Today the Unite Union has performed an about turn in conceding to the position of Ineos, owners of the Grangemouth petrochemical plant and its associated oil refinery.
This is an admission of an initial catastrophic failure to read the situation properly and to take astute strategic action. The union is reported as, subject to agreement by its members who are on the Grangemouth workforce, now accepting in its entirety the ‘survival plan’ put forward by Ineos and, under Union advice, rejected by around 50% of its workers.
However, while Union representatives are saying they are encouraged by exchanges this morning, there is not yet any response from Ineos so, in a situation of mutual distrust, the move may be too late. Ineos said last night that there was no prospect of its return to the ACAS conciliation service to reopen this discussion.
The situation has immediate social and economic consequences for the town of Grangemouth, with substantial local unemployment now in the offing.
Facts and consequences
These are the key facts of the situation, which has immediate social consequences and major business and political implications.
800 people work at the Grangemouth petrochemical plant and face the imminent loss of their jobs, with liquidators to be appointed within a week.
600 people work at the Grangemouth refinery and are now fundamentally uncertain of their futures. Some are reported already to be leaving to try and get a headstart on looking for alternative jobs.
Grangemouth alone delivers 8% of Scotland’s manufacturing performance.
10,000 secondary jobs are estimated to be at risk if the entire complex shuts down.
According to the Scottish government, total overseas sales of refined petrol and chemicals grew 3.5% in the second quarter of 2013.
These products accounted for nearly a quarter of Scotland’s manufactured goods sold for export.
Over the most recent quarter, exports grew by 4.2% – a slower rate of growth than that of previous quarters. The overall picture, following poor exports in the second half of 2012, produced at year-on-year figure showing total manufactured exports down 1.8%.
The Grangemouth refinery supplies 80% of Scotland’s fuel needs as well as the north of England and Northern Ireland. It also supplies steam and power to the platforms in the huge Forties Oil Field in the North Sea, 110 miles east of Aberdeen, through BP’s Kinneil terminal, on the opposite bank of the River Avon from the 3 square mile Grangemouth complex.
The steam power supply relationship of Grangemouth to the Forties Field platforms has earlier seen those platforms having to shut down because of a strike at Grangemouth.
The importance of the inward supply relationship of the Forties Field to Grangemouth is underlined by the parallel fact that the Forties Pipeline System delivers about 40% of the North Sea’s total production straight into Grangemouth.
For some time, the Forties pipeline has been carrying only one third of its capacity because the Grangemouth refinery does not now need any more than that.
The issue here is the availability of cheap shale oil and gas exported from the USA, undercutting North Sea prices, with refineries not only in the UK but elsewhere, unable to compete on price. Refineries are closing in other parts of the world, some with lower labour costs than the UK, because they are not financially sustainable.
With refineries in the UK closing over the past decades, there are now only seven left.
At Grangemouth, the petrochemical plant – which is to have liquidators appointed with a week – has been buffering the financial viability of the oil refinery by producing plastics and pharmaceuticals from the by product of the refinery.
But the refinery is now in the position of having to pay more than it needs for the oil that produces the by product to keep its supportive petrochemical plant going.
So Ineos wants to import cheap gas from abroad to sustain the refinery and with its byproduct keeping alive the petrochemical plant, which itself has been keeping the refinery viable.
If the refinery were to try to retrieve the kind of support it has enjoyed in selling its byproduct, or feedstock, to the petrochemical plant, it might try shipping out the byproduct for sale elsewhere. But that would add to the costs and would be competing with similar shipments from the USA
It may have no choice but to flare off its excess gas – which will lose it income and raise concerns around excessive emissions.
The likelihood is that the petrochemical plant’s closure will mean the closure of the refinery itself.
If that happens, it is possible that Ineos would reopen the site simply as a storage depot and distribution point for cheap imported gas – which would see the oil from the Forties Field having to come ashore in the north east of England.
There is a precedent for this change of use. After its owner, Petroplus, filed for bankruptcy in 2012, the Coryton refinery in Essex was closed – and reopened as a depot and distribution point.
Ineos has said that if the refinery is to continue, it will need government loans. The Scottish Government is making available £9 million in general support, which may be straightforward grant support; and the UK Government is making £140 million available in potential loans.
The Scottish Government position
The weakness of the Scottish Government has been immediately evident in the irrelevance of Energy Secretary Fergus Ewing. The heavy lifting is being done by Finance Secretary, John Swinney and First Minister, Alex Salmond; while UK Energy Secretary, Ed Davey is fronting the matter for the UK, with a bit part role for newbie Scottish Secretary, Alistair Carmichael.
Both are working flat out to try to find a buyer for the Grangemouth plant – which industry wisdom regards as highly unlikely, with its value currently written down to zero -reflecting the level of potential commercial interest.
However there is some distance between the positions of these two senior ministers. Mr Salmond has been hinting at possible nationalisation of Grangemouth, as a last ditch measure.
This is a political tranquiliser but is financially and operationally non-viable, as Mr Swinney is aware, saying only that nationalisation would ‘not be appropriate’.
Scotland’s finances could not afford a major loss-maker supported by the tax payer. The Government itself would have to confront the Unions on terms and conditions – which it is not prepared to do at the moment, for obvious political reasons.
The UK Government and its civil service, never mind Scotland’s, have no experience of running such operations – so an expert team would have to be hired to do it. As the bump-along-the-bottom survival operation – which is all this could be, the best abilities would not take such jobs. So a nationalised effort would be even more expensive and even less productive in what is already a loss making situation.
Information above underlines the fact that this is not a situation whose cause lies in Scotland – although the Union’s strategy has made the position worse in bringing it to an immediate head for which we are not prepared.
This is an industry wide picture, which makes its resolution here even more difficult.
It was noticeable that, with its own party conference in Perth an immediate commitment, Scottish Government ministers were slow to read the nature and import of the developing stand-off at Grangemouth. Had they got involved earlier than they did, at the most capable senior level, they might have deflected the Union on to a more useful course of action, avoiding the polarising stand-off which developed.
The Westminster Government has also been markedly slow to get involved – arguably driven by fear that any premature intervention, in the context of the run up to the independence referendum, would become instant political capital, used to claim a continuing colonialist mindset.
Scotland and the UK has suffered from both of these slow motion responses, as the delay meant the Union committing to what was obviously suicidal action.
A contract worker at Grangemouth, with this category of staff also facing the loss of their jobs, said to camera with some desperation, ‘Everybody’s had to take a hit in this recession. Why not take a wage freeze and a lower pension and keep your job? Where are there any others?’
And this is, flatly, the position, with that common sense response possibly beyond recall.
For every possible reason, Unite should have accepted the Ineos financial survival plan. It should have done so, even if, as is quite possible, Ineos was playing a game to defect responsibility away from itself, banking on Unite doing exactly what it did do – and giving Ineos cover for an action it was determined to take anyway, for reasons of financial efficiency.
Doing this would either have given the Grangemouth complex a survival strategy with Ineos then committed to reinvestment; or left the company’s covert intention naked, if it had gone on to close the plant regardless.
The political impact
The political impact of the Grangemouth situation is already immense.
It has shown how vulnerable the Scottish economy as a whole is to a crisis with a single business of this scale, beyond the means of Scotland, independent or not, to resolve on its own.
It is demonstrating the interconnectedness of things – with the possibility of Forties Field production having to divert to come ashore in the north east of England, if Grangemouth were to become a storage depot and distribution point for shipped-in cheap imports. The redirection of the Forties Pipeline network to enable this, would remove the direct availability of this fuel to Scotland.
Moreover, it would complicate the distribution of assets in a move to Scottish independence; where, in a United Kingdom or a federation, this would make no overall difference.
The First Minister is saying that he will not accept the closure of Grangemouth. This is impotent rhetoric wiser to leave unsaid.
The Diageo closure of the Johnnie Walker bottling plant in Kimarnock should have taught the Scottish Government a lesson in the minimal influence governments anywhere have these days on the actions of the inhabitants of Planet Business.
The big issue
The big issue is about jobs.
Scotland needs to increase its manufacturing base, both for economic performance and for employment.
But labour costs in the far east and elsewhere are far lower than ours, often with little quality differential. How do we compete?
Over time, labour costs will rise in our competitor markets but, even then, if we do not change aspects of our present employment requirements, we will remain out of competition.
We are looking at an economy which will see expertise and jobs available in research, innovation and development – but see the fruits of this capability sent for manufacture elsewhere.
This would leave us – and the same is true of the UK as a whole – with no jobs available to a large spectrum of our people, whose needs in social support would increase. This insupportable direction of travel is not only about an ageing population. It is about an uncompetitive economy.
The only answer to this is a form of social contract where business accepts its social responsibility and takes less profit in order to fulfil that responsibility; and where workers accept the value of job security and secure earnings in exchange for lower expectations.
This would see the country deprived of the input of what we call the grab-and-go merchants, the international privateers taking swift opportunity of serious short term profitability and state financial incentives to set up – and then departing at speed when they’ve milked the cow dry. Their loss would be no bad thing. Our economic philosophy has long been in need of re-education.
This social contract would, however, see a necessary stabilisation in our expertise, in our production and economic performances, with settled and responsible businesses offering relatively secure jobs – seeing the benefit of a skilled and responsible workforce and regular reinvestment in exchange for respectable but not stellar returns.
This would involve a change of values and of attitudes to their respective roles by employers and employees alke – and involve governments in what our traditional political system actively prevents – long term strategic planning.
For the moment
It is said that there is no serious concern about fuel supplies, with contingency plans apparently in place to source petrol and diesel supplies from elsewhere, if the Grangemouth refinery closes.
Panic buying is not necessary and might accelerate a crisis that would not otherwise occur.
A further economic hit is the fact that the BASF chemicals plant in Inverclyde – which coincidentally, Jim Ratcliffe also once controlled, is now closing, with the loss of 141 jobs. Its now German owners are to send its work – to China.