, it will be a bad time for myself and others
    like me who are employed by the oil and gas sector as the taps are turned to a
    trickle, operations are stripped back, and investment and new projects are put on
    the back burner or scrapped altogether. But hey that’s the way the cookie

    • jusmastuff

      Will they at least give you unemployment how will the workers of the shale be handled by their company’s? i hope everything works out for you have a happy new year

      • La Fold

        Ill put in into context, I am a contractor (so essentially self employed and bill my time to whatever companies gets me to do work for them) so my employment is heavily reliant on the price of oil as contractors are pretty expensive and the first to go in times of financial hardship.
        Yes being a UK citizen I’d be eligible for unemployment benefits etc when my contract finishes tomorrow funnily enough. As for shale to be honest Im not sure. If they are working in the UK in case of redundancy they would be eligble for unemployment. As for anywhere else i dont know.
        Cheers, hope you have a good one yourself, Happy Hogmanay!

  • rtj1211

    Cheap oil is a disaster for oil exporters, particularly those with higher cost bases.

    It is a triumph for countries who import lots of the stuff.

    First rule of trade: ‘every trade’s a winner and every trade’s a loser’……

  • nogginthenog

    “The oil price slump is turning into a disaster because … because … I’ll think of a reason another day.” The facts are simple: the Saudis are punishing Russia and Iran and driving shale capacity out of the industry. When they reckon they’ve done enough to meet those three objectives, they will restrict supply again and put the price back up.

    • ptaipale

      … and then the shale bounces back sooner than ever, because now the technology is there, people have been trained and resources mapped.

  • jusmastuff

    i call BS so the top people aren’t getting richer while poor people can afford food is a bad thing screw investors. i cant even afford to take my kids to school or the park half the time. if the world could function on 1.19 gas all the 90’s why cant they now. just sayin. let the government give them the stimulus package instead of giving me foodstamps

    • jusmastuff

      to funny my L is sticking had to edit everywhere that had an L

  • greggf

    “Cheap oil has finally arrived – and it looks like being a disaster…”

    Certainly it’s a disaster for the financing of the large public sectors in Western governments because that is based on small but steady and corrosive inflation, whereas now falling and lower Oil heralds deflation (already showing in Japan and coming soon to the EZ)…..

  • Diggery Whiggery

    If it is a disaster, it’s only because supposedly intelligent captains of government, finance and industry have been legislating, lending and investing based on peak oil, thereby giving up on one of the most basic principles of capitalism i.e. the price mechanism.

    Whenever the state tries to manipulate the price of anything, be it money through monetary policy or energy through environmental policy, it can only hold the illusion for so long before the market grabs back control. The only reason this does so much damage is because governments don’t know how to butt out in the first place.

    Either we give up on the prized ‘stability’ and allow the market to function and accept constant but minor instability or we hold on to the illusion and feign bemusement as the economy booms and busts.

    Stability is simply not possible.

  • MaSek12

    Hello! Wake up dummies. The Saudis dropped the price of oil so that ISIS could not make so much money from the selling the oil they steal. When the crISIS is over prices will shoot up again. Cheap oil is only temporary.