Profile of an Engineer: Part 1 – the 20 year veteran

I thought I would share some musings on differences in the UK economic and social environment as different generations grow up, and the effect it might have on their approach to the future.

I hasten to add that all the characters here are completely made up. This is a deliberate caricature based on some of my own observations but I hope it’s thought provoking at least.

Ok, so meet Peter, he’s got 20 years experience and is currently head of Subsurface at Big Oil Co.

He was born in 1976 so he’s 42 now. He graduated in Geology in 1999. He was taught computing on a Vax mainframe.

The University computers still ran DOS, not Windows. He had to go to the library to research material for his dissertation. When he started work Geology and Geophysics were separate departments and colour pencils were still being used to colour in seismic renderings.

This is what the UK economy was doing throughout his whole time in education.

The FTSE 100 between 1976 and 2000

The prevailing attitude of the time was “we have worked out the formula”. Mankind rocks! You do this, you get that. Put money in the stock market, it goes up. “The end of boom and bust!” (link).

Companies were run by “Command and Control”. You start at the bottom and you work your way up. You do your time. You wear a suit to work.

Peter started work in 1999 and the world turned upside down! This is the FTSE 100 during his career.

The FTSE 100 between 2000 and 2018

So pretty much the day Peter left full time education the formula stopped working! Don’t get me wrong here, I don’t mean the laws of physics stopped working. I just mean the accepted wisdom he was infused with during his education didn’t hold true anymore.

Peter has now lived through his 3rd downturn in the Oil & Gas industry. The ups and downs of the cycle are driven by macro economic trends completely out of his control. The industry itself is slow to change.

Peter recognises the signs of cynicism appearing in his attitude. He fights them because he know’s cynicism kills enthusiam! He is looking for ways to genuinely make things better. He’s still got 20 years before he retires. He needs to prepare is company for the future and that means recruiting great talent. How can he attract them to an industry that’s still talking about how to do that same things it was 20 years ago, and thinks it’s funny when the person opening a “Hackathon” jokes that they can’t spell the word and don’t know how to turn on their iPad thing (link).

Spreadsheets are so 2008!

VisiCalc – the first spreadsheet https://en.wikipedia.org/wiki/VisiCalc

A few weeks ago, at a talk I was giving at a Finding Petroleum conference (link), I quipped that the Oil and Gas industry has been run on spreadsheets for over 30 years. Someone in the audience joked back during the questions afterwards that I wasn’t quite right, it was actually Powerpoint! They had a point, but here’s the reason I think spreadsheets have been the reason for the 20 years of progress between 1980 and 2000 and why they are not the right tool for the next revolution*.

Here is a chart of the FTSE 100 index between 1978 and 2017.

There was a period of about 20 years of near exponential growth between 1980 and 2000. I think there is a strong case to be made that this was thanks to the arrival of the spreadsheet. The first spreadsheet, VisiCalc, was released on the Apple platform in 1979. The first version of Excel came out in 1985 but it wasn’t until the release of Windows 3.1 in 1992 that things really took off.

So why are they responsible for this growth?

Because now we had a tool that allowed us to do much more complex analysis of things. Everyone could build their own model of the world in a spreadsheet and optimise it. Goal Seek let us “solve for X”. Now we could model the past and use it to predict the future – hooray, and off we merrily went. We got really good at planning and offline analysis and developed a centralised Command and Control approach:

  • We better modelled and understood what was happening
  • Data was sent back for offline analysis & understanding
  • Then we sent the instructions back

That was great, but I believe this way of working came to an end with the Dotcom crash in March 2000, 19 years ago today as I write this. The spreadsheets had got too big and our faith in the models we built was misplaced. It’s easy to make errors in formulas but is is very difficult to audit a spreadsheet someone else has built.  Complex spreadsheets make it look like we know what’s going on, and the person with the most convincing argument (best spreadsheet) at the time wins. But it doesn’t mean the answer on the spreadsheet is what will actually happen!  

Every model comes with implicit assumptions and what is not in the model is just as important as what is.

The world has changed. There is now a distrust of centralised decision making and a rebellion against command and control.

Spreadsheets are a great tool and will always be around, but I think we need to change our thinking in order to advance again. We need to move away from the old command and control style. 

We must recognise that we don’t actually know the future and we can’t define exactly what we want/need up front.

We must recognise that we don’t actually know the future and we can’t define exactly what we want or need up front. We have to take small steps, get knowledge, fail fast and learn quickly.

Oh, and why did I pick 2008? Well that was the financial crisis caused by a lot of people doing stuff based on models (most probably on spreadsheets) that they didn’t actually understand.

——

* This is based on a presentation I wrote with Gareth Davies in 2017 and presented at the Digital Energy forum in Aberdeen on 14-March (link).

BAgain

BA has had another IT disaster, it appears to be becoming a habit.

Quote from today’s FT

Neither the customer emails nor the airline’s public statements to date have offered any explanation for how BA managed to lose such vital information. Some critics of the airline have asked whether its parent IAG has focused too much on cost-cutting and failed to invest sufficiently in technology. This is its second big problem in two years — last May, BA’s global IT system crashed grounding more than 700 flights and leaving 75,000 passengers stranded. To be fair, the two problems are almost certainly unrelated except as part of a general window into BA’s IT. An airline spokesman insisted, “This was a sophisticated criminal act. We are investing more in cyber security than ever before and will continue to do so.”

The article can be found here: https://www.ft.com/content/a301f46a-b4df-11e8-bbc3-ccd7de085ffe

Just as a reminder, here are the pieces that I published last year [link] [link]

The fourth industrial revolution demands investment in information technology in order to reap the benefits of efficiency, BA has been trying to cost-cut its way to success. It will be left behind if it doesn’t get with the programme.

Image credit: https://edition.cnn.com/videos/travel/2015/09/08/las-vegas-british-airways-plane-catches-fire-hampton-beeper-erin.cnn

 

 

BA – Blinking Awful?

I haven’t posted for a while as I’ve been very busy working with clients on industry 4 projects, but the recent IT outage for British Airways (BA) requires a response. (for more information on the BA IT outage follow this [link])

In August 2016, I examined the cost of the IT outage to DELTA airlines [link]. I calculated that this must have cost DELTA at least $60m [correction:  with related costs the post says it would be $100m]. In the wake of the BA story the FT published an article over the weekend [link] looking at the top 5 IT outages. They tell us that DELTA believed that it cost them at least $100m.

We’ll wait and see what effect that BA outage has on their revenues – but IAG (the owner for BA) declared a profit of about £2Bln for 2016, so there is a chance that this will have the possibility to knock 10% off the earnings for 2017.

Now – in an eerily similar set of circumstances to Delta – the company had recently outsourced their IT and they experienced a “power surge” and the back-up system didn’t work.

The following seem likely to me:

  1. The digitisation of business has happened and is accelerating, IT systems are not peripheral to operations they are now crucial.
  2. The creation, management and care of these systems are critical, but it appears that there is no-one on the senior leadership team who is on the case.
  3. The focus on “business cases” for IT investment don’t consider the transformation of current business operations, nor the risk of “not investing”

This posts talks about the need to prepare non-linear business cases [link].

The Oil and Gas industry (and others) are becoming rapidly digitised and will require different investment decisions around IT. It is no longer appropriate to concentrate on cutting costs, driving standardisation and outsourcing the activities. In operations “IT” is now critical to business success. This means good investment decisions drive competitive advantage and loss of IT capability can cripple the business.

Business-case for non-linear world

I wrote recently about the Delta data meltdown and how the investment in technology had not been made sensibly. I’ve seen this in a number of organisations – where status-quo seems cheaper than updating. It’s an argument that would not be made for safety or passenger comforts but appears to be OK for back-office IT systems.

The world has moved on and it now relies on data as a core asset and capability. With the 4th industrial revolution this is only going to become more reliant on data and understanding how to make risk-based investment decisions will be key.

InfoWorld report that Cloud technologies could have made even a traditional business-case work [Link]

Here is my post about DELTA [Link]

This is what Delta’s CEO had to say [Link]:

“it’s not clear the priorities in our investment have been in the right place. It has caused us to ask a lot of questions which candidly we don’t have a lot of answers for.”

 

New industrial revolution

Bill gates was quoted in Forbes today predicting a new industrial revolution. [link]. This is in his review of Robert Gordon’s new book. I agree with Bill and if you’d like to know more about the Robert Gordon (old school, grey hair, suit and tie – 1945-1980 view of business) and the post-internet view of progress have a read of my primer here [link].

Bill gates points out three key examples as Robotics, A cure for Alzheimers and Material science. I like the way he boils it down so simply. I was influenced by books in my youth including Alvin Toffler’s future shock which I read 30 years ago, it was already a classic then [link] (Poor Alvin died last month), books by Robert Beckman [link],  Edward de Bono[Link] and James Dale Davidson [Link].

I think there are two books that anyone should read if they want to prepare for the next big trends:

Industries of the Future, Alex Ross [Link]

Second Machine Age, Brynjolfsson & McAfee [Link]

Image by Kyle Bean

Schumpter’s Cayman Island holiday

Schumpter was an economist who theorised on the creative destruction of capital, replacing activity in old industries with activity in new ones. I’m not an economist, but to me it is an interesting time now because it all seems to be a bit broken – the oil industry is being knocked down by external (temporary) market distortions and governments are unable to enact public policies that might help because they don’t have access to the tax base they once had – and have been busy expanding the spending of what they do have on other things.

Today’s FT was a classic issue – with stories exploring some hot topics:

Accelerated Decommissioning in an article titled – “North Sea fields face end of production” [Link]

A piece examining the dynamics of adjusting to low oil prices – “Oil Producers retool for lower prices” [link]

A call for support and regulatory intervention into the North Sea shared infrastructure – “Premier Oil urges action to maintain North Sea fields” [link]

A story about BP’s accounting profit – “BP Shares tumble after $2.2Bn fourth-quarter loss” [link]

The WoodMac analysis says that 50 North Sea fields could cease production this year. Of course they will need to apply for COP (Cessation of Production) agreement from the government:

Prior to permanently ceasing production from a field, Licensees will have to satisfy the department that all economic development opportunities have been pursued. To ensure that all issues are addressed thoroughly before agreement to CoP is required [link].

The article goes on to speculate that some of the lost revenues for exploration service companies might be replaced by decommissioning revenues. While this might be true on an aggregate revenue basis, it’s unlikely that you can use a seismic survey vessel in this process so there will be capital assets that become worth a lot less, even if employment has some life-lines.

The dynamics of low price adjustments are explored by Amrita Sen and Virendra Chauhan from Energy Aspects [link] – they make a great point that one of the cause of high costs in the last up-cycle was shortage of skilled labour (sometimes referred to as the big crew change [link] ). Many of the current workforce (upwards of 250,000 people [link]) have been laid off and many will leave the industry permanently. This may set-up a cost-dynamic that will increase input prices and damp capacity for the inevitable upturn, potentially leading to even larger commodity price spikes and surges in service company profits?

The call from Tony Durrant, Premier CEO asking the regulator to step in to protect shared infrastructure in the North Sea is one that I’ve supported on this site for a while. It’s not just power that they need (the CoP mechanism may already mean they have it) it is one of public policy, subsidy and – ultimately – courage. We saw David Cameron promise £250m to Aberdeen (aiming it in entirely the wrong direction). But that is really small potatoes, which – to mix a metaphor, and pay homage to John Major – will butter no parsnips.

This is not really subsidising or investing in infrastructure: For instance if we look at Indonesia:

The government’s plan includes constructing power plants that would supply 20,000 megawatts of electricity in the next 10 years and 1,095 kilometers of new toll roads to move goods faster across the vast archipelago. The projects will be concentrated in six “economic corridors” or growth centers: Sumatra, Java, Kalimantan, Sulawesi, Bali-Nusa Tenggara, and Papua- Maluku. The price tag: $150 billion over the next five years. But the government can only finance 30 percent of the cost; the rest would have to come from the private sector. [link]

If we look at Cross-Rail, a train to move people slightly faster from Maidenhead to Lewisham has a budget of around £15Bn [link] (which is 60x the subsidy for the North Sea)

In the 1970’s the Oil industry was seen as a way of providing tax revenues to the UK – you might argue that much of the Thatcher-era economic achievement was predicated on Britain becoming a net exporter of oil which, combined with the sell-off state industries, increased the tax take and enabled the unwinding of the debt accumulated by previous governments.

Most people don’t realise that Oil companies don’t pay just normal corporation tax – PRT is charged on “super-profits” arising from the exploitation of oil and gas in the UK and the UK’s continental shelf. After certain allowances, PRT is charged at a rate of 50% (falling to 35% from 1 Jan 2016) on profits from oil extraction. PRT is charged by reference to individual oil and gas fields, so the costs related to developing and running one field cannot be set off against the profits generated by another field. PRT was abolished on 16 March 1993 for all fields given development consent on or after that date. [Link]

Corporation tax supplementary charge manual here [link]

It’s perhaps as well that these sort of measures are in place because Oil companies (and service companies) are very well practiced in the art of reducing corporation tax – either by legitimately moving costs to high tax areas and profits to low-tax ones, or by – as BP has done today – booking as big a loss as they can (when it’s expected – a practice called “taking a bath”). They do this to provide a shield for future profits against tax. A practice similar to that used by the banks to shield their current earnings from the losses of the financial crash of 2008 [link]. Many of today’s tax “dodges” have been heavily utilised by our industry.

We’re seeing a situation where an industry (one of our few industrial and engineering success stories of scale left in the UK) being decimated by a temporary market swing and there is nothing that the government can do about it because the new industries which are very profitable pay little tax and where disruptive industries are supported by the “subsidy” from investor’s tax free cash piles sitting offshore.

Take for example UBER and it’s disruption of local tax-optimising (sorry mate only cash) taxi drivers:

A recent article in The Information, a tech news site, suggests that during the first three quarters of 2015 Uber lost $1.7bn while booking $1.2bn in revenue. The company has so much money that, in at least some North American locations, it has been offering rides at rates so low that they didn’t even cover the combined cost of fuel and vehicle depreciation.

An obvious but rarely asked question is: whose cash is Uber burning? With investors like Google, Amazon’s Jeff Bezos and Goldman Sachs behind it, Uber is a perfect example of a company whose global expansion has been facilitated by the inability of governments to tax profits made by hi-tech and financial giants.

To put it bluntly: the reason why Uber has so much cash is because, well, governments no longer do. Instead, this money is parked in the offshore accounts of Silicon Valley and Wall Street firms. Look at Apple, which has recently announced that it sits on $200bn of potentially taxable overseas cash, or Facebook, which has just posted record profits of $3.69bn for 2015.

[Link]

Interesting times indeed.