Bang!: A History of Britain in the 1980s (38 page)

Danger, risk-taking, big rewards, tough management, individualist attitudes . . . to admirers and critics alike, the rush to make money from the North Sea had a Wild West feel to it. This was
not an industry that the Thatcher government wanted to turn into a state-run monopoly. In any case, the moment to confine the oilfields to a single nationalized corporation, perhaps on the lines of
Norway’s Statoil, had already passed by the time
the Tories came to power in 1979. Given that previous governments had already welcomed multinational companies into the
North Sea, it was hardly a serious option to seize their assets and endure years of litigation and billion-pound compensation pay-outs. Rather, what was at issue was the degree to which it was in
the national interest for Whitehall to direct and control development.

The state had two principal means of intervention. The first was through British Petroleum (BP), in which the state had acquired a controlling stake in 1914 and had the right to appoint two of
the directors to its board. Thus the government could, if it wished, seek to use its leverage to make BP subservient to its own agenda for North Sea oil exploration and extraction. However, no
previous government had interfered with the company’s commercial independence in this way, and enacting any policy that retarded BP’s commercial imperatives and share price would risk
undermining it in relation to other, foreign-owned, competitors. The second agent of state intervention was the British National Oil Corporation (BNOC), the wholly state-owned company set up in
1975 by the then energy secretary, Tony Benn. It held direct stakes in oilfields and enjoyed the right to buy back 51 per cent of any private company’s oilfield production. However, while
initially holding on to the buy-back rights as a means of trying to ensure price stability, the government soon decided to sell the majority of its stake in BNOC’s exploration and production
operations. When the company – duly christened Britoil – was floated in 1982, it raised £500 million for the Treasury. Given the sums later generated, this may not seem much, but
at the time it represented the largest privatization in the modern world.

By 1988, Britoil was being taken over by BP, which, in turn, had ceased to have the Treasury as its major shareholder. In 1977, the Callaghan government had started selling off its shares in BP
as a means of raising £564 million of emergency cash to satisfy the country’s IMF creditors. Though it no longer had the IMF to worry about, the Thatcher government intensified the
process, divesting itself of its holding in BP in several stages, finally selling all but a token fraction of its remaining 31.7 per cent share in 1987. While BP was still smaller than Shell or the
American market leader, Exxon (whose Esso logo was a familiar sight along Britain’s major roads), it underwent rapid expansion during the eighties under the chairmanship of Sir Peter Walters,
thanks to the output from the Forties field and its oil interests in Alaska. This was a far better outcome than could have been foreseen at the beginning of the decade, when BP had suffered the
nationalization of its assets in Iran and Nigeria. Nevertheless, whatever the case for the Treasury selling off its stake in BP, its timing was disastrous – the share floatation went ahead
just days after the Stock Market crashed on ‘Black Monday’, 19 October 1987. As the British government moved out, the Kuwaiti
government moved in, with its
sovereign wealth fund quickly buying more than a 20 per cent share at a knock-down price, sufficient to give the Gulf emirate effective control of the company’s future direction. Responding
to political pressure, the Treasury found itself calling in the Monopolies and Mergers Commission. In October 1988, the commission duly concluded that the Kuwaiti acquisition was against the
national interest. The emirate was restricted to owning less than 10 per cent of the company. In oil, at least, the question of foreign takeovers could not yet be left entirely to the market.

Nigel Lawson, first as energy secretary from 1981 to 1983 and thereafter as Chancellor of the Exchequer until 1989, was the dominant figure in this process. He believed in principle that the
decisions of great British companies should not be directed by government departments. But, like all residents of 11 Downing Street with immediate commitments to honour, he was also motivated by a
short-term desire to maximize the money coming into the state coffers. Selling the government’s share in BP raised £6 billion. Together with the proceeds from floating Britoil and from
privatizing British Gas, which raised almost £5.5 billion in 1986, it ensured that a majority of all the proceeds raised for the Treasury through privatization in the 1980s came from selling
off North Sea energy companies.
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Even more money was to be made from taxing the oil companies directly. The 1979 price hike following the Iranian revolution had a positive knock-on effect for North Sea companies, encouraging
the maximizing of production and making exploring new oilfields economically justifiable. In addition to corporation tax, a special tax on oil company profits, petroleum revenue tax, was introduced
by the Labour government in 1975, although the size of the companies’ initial development costs (which could be subtracted from profits) prevented much tax revenue being generated. By 1980,
this was no longer the case: profitability was soaring ahead, offering a tax bonanza for the Treasury. The first three budgets of the Thatcher government pushed the petroleum revenue tax rate to 75
per cent in 1982, by which time there was also an additional supplementary petroleum duty. During 1983, Lawson at the Department of Energy argued with Howe at the Treasury that such high rates were
ultimately counterproductive. Lawson won this debate, the tax burden was gently eased and, sure enough, by encouraging even higher output, tax receipts actually went up. By 1982/3, the
Treasury’s coffers were being filled with nearly £8 billion from North Sea taxes, equivalent to almost 8.5 per cent of all tax revenue; and by 1984/5, the North Sea’s £22
billion income brought in £12 billion for the Treasury, equivalent to 8 per cent of all tax revenue. Such was the significance of these figures that double the amount of revenue was being
raised from taxing North Sea oil and gas output than was being raised through corporation tax on all other business sectors put together.
³⁶

By 1983, two million barrels of oil per day were being pumped from the North Sea, with technological advances in oil platform construction making extraction feasible from
ever deeper waters. Offshore and on, about seventy thousand people in the UK were employed directly by the oil industry, with a further twenty thousand jobs indirectly dependent upon
it.
³⁷
The majority were located in Grampian region, with house prices in the granite city of Aberdeen soaring to levels that would have been
unimaginable before the oil men arrived. Britain’s largest oil port became Sullom Voe, which brought jobs and prosperity to the Shetland Islands (this was certainly appropriate, for had not a
cash-strapped Scandinavian monarch in the fifteenth century pawned the islands as part of his daughter’s dowry to the King of Scots, the massive Brent oilfield would have been in Norwegian
waters). While the daily heroics that brought up the oil may scarcely have troubled the imagination of many Britons, it gave renewed pride and purpose to a Scotland where the outlook for those
engaged in the traditional heavy industries and in coal mining looked bleak. These were years in which the prospects from oil loomed so great in the Scottish consciousness that the opening credits
for
Reporting Scotland
, BBC 1’s main regional news programme north of the border, featured an oil rig, its flare boom burning bright, within the stylized outline of Scotland. It was a
dynamic new image to replace the familiar hills, glens and tartan clichés that had long symbolized the nation.

Given that the oilfields would have been overwhelmingly within the waters of an independent Scotland it was hardly surprising that the Scottish National Party was the immediate political
beneficiary of the discovery of North Sea oil in the 1970s. But the party’s momentum was checked by the lost referendum on devolving power in 1979, and by a dismal showing in the ensuing
general election which reduced the SNP to two MPs and produced an internal split between its leadership and left-wing activists. The party fared no better at the polls in 1983, despite a campaign
that included a cartoon of a sinisterly grinning Thatcher with Dracula fangs dripping oil alongside the caption ‘No Wonder She’s Laughing. She’s Got Scotland’s Oil.’
The message may have resonated, but the solution did not. At least until such time as a Scottish Parliament existed, the obvious way for Scots to get Thatcher out of their lives was to vote Labour
in Westminster elections. The 1987 general election merely took the SNP parliamentary tally to three. Nevertheless, the cry of ‘It’s Scotland’s oil’ remained a potent one.
Nervous of a nationalist backlash, Nigel Lawson only allowed BP to acquire the Scottish-based Britoil in 1988 if it promised to keep a headquarters in Glasgow and to endow several Scottish
universities.

Given how much faith was placed in North Sea oil’s ability to fuel an economic renaissance, it stimulated notably little response from novelists or dramatists. No British version of J. R.
Ewing hit prime-time television –
Dallas
did not have a windier equivalent called
Aberdeen
. Even for Scottish viewers, the only major television programme
to come regularly from the city at the centre of the oil boom was a hardy perennial series for horticulturalists called
The Beechgrove Garden
. The British film industry was only slightly
more attuned to the moment, its one successful foray into the oil phenomenon coming in 1983 with a David Puttnam-produced latter-day Ealing Comedy by the Scottish writer–director, Bill
Forsyth.
Local Hero
told the tale of a fictional Scottish fishing village that a Texas oil firm hoped to buy in order to build a refinery on the site – the plot twist being that some
of the jaded villagers are keen to sell and make a quick buck, and it is the oil company rep sent to negotiate the terms who ends up seeking to preserve the village and its gentle way of life.

In reality, the golden egg was about to crack. North Sea oil production peaked in 1985 at 953 million barrels per year, which, together with gas, represented 4.6 per cent of world oil production
and nearly 5 per cent of the United Kingdom’s total GDP. But in early 1986 the international price of oil collapsed as quickly as it had soared seven years earlier. The immediate cause was
the further fracturing of the OPEC cartel and the relaxation of its production-fixing quota system. The market responded predictably to the oversupply of a commodity by discounting its value. The
price of oil dived from $30 per barrel in November 1985 to $10 in April 1986.
³⁸
Presciently, the Department for Energy had in March 1985 dispensed
with BNOC’s remaining role of buying other companies’ North Sea oil at quarterly fixed prices before selling it on. Given how violently the price was about to plummet, the effort to
shore it up by such means would have been doomed and an expensive waste of taxpayers’ money. At such moments, the market was beyond direction and the winding up of BNOC was merely a further
example of the government’s determination to distance itself from direct involvement in the North Sea industry.

The crash’s consequences were felt immediately. During 1986, the value of British North Sea oil production halved from £20 billion to under £10 billion, with drilling being cut
by 40 per cent.
³⁹
Twenty thousand jobs were lost as offshore workers were laid off, onshore platform and supply construction contracts were cut, and
companies merged or went under. Compounding the bad news, tragedy awaited some of those still going out to the rigs. On 6 November 1986, forty-five men were killed when a Chinook helicopter taking
offshore workers back to the Shetland Islands crashed. Even worse was to follow. On 6 July 1988, 110 miles off the coast of Aberdeen, a gas-condensate pipe exploded because a valve on a pump had
not been correctly replaced on the Piper Alpha platform. The rig, owned by an American company, Occidental, was responsible for bringing onshore 10 per cent of the UK’s North Sea oil. Within
twenty minutes, the pressurized gas pipeline
burst under the heat of the explosion, spewing forth a fireball powered by the release of 3 tonnes of gas per second, equivalent
to one and a half times the entire British gas consumption at that moment. Subjected to 1,000-°C heat, the platform buckled and crashed into the sea. Of the 226 personnel who had been aboard,
167 died. Seven George Medals were awarded – some posthumously – to those who had risked all to rescue desperate men. When the Cullen inquiry detailed what had gone wrong, it revealed
not only specific errors on Piper Alpha but more general systemic failings in a culture of lax rig safety procedures. In the zeal to extract ‘black gold’, unacceptable shortcuts had
been taken.

The Piper Alpha disaster came to symbolize the end of a dream of instant and trouble-free riches which had begun to fade two years previously with the price crash. The diminished price for oil
decimated profit margins and discouraged further exploration. This in turn forced the Treasury to cut its tax rates in an attempt to induce new activity. Yet even by 1989, production was still, at
90 million tonnes, only one third down on its 1985 peak. Worldwide, there was still oversupply, and one result of the years of high prices was the promotion of greater fuel efficiency, which
succeeded in cutting demand. For every dollar that the price per barrel fell, about £500 million was lost in tax receipts to the Treasury. By 1992, the North Sea’s income stood at
almost half its 1985 level – £11.7 billion, yielding merely £2.2 billion in tax. The age in which oil had been a major factor in propping up sterling and cutting borrowing was all
but over. For her part, Thatcher struck an optimistic note, claiming that falling prices were for the best. As she reassured a conference of Conservative activists in March 1986: ‘Those who
thought the oil price explosion of the 1970s did harm to our industry and slowed our growth rate were right. Falling oil prices are, on the whole, good news . . . Industry’s costs are being
cut. All this is a bit like a tax cut.’
⁴⁰
Despite being the wife of a former director of Burmah oil, the North Sea boom had never captured the
prime minister’s imagination even though, until the crash, it was a crucial ingredient in her objective of bringing the budget into balance. Indeed, the phenomenon received only the most
passing of mentions in her 900-page memoirs.