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.
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.
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 email@example.com 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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