Costing Grangemouth

I fear the media are exaggerating the costs of the strike at the Grangemouth oil refinery. The Times says:

BP has also shut its Forties pipeline system, which is powered by the plant, 25 miles to the west of Edinburgh. As the pipeline carries about 30 per cent of Britain’s daily oil output from more than 70 oilfields in the North Sea, the industrial action could cost Britain up to £50 million per day in lost revenue.

This is surely wrong. If oil is not piped ashore today it's left in the ground, and can be piped ashore in future. Revenue losses occur only if oil prices fall from today's levels. This is of course highly possible, but by no means certain. Indeed, Hotelling's rule tells us that the least worst assumption to make about future oil prices is that they'll rise in line with current interest rates. On this view, the revenue losses - over time - will be nothing. What we lose today we'll get, with interest, in future.
This helps explain why Ineos can afford to take a hard line. If it doesn't refine crude today, it can do so in future at (probably) higher prices and margins. Its losses are not today's production, but rather the maintenance costs incurred by cooling the refinery; cash flow losses - it has less immediate revenue with which to cover its big interest bill; and the risk of falling prices in the future. But these are probably smaller than the headlines about "lost" output.

Comments

[kinglear]

Too right! I am always astonished at the losses we are told strikes etc rack up - there never seems to be any account taken of the other side of the equation.

[dearieme]

When did "least worst" come to replace "least bad"? Anyway, shutdowns at the refinery and in the pipeline system will have led to some flaring of gas: that's pure loss.

[jimbo555]

I understand that Ineos buys feed gas from BP and stabilised crude oil from BP and others in the market place. They sell their refined products into other markets. Unlike BP who arguably retain their oil in the ground for later extraction, the earnings lost by Ineos plus any penalties payable to BP, resulting from the shutdown, are unlikely to be recoverable other than from insurance. I also understand that Ineos propose an investment of about £750 million in plant upgrades and that Grangemouth accounts for about 11,000 jobs, directly and indirectly, in Scotland. Perhaps Ineos are hoping for Government subsidies for their plant upgrade. There is no doubt that Labour will need Scottish votes at the next general election and that a quick resolution of the dispute, possibly by Ineos withdrawing the proposed pension changes, would limit further damage to Labour's well earned reputation for incompetence.

[Sam Hicks]

No, no. The cost in lost revenue is calculated on the basis of constant throughput. The supply from upstream doesn't waver from day to day. BP/Ineos/etc. can't stop production for one day, losing 50 million pounds, and then double it the next day for a 100-million-pound day with no net loss, because they can't double the throughput at any of the points (never mind ALL the points-- which would be necessary).

Granted, if throughput stops (and does not have to be flared/burned at the source due to a non-variable output upstream), then there is conceivably one day in the future that will net that 50 million pounds back, after the field would have dried up otherwise. But how far in the future? Future returns are worth a lot less than current ones, and for all the capital and labour to sit idle in the meantime incurs most of that cost.

So even if you can just 'leave it in the ground and get it later' the 50 million pounds is still lost.