The great oil fiasco
George Szarnuely
The British National Oil Corporation, created in order to 'secure effective control on behalf of the British people' of the development of North Sea oil is an awkward mixture of tendentiousness and pretentiousness. Its objectives are vague in the extreme, since it fulfils mutually contradictory functions. The spirit in which it was set up was one of deep hostility towards the 'multinationals'. But it is there not merely to keep an eye on them — its ultimate aim is to set itself up as a rival oil company. So its chairman, Lord Kearton, is cast in two roles: that of the ruthless captain of industry as well as the guardian of the conscience of the people. He is not so much a poacher turned gamekeeper as a part-time poacher and full-time gamekeeper.
His selection was controversial. Why should a man with no experience or knowledge of the oil industry be entrusted to look after the nation's oil interests? The choice, however, was a wise one; as a former chairman of Courtaulds, Lord Kearton is well equipped for his role of baiting the 'multinationals'. His . colleagues on the board are, however, a strange selection, including men who have no experience and have not evinced the slightest interest in oil in the past. For instance, the board includes Lord Briginshaw; he is joined by Will Camp, Sir Harold Wilson's former public relations adviser who advised him to call the election in June 1970. On the board also is a prominent A UEW official in Scotland. The deputy chairman is Lord Balogh, of whom Mr Peter Walker has said: 'Few men have been so consistently wrong on North Sea oil as Lord Balogh'. Thus the BNOC is continuing the tradition set by the nationalised industries and other public bodies of creating employment for ex-politicians, ex-trade union leaders, ex-civil servants and exheads of nationalised industries.
The BNOC, in fact, is not the dispassionate unpolitical body its spokesmen claim it to be. It is perpetuating, for example, the myth that the oil belongs to Scotland. The board members, whom the Secretary of State for Energy was authorised to nominate, were rather tendentiously supposed to be 'familiar with the special requirements and circumstances of particular areas of the UK'. And a Scottish Development Agency was duly set up to steer profits from oil into Scottish regional development. Already the BNOC has been putting in orders for steel platforms for oil rigs in Scottish industries. Marathon shipbuilding, formerly Upper Clyde Shipbuilding, after more shop steward militancy, 'won' an order for an oil rig project. It has also been stipulated by the Government that the award of licences in the North Sea will be conditional on the willingness of companies to cooperate with trade unions. These conditions are difficult to reconcile with the bold claims of the BNOC managing director that the BNOC's task is 'not to create employment; it is to run an efficient oil company'. Union leaders have been predictably free with their advice on how best to achieve this. Private industry, they claim, has not invested enough. The BNOC must set the matter right. The Municipal Workers Union has demanded that the BNOC must either pressure chemical companies into building more plants based on North Sea feedstocks in Britain, or it must undertake the task of investment itself.
But the central weakness of the BNOC is that it has no clear functions. When questioned about this so many different answers are put forward that it becomes difficult to untangle all the mutually conflicting claims and counter-claims, Unkind men in the oil industry insist that the letters BNOC stand for British Nonsense Over Crude. We have heard for instance that the BNOC will be a 'fully fledged oil company' and that it will 'safeguard national interests', yet the proof that it will achieve either aim is difficult to establish.
The BNOC clearly has ambitions to move into downstream operations: that is, it wants to refine, market, and sell oil. Challenging the 'multinationals' in the markets of the world in this way is an ambitious undertaking. Nevertheless, Lord Kearton has said that it would be .. oddness extraordinary if the BNOC did not move into downstream operations'. He has also declared that the BNOC will not engage in any price-cutting war. The major question here, though, is: Do we need a state-owned oil company? Mr Berm and the Labour left naturally answer in the affirmative. However, since the Treasury, after rights issue and takeovers, now own just under 50 per cent of BP and the Bank of England, after taking over Burmah Oil's holding, owns 20.5 per cent, BP is already virtually a state concern. BP has four UK refineries and has 15 per cent of the British market. And, in any case, what is a state-owned oil company supposed to do? There is no shortage of companies wishing to exploit North Sea oil. In the fifth round licence awards, one hundred and thirty-three companies applied for the seventy-one blocks and part-blocks on sale, with only sixty-five receiving awards. Under the terms of the fifth round licence awards the BNOC acquired a 51 per cent stake in each licence which means that it has to put up 51 per cent of the development and exploration costs, paying as it goes rather than on a hire-purchase basis. This seems an unnecessary burden on the taxpayer.
The BNOC also has participation agreements with companies whereby it has an option to buy Si per cent of the companies' crude which will be sold back to them on condition that it is refined in Britain. The companies involved include Shell, Esso, Mobil, Texaco and Occidental. The BNOC does not actually put up a penny, because it supposedly pays a market price and then sells it back at the same price. The arguments justifying this extraordinary commercial transaction are many, the most important of which is the claim that the 'multinationals', who know no country and whose only allegiance is to their shareholders, are extremely flexible and can shift their tax liabilities. Consequently no satisfactory taxation system can be devised whereby the Exchequer receives adequate revenue from North Sea oil — despite the fact that the Government 'take' from any oil found will be about 85 per cent with 70 per cent coming via taxes and royalties (paid in kind) and 15 per cent from the half stake in the equity from all fifth round discoveries. It is argued that the American maiket is the most lucrative in the world, and is likely to be even more so in the 'eighties, and that in order that the 'British people' do not let their oil slip throtigh their fingers, the Government must insist that 51 per cent of commercial discoveries be refined in Britain. This argument is unsound. If it is indeed the case that the 'multinationals' can run rings around governments, then in order to ensure that most of the oil is refined in Britain the Government has only to offer a reasonable price; but all this could have been done through the offices of BP.
However, the important effect of all the participation agreements will be that the BNOC will have a direct say in North Sea operations. For instance, the BNOC by acquiring the NCB stake has entered into a consortium with Gulf Oil and Conoco (a subsiclary of Continental). It will act as a commercial partner with a seat at the 'decision-making' table. With Shell and Exxon, however, the agreement states that Shell and Exxon will teach the BNOC the rudiments of the oil industry and that the BNOC will have access to trade, investment and policy planning information. For their part the BNOC demand an 'effective voice' and, in fields where other companies have interests, a vote in the 'development and operation of the fields and associated facilities. So by providing the BNOC with personnel, with training in crude oil supply, transportation, and refinery operations, the 'multinationals' will be rewarded by the BNOC keeping a constant check on them.
Another argument much favoured by the BNOC is that, because it is only profitable to refine 34 per cent of North Sea oil in Britain, the participation could be used as a lever by the BNOC to make the oil com panies change their refinery capacity. But to reconvert a refinery, from being mainly applicable for the heavier Middle East crudes to the higher grade North Sea oil, would cost at least £200 million.
The important point that gets overlooked is that Britain, in common with the rest of Europe, is over-refined. At the moment British refineries are working only at 60 per cent capacity and this situation is likely to continue until the 'eighties. And this leads inevitably to the main argument against the BNOC. There is no doubt that the BNOC plans to become a commercial oil company, although Lord Kearton does not plan to move into downstream activities till the 'eighties. But there is not the slightest commercial argument for building a refinery in Britain; Shell and Exxon already have seven with a total capacity of 68 million tonnes and BP has four with a capacity of 30 million tonnes. Even if the BNOC buys a refinery chain from a lame-duck American concern (an expensive enough operation) reconverting it to take North Sea oil would be an extravagance that Britain can hardly afford. The general air of uncertainty that the BNOC has created could make the 'multinationals' sell their 51 per cent of extracted oil to the BNOC, thus leaving the British market at its disposal, and refine their 49 per cent elsewhere.
The Labour Programme of 1976 urges that the BNOC be given a 100 per cent stake in future licences where appropriate, and that it should develop downstream activities as soon as possible. But it has never been clear how the BNOC is sup posed to achieve this. There is no doubt that the Labour left would like to see the BNOC setting itself up in competition to the `multinationals'; having bought their expertise, their commercial discoveries, and their rigorous tuition, it plans to undercut them in the domestic market. But BP has already made it clear that if the BNOC enters into competition against it, it will immediately pull out of its refining and marketing schooling arrangement. The Shell and Exxon participation statement is remarkable for the Way it skates around the whole issue of Whether the BNOC is a potential comPetitor. There is no doubt that pressure on the BNOC to move into downstream operations and to become more active, will grow.
On less ambitious days the BNOC claims that it exists merely to exercise supervisory functions. For this reason the Secretary of State for Energy was authorised to nominate two civil servants on to the BNOC board. Thus the BNOC claims as its functions: restricting the rate of depletion, identifying bottlenecks, improving the interchange of expertise and knowledge among companies handling crucial field developments, speeding up development, making sure that small fields are being adequately exploited since companies tend to concentrate on the larger fields. There is no doubt that all these things are very important. However, under existing legislation the restriction of the rate of depletion of the reserves is not the corporation's job but that of the Department of Energy. The other monitoring functions the BNOC seems hardly capable of performing. Once again, it is difficult to understand why BP could not have discharged the Government's responsibilities. Thus the BNOC has two possible roads of development before it: either it becomes a spokesman for the 'multinationals' or it enters into competition against them — in which case the consultation, training and schooling would cease. At the moment the BNOC is in the absurd position of wanting to have it both ' ways. As Tom King, the Shadow Energy spokesman, has pointed out, the BNOC is both an umpire and player in the same field. Accusations to the effect that the two civil servants on the board are there in a spying capacity have been heard. How could this be otherwise? Civil servants will often learn of confidential information in their departmental work about companies who might compete with the BNOC. And although the BNOC. participation agreement with Shell and Exxon states several times that 'commercially sensitive information received in [that] advisory capacity . . . is not disclosed otherwise than to HMG and is not used by BNOC otherwise than in discharge of its advisory function', the oil companies are not unnaturally worried that such information as the quality of drilling results will be passed on by the BNOC, perhaps inadvertently, to its joint licence holders. Commercial undertakings and regulatory functions cannot be exercised by the same body, since one of these duties requires the strict impartiality which the BNOC by its nature cannot possibly have.
The British National Oil Corporation, then, seems to do little good and probably much harm. It has created uncertainty in the North Sea. Its precise functions have never been clearly stated, and it is undertaking tasks which it is unlikely to be able to perform effectively. Its cost to the taxpayer is likely to grow for no purpose. There seems little point in the Tories preserving it, at least in its present form. A case might be made for its existence if its functions were much more limited. HoweVer, while it exists, left-wing demands for a greater state role in the North Sea are likely to grow.
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