Brent: Episode 2, Part 1 - Liz Bossley, Colin Bryce

Neil: Hello and welcome to The Price of Everything, a podcast that aims to shine a light on pricing. The cost of commodities, that's energy, food, and so on, is such an important part of our lives. But how are those prices actually calculated? Why do they move up and down quite so much? And what's next? The Price of Everything is the first podcast dedicated purely to how pricing works. My name is Neil Bradford, and I'm the founder and CEO of General Index, which is the world's first technology-led benchmark provider. Together with my colleagues from around the world and some special guests, we'll be taking you through how some of the world's most important commodities come to be priced, and what the future looks like for them in the age of climate change and the energy transition. Dated Brent is the world's most widely recognised price for crude oil. But why Brent? How did an oil field off the coast of Scotland become so pivotal in global oil pricing? My colleague, David Elwood, explores the history. David: It was our friends, the Americans, who went to the moon and returned with honour. But here, in Britain, in the North Sea, the oil industry has been to the bottom of the deep and has won not only honour but oil. Well, hello, everyone. My name is David Elwood, and welcome to The Price of Everything. And now those are the words of Margaret Thatcher delivered, obviously, not in her own indivisible voice, but mine, in a speech the former Prime Minister of the United Kingdom gave to the UK's Institute of Petroleum back in February 1985. The Institute of Petroleum was the forerunner to the Energy Institute, which, of course, as we know, as many of you know, is the organiser of the annual International Energy Week in London. Now, back in 1985, Thatcher would've been about halfway through her time in office. And it was also when oil and gas receipts from the North Sea for the UK's Treasury were at their peak. And, as we'll see in this podcast, Thatcher's politics played a significant role in the rise of the North Sea industry and the proliferation of London as a hub for oil trading. But before we drill down any further, let me introduce you to our two guests who will help guide us through our topics today. Liz Bossley and Colin Bryce. Liz is the CEO of Consilience Energy Advisory Group, having previously been head of trading, risk management, and shipping offtake operations at Enterprise Oil. She has acted as an expert witness in almost 50 trading disputes, and continues to participate in contract negotiations on behalf of clients. She's a true thought leader in the area of price formation and the development of international oil benchmarks. Colin, meanwhile, is a founding partner of Energex Partners. And before that, he spent some 29 years at Morgan Stanley. He was chairman of Morgan Stanley Bank International and co-head of Global Commodities and head of EMEA Sales and Trading at Morgan Stanley. And another claim to fame, he was also closely involved in the creation of the Intercontinental Exchange. What my guests both have in common, actually two things, in fact, is they were both at the same university together at the same time. And then, fresh out of university, they joined the British National Oil Corporation. And there'll be much more on this a little later in the episode. But just to say, so the BNOC, as it's known, was the UK state body responsible for managing North Sea oil exploration and associated trading. Liz and Colin, many thanks for joining us. Welcome to The Price of Everything. Liz: Hello, and nice to be talking to you. Colin: Thank you very much. Yeah, nice to be on as well. David: Thank you both. Well, perhaps just for our listeners, just to tie up and link back to episode one, so where we left things off with Dr. Adi Imsirovic, was we were heading into the 1970s. We'd spoken about the role that OPEC was playing and, perhaps, actually riding the wave of the market and not being so much of a price leader, a price setter. And that the market was evolving with much more spot trading activity going on. But there was also increasingly activity, exploration going on in different parts of the world, Alaska, but also the North Sea. And that really brings us to our topic today. And our loosely titled episode is North Sea Oil and the Early Years of Brent. And put dates around it, I'll say 1971 to 1988. And '71 is key because this was the start of the '70s. There was a lot of drilling activity and exploration going on in the North Sea. And just for our listeners, perhaps who are not familiar with the area of the North Sea, we're thinking here about the body of water between Scotland and Norway, Scandinavia. Both of you might have some thoughts on this. So obviously, at the turn of to the '70s, BP had a big find in 1970. But then, specifically for our area, in terms of Brent, Shell and Esso, they discovered the Brent Field in '71 and production started up a bit later in '76. What are your thoughts looking back at that period? There was a lot of geopolitical upheaval going on in other producing regions, parts of the Middle East. Was drilling in the North Sea by the majors, the BPs, the Shells, the Essos, was it a move, do you think, made out of desperation or economics? Liz, perhaps I might come to you first with any thoughts you might have. Liz: Yeah, I'm not sure desperation is the right word. I think it was a move made of the desire to make money, which at that time, early 1970s, we had a Tory government under Heath. We had seen oil prices leap up higher than we had seen before. And there was a desire for security of supply and to reduce reliance on other countries, particularly Middle Eastern countries. So when those early finds were made, it was pretty much wanting to make money and ensure security of supply. But the real big change came with the change of government from Heath to Wilson where there was a much more marked desire to explore for oil for the benefit of the UK population as opposed to for the benefit of the oil majors. So I think the introduction of the Petroleum and Submarine Pipelines Act in 1975, which set up BNOC, was really to say, "Good grief, we found oil. We didn't expect to. Now let's make sure that the British population gets some benefits from it." David: It was a bit of a surprise to the political class at the time. They weren't expecting this, or I suppose, perhaps, the actors drilling weren't expecting such a big discovery either. Liz: Well, that's right. When we started exploring for oil, it wasn't with any great expectation that we were going to find what we eventually did find. So it was something of a surprise, yes. That's my recollection at the time. But remember, I was a baby, still at university in those days. But that was my perception. David: Colin, you would take the same view? Was it naked commercialisation and desire to make money? What factors do you think were going on there at the time in the '70s? Colin: Yeah. Well, like Liz, I was still in secondary school at that point. But interestingly enough, my father was a tanker master, captain of the oil tankers with BP. And he spent a lot of time in the mid-'70s taking ultra large crude carriers that had been built in Korea and Japan on their maiden voyages, not carrying oil, but to run them directly up a beach to be scrapped because they were commissioned in the early-'70s when there had been a bunch of agitation from the producing countries. And then by the time they were delivered and ready in the mid-'70s, lo and behold, North Sea oil had been discovered. So I guess that tells you it was a surprise. Oil trading, as we know it, I suppose, started in the mid-'60s with people like Pinky Green and Marc Rich. And it was an activity where very few transactions were done. Maybe 5%, maybe less of the market was characterised by these little spot transactions. And much of it, actually, I think broked by people like Irwin Spooler, who had his [inaudible 00:09:47] brokerage established in Paris in 1966. And these guys were making, the brokers were making, $100,000 per cargo, so very lucrative business, even if the volumes were very small. And that really was the start. But it was only really post, I suppose, 1976 when North Sea oil came on, and when producing nations that started to nationalise and move away from the traditional lines of supply to the oil majors that the glut came about. And definitely, the fact that there was a surplus and a glut was the reason for the creation of companies like BNOC and the beginning of trading. And, as Liz mentioned, the political and economic circumstances in the UK were such that it was fertile ground to get going on. David: It's interesting what you were saying about the proliferation of spot trades. And I know there was a statistic in Adi's book, he notes that spot trades at the end of the '70s, just in over one year, that they rocketed from under 5% to around a quarter of activity in the market in 1979, over the course of the year. So there was a real trajectory and real explosion in activity. And I'll come on in a moment, we'll come back to talk about the role of the BNOC. But we've noted a little bit about the dynamics of the situation at the time, specifically here in the UK, and why that was conducive. So we'll dig into this. And, Colin, I know you've got some thoughts on why London became a real hub for crude oil trading. Well, tell our listeners, why did that happen in London and not, say, New York or Houston? The US which had, up until perhaps the 100 years or so, up until the 1970s, had been a dominant place, but it didn't happen in the Middle East either. So what was it about London that made it a really attractive and dynamic place for this new industry to take off? Colin: I think that's a really interesting question because, of course, it presages the creation of something very special actually between 1978, '80, and the present day, which is the genesis of North Sea Oil trading in London. The good old days of North Sea Oil trading, as I think it sometimes is referred to. Well, clearly there was the legal system, and in the UK there was a, as Liz pointed out, desire by Mrs. Thatcher's government to deregulate the city and to promote and promulgate business. There was this ample production then from the North Sea finds, from, I think, 76 was the start with the Argyle field, and it came flooding on thereafter. And also, quite importantly, two of the major producers of that volume, Shell and BP, were London based. So there were a number of factors came together there. I guess you could have said, "Well, why didn't it happen in Houston or in New York?" Because already there was a trading business effectively, mainly in Houston, trading federal price controlled markets in the US. And it may well be that they were so busy with that profitable activity that they really didn't look beyond their own domestic doorstep to what was happening in the international market. Liz: Can I add something to that, please, Colin? Colin: Yes. Liz: Of course, you have to remember, back in those days, communications were completely different. When you wanted to talk to a client, you could pick up the phone, but there was no mobile phones. There was no social media. There was no email. So a lot of the negotiations and relationship building was done face-to-face in restaurants or in meetings. So their cluster formed around London because of North Sea Oil, and the fact that a lot of the producers and the regulators were based in the UK. So if you wanted to talk to them, you wanted to take them out to dinner, and you wanted to just constantly be in touch, you actually had to be physically in London. David: Well, I guess that being in person meant that this was a period where the influence of driven and proactive individuals and personalities was a factor too. Liz: Yes. Yes, very much so. Colin: Yeah, I think you can talk, emphasise that fact, I think. That's a very, very important reason why this milieu grew so fast, and it was such good fun for those who had the good fortune to be part of it. They were some very strong and forceful characters about at the time, people like John Dolce, Trans World and Marc Rich. Even others, money guys in the shadows, like Jacob Rothschild, who sponsored certainly Bomar, one of the trading companies, if not more. There were big traders, like Andy Hall, Peter Ward, and Shell. And then- Liz: Jerry Brennan. Yeah. Colin: Yeah, Jerry Brennan. There were brokers. David Huff and PBM played a big part. The media were important. Jan Nasmyth with his weekly [inaudible 00:15:49] articles that everybody worshipped on a Friday when there were just people who wanted to make something of what was able to happen and what was being built on the back of our very strong volume growth and a legal and political system that was promulgating with this whole movement. Liz: Some of the high jinx stories from that period make very entertaining accounts. It was a bit Wild West, I have to say. Colin: There were certainly some scallywags around, Elizabeth. We both know probably who they are. Liz: My lips are sealed. Colin: Some of the people that were attracted to this business, there were some really colourful folks. Former mercenaries and folks with pretty shady pasts. Liz: But having said that, we also had people like the now Archbishop of Canterbury. Colin: Yes. Liz: So we had the whole spectrum. Justin Welby was, I actually shared an office with for some time. David: These people were obviously, they were all mixing, and the oil industry was growing here in London. And they were obviously part of a much broader economic environment that was growing around the city of London. So as it was the right place to be at. I suppose the North Sea exploded at just the right time. Liz: Yes, there was definitely a London cluster, and it was encouraged by the city of London Authority. They enjoyed the business, and particularly during the Heath years and the Thatcher years. It was made a reasonably comfortable place to be doing business. Colin: Yes, I remember that there was a very famous article in Texas Monthly in October 1984, which examined what we're doing at the time relative to that whole [inaudible 00:17:58] crisis and how the traders at the time were reacting to it. A very interesting article. But I recall one of the stats in there was that at that time in late 1984, they reckon there were 1,000 people who were involved in trading in the North Sea markets. So it was a pretty sizable size activity. David: Well, what I'd like to do next is I'd like you to try, take us inside this organisation that we've referenced a few times. So the British National Oil Corporation, or the BNOC as it's known. You were both working there quite early in its life. Maybe, Liz, perhaps you could give us an introduction. What was the purpose of the BNOC? What was its mandate? What was its link to the North Sea and what was going on? Liz: Sure. Well, it was set up by the Petroleum and Submarine Pipelines Act of 1975, and it established British National Oil Corporation with a mandate to explore for oil and the handle of the licencing and taxation of oil, and also to [inaudible 00:19:16] the petroleum and some of the pipelines system in the UK. So it's a pretty broad mandate. It was formed out of the outset of the Cold War and some from Burma Oil. But the main thrust of BNOC was the participation agreements. And what those said was, effectively, if you're producing in the North Sea, BNOC is entitled to purchase 51% of it. And the thinking behind that, or the political explanation of the thinking for that, was that if there was ever a crisis and they were short of oil, BNOC would have access to at least 51% of what was produced in the North Sea. Now, BNOC had no refineries. So what was it going to do with all this soil once it bought it? And the answer was it would sell it back to the oil companies at the same price that they had just bought it. But if ever there was a crisis, they would continue to buy it and not sell it back. So BNOC was mandated to negotiate the price on a quarterly basis at which it would both buy and sell North Sea oil. That was the original intention. Of course, as soon as it was set up, we had, well, it was developed, really, through the Callahan years. And then in 1979 when it was just getting into its stride, Margaret Thatcher came in. And she, in 1982, started to systematically dismantle it. But maybe you want to talk some more about what BNOC did before we talk about Mrs. Thatcher as BNOC's nemesis. David: Yeah. We'll come to its dismantlement. So given that it's purchasing or has a right of refusal to buy this crude, and then could sell it back, it had a key role in pricing. And you were describing that they were setting quarterly prices. Obviously elsewhere in the world, you had OPEC at the same time, and the majors before them had set posted prices. Was the BNOC doing anything different? How were they going about their pricing? Liz: Well, I was a trader in the trading department of BNOC at that time. And the idea was she would buy the oil and sell it at the same price, all under long term contracts. So if we could not sell it at the price at which we were buying it, we would lose money. So it was a balancing act to make sure that we could buy to a price that the producers would agree and could sell it on at the same price either back to integrated producers or onto refiners, which was fine when you could do that, and you had a total freedom to set the price. But as time went on and the market developed subtlenesses in certain BNOC could agree a price to buy the oil but would not be able to sell it on at that price. The price at which we agreed every quarter had to be approved by the treasury. And over time, consistently began to insist that the purchase price was higher than a market cleaning price at which we could sell. So whereas we started with all term contracts for reselling the oil, over time, we had to go to spot contracts, and those spot contracts underperformed the quarterly negotiated price. So BNOC started to haemorrhage money. If the producers didn't like the price that we were setting, they had the right to take us to an expert determination, an independent expert. And as far as I recall, I think that only ever happened once during BNOC's history. Thompson Oil, the newspaper group was an oil producer in those days. They took BNOC to expert determination and lost. But it was mainly the fact that BNOC was always pushed towards a higher price that meant that it began to lose money because it couldn't resell at that price. And that was the beginning of the end, really, for BNOC. David: Colin, any thoughts on this area? Colin: Yeah. There's so much to say about BNOC. It would be a long podcast on its own. I left in 1982, actually, to join Brit Oil, which was the privatised arm. So I remained with them and said goodbye to Liz, who went off down to London to trade for UBAOC. But it's interesting. I think that there are, for me anyway, there are two reasons why BNOC were set up in the first place. The first was ideology, and it was Tony Benn's Socialist ideology to have our nationalised industry. And the second was the fact that there was a massive surplus of oil out there, happened to be a bunch of it in the North Sea. And the same two reasons caused the demise. It was ideology. And Mrs. Thatcher came in and didn't like that kind of stuff. And it was surplus, as Liz said. The surplus created a need for BNOC to have to move barrels in the spot market, and the spot underperformed the contract. And in surplus conditions, they lost money. And that was intolerable for the government. So ideology and surplus started out and ideology and surplus closed it down, in my humble view. Liz: At that time when Callahan was in power, and when Colin and I both joined BNOC, there was a lot of zealots in the BNOC staff who were very left wing. And I have to confess, in the early days, I was one of them. I came out of Clydeside Union shipyard background and thought that BNOC was just the very fellow for me, this left wing organisation sticking it to the oil companies. Well, I'm older and wiser now, but that was a popular perspective in those days. There was an ideological drive to have the headquarters in Glasgow because, at the time, we had the whole Scottish nationalist thing going on. It's Scotland's oil. So the government wanted to prove that Scotland was getting something out of this. So the main recruiting was done in Glasgow initially. Of course, it migrated to London eventually, but having BNOC'S headquarters in Glasgow was just all part of the ideology of the time. Colin: Unlike Liz, I didn't have any ideological consideration to trouble me at the time. I just got a call. I got a call from my economics tutor. I said, "Bryce, [inaudible 00:27:22] and Vincent Street, BNOC are interviewing. I said fine. Off I went. Next thing, they sent me a letter to say, "You're starting on the 9th of July." And when I turned up in St. Vincent Street, and lo and behold, there was Liz sitting next to me. And I had no idea. She joined the Economic Intelligence Unit. I joined the pricing unit, and we've been pals ever since. David: Picking up on what Colin was saying, that in as, obviously, into the '80s, we were then ideologically in Thatcher period and Lawson Chancellor, I think, and obviously the more free market ideology going on here. And you would, describing how the BNOC and the Treasury wanted to increasingly link the price into the spot market. That was part of just the broader trend at the time, right? There's more activity outside of the North Sea as well going on in the spot market. Was that simply the link? Was that the direction of travel? Liz: Not quite. The Treasury didn't have a view about spot versus term. David: Okay. Liz: It was all about money and price, and the fact that we couldn't sell the oil at the term price on which they insisted meant that we had to sell at spot. And that's why the spot market grew. It wasn't that the Treasury or the government were trying to encourage the spot market. I do recall from that time I was a trader at BNOC, but I was a low pay grade. I was just a desk trader. But my bosses had regular quarterly meetings, not only with staff who were our Norwegian equivalent, but also with various OPEC member states who were putting pressure on BNOC and on Treasury to support high oil prices. And towards the end of my stay at BNOC, when I became extremely disenchanted with the whole thing, around about 1985, just before Thatcher wound it up, the BNOC traders were saying, "We cannot set the price at that level because we can't sell it at that level. We're going to lose a fortune." And Treasury insisted on the high price. As a result, we had to sell huge quantity spots, started haemorrhaging money, and Baroness Thatcher said, "Oh, goodness me. We've got another loss-making state enterprise. We better wind them up." The only reason, sorry, you can see I can feel my blood pressure going up talking about this, the only reason we were losing money in the first place is because Treasury would not let us do our job and set the price at a market clearing level. David: And really, so you're describing it became a recipe for disaster and precipitated its demise. Liz: Absolutely. It was a very popular thing for the Tory government to be able to say, "This is a loss-making state enterprise. Let's get rid of it." And the man in the street, the voters in the street, doesn't quite understand the background and the politics of how it came to be losing money in the first place. David: Okay. Liz: And just before the axe fell, I thought, I'm not having this and jump ship and left the company, went to the city. David: That's a good place for us to pause and bring the first part of episode two to a close. In the next part, I'll be asking Liz and Colin more about the proliferation of trading around Brent crude oil as we continue to explore the history of Brent, the world's most important oil price benchmark. Thank you for listening to The Price of Everything, a new podcast from General Index. To continue listening, click on the link in the show notes for the next part right now.