“However did this happen?!”

I once worked for a company that was, by and large, run by a group of acquaintances if not actual mates.  The company was appallingly run, and survived largely on handouts from its parent company that did extremely well out of a monopoly position kindly granted to it by the government.  A feature of this company was regular reorganisations which saw the same dozen or so men (all of the same nationality) shuffled between the senior positions in HQ like a game of musical chairs.  Every year the financial performance would be woeful, the client feedback worse, and so action would be taken…which involved the people who’d presided over the mess thus far swapping offices in the same building.  Quite often a new position with a grand title would be created – Director of International Projects, for example (even though we had none) – but the same people remained.  Nobody ever got fired.  I visited the head office once, and found an open-plan office large enough that Plains Indians had set up in one corner in order to hunt buffalo in the other, but alas there were no actual engineers.  But around the outside were the managers’ offices, and there were plenty of these, and all were occupied.  It wouldn’t surprise me if I went back now, over 20 years later, and found the same people sat – dead or alive – at the same desks.

With the oil price nosediving by over 40% to hover around $60 per barrel at the time of writing, the reactions of those tasked with dealing with the fallout is instructive.  I already wrote about the investors forum I recently attended, in which a senior representative of a major oil company casually informed us that the strategy they’d followed for the last half a decade was being abandoned as unfeasible, and that financially they were in the shit.  Well, things haven’t gone much better for this particular outfit and they’re staring down the barrel of a serious cashflow shortage in 2015.  Unless their press releases are for some reason failing to mention a major reorganisation at the top, we have to assume that the executive management team have not done the noble thing and fucked off into retirement or jumped off the roof.  In other words, the market is expected to believe that the same people who have led the company to this point are the ones to be in charge of the recovery.

If an organisation gets bloated in the boom years, the sensible course of action in the downturn is to firstly get rid of all of the senior and senior-middle managers who are 2-3 years away from retirement.  Chuck them a redundancy package, grant them the full pension, and send them away after a nice farewell party, preferably one with free drinks.  Firstly you’ll be saving on salaries and benefits – these guys will be among the highest paid in the organisation.  Secondly, there’s no point in keeping them sat at their desks doing nothing for 2-3 years only to retire when the market picks up again.  Thirdly, a lot of them will quite happily take an early redundancy package, there’s a good chance they’ve made their cash, the kids have moved out, and the mortgage is paid off and they’ve been waiting for just such an event.  And finally, you can promote the younger ranks of managers to the senior positions who will bring freshness, new ideas, energy, enthusiasm – and without needing to pay them much more than they were on before.  You may want to keep a handful of senior managers around, especially at board level, and it would be a very bad idea to start applying the same concept to your technical staff.  But that’s one of the major steps to getting your costs down when the market turns sour.  Another advantage is when the upswing occurs, you have a relatively young and dynamic management in place to take advantage.

What you don’t want to do is keep huge swathes of greying senior managers in situ and start firing the lower ranks.  I heard a story once from somebody who worked in the Indonesian office of a major engineering contractor.  They were losing money hand over fist, and so the team of 7 or 8 senior managers with lucractive expat packages all met in the boardroom to decide what must be done.  After much debate, they came up with a solution: fire the tea lady.  They could all make their own tea from now on.  So they did, and saved $65 per month.  Only a few days later there was an awful stench coming from the toilets.  It turned out the tea lady also cleaned the toilets, and since she’d been fired they were starting to reek.  And so they brought her back.  Only later did the managers responsible for getting the business back in the black come to understand that the best way to go about it was for all of them to quit.

I heard another story this week that a senior manager in an oil company which needs to make cost cuts in the region of $5-10bn boast that they had saved $75k by dicking with the travel policy, $300k by dispensing with free lunches in a European subsidiary, and $400k on potted plants.  That last one was the best.  Aside from the fact that an oil company spending $400k on potted fucking plants speaks volumes about the management, these numbers are mere rounding errors when placed against a target measured in the billions.  Yet these were quoted with pride as evidence the management are engaging in some serious cost-cutting.  They clearly have no idea of the scale of the task ahead of them; it’s the equivalent of holding up a dollar bill you found in the pocket of an old suit when the bailiffs are at the door looking to repossess your house.  Anything less than figures in the hundreds of billions are meaningless in the context.

There are several oil companies in this situation: financially distressed, yet stubbornly holding onto their senior management, the very same people who stumbled into this mess and clearly have no idea how to get out of it.  In my opinion there are too many oil companies around right now, and we can expect to see several being snapped up by larger or better-run rivals (Repsol’s purchase of Talisman has already kicked things off).  What may surprise this time around is one or two big names ceasing to exist as independent entities: rumours are circulating that Shell intend to make a move on BP, although that one has been doing the rounds for years and in any case, there seems to be no end in sight for BP’s liabilities over Macondo.  It is also my opinion that there is one too many supermajor in the industry for the coming decades, but more on that later.

Getting back to people long-in-the-tooth sticking around and promising to fix things after they’ve fucked them up, we had Vladimir Putin giving his annual address this week:

Mr Putin accepted Russia had failed to diversify its economy for the past two decades and relied too heavily on its oil and gas exports.

No shit!  And whose fault is that, Mr President/Prime Minister/President for the past 15 years?  That sentence reads like the extract from a resignation speech, but Putin, like our oil company execs, has no intention of going into retirement.  Their egos simply won’t let them, and so it’ll be more of the same in a downward spiral of painful decay and disfunction until the inevitable collapse occurs.

Meanwhile, in Nigeria, hard times mean the introduction of banana-republic laws:

Buyers of foreign currency must use that money within 48 hours or be forced to sell it back at the rate set by the central bank.

Speculators are betting on further falls in the naira by buying foreign currency in the hope that they will be able to buy more when they reconvert their money back.

In November, the CBN devalued the naira to 168 against the dollar, but its action has not stopped it falling further.

The Central Bank of Nigeria (CBN) warned it would impose sanctions on anyone who did not follow its new rules.

There are good reasons why the Naira is falling so sharply:

Nigeria, which is Africa’s largest oil producer, receives 70% of government revenue and 90% of all foreign exchange earnings from oil.

And not only that:

In a separate development, Nigerian oil workers agreed to call off a strike that started on Monday.

A spokesman for one of the unions involved, Pengassan, said the government had given assurances that it would address union concerns over refinery maintenance.

This includes a renewed push to get a long-delayed bill passed in parliament, aimed at overhauling the industry and improving maintenance.

So when the market recognises that Nigeria is largely dominated by the lazy, feckless, and corrupt whose meagre importance depends wholly on the oil price, the oil unions threaten strikes and the government starts forcing people to sell foreign currency at rates convenient to them.

If anyone was expecting a grown-up response to the sliding oil price, they’ll be sorely disappointed.  To their credit, BP seem to be taking things seriously.


Comments are closed.