Examination of Witnesses (Questions 146-159)
MR RALPH
ALEXANDER
25 JANUARY 2005
Q146 Chairman: Good afternoon, Mr Alexander.
Can I thank you for attending this afternoon's session of the
Select Committee. Before we start on the detailed questioning,
do you wish to make any remarks? Perhaps you would like to update
us on the situation of any developments that have taken place
since we had Mr Conn before us in November?
Mr Alexander: Thank you, Chairman.
I would like to make a brief statement to put both Grangemouth
and the new company in context. My comments will be structured
around three points: first, it is important to note that Grangemouth
is a critical component of the new company's portfolio, as well
as of course a very important part of the Scottish industrial
base and we understand that; secondly, the site faces global competition
and must work hard to overcome some of its disadvantages which
I will touch on briefly; and, thirdly, we have to ensure that
Grangemouth operates in a truly level playing field against both
its global competitors and its European competitors, and that
is something you may want to explore. Our industry like others
is becoming increasingly global and increasingly interconnected
and that means that what happens in China 6,000 miles away or
in the Middle East has a direct consequence of what happens in
Grangemouth. In China you all know I am sure that industrial production
is growing at around 20% a year and driving massive increases
in demand of chemicals, so building plants close to that market
is an advantaged thing to do and, in fact, this new company is
involved in building a major cracker called SECCO, which is a
$2.7 billion investment in the Shanghai area which will start
up later this year. In the Middle East, of course, they sit on
a wealth of low cost feedstock. The molecule of ethylene which
is the basic building block for all our petrochemicals currently
costs about 85% less to be manufactured in the Middle East than
it does in Europe. This, of course, gives them a big competitive
advantage, and to the extent they have excess buyings, because
the Middle East is not a big consumer of chemicals, they export,
and if they cannot export into Asia they will export into Europe,
again creating more pressure on the European competitive context.
Turning to North America, it is a bit more insulated than the
Middle East because it is not as close so shipping distances are
further and that allows the US to hold on to superior margins.
It also has a very strong infrastructure in core areas like South
Texas where we also are a major player, and more importantly it
has enjoyed robust industrial production growth over the last
few years, much greater than Europe. Turning to Europe, it suffers
from a couple of disadvantages. One is higher costs which have
been accentuated with the weak dollar which has seen tremendous
pressure on cost; it is going much slower than the rest of the
world in terms of industrial production, and many of our plants
in Europe are smaller than worldscale plants, making it more difficult
to compete. It also tends to have, on balance, more burdensome
environmental regulation to deal with. When I put all that together
I do not believe these disadvantages are insurmountable when it
comes to Grangemouth; if they were I would not be here today,
nor would BP have invested around $1.3 billion over the last six
years into Grangemouth, but we are going to have to work hard
to overcome this. On the business side we must drive for superior
performance from Grangemouth. It cannot afford to operate at anything
less than best in class. With a major refinery, major crackers,
world class polymer assets, we think this is possible. We also
think we can make Grangemouth the most flexible cracker complex
in Europe, which I think is important. Given a world of high volatility
of feedstock and product prices, being able to flex around that
will be quite important. Of course, we have a very highly skilled
management team, a workforce, access to the North Sea, all of
which are significant strengths, but to realise its full potential
will require us to focus on the chemical sector and Grangemouth
itself, and we need a motivated workforce, dedicated to improving
our performance. We will achieve the focus because manufacturing
is our core business and we will not be distracted by other business
lines. With regard to motivation, I have been pleased with the
support I have received throughout the organisation. Our people
have much goodwill towards the new company and I intend to build
on that through direct and frequent communication. Realising Grangemouth's
potential will also require efforts beyond the site itself. We
must work with our industry partners and with political stakeholders
in Edinburgh, Westminster and Brussels, to ensure that we operate
in a regulatory environment that welcomes and supports business,
and we will not be reluctant to look for your help to tackle critical
issues such as regulations that disadvantage United Kingdom industry
relative to Europe, export logistics and, further down the road,
raw material supply. Let me turn to what remains my greatest priority.
We aim to build a great company and that means continuing our
persistent safety, health and care for the environment. For me,
achieving high standards in those areas is just as important as
achieving high standards in financial performance. That is what
great companies do. We will continue to work closely with the
local community; we will continue our close co-operation with
local authority and local enterprise in an effort to diversify
the local economy, and we will continue to emphasise skill development
at our sites. At the end of the day it is the people that make
the difference and provide the future. So from a personal point
of view I am confident that this new Fortune 150 company, of which
Grangemouth is such an important part, will become a robust competitor.
I will tell you what we need to do and I can assure you that we
will do everything possible to deliver what we need to do, and
I am sure I can count on you to support this endeavour. In terms
of updates from Mr Conn, as of January 1 we have now within the
BP group ringfenced this operation as a separate identifiable
piece of business, before it was embedded in other pieces of business,
so we call this operational separation. We now have a new organisation,
we have a chief executive firmly in place still within BP, but
we are on track building our own plans which are, in fact, in
action as we speak. We still intend in early April to legally
register the company as a separate subsidiary of BP in the US,
and we have announced since you spoke to Mr Conn the headquarters
for this organisation. A small headquarters will be in Chicago,
and we can go into why that is, if you like, and we are on track
to move forward with the IPO in the 4Q of 2005, market conditions
prevailing. We are in the process of integrating the refineries
into the Grangemouth complex as well as the Lavera complex in
France, so I think there is lots of progress, people are very
aligned, and we are running the company as a separate entity as
of January 1.
Q147 Chairman: Just as a matter of interest,
has the name of the new company been decided, or should we continue
to refer to it as "NewCo"?
Mr Alexander: People are getting
comfortable with NewCo but that is not the plan. As you might
expect we are doing a lot of work looking at different names.
Our current plan is to announce it in April. The day when we become
legally independent, become a new subsidiary, at that point we
will declare our name. There are two or three in the running right
now. We do have a new logo which at the right point I will share
with you, but that is where we are on names.
Q148 Chairman: Is it still BP's intention
that the Olefins & Derivatives business will be transferred
to NewCo some time during the second half of this year?
Mr Alexander: It is BP's intention
to go ahead and basically divest itself of and exit the Olefins
& Derivatives business through the initial public offering
process, essentially creating a new company and putting it into
the stock market. That is still the intention; that is what BP
intends to do. We are on track to do that.
Q149 David Hamilton: Are there any outstanding
issues about the sell-off which still need to be resolved by the
management and unions?
Mr Alexander: Let me just say
I believe the unions and our people in them are quite on board
with what is going on. I think bringing the refinery to the Grangemouth
complex made a lot of sense to them: it enhanced the competitiveness
of Grangemouth, so, like I said, the goodwill has been phenomenal.
There has been a lot of constant meetings; we are looking at better
ways to run ourselves; we have taken out management levels within
Grangemouth. As it stands today I believe we are in very good
shape to continue that relationship.
Q150 David Hamilton: Talking about the
relationship, you addressed 400 of the staff and talked about
opportunities in the future. Will you continue with that personalised
relationship?
Mr Alexander: I think that is
really important. First of all, I started my working career driving
trains in north east United States as a union member and I was
quite struck in those years by how little management asked us
what the answers were, because they were smarter than us, but
of course if anybody had asked us we could have run the railroad
a heck of a lot better. That is a piece of history, my history,
that I believe deeply in. My personal view is that direct contact,
hearing from the horse's mouth what we are trying to do and getting
feedback is what we have to do. These are our people. I need all
of them, all 10,000 around the world, pulling in the same direction
to win this game, and that is what we are about to try to do.
I do not think there is any substitute for face time.
Q151 David Hamilton: Are there any issues
outstanding between NewCo and BP that you still need to deal with?
Mr Alexander: There are minor
pieces around legal documents, so that we can declare to people
who might want to buy the new company, shareholders, what is the
nature of the legal interfaces, so what type of supply deals we
might have with different parts of the company, and what type
of services might be provided in the short term. Those are all
moving and progressing right on track, so I do not see any significant
issues. Again, we are right on track to deliver separation in
April.
Q152 John Robertson: Mr Alexander, BP's
original intention was to disintegrate Grangemouth with NewCo
taking over the petrochemicals plant and BP retaining the oil
refinery, despite oil companies saying for years that an integrated
site was a better arrangement. Then, in November, it was decided
that the site would remain integrated. Why was the original decision
taken, and why then did BP change its mind?
Mr Alexander: I think the two
were just juxtaposed in the thinking. I think the refining strategy
going on was behind the petrochemical strategy. I personally believe
we could have captured lots of the integration through the right
relationships with BP had they kept the refineries, but I think
as BP thought about it some more it became clear that (a) they
did not need the refineries to support the fuel business and we
did the same with Lavera in France, and (b) that it was in the
best interests of the NewCo—and remember BP really wants
to see this company succeed because they are the recipient. Whatever
the shareholders pay for us BP gets, so their motivation is to
maximise the value and make this as robust a company as possible—in
listening to what people were saying at the site, but also looking
at the strategy it was clear that for us to have security of supply
running two integrated sites, one in France and one is Scotland,
made tremendous strategic sense and finally, as I became more
involved and spent more time learning, it was clear to me that
with an integrated site there were all sorts of synergies that
we had not taken advantage of. For example, even though we had
integrated in the past, there were too many factory managers;
there is now one. There were three commercial directors; there
is now one. We will run this as a single manufacturing site; we
will continue to de-layer and really integrate this, so I think
we will make good progress and I think those three elements are
why we turned it around.
Q153 John Robertson: From what you say
NewCo was originally intended to be a petrochemical company. Are
you ready to be an oil company as well?
Mr Alexander: I think we are going
to be a company that really manufactures hydrocarbons, so I think
the acquisition of a crude oil refinery and the running of it
frankly is very similar in terms of technology as running petrochemical
plants. At a personal level, if you look at my management team,
about a third of them grow up in refining and marketing so we
have the expertise and capability to do that, and my own experience
is very strong in refining and marketing, certainly relative to
my chemicals experience. So I think we are ready: we like what
we have, we think it has a lot of potential, and it gives us one
more set of things to have in our portfolio to strengthen Grangemouth's
performance.
Q154 John Robertson: It was explained
to us about your layers of management. Is your management team
now complete and are you ready to go forward with it?
Mr Alexander: Since we spoke to
Iain we have announced all the layers. I took some layers out;
my management team has built plans and has been in place for four
months, but if I go to Grangemouth we have announced a new management
team there so they are in place. So we are pretty much done. There
are still some vacancies on the margin but the management team
are in place both at Lavera and at Grangemouth and at sites around
the world.
Q155 John Robertson: Is that the same
for the workforce in general? You have done your cutting back
and now you are ready to go forward with the new company?
Mr Alexander: We have cascaded
down through the system and everybody has been told where they
are going to be. We have the team we want to play with, and that
is where we start.
Q156 Chairman: Is it still BP's intention
to retain control of the pipeline?
Mr Alexander: Yes.
Q157 Ann McKechin: Could you give us
some general indication about how closely you were involved in
BP's discussions to create NewCo, and perhaps you could also tell
us what hat you were wearing in the discussions, because you are
also a senior BP executive and now you are the CEO of a petrochemicals
business? Which hat were you wearing and how did you manage to
keep all the hats on with the Chinese walls?
Mr Alexander: I can tell you the
hat I was not wearing, which is the one I have today. At the time
I was running our Gas, Power and Renewables business which is
one of the four operating companies, and I understand if I still
had that job I may have been in Parliament today also talking
about gas prices, but instead I got this opportunity! BP's performance
in petrochemicals has always been something that has been reviewed.
If you think about BP predominantly roughly 60% of the assets
are upstream, exploration and production, the things you would
know BP for, in the North Sea and around the world. Petrochemicals
tended to be the smallest part of the company with gas now moving
very fast and growing very rapidly, so when we looked at it, given
the choice to invest if you were BP, would you put it in petrochemicals—we
are in the middle of the pack in performance—or would you
put it in the exploration and development of oil and gas, for
example, and it was pretty clear that we are really good at that,
so strategically that was the push, and I was in that camp. It
was not till after the decision was made that I had a conversation
with Lord Browne about my future and I really liked the idea of
doing this. It is a wonderful opportunity and I believe we will
make it very successful.
Q158 Ann McKechin: So the principal decision
was made before you were approached within the group?
Mr Alexander: Correct.
Q159 Ann McKechin: And then you were
presumably involved in the mechanics of actually forming the company?
Mr Alexander: Correct.
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