Scotland the Blog: Oil, Gas and Grangemouth: How management and unions can put their foot down too much in VERUCA World

Many of you will have heard the term VUCA. Our CEO Peter Cheese uses it regularly. It reminds us that the world we operate in is Volatile,  Complex, Uncertain and Ambiguous. I am often tempted to put a E And an R in front of the V maybe to stand for economics and the R for regulation. We would have VERUCA. To be honest that's the only thing I can find to smile about on a black day for Scotland.

Ineos the global chemical "player" as often described by city analysts, has announced the closure of the petrochemicals plant at Grangemouth. This busy town on the Forth is with  neighbours Bo'ness and Falkirk as close as you will get to a company town these days. The petrochemical plant is usually a key part of the efficient scale of the integrated plant. To be crude the oil refining part could also close. A VERUCA mindset is needed to make sense of this sorry situation.

>It seems negotiating in a Russian roulette style isn't just the tactic of militant unions.

The volatility is the fizzingly unstable market for petrochemicals of which oil and gas are just the core. Fixed to the global price for oil and gas this business is very marginal. Many of our members work in this industry and you don't have to spend long with them to know how volatile it can be. That's why BP spun off refining to concentrate on higher margin chemicals. They eventually sold their spun off operation to Ineos, who used cheap debt and private equity to build up refining capacity. Many other Chemical giants got out at the same time. On occasion this commodity end of the business can deliver bulging revenues and fat profits. But if the price of oil goes south these gains can evaporate. Maybe that is why an L&D Director form a Middle Eastern oil company I was talking to asked me if CIPD training is "good at getting cheap men!".

The Economics issue is related to that. Debt leveraged companies like Ineos trying to make money in this business are different beasts from majors BP and Shell. The new breed watch the screens tracking the global price of oil and constantly calculate which parts of their  capacity is making or losing money. Long term demand for oil if falling in the West with fracking and future fuels. That means the gas feedstock to the PC plant is more costly and the alternative of exploiting shale gas necessitates big investment. That investment is allocated ruthlessly. This why the R of regulation is important to understanding this issue.

Regulation and uncertainty operates in three dimensions. The product market which defines competition  rules and standards. Government regulation including tax and the environment, and in this case crucially labour market regulation. To be crude again unions try to regulate the labour market by negotiating terms and conditions and use the threat of industrial action and political influence  to challenge corporate decisions. However in this sort of product market owners are at best ambivalent and at worst openly hostile to unions. Normally unions try and adjust by adopting a partnership approach, negotiate no strike deals and building in efficient team working etc.  Therein lies the complexity and ambiguity.

Unite's involvement in the Labour party selection process and the suspension of its convenor as well as its generally militant strategy mean compromise is difficult. But they have backed down. There has been no strike and the necessity of a "cold shutdown" is to say the least disputed.  It seems negotiating in a Russian roulette style isn't just the tactic of militant unions. Unite gambled and won a pyrrhic victory to retain final salary pensions for new starters five years ago. They should have been thinking more strategically. Unions need to be much more savvy about the business they organise in. Sometimes ideology and conviction displace rationality. I myself was involved as a young railwayman in trying to close the Ravenscraig steel plant to support striking miners. It was even within the context of fractured industrial relations vindictive and daft. It's uncertain whether in this case the company is just forcing the issue to secure a lower cost base. Let's all hope that is the outcome.

However there is no ambiguity about the crushing impact on Scotland's economy. Economists estimate it will wipe 2 per cent off GDP.  Grangemouth's oil refinery supplies 70  percent of Scotland's petrol most of Northern Ireland's and a significant amount of the North of England's. The 800 jobs currently under threat and the 1700 given the refining plant is at risk, can be multiplied a dozen times with logistics and support jobs. Whatever happens Ineos's actions impact many more than its shareholders and Unite's  impact many more than its own members. Unite seem to be ready to accept the terms Ineos have put though members rejected the offer. The Scottish and Westminster government are working hard for a solution.

Let's hope minds are concentrated on both sides and everyone stops putting their foot down!

PS I do know how to spell Verucca properly!

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  • Perceptive, in a competitive global market there is need for long-term employee engagement so we can respond quickly to volatility:but how do get there?

    All too often unions and employers get the employee relations we deserve rather than builing trust and market knowledge.