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.

Subsidy on the agenda?

Last year I suggested that there were strategic reasons to maintain North Sea production. The system of interconnected assets and their cross-reliance on each other means that it will be in the common good for “UK PLC” to maintain key infrastructure despite it being a poor proposition for individual operators.

For goodness sake – we subsidise the tracks that our trains run on, I can’t see any argument for the creation of economic value there that does not apply to our North Sea processing and export network. [Link]

So I was heartened to see that David Cameron is in Aberdeen with what the FT called an emergency investment package. I was less pleased to see what the promised £250m investment was to be spent on:

The prime minister will promise a new “oil and gas technology centre” in Aberdeen to fund future research, including into innovative ways to extract oil and gas.

The package will also help expand the harbour and support the city’s pharmaceutical and agri-food industries to try to help Aberdeen diversify from its reliance on oil and gas. [Link]

Well that’s not exactly the response I was thinking about – seems to be a rather poor investment case for UK PLC. Luckily we’ve formed another task force.

His visit coincides with the first meeting of a new task force of senior ministers set up to deal with the issue, chaired by Amber Rudd, energy secretary. The group will include Anna Soubry, business minister, and David Mundell, the Scotland secretary.

Together with the OGA there seems to be plenty of civil servants looking at the issue.

True to form – the FT actually got to the nub of the issue with its parting shot:

Many in the industry are also urging George Osborne, the chancellor, to relax the rules around who pays to decommission oil platforms when they reach the end of their lifespan. Many argue that the strict laws making anybody who has ever owned a particular platform potentially liable for its eventual dismantling are discouraging companies from buying up ageing assets and investing in them.

One energy banker said: “One of the things that could really help is if we see more takeover activity, with companies buying either struggling rivals or older rigs.”But the main thing stopping that right now is that nobody wants to take on potentially massive decommissioning liabilities.”

The BBC covers his visit here [Link]

Despite the decline in oil prices there is risk capital available but to take this opportunity irequires a few critical pivots. They are:

  1. Decommissioning liabilities stopping the trade in assets to lower-cost operators
  2. Un-certainty surrounding enabling infrastructure operated by others
  3. Mis-alignment of interests between partners meaning operating committees stopping development plans

Perhaps rather than expanding Aberdeen Harbour we could change the rules and use this £250m to help sort these out? At least it would be a start.

What do you think, is the proposed disbursement the best use of the money?

Break your business CIA style

So Ian Stewart at Deloitte comes to my rescue today with a pointer to an excellent piece of research.

During the Second World War the CIA published a how-to-guide for citizen saboteurs living in occupied countries. Among various ways to disrupt machinery etc. were some excellent examples of how people were advised to prevent the smooth running of business and stopping progress. Many of the pieces of advice remind me of the practices I have witnessed first-hand being business as usual at oil and gas operators.

Including advice for Strategic Management:

(1): Insist on doing everything through “channels”. Never permit short-cuts to be taken in order to expedite decisions.

(2): Make “speeches”. Talk as frequently as possible and at great length. Illustrate your “points” by long anecdotes and accounts of personal experiences. Never hesitate to make a few appropriate “patriotic” comments.

(3): When possible, refer all matters to committees, for “further study and consideration”. Attempt to make the committees as large as possible – never less than five.

…..

(5): Haggle of precise wordings of communications, minutes and resolutions.

….

(7): Advocate “caution”. Be “reasonable” and urge fellow conferees to be” reasonable” and advoid haste which might result in embarrassments or difficulties later on.

And Advice for Operations

(1): Demand written orders

….

(4): Don’t order new materials until your current stocks have been virtually exhausted, so that the slightest delay in filling your order will mean a shutdown.

(5): Order high quality materials which are hard to get. If you don’t get them argue about it. Warn that inferior materials will mean inferior work.

….

See more and gasp in admiration of the foresight here: [Link] – the full manual is available direct from the CIA here: [Link]

Resource nationalism

A colleague whose opinion I respect, had an interesting reaction to my recent article “Can we get the last drop“. He said that perhaps I was being rather nationalistic, perhaps you agree?

Unlike the points made in this Forbes magazine article, when I say that I don’t want to enrich other countries I don’t mean we should act like Venezuela and nationalise assets. I mean that I want any wealth created by the extraction of the resource to be available in this country (as private, taxable profit). I prefer not to see national treasure being exported to other countries in return for a product that we already have. Further, I think if we don’t act soon we won’t be able to act at all.

When I reflected further I realised that every country where I had worked except the UK and main land Europe, there was a general acceptance that energy and resource policy was of national interest. Even the USA has trade policies that govern the export and import of crude oil and refined fuels. Of course, countries like Saudi Arabia and Kuwait have export policies that not only move the commodity price but also are used to generate political power by choosing which countries can receive exports and where downstream investments will be made.

I am no politician nor would I claim to be a student of history. I am not an economist. I am an engineer and a business advisor. To me it is obvious that now we have an opportunity to extract resources from our reservoirs. There is a small time-window before the necessary supporting infrastructure is removed. As a country and an industry we are fiddling while Rome burns. If we do not act quickly then narrowly defined considerations will result in our opportunity being forever lost. I don’t think this is right.

We need to find a way to extract the last drops. Do it in a way that respects commercial reality while protecting the environment. If we don’t then we’ll end up exporting more of our treasure than we need to and all the people who rely on (or contribute to) our state treasury will be poorer.

It’s a challenge but I am sure we’re up to it. What do you think?

(Diagram from slideshare.net with thanks to AngloAmerican reference: http://www.slideshare.net/angloamerican/anglo-american-resource-nationalism )