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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 278-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE Scottish Affairs COMMITTEE
Implications for Grangemouth of BP's Plans for its Petrochemicals Business
Tuesday 25 January 2005 MR RALPH ALEXANDER Evidence heard in Public Questions 146 - 171
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Scottish Affairs Committee on Tuesday 25 January 2005 Members present Mrs Irene Adams, in the Chair David Hamilton Mr John Lyons Ann McKechin John Robertson ________________ Witness: Mr Ralph Alexander, Chief Executive, Petrochemicals, BP and Chief Executive Officer-designate, NewCo, examined. 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 per cent 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 per cent 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 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 the 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 co‑operation. 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 Varney: 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 delayer 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 Ian 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 pharmaceuticals 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 per cent 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 Lloyd Brown 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. Q160 Ann McKechin: You have alluded to the fact that NewCo's headquarters will be in Chicago and obviously BP's headquarters are in London. How do you envisage NewCo? As a British company with interests in the US or as an American company with interests in Britain and in Europe in general? Mr Alexander: I envisage NewCo as an international company that is deeply distributed and would be part of the local fabric, no matter where we were. Let me explain why we ended up in Chicago in the United States. The company is quite large; it would be among the FTSE 30, FTSE 50‑type scale. The equity markets in Europe just are not big enough to absorb this level of new equity, and the US market is. Secondly, in the US the equity markets tend to pay a premium for petrochemical companies of around 10‑15 per cent, so the overwhelming decision to maximise value and allow us to sell the company was to be in the US equity market. This is important for Grangemouth because if the day comes where we need to go and get capital we are in the biggest capital market on the planet, and I think that is quite important. So that is where the US was. Chicago was picked because we have a lot of employees there and we were keen not to move employees just for the sake of moving them. It is disruptive to their families, and we do not think we can build a great company having disrupted families and upset employees. We want them motivated and interlined, so Chicago seemed like a natural place. I have spent 12 years of my life in the United Kingdom; I have spent a lot more time in Scotland than I have in Chicago, both on business and on holiday; I would expect that to happen in the future, so I do think the model is we are going to be listed in the US, we have to work under US governance, but I would love the people of Falkirk to believe we are one of them. Q161 Ann McKechin: You seem to be alluding to the fact that if anybody was talking about a major flotation or a separation in the petrochemical and oil and perhaps gas exploration market, they would naturally be looking to launch this through the US market. Are you saying there is a problem in terms of the absorption of the equity market in Europe? Mr Alexander: It depends on the sector. It is not true of all sectors. Q162 Ann McKechin: Financial sectors ‑‑ Mr Alexander: Pharmaceuticals is another sector where it does not work, and it depends on the scale. Because this is such a big company, we just felt that the appetite would be very difficult. Q163 Chairman: So companies like BP and Shell are slightly out of the norm because they are based on the European market? Mr Alexander: On new equity. That is a big sector. If you add up Europe in the oil and gas sector it is I believe, on capitalisations of Europe versus North America, about equal if not bigger in Europe because of the success of BP, Shell, Total and E&I. Q164 Mr Lyons: On the question of the Rigidex plants, when we visited Grangemouth it was clear there was a nervousness that that closure might well lead to concerns about the future of the O&D plant. What would you say to allay those fears? Mr Alexander: First of all, I wanted to tell the people decisions we make when we make them. Rigidex has been on the board; its future had been discussed for a while; and I wound up by saying "We are willing to be transparent and open" and the entire workforce knew that, so we declared that is what it wanted to do. It still has time before it shuts down - and by the way it is not the only thing we have done; we are also shutting down a plant in Pasadena, Texas, also selling a BDO plant in Ohio, we are supporting a big joint venture in Europe and Belgium and France in polystyrene, so we are doing things to strengthen the company so we can compete. In the case of Rigidex, while we knew it was happening we stopped hiring and replacing jobs; it was natural attrition, and talking to Robin McGill just yesterday and the people involved in Rigidex it is likely that there will be no forced redundancies as a result of this, and we will have enough space within Grangemouth to absorb the workforce. So people are assured and they are being told either this week or next week or over the next few weeks, if not today, where they will live post the Rigidex world, so I think we did this frankly in a way I would like to do in the future, with the workforce planned for with least disruption for them, and make this as easy a transition as we can. Q165 Mr Lyons: You talk about consolidation. Against that background, what would people think then, if NewCo take over the new O&D plant, that it might close down eventually and move off to, say, Germany or the US? Is there any guarantee about that situation? Mr Alexander: There are no guarantees but all I can tell you is there is no interest for me in that happening. Grangemouth is such a huge part of this company; it must succeed. We must give it its personal time; we must focus on it. In the BP world, Grangemouth was a small fraction of the company. It is a huge part of mine and my guarantee is we will do everything we can to make sure that Grangemouth is a robust plant. People in the workforce will understand what they need to do and they will do it. Q166 Mr Lyons: But, not to be unfair, you would be prepared to go to the workforce and say "To secure the future of Grangemouth it might well be necessary to transfer to Belgium or the US"? Mr Alexander: I do not think so. To be fair I would say "To secure the future of Grangemouth you have to be the best in the world at what we do. The future is in our hands". I cannot control competition, and you would not want me to be able to do that; it is the way our system is modelled and that is how commerce works, but you can do things to us; you could put us out of business. I believe there is a risk that government regulation may be the thing that creates the biggest competitive barrier for Grangemouth. For example, air regulation; SOX emissions. We comply with every Directive in the EU. Our plant at Lavera can do it and our plant at Grangemouth can do it, but the way the United Kingdom is interpreting those Directives to its monitoring unit it becomes unclear whether or not we can do it. There is no other technical solution beyond what we have invested. So here is a case where because we have interpreted in this country a EU Directive for whatever reason, and I am sure there was good reason for it, in a very tight way it disadvantages that site, despite the fact we reduced SOX emissions by 70 per cent and we are investing in a new sulphur removal plant as we speak. We just cannot keep doing that, and I cannot control that. I am sure this was a balanced decision but I think we will see very clearly in the future when these decisions are made what the consequences are. Q167 Mr Lyons: I think we want to give assistance where we can and where we can help and so on, but can you give reassurances about the employees at the refinery at Grangemouth? Mr Alexander: What would you like me to say? Q168 Mr Lyons: That they are fine? That they have absolute security and are protected? Mr Alexander: As it stands today I see no reason why they are not, but I am not a fortune teller and I cannot say what the future holds. If hydrogen becomes the fuel in the UK then the oil refineries go away. 20,000 windmills - who knows? I cannot control the future. But we have a refinery that competes well, is sitting in a good place, it has been heavily invested in as a cracker, and it should be able to run. Interestingly, one of the things we have invested in that creates a real competitive advantage for that refinery is its ability to run high sulphur crudes, but we cannot use it as much we thought because of the air emission issue, so we are having to back off and buy more expensive crudes, which is putting us as a disadvantage relative to my other plants sitting in France so, again, it is a system and I just need to be clear with you about what we have to do. Q169 David Hamilton: You have basically answered the question about the importance of Grangemouth to the Scottish economy, not just the people in Falkirk but in Scotland Grangemouth is the single biggest customer so it has that knock‑on effect all the way through. When we spoke to Robin McGill and asked him whether there was anything we could do as parliamentarians, he actually said in one point that there was an interpretation of regulations coming through, and it might be worth, Chairman, sending the information out in relation to that, and why you feel there is a difference in interpretation. Recognising the importance of the company, and indeed of the workforce in Grangemouth to the Scottish economy, what other things do you feel that the United Kingdom government could do to assist in relation to ensuring the long term future of that plant? Mr Alexander: I think I have two comments only. One is that I take very seriously the relationship of Grangemouth to Scotland; that to me is a very high duty for us to make sure this plant runs and is robust. You will see relative to BP that we will probably pursue a policy of community affairs very much more locally. You should not expect us to be pronouncing our view of global warming and Kyoto and so forth; you should see us more active in the local community. I really want the local community to say "We want these jobs, these people, this plant, because they are good for us", and that is true of Koln and Grangemouth and Lavera. As it stands now the only thing right in front of us is air emissions. Falkirk has had the consultants come in, they agree there is not an issue but the parent has to opine on this, this is an area that we need to be clear about. It is right in front of us and it disadvantages us not just globally but against Europe, which I do not believe was the spirit. I do not want to be the type of executive that comes in crying wolf all the time; there are things we have to do ourselves; but as we develop Grangemouth and its operating capability, in which I would expect to see significant improvement over the next two years, now we need to think about how do we grow flexibility? We may need to build export facilities. The day will come, maybe not in my lifetime, where the Forties is not able to provide all the gas we need and all the feedstocks we need, and we need to have the capability to go in and do other things, keep the plant robust. As new sources of supply come in from Norway and so forth we need to make sure we are not disadvantaged. We are no longer part of the Shell complex, the BP complex, we are an independent chemical company, and that will put us at an disadvantage against companies that are integrated like Exxon, Shell, BP. So we may need some more voice in the future, but we do not know that yet. What I would like to say is we will not be reluctant to raise issues with you because I believe it is in our mutual interest that Grangemouth is a success, so working this in the back office and the back room, not consulting and getting help does not feel like the right thing to do. It is something we need to be quite transparent, or worried about. Q170 Ann McKechin: Talking of other competitors and the integrated sites of Exxon and Mobil, do you see any movement by those companies to separate out their petrochemical business, or do you see at the moment that they will be seen as integrated plants? Where do you think physically will be the nearest competitors? Is there one, for example, in Norway or on the Scandinavian coastline which will be in direct competition with you at some point? Mr Alexander: On the integration point I was talking more towards the upstream immigration. We do not have an upstream company so if I am developing a pipeline from Norway from Norwegian gas fields I do not have one. Shell does, Exxon does and BP does, so we need to make sure the playing field is level so that you cannot get shut out. In terms of competition, our big competitors are, believe it or not, in the Middle East. They just have such an advantage. Right now China, for example, because it is the New Year has shut down, basically. They have stopped buying, so Middle Eastern plants are diverting into Europe. Because it is globally connected, it is not a local competitor any more; it really is a global competitor. But there are a lot of other European companies - Borealis, Basell, Shell - and Shell is investing with BASF in its petrochemicals company called Basell as we speak, so whether they go further into their R&D on the relevant side they have not announced. I have not talked to Exxon but they are pretty happy with their portfolio, I think. Q171 Chairman: Mr Alexander, we have exhausted our questions to you but, before I declare the session closed, is there anything you would like to say in conclusion, perhaps, that we have not covered in the questions? Mr Alexander: No. I think the questions were relevant to where we are. I hope this was useful for you and I look forward to our future together. Chairman: Can I thank you very much for your attendance here today and I assure you that your evidence will be very useful to us when we come to prepare our report. |