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Business Blunderers #1 - cont: it gets funnier

Saturday, April 5, 2025 6:41

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Continuing the story of Sir Archibald Forster’s Big Business Blunders …

For a period in the 1980s, the old monopoly British Gas had been paying ever higher prices for new long-term purchase contracts from North Sea gas producers: it was a sellers’ market. This came about from an archetypal monopoly planning cock-up: they’d contracted vast quantities of gas in long-term contracts during the huge boom of the late 1960′s, priced in single-digit pennies per therm. Being thus sated, they’d bought very little in the 1970s. One day, they re-did the supply/demand sums and noticed – guess what? – a looming shortage! Owing to the low gas price and, at the same time, booming oil prices after the twin crises of 1973-4 and 1979, everybody was exploring only those hydrocarbon plays that looked set to yield oil. And new gas developments take several years to bring on stream.

So, being a monopoly and not caring what things cost (they know who’s gonna foot the bill, haha!), BG did the rounds, telling everyone that they’d be willing to pay more than 20 p/th – a gigantic price increase – for any new gas supplies that anyone could develop. (The output of an entire field would be sold under a single contract for decades of delivery, years in advance.) This sent every NS producer back into the vaults where they stored their old drilling logs, looking for long-forgotten gas discoveries they’d ignored as being totally uneconomic at those 1960’s prices. Sure enough, new gas fields began to be offered and, true to its word, BG started a price-ramp of several years for new gas that by the mid 1980s saw prices in the high 20s of p/th. A classic sellers’ market phase in the great commodities cycle.

Though no gas expert, Archie, headstrong Esso Chairman & CEO, somehow got it into his head there was no end to this ramp. Esso had enjoyed a couple of big sales at stonking prices in this period, and one of his JVs now had a couple more new gas fields to offer BG. Forster decided that he would triumphantly be the first to breach 30 p/th. He convinced the JV partners to go along with an eye-watering opening offer of 34p. Many of us were unconvinced, but were willing to go along for the ride. Unfortunately, thus emboldened, Forster flamboyantly guaranteed to his Exxon overlords that a price in the 30s would in due course be delivered. Sadly, he’d failed to notice the laws of supply and demand grinding slowly into action. High prices bring forth, errr, lots of supply; and he’d not heeded warnings that a glut was coming inexorably down the production-line.

When his hapless negotiators rocked up at BG, in response they got given a long and detailed list of new fields currently on offer. BG stated it would only need to buy a couple of these, and told them to go away and recalibrate their aspirations to less than half of what they’d walked in the door with. Yep, we were now in a buyer’s market.

Cue carnage at Esso: was this right? Why didn’t “we” see this coming? Etc etc – the usual search for scapegoats. It would have been fun to be a fly on the wall when Archie broke the fell news to his US masters; but BG was right: it was indeed sitting on a glut, as a bit of belated due diligence readily confirmed. For its new gas fields Esso subsequently settled for 16 p/th**. A salutary tale indeed.

So many life-lessons - as my 11-year old granddaughter would say.

________________

** There’s another lesson here. In order to “justify” asking for 34p/th, the negotiators had been primed to say that detailed engineering confirmed this was nothing more than was needed, based on the ever-rising cost of offshore development. Gosh, yes. The JV had indeed concluded internally that a price in the high ’20s was needed, even if 34 was taking the piss. So: how come we didn’t pack our bags and just go home, sadder and wiser, and leave the stuff in the ground?

Answer: huge engineering projects build up serious momentum (see HS2, Sizewell C etc etc). Big project teams had already been assembled: plum jobs awarded: a great deal of engineering work already done: we were not about to walk away from these sunk costs. The teams were told to take out their sharpest pencils and bring the costs down – massively. And lo – they succeeded! As I’ve found many, many times in business life, engineers, like so many of the rest of us, are basically lazy and complacent; and if they think money is no object, they pile it on. (“Safety” is the usual reason given for gold-plating – and who dares to second-guess them on that?) But if they are told their jobs depend on it, suddenly they are capable of amazing innovation and rationalisation! It is ever thus. Only a good kicking does the job.

Source: http://www.cityunslicker.co.uk/2025/04/business-blunderers-1-cont-it-gets.html

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