125

---

CONFIDENTIAL

Treasury Chambers, Parliament Street, SW1P 3 A G 01-233 3 0 0 0 2 0 t h December 1 9 7 9

FUTURE OF BNOC AND THE PSBR

The C h a n c e l l o r o f t h e E x c h e q u e r w a s a s k e d a t t h e

m e e t i n g o f E C o m m i t t e e l a s t week t o a r r a n g e f o r o f f i c i a l s

f r o m t h e D e p a r t m e n t s c o n c e r n e d a n d f r o m t h e CPRS u r g e n t l y

t o r e v i e w t h e i m p l i c a t i o n s f o r t h e PSBR o f t h e v a r i o u s

options f o r introducing p r i v a t e c a p i t a l i n t o BNOC,including

d e l a y i n g s u c h an i n t r o d u c t i o n f o r a p e r i o d ( E ( 7 9 ) 1 9 t h

Meeting, Item 3 ) . The P r i m e M i n i s t e r w o u l d t h e n arrange

f o r t h i s f u r t h e r work t o be c o n s i d e r e d by t h e M i n i s t e r s

d i r e c t l y concerned, i f p o s s i b l e before Christmas ( a meeting

h a s now b e e n a r r a n g e d f o r F r i d a y m o r n i n g ) .

I a t t a c h a n o t e w h i c h t h e C h a n c e l l o r h a s a p p r o v e d on

t h e PSBR c o n s e q u e n c e s o f t h e v a r i o u s o p t i o n s f o r i n t r o d u c i n g

p r i v a t e c a p i t a l i n t o BNOC. The note h a s been produced i n

c o n s u l t a t i o n w i t h o f f i c i a l s from t h e Department o f Energy,

t h e CPRS a n d I n l a n d R e v e n u e . I n accordance with the remit

f r o m E C o m m i t t e e i t c o n c e n t r a t e s on t h e n a r r o w , t h o u g h

i m p o r t a n t , PSBR p o i n t s a n d i s n o t i n t e n d e d t o c o v e r o t h e r

i s s u e s r e l e v a n t t o BNOC p r i v a t i s a t i o n .

I a l s o a t t a c h a n a i d e memoire s u m m a r i s i n g t h e o p t i o n s ,

p r o d u c e d by T r e a s u r y o f f i c i a l s a s p a r t o f t h e C h a n c e l l o r ' s

briefing.

I am s e n d i n g a c o p y o f t h i s l e t t e r a n d i t s a t t a c h m e n t s

to t h e P r i v a t e S e c r e t a r i e s o f t h e S e c r e t a r i e s o f S t a t e f o r

E n e r g y , I n d u s t r y , F o r e i g n a n d Commonwealth A f f a i r s a n d T r a d e

and t o t h e A t t o r n e y G e n e r a l . C o p i e s a l s o go t o

S i r R o b e r t Armstrong and t o S i r Kenneth B e r r i l l .

*"» M/t. (M.A. H A L L )

T. L a n k e s t e r , E s q . ,

No.10, D o w n i n g S t r e e t ,

S.W.I.

CONFIDENTIAL

SUMMARY COMPARISON OF OPTIONS WITH STATUS QUO

Control o f

UKCS o i l

U n i f i e d Management

S t a t u s quo

No change

No change

Case 1 ,

Mr Howell's p r o p o s a l - s p l i t T r a d i n g and O p e r a t i n g and s e l l 1% o f O p e r a t i n g t o p r i v a t e shareholders

PSBR

(see p a r a k o f

d r a f t paper)

Lose

49# o f

Split

BNOC's equity oil

No change

• • Private

Shareholders



No change

Large e a r l y r e d u c t i o n s

i n PSBR, l a t e r i n c r e a s e \

provided c l e a r statement

P r i v a t e shareholders

made about g i v i n g up c o n t r o l a l l

control, & intention t o •Operating assets

s e l l a t l e a s t 5U»S & o i l ­ s u b j e c t o n l y t o 51/° p a r t i c i p a t i o n options

Case 2 M a i n t a i n u n i f i e d MBBgMWttt b u t s e l l k
No change

No change

Share s a l e s , a t depressed P r i v a t e s h a r e h o l d e r s

g e t income stream

p r i c e s compared w i t h

Case 1 , f i n a n c e b u t don't b u t no c o n t r o l

reduce PSBR

Case 3

I

P a r t i ? - ! p r i v a t i s a t i o n o f utistream a s s e t s : s e l l i n g p o r p o r t i o n .of BNOC's l i c e n s e i n t e r e s t s t o s e p a r a t e company, w i t h 75$ p r i v a t e shareholding

•

>

N@ change

Lose some o i l but l e s s t h a n Case 1

1

Some e a r l y r e d u c t i o n

i n PSBR; l a t e r i n c r e a s e . P a r t i a l

As i n Case 1 b u t no private control

Statement on f u t u r e p r i v a ­ o f o i l a s s e t s

t i s a t i o n needed

1

|

Case k

T r a n s f e r r i n g t h e r i g h t t o , say, 3% o f t h e revenue from BNOC's o i l f i e l d s t o a company, w i t h 100^ to p r i v a t e shareholding

No change

No change

Proceeds f i n a n c e PSBR

b u t don't reduce i t

A s i n Case 2 above but s m a l l e r scale

(CONFIDENTIAL) THE FUTUEE OF BNOC & THE PSBR

Note by t h e C h a n c e l l o r

1. the

I

o f the Exchequer

was a s k e d t o a r r a n g e f o r o f f i c i a l s

CPRS u r g e n t l y

for introducing

from t h e d e p a r t m e n t s c o n c e r n e d a n d from

t o r e v i e w t h e i m p l i c a t i o n s f o r t h e PSBR o f t h e v a r i o u s

private capital

i n t o BNOC, i n c l u d i n g d e l a y i n g

( E 7 9 ) 1 9 t h Meeting, Item 3 ) .

for a period

such

options

introduction

The p o s i t i o n i s a s f o l l o w s .

Assumptions

2.

Any a s s e s s m e n t o f t h e PSBR e f f e c t s o f i n t r o d u c i n g

must i n e v i t a b l y r e l y on many w o r k i n g a s s u m p t i o n s . below i l l u s t r a t e for introducing

private capital

i n t o BNOC

But the f i g u r e s i n paragraph h

t h e b r o a d s i z e and d i r e c t i o n o f t h e e f f e c t s f o r t h e main o p t i o n s

private capital

i n t o BNOC l i s t e d

i n paragraph 3 below.

The c r i t i c a l

assumptions i n those f i g u r e s a r e :

a)

T a x . I t i s assumed t h a t payments o f PRT 'and C o r p o r a t i o n T a x t o t h e

E x c h e q u e r w i l l be t h e same f o r a l l k c a s e s i n p a r a g r a p h 3« b)

O i lprices.

T h e s e a r e assumed by BNOC t o be a t # 2 8 . 5 0 p e r b i l l i o n

b a r r e l s i n A p r i l 1 9 8 0 , an a s s u m p t i o n w h i c h now l o o k s of Caracas. It

The h i g h e r

i s uncertain

o i l p r i c e s , t h e g r e a t e r BNOC's p r o s p e c t i v e

whether t h e f u l l b e n e f i t s o f t h e s e

higher

i n view revenues.

r e v e n u e s would be

i n s a l e p r o c e e d s from p r i v a t i s a t i o n ( f o r t h e r e a s o n s i n p a r a g r a p h 5

reflected below).

conservative

I f BNOC, o r a p a r t

o f i t , remains under p u b l i c

sector control, the

PSBR would c e r t a i n l y b e n e f i t . c)

BNOC's c a p i t a l e x p e n d i t u r e programme.

assumed by BNOC i n t h e i r r e c e n t to £90 m i l l i o n a year

lion The

higher

o r any p a r t d)

review

T h i s i s t a k e n t o be a t t h e l e v e l

( s e e Annex).

T h i s i s some £*+5 m i l ­

below l e v e l s a g r e e d by M i n i s t e r s i n September.

t h e c a p i t a l programme, t h e l e s s t h e PSBR c a s e o f i t , i n thepublic

S i z e of s a l e proceeds.

f o r k e e p i n g BHOC,

sector.

T h e s e a r e c a l c u l a t e d on t h e b a s i s o f Mr P h i l i p

S h e l b o u r n e ' s v a l u a t i o n o f BNOC a s a t 1 s t J a n u a r y 1980 o f £ 1 . 5 b i l l i o n £1.25

billion

effect

3.

Options

T h i s v a l u a t i o n t o o k no a c c o u n t o f any

on t h e s a l e p r i c e o f any O p p o s i t i o n t h r e a t s t o r e - n a t i o n a l i s e t h e

privatised The

a t 1979 S u r v e y p r i c e s ) .

company on o n e r o u s t e r m s .



I n b r o a d terras t h e o p t i o n s f o r i n t r o d u c i n g

out b e l o w .

(about

private capital

i n t o BNOC a r e s e t

T h e i r PS3R e f f e c t s a r e summarised i n p a r a g r a p h k b e l o w .

c)

Case 1 .

S p l i t t i n g BNOC i n t o t w o i n d e p e n d e n t

and

BNOC ( O p e r a t i n g ) ,

companies, BMOC

(Trading)

and s e l l i n g 7 5 ^ ( o r a somewhat l e s s e r amount) o f t h e -

1 ­

(CONFIDENTIAL)

shares i n O p e r a t i n g t o p r i v a t e s h a r e h o l d e r s , w i t h a minimum o f 25% b e i n g owned by T r a d i n g , which would remain 100% owned by t h e Government.

This i s

o p t i o n f a v o u r e d by the S e c r e t a r y o f S t a t e f o r Energy i n E ( 7 9 ) 6 7 .

the

The shares c o u l d be s o l d i n 3 e q u a l t r a n c h e s o f 25%, b u t f o r t h e proceeds t o count as a PSBR r e d u c t i o n , i t would have t o be made c l e a r a t t h e o u t s e t t h a t t h e p u b l i c s e c t o r was i m m e d i a t e l y r e l i n q u i s h i n g c o n t r o l over O p e r a t i n g and t h a t i t i n t e n d e d t o s e l l a t l e a s t 5 1 % o f t h e shares e v e n t u a l l y . The proceeds would f i n a n c e the PSBR but would not reduce i t i f t h e r e were o b l i g a t o r y arrangements whereby 100% o f i t s o i l (as d i s t i n c t from t h e normal 51%)

was s o l d t o T r a d i n g .

Three y e a r s a f t e r t h e s t a r t o f t h e s a l e t h e PSBR

would be i n c r e a s e d , because O p e r a t i n g ' s cash s u r p l u s e s would no lo;;ger accrue t o t h e p u b l i c s e c t o r and t h e r e would be no more s a l e s proceeds t o o f f s e t

this

loss. b)

Case 2 .

the

o i l f i e l d a s s e t s t o a s u b s i d i a r y company, and s e l l i n g a m i n o r i t y ( e . g . ^9%)

of

M a i n t a i n i n g BNOC's p r e s e n t u n i f i e d management by t r a n s f e r r i n g

t h i s company t o p r i v a t e s h a r e h o l d e r s . T h i s i s t h e o p t i o n d i s c u s s e d i n

paragraphs 5 - 7 o f E ( 7 9 ) 6 7 and i n t h e Annex t o E ( 7 9 ) 8 0 . The proceeds from t h i s s a l e would f i n a n c e , b u t would not reduce the PSBR, s i n c e t h e p r i v a t i s e d s u b s i d i a r y would be under BNOC's c o n t r o l and t h u s w i t h i n the

public sector.

I f t h e company's cash s u r p l u s e s i n l a t e r y e a r s a r e t o

c o n t i n u e t o reduce t h e PSBR, t h e y would have t o be i n v e s t e d i n p u b l i c s e c t o r debt so t h a t t h e cash remained a v a i l a b l e t o t h e p u b l i c s e c t o r and t h i s has been assumed i n e s t i m a t i n g t h e f i g u r e s f o r Case 2 .

Such a r e q u i r e m e n t would

have t o be made c l e a r t o p r o s p e c t i v e i n v e s t o r s i n t h e p r o s p e c t u s , and s a l e proceeds c o u l d be reduced i f t h e y b e l i e v e d t h e company t o o much under ment c o n t r o l .

Govern­

The s i z e o f t h e cash s u r p l u s e s would p a r t l y depend on t h e

amount o f c a p i t a l e x p e n d i t u r e u n d e r t a k e n by t h e company. would t h e r e f o r e want t o c o n t r o l t h e c a p i t a l programme.

The Government

T h i s t o o would need

t o be d i s c l o s e d t o i n v e s t o r s w i t h p o t e n t i a l e f f e c t s on s a l e proceeds. c)

M a i n t a i n i n g BI.'OC's p r e s e n t u n i f i e d management by r o u t e s o t h e r t h a n a t ( b )

above. i)

F o r example:

Case 3»

S e l l i n g a p r o p o r t i o n o f 3N0C's l i c e n s e i n t e r e s t s i n i n d i v i ­

d u a l o i l f i e l d s t o a s e p a r a t e company i n which p r i v a t e s h a r e h o l d e r s would

own 75% of t h e shares.

The company would be e s s e n t i a l l y an i n v e s t m e n t

company owing e.g. X% o f D u n l i n f i e l d , Y% o f S t a t f j c r d and Z% o f N i n i u n .

The e f f e c t would be t o s e l l p a r t o f BNOC's a s s e t s t o t h e p r i v a t e - 2 ­

(CONFIDENTIAL)

sector

(CONFIDENTIAL)

t h r 6 u g h t h e medium o f a company owned by p r i v a t e s h a r e h o l d e r s . The

a t t r a c t i o n t o i n v e s t o r s would be t h e p r o s p e c t o f i n c r e a s e d revenues

and c a p i t a l g a i n s . of

I n v e s t o r s would p r e f e r t h e w i d e s t p o s s i b l e

i n t e r e s t s i n BNOC's f i e l d s .

spread

The i n e v i t a b l e n e g o t i a t i o n s necessary

w i t h f i e l d p a r t n e r s c o u l d p r e v e n t an e a r l y s a l e , though t h i s might

apply

e q u a l l y w i t h Case 1 .

The proceeds from t h e s a l e would reduce t h e PSBR ( a s d i s t i n c t f i n a n c i n g i t ) i f t h e new company was w h o l l y independent

from

( e . g . i t s manage­

ment and i t s m a r k e t i n g and i t s p r i c i n g p o l i c i e s ) from BNOC and i t had

the

normal p a r t i c i p a t i o n o b l i g a t i o n o f s e l l i n g no more t h a n

o i l t c BNOC.

of i t s

I n l a t e r y e a r s t h e PSBR would be i n c r e a s e d s i n c e t h e

revenues from t h e f i e l d i n t e r e s t s s o l d would no l o n g e r be a v a i l a b l e t o

the

public sector.

T h i s course, which M i n i s t e r s have n o t so f a r c o n s i d e r e d , would

produce a s m a l l e r r e d u c t i o n i n t h e s h o r t t e r m and a s m a l l e r i n c r e a s e i n the

l o n g e r term i n t h e PSBR compared t o Case 1$ keep, except f o r t h e

p r o p o r t i o n o f a s s e t s t r a n s f e r r e d t o t h e separate company, a u n i f i e d BNOC management; and reduce t h e amount o f o i l l o s t from p u b l i c s e c t o r control.

The f i g u r e s f o r Case 3 i n paragraph

k i l l u s t r a t e t h e PSBR

e f f e c t s o f p r i v a t i s i n g some £ 2 5 0 m i l l i o n (about o n e - f i f t h ) o f BNCC a s s e t s i n t h i s way.

The more a s s e t s s o l d , t h e more t h e p r i v a t i s e d company

would resemble an o i l company r a t h e r t h a n an investment ii)

Case k.

company.

T r a n s f e r r i n g t h e r i g h t s t o , say, 5% o f t h e revenue ( b u t

not t o t h e o i l ) from BNOC's o i l f i e l d s t o a company, a l l o f whose shares would be s o l d t o t h e p u b l i c . The proceeds from t h e s a l e would f i n a n c e , b u t n o t reduce t h e PSBR,

s i n c e such a company would i n e f f e c t o n l y be a channel f o r advancing

money t o BNOC w i t h no c o n t r o l over t h e o i l a s s e t s .

I n l a t e r years the

PSBR v o u l d be h i g h e r , s i n c e t h e revenues p a i d out t o t h e p r i v a t i s e d

company would no l o n g e r be a v a i l a b l e t o t h e p u b l i c s e c t o r .

Summary o f PSBR E f f e c t s The e s t i m a t e d PSBR e f f e c t s o f t h e k cases above compared w i t h t h e base l i n e of t h e c t a t u s quo ( i . e . assuming BNOC remains as i t i s ) a r e as f o l l o w s :

- 3 ­

(CONFIDENTIAL)

(CONFIDENTIAL)

Estimated

E f f e c t o f t h e 4 Cases on t h e PSBR Compared w i t h t h e S t a t u s Quo

Baseline

( + means t h e PSBR i s h i g h e r , - means i t i s l o w e r )

£m 1979 S u r v e y P r i c e s

380-81

S t a t u s Quo Base­

l i n e ( i e BNOC's

contribution t o

PSBR a s s u m i n g i t

s t a y s as now a n d

c a p i t a l e x p e n d i ­

t u r e as now a s ­

-140 sumed b y BNOC)

81-82

82-83

83-84

84-85

85-86

86-87

Total

-340

-285

-215

-255

-180

-170

-1585

+

-

+200

+240

+160

+150

+ 410

+ 15*

+

+ 35

+ 40

+

+ 170*

i

Changes i n above

b a s e l i n e produced

Case 1

-310

Case 2

0*

+

15

5*

45

30

45

Case 3

-190

+ 65

+ 55

+ 45

+

50

+ 35

+ 35

Case 4

+ 20*

+

+

+

+

20

+

+

Tax assumed payable i n e v e r y case

*

-

-

C a p i t a l e x p e n ­

d i t u r e assumed

i n s t a t u s quo

baseline

+ 215

20

+210

20

20

30

30

+ 95

+ 160*

-125

-245

-250

-360

-375

-1355

+220

+200

+185

+170

+155

+1355

I n Case 2 and Case 4 t h e p r o c e e d s w o u l d n o t r e d u c e t h e PSBR a n d

therefore arenot reflected

i n the asterisked figures.

F o r case 2 ( 4 9 pe:

cent p r i v a t i s a t i o n ) i t i s v e r y hard t o estimate t h e scale o f t h e s a l e

p r o c e e d s because

t h e s h a r e p r i c e v/ould b e d e p r e s s e d b y t h e p r o s p e c t o f

c o n t i n u e d p u b l i c s e c t o r c o n t r o l ( s e e p a r a g r a p h 3(ii))« B u t i t i s c l e a r

t h a t t h e f i g u r e s w o u l d b e a good d e a l l e s s t h a n t h e t h e o r e t i c a l o f a r o u n d £200m i n e a c h y e a r i n t h e p e r i o d 1980-81

t o 1982-83-

value For





Case 4 ( t h e r e v e n u e r i g h t s company) t h e p r o c e e d s w o u l d b e some £200m

i n 1980-81

T

and l i k e t h e p r o c e e d s u n d e r Case 2, w o u l d h e l p f i n a n c e t h e

PSBR.

- Ii ­

(CONFIDENTIAL)

(CONFIDE NTJAL) Timing

5-

!There are two f a c t o r s a f f e c t i n g t h e t i m i n g o f s a l e s .

achieved

quicker

t h e e a r l i e r t h e shares are s o l d .

PSBR r e d u c t i o n s a r e

The l o n g e r t h e p e r i o d over

which a share s a l e o f a g i v e n s i z e i s phased, t h e l o n g e r t h e p e r i o d i t t a k e s t o

achieve

t h e PSBR r e d u c t i o n s and t h e l a t e r consequent PSBR i n c r e a s e s .

hand, t h e CPRS argue t h a t t h e s t o c k market has not f u l l y r e f l e c t e d t h e of future o i l price rises.

On t h e o t h e r

prospect

I f t h i s i s r i g h t , t h e l a t e r t h e s a l e o f t h e shares

the h i g h e r t h e proceeds are l i k e l y t o be, s i n c e t h e y w i l l r e f l e c t t h e f u l l of actual higher p r i c e s .

T h i s l a t t e r e f f e c t cannot be q u a n t i f i e d .

- 5 ­

(CONFIDENTIAL)

effect