Examination of Witnesses (Questions 61-79)
MR IAIN
CONN
17 NOVEMBER 2004
Q61 Chairman: Good afternoon, ladies
and gentlemen. Before we start, can I inform you that there will
be interruptions to this session. There will be a division, we
think, around 2.31 and there may be other divisions as the afternoon
goes on. When that happens we are obliged to stop the Committee
to facilitate that division and we will stop for 15 minutes. Mr
Conn, can I welcome you back and thank you for attending this
afternoon's meeting in order that you can make a statement about
yesterday's announcement by BP concerning the Grangemouth plant.[1]
I know that you have rearranged your schedule in order to be here
today, so can I thank you for that and invite you to make a short
statement of probably no more than five minutes at this point
before we ask you some questions.
Mr Conn: Thank you very much,
Chairman. May I just say it is a pleasure to be back and I am
glad to have the opportunity of today. Very briefly, firstly the
context for the decision and the announcement yesterday. To recall,
in July I outlined the reasons why BP had made a global decision
to sell Olefins and Derivatives and that affected half of the
Grangemouth site. Because it was a global decision it left a lot
of issues unanswered, including, indeed, as many of you had pointed
out and so had our union colleagues, how we were going to run
Grangemouth best for the sake of Grangemouth and for the workforce
and interface and strength of the local community and the manufacturing
base in Scotland. Since that time, we have been looking at strategy
along three areas. The first one is what will this new petrochemicals
company need as regards feedstock security, that is the chemical
feedstock it uses in the chemical plant, and which comes from
the refinery? The second thing we have been looking at is BP's
refining needs around Europe and how many refineries we need to
supply fuel. The third thing we have been looking at is Grangemouth
and Lavéra, which is the other refinery involved in France;
how would we best run these as a single unit maintaining the integrated
value which I undertook to you that we would do? But I also said
that there were many unanswered questions. After some time we
decided that the new chemicals company needed feedstock security
very badly from a strategic point of view. BP did not need to
own and operate Grangemouth and Lavéra as long as we could
secure fuel supply from them, and there was a lot of sense, if
we could find a way to do it, to keep Grangemouth as a single
integrated site. When you take these three things together it
is clear that not only does BP not need to own the refinery but
actually the new chemicals company should own the refinery, and
that was the announcement we made yesterday. I am sorry that it
took a long time because clearly it would have been nice if we
had thought this all through in April but strategy tends to happen
one step at a time and we wanted to do a bit of listening, we
wanted to get it right, as I outlined on 13 July. A few more key
points and then I will stop. I would like to draw your attention
to some of the points we made in the written submission. Firstly,
we are creating a company here. It is not like there is an existing
company coming over the hill to buy the workforce, it is actually
BP creating a company with the right level of standards, the right
balance sheet, the right terms and conditions and the right relationships
to secure the future of Grangemouth. That is entirely in our control.
The second thing is BP is not leaving Scotland. We have a few
thousand people involved directly and indirectly in our upstream
operations and in our marketing, our Aberdeen operations, and
535,000 barrels a day of North Sea oil depends on BP in Scotland.
We have plans. As you know, we have been expanding our marketing
in the southern part of Scotland between Glasgow and Edinburgh
and we intend to continue to do that. Thirdly, BP is going to
be a critical supplier to the New Company through the Forties
pipeline system and obviously BP's role in securing natural gas
and oil supplies in the UK will continue. BP will be a very important
customer of the New Company. It is in BP's interests to get this
right. There is a mutuality of advantage that we can create through
the right relationships. Fourthly, this is best for Grangemouth
as a site because, as many of our colleagues have pointed out,
if we can find a way to run it as one entity it will be much more
powerful and much more coherent. Lastly, Grangemouth is going
to be 20% of the revenues of this New Company, not 2% of BP. That
is a really important point. This New Company is going to be bigger
than British Airways, it is going to be the same size as Michelin.
This is a global company and Grangemouth will be right at the
heart of it. Lastly, some impacts: there are no compulsory redundancies
associated with this decision. Terms and conditions for our employees:
we have worked very hard since April to create an offer for our
employees where their terms and conditions and benefits essentially
will be unchanged and BP will guarantee to undertake that for
at least a year after the initial public offering and that mean
two years from now. Investment plans: BP and the New Company are
planning to continue to invest in Grangemouth. We have invested
$1.4 billion in Grangemouth from 1998. The New Company will continue
to invest at an estimated rate of $120 million a year. We are
thinking about investment plans to expand some of the facilities
at Grangemouth around ethylene and feedstock acquisition in a
new dock facility. Lastly, there has been a decision connected
to yesterday's announcement to shut down one of the plants at
Grangemouth. I alluded to this last time I was here, I alluded
to it with the union representatives both at national and local
level, and we have decided to do this but, again, with no compulsory
job redundancies. We are confident that we can absorb those 75
posts associated with that over time within the Grangemouth site.
That is the end of my prepared remarks, thank you, Chairman.
Q62 Chairman: Thank you, Mr Conn. The
part that you are closing down, what do they do there?
Mr Conn: Rigidex is a polyethylene
plant, it is quite an old design. It has not been profitable and
for some time there have been a number of reviews about this plant.
BP has been simultaneously investing in Grangemouth, we built
a new polypropylene plant and another modern technology plant,
Innovene technology, at Grangemouth. Essentially, it is replacing
old, obsolete technology with new technology. We did the investment
first and now we are planning to close down the Rigidex facility
over time and transfer some of the activity to the continent,
but Grangemouth has had a lot of investment in advance of this
decision.
Q63 Chairman: So this part of your operation
is going abroad?
Mr Conn: You can think of it that
way, yes, but we have been making investments in similar products
in Grangemouth in brand new technology in advance of this decision.
It is not a very big part of the operation. There are 1,300 jobs
at Grangemouth in the refining and chemical plant and there are
75 associated with this plant. We believe that the majority of
those will be reabsorbed in the workforce because we have been
running quite light. Secondly, there are a few people who have
planned to retire. Between those two we are undertaking to do
it with no compulsory redundancies.
Q64 Chairman: The end product that you
have from this plant, which is now being transferred abroad, is
that something that is used on the continent or is it a product
that is used in the UK? Is it going to be coming back into the
UK as a finished product?
Mr Conn: Grangemouth's main market,
both in terms of much of the end product and in terms of the price
setting of the product, is the continent. I think I outlined to
you before that Grangemouth has the huge advantage of being connected
to the Grangemouth refinery and the pipeline and it has the disadvantage
of having to use ships to take the product across to the continent.
Those two balance out quite well but the continent is the destination
for much of that product.
Q65 Chairman: Maybe you can tell us how
the employees at Grangemouth have reacted to yesterday's announcement
as far as you are aware?
Mr Conn: I spoke to the complex
director this morning and also we had some feedback yesterday.
As always, the employees at Grangemouth have been extremely constructive
in their contemplation of new news and in their reaction to it.
I think it is different from the announcement we made in April
because people have had a bit of time to think about what we announced
in April, people have had real clarity on the terms and conditions
so, for instance, as I say, people's pension schemes are going
to be the same type of scheme with the same offer as BP's, we
are not going to have a two-tier workforce. All of these issues
have been clarified in advance of this. The refining employees
are obviously a bit surprised but I would judge that the overwhelming
reaction is a cautious relief that Grangemouth is not being split
down the middle and we have had supportive comments from our colleagues
in the T&G. And I believe we have listened carefully to what
the unions said here and what our employees have said over the
last few months. They have contributed to us changing our mind
on this decision and making a better one that will serve the site
and its ability to attract investment, to operate more effectively
and to treat the workforce in the right way going forward. Overall,
I would say cautiously constructive.
Chairman: Thank you very much.
Q66 Mr Sarwar: Are there any outstanding
issues about the sell-off which still need to be resolved by the
management and the unions?
Mr Conn: Firstly, if I start at
the global level. In a transaction of this size, preparing a company
for market, there are many unresolved issues and it is going to
take us another year to resolve them all. It is still our plan
to offer this company in an initial public offering. Obviously
that depends on the state of the markets at the time but that
is our plan. At the site level, there are many things still to
be resolved. I think we have resolved the three biggest issues,
to my mind, one of them being pensions, the second one being is
there a two-tier workforce or not, and the third one running and
operating in an integrated way, and that is good news. There are
many aspects of terms and conditions that we need to consult on
still. There are many aspects as to how the site is going to operate
that we need to consult on and we will be continuing the consultation
processes with our colleagues as we walk forward. There is a lot
to do but I think everything is a lot clearer now.
Q67 Mr Sarwar: Which are the main issues
that are still unresolved?
Mr Conn: I think exactly how the
refinery and chemical plant together now interfaces with the crude
oil supply for the pipeline, but we have got a basis for that
already and I think it is just a question of making sure it is
real and commercially viable for the long-term. How does the company
sell its fuel, which is not a core business for the petrochemicals
company, into the UK market? Aspects of terms and conditions from
things like share schemes and some of the other more minor terms
still need to be resolved. How is the shut down of the Rigidex
3 plant going to be conducted and what is going to happen to the
workforce there over time. Which salary benchmarks are going to
be used for the positioning of compensation. There are lots of
things but I think these are things that on both sides we feel
equipped to be able to talk about.
Q68 Ann McKechin: Mr Conn, I am sure
the staff will find your decision to keep the Rigidex site reassuring
but, also, you will appreciate that over the last few years at
Grangemouth there have been a number of decisions made which have
been unsettling, including one plant, the Rigidex 2 plant, which
was closed and the proposed replacement plant ended up being moved
to Belgium. In those circumstances, can you give any assurances
that once the New Company has taken over the refinery, there will
not still be a danger there that they will eventually close it
down and move operations of production elsewhere, maybe to the
continent or the US?
Mr Conn: I would make two points.
First of all, while you can say that the Rigidex volume is going
to Belgium, which is true, Grangemouth has replaced that capacity
with other large and modern invested production through polypropylene
and polyethylene over the last few years. The picture I want to
paint is this: a big complex like Grangemouth is a living thing,
it has been there since 1924, it has ties back to 1850 and the
1924 onwards period has seen many advances in technology. It is
an economic thing. For the good of the workforce, the Scottish
suppliers and the taxman in the UK, we have got to keep that business
making money. As the technology advances, parts of the technology
become older and, eventually, they do not make money, so you have
to keep replacing the technology and innovating all the time and
that is exactly what has happened with Rigidex and Innovene as
we have replaced these. A healthy chemical company continues to
shut down plant and build new plant and that is what I would expect
to happen. Grangemouth has had a huge amount of investment in
the last five or seven years and now I believe the focus needs
to be on making what is a world class plant run extremely well.
Q69 Ann McKechin: But these are the most
profitable grades and they have been taken out of Grangemouth
and put onto other sites. You do not understand that is a concern
to the workforce, that the more profitable elements are being
taken over to sites on the continent and, ultimately, they are
going to lose out.
Mr Conn: Without going into the
details, I would just point out that the grades may be profitable
but the Rigidex technology for producing them is not. Theoretically,
it may be a profitable business line, but doing it at Grangemouth
at that plant is not profitable. The only reason we are closing
it is because it is not profitable and we have reviewed it three
or four times in the last few years. I do take your point that
part of NewCo in Belgium is going to benefit from that activity,
but Grangemouth could never have done it at Grangemouth profitably.
You raised the point about the viability of the whole site, as
I said to Tony Woodley yesterday,[2]
as long as Grangemouth is connected to the Forties pipeline system
and unless something completely inconceivable happens to the world's
use of plastics, I cannot see there being any threat to the overall
viability of having a refinery and chemical complex in Scotland.
It is the only one and it will be important in the long run. I
think NewCo's relationship with Scotland, in developing this business,
will be very important and also to BP.
Q70 Mr Liddell-Grainger: Your treasury
operation, how do you operate? Do you operate in dollars, euros
or a bit of both?
Mr Conn: It depends what you mean
by operate in!
Q71 Mr Liddell-Grainger: When you do
your centralised treasury operation, where is that based?
Mr Conn: London.
Q72 Mr Liddell-Grainger: What is your
main currency?
Mr Conn: Dollars.
Q73 Mr Liddell-Grainger: Do you operate
in euros as well?
Mr Conn: Yes. We have costs and
some products in euros.
Q74 Mr Liddell-Grainger: Do you bill
from Grangemouth in dollars or pounds sterling?
Mr Conn: We bill from Grangemouth
in pounds sterling.
Q75 Mr Liddell-Grainger: Which is then
changed into dollars?
Mr Conn: Yes. We express our official
accounts in dollars.
Q76 Mr Liddell-Grainger: One of the problems
you have got is the dollar exchange rate, at the moment, is penalising
the plant.
Mr Conn: Certainly, it is true
that right now all European petrochemical companies are struggling
with dollar based pricing on products and euro and sterling costs.
Q77 Mr Liddell-Grainger: Following on
from what Ann has just been talking about, one of the things I
want to ask is, is the reason it has become unviable because of
the dollar problem?
Mr Conn: No. It is not.
Q78 Mr Liddell-Grainger: The timing was
about right, if you understand what I am saying, in the last three
years.
Mr Conn: I think the timing is
about right for a very different reason. The timing is about right
for the New Company. Let me give you an example. Thanks to the
efforts of the workforce and the way we have operated it together—which
is why our colleagues in the union were so concerned about splitting
it—this year Grangemouth is going to make hundreds of millions
of dollars of cash flow contribution. That was not the case five
years ago. In July, I pointed out that if it were not for the
efforts five years ago, Grangemouth would have an issue. Not only
is it making cash flow, it is doing it with a weak dollar. I believe
it says a lot for what this site is capable of now. Is it true
that European based chemical companies are suffering because of
the dollar exchange rate today? Yes, very much so.
Q79 Mr Liddell-Grainger: Therefore, is
it not better to possibly look at changing the way you operate
by using one currency instead of using the euro and the dollar
which would help the plant in Grangemouth in the longer term?
Mr Conn: Not really because the
market is global and it is set in dollars. If you are in China,
you are still selling chemicals internationally or buying them
in dollars. If you are in the United States you are selling and
buying them in dollars.
1 BP Press Release. Not Printed. Back
2
General Secretary, Transport and General Workers' Union (T&G). Back
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