The Squeeze: Oil, Money and Greed in the 21st Century

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Both had inherited similar lessons about limiting risk. Their forefathers, they had been taught, had been scorched during the 1960s by investing too much. By the late 1970s the industry was hampered by bottlenecks. Mastering the cycle, Raymond and Browne knew, was perilous, just as predicting oil prices was impossible. Their predecessors had failed to foresee the collapse of oil prices in 1986, 1993 and 1998, and none had anticipated the huge increases after 1973. Learning the lessons had proved difficult. In 2003, Raymond and Browne did not anticipate that the cycle had again turned and prices would rise. More eager to instantly satisfy their shareholders than to care for the long-term security of oil supplies for Europe and the United States, both were buying back shares rather than investing in new oilfields. They would blame oil nationalism for preventing efficient exploration and production, but Raymond’s insensitivity towards Putin justified the president’s suspicion.

TWO The Explorer (#ulink_46d4c44c-9c79-5c61-a841-3a256cf911e2)

Gathering the masters of the underworld at BP’s concrete campus in Houston’s sprawling suburbs in early 2009 was a cruel ritual. The muted light cast a harsh sheen across the weary faces of 12 men and one woman in the ‘Big Brain Room’, a small cinema formally known as the HIVE, the Highly Immersive Visualization Environment. In the centre of the front row sat David Rainey, BP’s head of exploration. Peering at the curved screen through battery-powered spectacles allowing ‘sight’ of the whole reservoir, the audience scrutinised the computer-generated three-dimensional images of a possible oil reservoir four miles below the waves of the Gulf of Mexico. Hand-picked to assess the risks, none of the 13 was a buccaneer; they were rather proven company loyalists temporarily united by one credo: if their $100-million gamble to discover whether oil existed deep in the unknown was successful, BP could pocket $50 billion over ten years. But they would be cursed, not least by themselves, if their calculations were wrong. For oil explorers, the licence to make mistakes was limited. The humiliation of failure was permanent.

The mood in the HIVE was inevitably influenced by BP’s decision to locate its headquarters within a modern concrete zone. Despite some scattered trees, the disfigured Texan landscape embodied the cliché that oil is either an old, difficult and dirty business or ‘new, good stuff’.

‘Nothing is more exciting than drilling,’ smiled Rainey. The Ulsterman, born in 1954, personified the oil man’s permanent restlessness. Easy oil – ‘the low-hanging fruit’ – was now history, and breaking frontiers to find new oil was ‘incredibly difficult’. Although BP’s skills in exploration were acknowledged by its rivals, the search beneath the Gulf of Mexico was particularly brutal. Excluded from most playgrounds, at best only one in three of BP’s operations would strike oil.

At the end of the show the 13 headed for a hotel conference room, each clutching a personalised folder listing 50 potential sites for test holes off West Africa’s coast, in Asia, South America and the Gulf of Mexico. Over the next four days they would decide where to spend more than $1 billion drilling through sand, salt, clay and rock. BP’s future depended on finding new oil but there were no guarantees. Although the exploration business was dependent on science, much remained beyond their control. Even the best geologists tended to deploy just three words: ‘possibly’, ‘probably’ and ‘regrettably’.

Like the others in the room, David Rainey had learnt his craft during four years in Alaska. In 1991 he had moved to the Gulf of Mexico. ‘I’ve been there when we’ve hit,’ he sighed, ‘and also when we missed. A dry hole and you feel like jumping out of the window. The emotions are indescribable.’ In 1999 some had been convinced that ‘Big Horse’, a test drill in the Gulf, was a certainty, but the news from the geologist on the rig that the fossils brought up from the deep were Upper Cretaceous rather than Miocene cast a gut-wrenching gloom across the Operations Room. ‘We’re 60 million years out,’ moaned the blonde team leader. Any oil would have been ‘overcooked’. Every one of the experts in the HIVE had suffered similar agonies.

In recent years, dry holes had wrecked major oil companies. The skeletons of Gulf, Texaco, Arco and other past icons mercilessly testified that only the fittest and bravest survived. By placing enough bets to balance the odds, BP’s executives calculated that what the industry uncharitably called ‘orphans’ would not sink their company. Success depended on taking risks and limiting mishaps, not least thanks to inspired luck. BP had made a fortune in Alaska when Jim Spence, the company’s chief geologist in Alaska, struck oil in 1969 after deciding to drill on the rim of a potential reservoir, because the cost of the licence on the ‘sweet spot’ was too expensive. Its rival Arco, drilling in the ‘sweet spot’, found only non-commercial gas. Alaskan oil saved BP, but did not make the company immune to future errors. In 1983 it invested $1.6 billion to drill in the frozen waste at Mukluk in Alaska. That they would find at least a billion barrels of oil, BP’s geologists told newspapers, was ‘certain’. Instead, they hit salt water. The oil had leaked away. ‘We drilled in (#litres_trial_promo) the right place,’ said Richard Bray, the local chief executive, ‘but we were simply 30 million years too late.’ For the next 10 years, BP became complacent and chronically risk-averse, searching for oil in the wrong places.

Rainey enjoyed the rigorous challenges during those impassioned days in the Exploration Forum. ‘Nothing gets through on salesmanship and goodwill,’ he warned. The debate ranged between ‘concepts’, immature proposals that were a twinkle in someone’s eye; to ‘play’, which was work in progress; and finally to ‘prospects’, which offered a serious chance to find oil. ‘We’ve got to focus on the big stuff,’ Rainey reminded his experts. Like its major rivals, BP could only survive by finding huge reservoirs, or ‘elephants’. ‘Little things make no difference to BP,’ John Browne had ordained, knowing that finding a small field could take as long as finding a big one. Failure, Rainey knew, would delight his rivals. Across the globe, Shell, Chevron, Exxon and smaller adversaries were holding similar conferences. Amid ferocious competition, the challenge was to accurately assess the cost of failure. Like Exxon and Shell, BP had been accused of being averse to risk, too eager to return money to shareholders rather than to invest in finding new oil. ‘Volume versus risk,’ said Rainey, echoing an oil industry truism. Reducing the 50 potential wells to 20 eliminated some risk. The holes chosen, Rainey predicted, would ‘glow in the dark’.

His self-confidence reflected oil’s changing fortunes. Twenty years earlier oil had sold at less than $10 a barrel. Without money, exploration was limited. In the late 1980s the Gulf of Mexico had been classified as an area where inadequate technology prevented new oil being found. Rising oil prices since 2003 had invigorated the search, and technological advances delayed the death certificate. With prices hovering around $25 a barrel, the public assumed that the international oil companies would continue to produce unlimited supplies. The oil chiefs knew the opposite. Finding new oil was becoming harder, and opportunities to enter oil-producing countries were diminishing, although new technology consistently embarrassed the pessimists. Within the Big Brain Room were the architects of BP’s latest success, which had restored the company’s credibility. In 2004 ‘Thunder Horse’, a 59,500-ton, semi-submersible cathedral, the world’s biggest platform, had been towed from Korea and positioned over an ‘elephant’ reservoir in the Mississippi Canyon, identified by the US Department of the Interior as Block 778, 125 miles south of New Orleans. Designed to extract an astounding 250,000 barrels of oil and 200 million cubic feet of natural gas from four miles beneath the waves every day, it led to chatter among the Gulf’s aficionados that BP was overtaking Shell, the pathfinder in the region.

Since 1945 oil had been extracted from the Gulf’s shoreline waters, especially by Shell. For years the deep-water limit was assumed to be 1,500 feet. John Bookout, the head of Shell’s exploration in the Gulf, challenged that assumption, believing that the Gulf, like Prudhoe Bay in Alaska, would minimise America’s reliance on imported oil. In May 1985 the drill ship Discoverer Seven Seas began boring 12 exploratory wells in 3,218 feet of water. Oil was found, and a Ram-Powell platform weighing 41,000 tons was towed to the site. That project, also financed by Amoco and Exxon, confirmed that oil could be recovered from the depths and be piped 25 miles along the sea bed to terminals.

Bookout next focused on the nearby Mars field, 130 miles south-east of New Orleans. In 1987 Conoco had lost millions of dollars drilling dry holes there. Unable to afford further exploration from rigs floating 3,000 feet above the sea bed, the company sold the rights to Shell. Bookout was convinced that the drill should have been placed just 400 yards away. Soon after Shell’s purchase, Jack Golden, BP’s head of exploration in the Gulf, offered to buy a third of Shell’s investment in return for sharing a proportion of the cost. Passive investment, or ‘farming in’, by competitors was not unusual in big projects. Even the mighty oil corporations needed to mitigate their risks. Golden had regretted BP’s tardiness in bidding for the US government’s first round of ten-year licences for deep-water exploration in the Gulf, and his irritation was compounded by Shell’s perfunctory rebuff of his offer. Shell’s executives did not want to share their potential profits, especially with BP. Over the previous decade they had enjoyed watching BP’s struggle to survive, and some hoped their rival might even go out of business, allowing Shell to absorb the wreckage. But just one year later the companies’ fortunes were reversed. Shell had wasted $300 million drilling a succession of dry holes in the Chukchi Sea off Alaska. In urgent need of finance, the same executives had reluctantly agreed to Golden’s offer to share in the Mars field. In return for paying 66 per cent of the well’s costs, BP would receive one third of Mars’s income. In May 1991, Shell struck oil. ‘Getting Mars was a bonanza in 1988,’ said Bob Horton, BP’s chief in America. ‘Mars saved BP from bankruptcy.’ Dean Malouta, Shell’s skilled Greek-Italian inventor of sub-sea technology, would bitterly agree: ‘We are crazy to give BP a lifebelt. They brought nothing to the table except money.’

Shell’s discovery, and the introduction of new engineering techniques, washed aside a whole lexicon of uncertainties and prejudices which had gripped the Gulf’s explorers. Not only had Shell’s engineers drilled deeper than anticipated, but the gush of oil was far greater than anyone had expected. Even before the rig for Mars was built and towed from Italy, Shell had broken another world record. In 1993, using a rig tied to the sea bed by barn-sized anchors in 2,860 feet of water, the company’s geologists had found a giant reservoir called Auger 5,000 feet below the sea bed, while in 1995 at the nearby Mensa field, abandoned in 1988 as technically too difficult, Shell’s new technology and about $290 million enabled oil and gas to be extracted from 5,400 feet.

Finding those big reservoirs of oil had been coups for the geologists. In their Houston office, John Bookout’s team had plotted and recreated an area of the Gulf called the Mississippi Basin. Located just beyond the mouth of the Mississippi river, they traced where the river’s sand had been deposited 25 million years earlier, and deduced the sites of potential oil reservoirs. Their findings were confirmed in 1995. Predictions that production at Mars would peak at 3,500 barrels a day were far outstripped as it hit 13,500 barrels a day, with the promise of 30,000 in the future. Dean Malouta was an equal architect of that success. At Auger’s wellhead, 5,412 feet below the sea’s surface, Shell installed a production system and pipeline to bring the oil onshore. The production rig was held in position by six thrusters on its hull, linked by computers to acoustic beacons on the ocean floor which transmitted signals to hydrophones on the rig. Shell’s triple success reinforced the entrenched despondency in BP’s offices across town.

Ever since David Rainey arrived in Houston in 1991, the gloom in BP’s headquarters had been seared on his mind. After three years’ work, BP had hit yet another dry well. ‘Sycamore’ in the Gulf’s KC Canyon had wasted $20 million. Jack Golden had taken the failure personally. ‘Every time we hit dry hole,’ the wizened American explorer told Rainey, ‘we look back and see that we didn’t have to do this.’ In the race for survival, Golden was as conscious as others that the oil majors’ share of the world’s reserves had fallen to 16 per cent, and the national oil companies, driven by politics rather than economics, were less inclined to give them access to their oilfields. Five years later, BP’s continuing depressing record imperilled the company’s existence. At least BP could rely on its share of the profits from Shell’s success at Mars – where two more reservoirs would be found at deeper levels, promising to deliver 150,000 barrels a day – and learn lessons from Shell’s success, replicated in ‘Bongo 1’, 14,700 feet below the sea off Nigeria’s coast. ‘We’re taking two years off and focusing on learning,’ Golden declared.

In 1996, Shell’s success turned sour. The company struck a succession of dry holes in the Gulf, as did their rivals at BP, Texaco and Amoco. After the seventh dry well, everyone stopped. Exxon’s explorers congratulated themselves for their refusal to risk millions of dollars just as oil prices were falling, and for waiting until others had neutralised the hazards. The failures coincided with the US government’s announcement of a second auction of leases for deep-water exploration in the Gulf. Shell’s breakthrough should have triggered a boom to buy new leases, but the rash of dry wells caused head-scratching across Houston.

The explorers gradually realised that a mile-thick layer of salt beneath the sea bed, below the silt that had poured out of the Mississippi river and above the oil-bearing rocks, was causing scientific mayhem. Finding oil relies on plotting formations of rock created up to 60 million years ago. Based on a century’s experience, geologists know which rocks are likely to contain oil. Their knowledge guarantees some predictability in the Middle Eastern deserts, the Siberian tundra and the North Sea. In those areas, the question was not whether oil would be found, but whether the quantity was sufficient to make its exploitation commercially viable.

Identifying rock formations 70,000 feet below the Gulf’s surface was technically feasible. Ships dragging seismic equipment were regularly criss-crossing the Gulf, firing sound bops to the sea bed and, every millisecond, recording the pattern of echoes zooming back from below. Old-timers recalled watching pallets of magnetic tape of seismic data being unloaded by forklift trucks: processing them through nine-track computers took three months. Twenty years later, all that information could be stored on an iPod and analysed by computer within two hours. But either way, the results in the Gulf were notoriously inaccurate. As the seismic soundwaves passed through the salt, the ricocheting bops from the rock strata were grossly warped. ‘Recording the sound through salt,’ Rainey realised, ‘is like photographing through frosted glass. The image and the sound is distorted.’ Identifying the location of oil through salt was impossible. Shell’s early successes had been due to nothing more than luck. ‘Don’t worry,’ David Jenkins, BP’s head of technology, assured John Browne. ‘You’ll find more Mars-like oilfields once we can see through the salt.’

Texaco and Amoco had developed computer programmes to show two-dimensional images of rocks, slightly reducing the risk of dry holes. During the 1990s the experts predicted that 3D, and even 4D, images would further reduce the risk but only drilling produced conclusive evidence. On the grapevine, BP’s executives heard Shell’s boasts about its success with Chevron at the Perdito field in the Gulf, which it claimed was the result of superior seismic processing. ‘It’s a strong indicator of our success,’ said Dean Malouta. Rainey was dismissive about Shell’s reliance on seismic evidence rather than ‘human experts’. In wild frontier areas, Rainey believed in geology. He could cure the salt problem, but the cost would be $100 million. BP could not commission any trials unless a rival corporation agreed to share the expenditure.

At the time, BP was a junior partner with Exxon in unsuccessfully exploring a block in the Gulf called Mickey. Faced with poor seismic images, Rainey tried to persuade BP’s richer associate to finance more expensive tests. The latest computers producing three-dimensional images of the rocks were being fed seismic data recorded by ships travelling half a mile apart. BP had financed the development of software using seismic echoes recorded from cables just 12 metres apart, considerably improving the 3D image. But gathering raw data across a 300-square-mile block would be hugely expensive. ‘We need to go back from geophysics to geology,’ Rainey explained to Exxon’s geologists. ‘We need to put everything back in its proper place.’ Renowned for their technical excellence, Exxon’s executives are also infamous for believing that anything not invented by Exxon is certainly wrong. Ideas offered by an enfeebled, recently denationalised British operator were thus automatically suspect. Unlike BP, Exxon had focused on finding oil in West Africa, especially Angola, and with its enormous spread of interests the corporation lacked the financial imperative to find oil in the Gulf of Mexico. However, Exxon’s technicians were eventually convinced to finance the experiment, and Rainey’s idea was proven to be correct. Other oil companies were spurred to adopt the enhanced seismic measurements, reducing the cost for BP.

By itself, the intense mapping of rocks was worthless. Identifying the location of oil depended upon producing accurate geological maps. The oil companies raced to recruit mathematicians and geophysicists to compose computer programmes based on algorithms to rectify the seismic data. Rainey’s challenge was to recruit better mathematicians than his rivals, especially Amoco, the masters in this field. The breakthrough coincided with BP leasing a nine-square-mile block called Mississippi Canyon 778 off Louisiana, recently abandoned by Conoco after a succession of dry wells.

The opportunity to buy the block arose after Conoco had failed to find oil at Milne Point in Alaska. As oil prices slid, the company needed to cut its losses, and BP agreed to trade Milne Point for acreage in the Gulf of Mexico. Nonchalantly, the BP negotiator said, ‘There’s a value gap in the deal. We’ll agree if you throw in Block 778.’ Conoco’s negotiator was happy to oblige. Conoco, the BP team believed, had committed a cardinal error by misreading the geology at an unexplored depth. Concealing BP’s calculations from its rivals across town, Rainey was confident of success, even though the whole Mississippi Canyon area covered 5,000 square miles.

‘Everyone in the Gulf is making the same mistake,’ Rainey said in 1996. ‘The model’s wrong. We’re focusing on the geophysics.’ Rainey was convinced that his unique understanding of the Gulf would enable him to pinpoint a reservoir: ‘Shell and Chevron are fixated by seismic tests. They’re too rigid. They’re forgetting about the geology.’ While Alaska’s rocks had taken three years to master, the complications in the Gulf took 40 years to understand. ‘Everyone in the Gulf is focused on “top down”, relying only on the seismic and forgetting the rocks! It should be “bottom up”.’ Rainey insisted that BP’s rivals were looking at seismic images corrected by computers, and not at the rocks themselves. In their quest to find the rocks which 10 to 20 million years ago had heated up and generated oil, they had ignored the key factor: less dense than rock, oil attempts to escape. ‘The deeper I go, I can see the traps, but I can’t see the hydrocarbons,’ said Rainey. ‘We need to find the plumbing’ – shorthand for the ‘migration pathway’ where the oil had flowed and become trapped.

Peering at the 3D images generated by the computers in the HIVE, Rainey reminded his team: ‘The Gulf is the most complex area on the planet. You’ve got to stay humble because you can never crack the Gulf. Just as you think you have mastered it, some rocks come up and kick you in the backside. Science is helpful but in the end success depends on human understanding.’ The team debated whether the white columns spiralling out of the rocks on the screen were salt or sand. If they were sand, the oil would have leaked away and a $100 million test drill would be wasted. ‘Follow the salt,’ Rainey urged. The salt was an obstacle, but also an asset. The secret was to find a lump or hill rising within the rock: that would be the trap where the oil would gather, unable to leak out, sealed by the impenetrable salt. ‘I need people who think like a molecule of oil – where will it go into the rock?’ said Rainey. In his efforts to resolve the problem he had abolished the demarcation between geologists and geophysicists. Working together, they could determine whether the rocks had ever contained oil and whether the oil was still trapped. Like the pioneers in the space race, Rainey sought innovations, but the best he could hope for was an informed guess.

Risk is the oxygen of oil companies. Success and survival depend on tilting the risk in the company’s favour. In January 1996, Jack Golden told John Browne that BP’s explorers had understood the lessons of Sycamore and the salt. The corporation, he urged, should make the leap. His team calculated that, rather than their rivals’ estimates of 10 billion barrels of oil within the rocks below the Gulf, there were probably 40 billion barrels. In the second round of bidding for ten-year leases in the Gulf, BP should outbid Shell and Chevron. Browne agreed: the company would buy more acreage in ultra-deep water than any of its rivals.

The investment coincided with the industry’s slide towards disaster. 1998 was a dog year in the oil trade. The price of oil slumped below $10 a barrel, the lowest in 50 years. There was surplus of production, and cut-price petrol was being sold across America and western Europe. The protection enjoyed by vested interests was crumbling. Thousands of experienced engineers were fired, rigs lay unused or could be hired for 25 per cent of the old rates, and bankruptcies ravaged the industry. ‘I can’t tell you absolutely this is the bottom, but we haven’t seen anything like this,’ admitted Wayne Allen, the chairman of Phillips Petroleum. Potentially, the only profitable activity was deep-water drilling in the Gulf of Mexico, but hiring rigs to drill to a new record 7,625 feet below the sea bed and bore down to 12,000 feet cost $200,000 a day. New rigs were being designed to moor in over 10,000 feet of water and drill nearly 30,000 feet into the rock. The 3D image of Block 778 suggested there was oil somewhere four miles below the sea bed. A test bore in Block 778 would cost $100 million. The unanswered question was, where precisely to drill a 12-inch hole four miles through the rock?

At first, the debate among the 13 explorers was sterile. Red dots from lasers darted around the screen, identifying strengths and weaknesses for the drill’s path. At last the discussion became animated, and a route was chosen. The privilege of naming Block 778 was given to Cindy Yeilding, an attractive blonde geologist – an unusual sight in a male-dominated world. Having a passion for Neil Young’s music, she chose ‘Crazy Horse’, the name of his band. Protests soon arrived from the Sioux Indians, defending the memory of their chief, so the plot was renamed ‘Thunder Horse’.

On 1 January 1999, Rainey and Yeilding sat in a bland, windowless second-floor office, dramatically named the ‘Operations Room’, following the progress of a computer-guided drill gouging 29,000 feet through silt and salt towards the porous sandstone and shale where they believed oil had been trapped for eight million years. Only two rigs in the world were able to drill to such depths. Fortunately one of them, Discoverer 534, had already been hired by Amoco, which had just been bought by BP. The cost was $291,000 per day. Reservoir engineers had produced a computer programme to steer the bit around perilous flaws, after which it was hoped that oil would gush through the metal casing to the surface. Several drill bits were broken and replaced, but the geologist on the rig reported that the rocks brought up from the depths were the right age. ‘We’re at 13.6 million years,’ he told Houston, hoping that fossils 14.7 million years old, indicating the possible presence of oil reserves, would soon appear. In real time, Rainey and Yeilding scrutinised the constantly changing numbers flashing on a bank of screens for evidence of oil. One sensor attached to the drill reported whether gamma rays detected clay – a negative reading indicated oil. Another sensor measured resistance to electricity – a positive reading indicated oil and gas, because neither conducts electricity. For the next 186 days other members of the team followed the drill’s progress on their laptops, at Starbucks or in their beds at night.

‘Our sandbox has just got bigger,’ Rainey exclaimed on 4 July, as the drill’s sensors reported oil. Nine months later, the size of the reservoir was confirmed: one billion barrels of oil, the biggest ever discovery in the Gulf of Mexico. ‘The prize was beneath the salt,’ said Rainey, ordering everyone to secrecy until all the neighbouring acreage had been signed up by BP. After weeks of around-the-clock work, the explorers and their families discreetly celebrated their success with champagne and dinner.

Around Houston, BP’s triumph was greeted with mixed emotions. In normal times, the city fathers would have been thrilled. More oil would mean a boom, but at $10 a barrel, that was not going to happen. The American public, seemingly prepared to pay more for a bottle of water than for a gallon of petrol, were manifestly ungrateful for any Big Oil success. Unaware of the technological achievements involved, the oil industry was taken for granted by a generation of Americans who had grown up regarding cheap gasoline as their God-given birthright. Filling their petrol tank did not make anyone feel good. Ever since nearly 11 million gallons of oil had spilled from the tanker the Exxon Valdez into Alaska’s pristine waters in March 1989, the public’s antagonism towards Big Oil had become entrenched. Big Oil had overtaken Big Tobacco as a focus of hatred. Within the American public’s DNA was a belief that oil was a decrepit rust industry unfairly extracting tax from honest citizens. Few appreciated that Thunder Horse would fractionally reduce America’s dependence on imported oil, which provided 60 per cent of its daily consumption. ‘Guns, God and Gasoline’ may have represented freedom for many Americans, yet the oil companies, apparently ambitious for ever more power while remaining unresponsive to the public, were neither understood nor trusted.

In that hostile environment, BP’s achievement was acknowledged only by its rivals. The company’s reputation had been soaring since 2000 because of aggressive acquisitions. Exxon, Shell and Chevron anticipated their own successes, although the timing was uncertain. While the kingdoms of the major oil companies were diminishing, BP, the largest oil producer in America, was more admired than hated. David Rainey was proud to have met the architect of that success, BP’s chief executive John Browne.

As the guest of honour at a packed dinner in Houston in August 2002, Browne had been hailed as a hero. BP’s dapper chief executive, regarded as an idealist and a maverick, was loudly applauded for describing the Gulf as the ‘central element’ of BP’s growth. No one in his audience underestimated BP’s importance. The company had become the Gulf’s largest acreage-holder, and owned a third of all the oil discovered there. In the oil business, strong personalities made the difference, and Browne, like an evangelist, was wooing his audience. ‘We’re going to spend $15 billion here over the next decade,’ he promised, ‘drilling between four and seven wells every year.’ His enthusiasm was understandable. Oil which had been inaccessible in 1998 was now, he knew from Rainey, within their grasp. If the Houston team was successful, BP would outdistance its competitors. Only a handful of doubters suspected that Browne loved being treated like a rock star more than he loved rocks and their contents. Older members of his audience knew that oil had always attracted the ambitious and the larger than life. The same man who controlled 90,000 employees and pledged to serve mankind could also behave unaccountably. That was the nature of multinationals.

Exploration for new oil had barely increased over recent years. Since the mid-1970s, over 1,800 new wells in the Gulf of Mexico and in the Atlantic Ocean off Brazil, Angola and Nigeria had promised to deliver 47 billion barrels of oil. But, like a herd, the major oil companies assumed that prices would not rise, and feared risking their profits and their share prices. Their investment in the search for more oil was cut, and many wells had been abandoned. Yet, on reflection, Thunder Horse was recognised as marking a small revolution, and formerly abandoned areas were reconsidered. ‘Elephants’ meant big, fast profits. Thunder Horse meant (#litres_trial_promo) there was at least another 100 billion barrels of oil to be found under the sea in the Gulf and the Atlantic. Those who believed oil supplies would ‘peak’ between 2011 and 2013 were challenged to reconsider their doom-mongering predictions. The only disadvantage was the cost. Convinced that oil would not rise above $30 a barrel, Browne congratulated himself that his sharp reduction of BP’s costs would ensure Thunder Horse’s profitability.

Positioning the Korean-built steel rig 6,050 feet above a small hole in the sea bed caused jubilation among BP’s beleaguered staff. ‘The serial number of each piece of equipment is 001,’ exclaimed Rainey with pride. No one on the platform expected to actually see oil. Gushers of crude soaring into the air were relics of history. Oil produced in the Gulf was diverted as it emerged from wells into the Mardi Gras system, a network of about 25,000 miles of pipelines criss-crossing the sea bed from Texas to Florida. BP’s task was to link Thunder Horse to the system. The obstacles were the depth and distance to the terminals: divers could not survive a mile beneath the surface. But finding elegant solutions to apparently intractable problems caused oil men’s hearts to beat faster. BP’s answer was to use robotic underwater vehicles, powered by batteries and guided by sonar from the Houston control room, to find a route for the pipes to cross the furrowed, steep Sigsbee escarpment of mountains and valleys, and then to lay and weld the pipes and valves. On 18 July 2005, Thunder Horse was nearly ready. But then Hurricane Dennis hit the Gulf of Mexico, and under American regulations every engineer was compelled to abandon the rig.

The team closed the operation down, but those who gave the order from Houston forgot that the complicated procedures had never previously been executed. After the hurricane passed, the returning teams discovered the rig tilting at a dangerous angle. Defective valves in the hydraulic control system had allowed water to drain out of the ballast tanks. Oil was also leaking from equipment on the sea bed that linked the well to the pipeline. BP’s engineers had not noticed the poor quality of the manufacturers’ work. None of BP’s designing engineers had taken into account the fact that only valves manufactured from nickel could sustain the extraordinary pressures and temperatures on the sea bed; and the welding had been faulty. The flaws were superficially simple, and exposed BP to ridicule from its rivals. Sending divers to carry out repairs a mile down was impossible, and the damage was too great to repair with robots. The equipment would have to be brought to the surface. It was not clear where the blame lay, but the sums involved were too large to reclaim from the designers and the Korean shipyard. Publicly, BP reported (#litres_trial_promo) that the rig would be unusable until 2007, and that the repairs would cost £250 million. Such optimism caused wry smiles across Houston.

In normal times, the employees of the major oil companies cooperated to serve their common interests, but in the competitive atmosphere of the time mischievous gossip raged across Houston, and the spirit of BP’s humiliated team faltered. Thunder Horse was more than just a tilting platform – it was symbolic of the company. ‘Poor design and supervision,’ smiled Shell’s head of design about the calamity. ‘BP always shoot from the hip,’ said a Shell technician, characteristically dismissing the abilities of a rival. ‘Their technology and engineering is second rate. They’re always coming to us for help.’ He dismissed BP as a late arrival, hanging onto Shell’s coat-tails, copying its rivals or outsourcing. A colleague agreed that BP was a fast follower, depending on ‘off-the-shelf go-buys’.

David Rainey was indignant at such criticism. History, he believed, undermined Shell’s claims of superiority. He felt the company had rested on its laurels, and that following the success at Mars it had been closed to new ideas in the Gulf. ‘Deep Mensa’, an $80 million well bored by Shell in 2001, had been a disaster. Technicians monitoring the data witnessed the ‘crash out’ – the uncontrolled vibrations which smashed the drill as it struggled through fractured rock. Even the best explorers risked embarrassment on the frontiers of the industry. Mortified, Shell’s engineers had taken a year to rectify their mistakes.

Shell’s expensive errors had been concealed from the public. But Thunder Horse appeared to be a warning to Russia and other national oil companies not to rely on BP. The company’s explanations were gleefully rebutted by a Chevron vice president: ‘It’s defeatist to say “Stuff happens.”’ That criticism was also rebutted by Rainey. During the 1980s, he recalled, Chevron had suffered multiple drilling failures which had crippled the company. Cooperation in the Gulf with Chevron, Rainey said, had caused arguments. In 2001, BP’s explorers had collaborated with Chevron to test drill the ‘Poseidon’ block. ‘They’re off the structure,’ Rainey had complained, urging Chevron to reconsider the test location. Chevron insisted on its expertise, but missed the oil reservoir. Expressing condolences for the failure, BP negotiated to inherit the ‘barren’ field. Rainey’s team had precisely calculated the top of the reserve’s ‘hill’, hit a billion barrels of oil, and renamed the well Kodiak.

BP’s engineers were however not protected from the reproaches of a leader of Exxon’s exploration team. As the junior partner in Thunder Horse, Exxon was suffering losses caused by BP. Lee Raymond’s jocular description of John Browne as a ‘bandit’ found many echoes among Exxon’s executives, especially from the technical director who recalled a fault at the BP’s Schiehallion oilfield off the Shetland Islands which had compelled BP to lift equipment off the sea bed not once, but twice. On two occasions the company’s engineers had failed to spot valves installed upside down by the contractors. While Exxon’s engineers would at worst have spotted the fault and learned the lesson, BP’s management system was not equipped to evaluate the technology, neutralise risks and absorb the lessons.

Exxon, as the industry leader, proudly avoided technical disasters. Since the days of John D. Rockefeller, the nineteenth-century founder of Exxon’s forerunner Standard Oil, the corporation had standardised the rigorous management of costs and processes to prevent financial or technical errors. Like God, the system and the company were infallible. Relying on a culture developed since Standard Oil’s creation in 1870, Exxon was built on tested foundations. By comparison, BP in 2004 was a conglomerate including former Standard Oil companies – Sohio, Arco and Amoco – still struggling to replicate Exxon’s excellence and standardisation. While Raymond concealed uncomfortable truths by cultivating a mystique and keeping outsiders at a distance, Browne was constantly selling himself and his improvised company. Nevertheless, both men could justifiably claim considerable technical achievements to ameliorate oil shortages; yet their skills were spurned by oil-producing countries.

One manifestation of the mistrust of BP, Exxon and the other major oil companies lay across the Gulf, in Mexico. The country, the world’s sixth largest oil producer, owned vast quantities of unexplored oil beneath its coastal waters. To Browne’s frustration, Mexico’s national constitution forbade the participation of foreign companies in its oil industry, and 1938 nationalisation laws had expelled American oil corporations, damaging Mexico itself. Pemex, the national oil company, mired in intrigue and patronage, had become notorious for its inefficiency, and as a slush fund for local politicians. Like so many national oil companies, Pemex was expected to provide employment – there were 27 workers on each of its wells, compared to the industry’s average of 10. And those employees, lacking technical skills, relied on services provided by Schlumberger, which posed no challenge to Pemex’s sovereignty.

In 2002 Mexico’s president Vicente Fox sought to change that situation. The facts were alarming. Mexico’s oil production was falling. The reserves in Cantarell, Mexico’s biggest field in shallow water, which accounted for 60 per cent of the country’s production, was declining by 12 to 15 per cent every year. In 2002 the government borrowed and spent $50 billion to pump more oil, but it had spent only $5 billion on exploration in four years, none of which was in deep water. Consequently, Mexico’s proven reserves (#litres_trial_promo) – the oil that was technically and economically recoverable – had been reduced within three years from 15.1 billion barrels to 11.8 billion. The country had neither the expertise nor the money to undertake deep-sea drilling, and its plight was compounded by its inability to refine sufficient crude for its domestic consumption. Instead, Pemex exported crude oil to the USA and paid mounting prices for the petrol and other refined products imported from America. Natural gas was flared or burnt at Cantarell because Mexico could not afford to collect and pipe it across the Gulf. Within a decade, the country would need to import oil. Fox urged the vested interests to change the 1938 constitution and allow foreign investment, with the condition that any benefits would materialise only after a decade. His exhortations were ignored. Mexico’s political leaders cared even less about their introverted and protectionist neighbour than about their own plight, an attitude which weakened the oil majors and encouraged the ambitions of the Chinese and other consuming nations to make unrealistic offers to Mexico and neighbouring Venezuela, which was even more beleaguered by falling production. For those governments, local politics and world prices were more important than America’s energy needs.

These seemingly disparate events around the Gulf of Mexico became interlocked in the summer of 2005. In August Hurricane Katrina hit the Gulf, passing over Thunder Horse and devastating New Orleans. 220-mph winds destroyed old rigs, and struck the Mars rig and 11 refineries. One quarter of all America’s oil production and one half of its refining capacity was paralysed. Overnight, Americans understood the vulnerability of oil and gas production in the Gulf. Four weeks later, Hurricane Rita hit the area, damaging deep-water platforms and compounding the difficulties of repairs. Fifteen years of low fuel prices in America were over.

Although BP’s oil traders in Chicago and London rank among the most aggressive, David Rainey was unaware of those who were profiting from these calamities. He had nothing in common with that breed, speculating in the darkness, welcoming the probability of oil shortages.

THREE The Master Trader (#ulink_3a94f5a7-174e-555e-aa01-8b14a0210bf2)

Andy Hall was cheered by the reports from the Gulf of Mexico. Bad news from oilfields usually satisfied the tall, unshaven trader. Moving from his barren cubicle into the adjoining trading area, he gazed at one of the 15 screens and calculated how much he was up that day. As usual, at 5 p.m. he headed off to practise callisthenics for an hour with a ballet teacher in Norwalk, near the Connecticut coast. The rising price of oil in spring 2005 seemed to confirm Hall’s bet that the world was running out of crude. ‘The trend is your friend,’ he frequently told his staff. ‘Ignore the trade noise. Play it long, because I’ve got ample time to pay.’ Anyone, Hall knew, could buy oil. The skill was to sell at a profit. Ever since John Browne had predicted in November 2004 that oil prices would stick at around $30 a barrel – although they had already reached $50 – and had gone unchallenged by oil’s aristocrats including Lee Raymond, Hall had believed that his massive gamble on soaring oil prices was certain to pay off. Although he was coy about the exact amount, his first stakes were quantified at around $1 billion as oil hovered at about $30, the price, Hall believed, was heading towards $100 and possibly higher.

Lauded for being ‘clever as sin, outgunning everyone in the brains department’, and referred to as ‘God’ by rival traders, Hall immunised himself from daily market sentiment because he was not part of the herd. An Oxford graduate and art connoisseur, soft-spoken and deceptively shy, he abided by the old adage, ‘Oil traders work in a whorehouse, so don’t try to be an angel in this business.’ Originally trained by BP, he understood the mentality of Big Oil’s chiefs, and believed that Lee Raymond, John Browne and the rest were in denial. Some of the smaller oil producers, like the Austrian and Italian national oil companies, had even bought hedges pricing oil at $45 to $55 a barrel, which would lead to huge losses as prices rose. In March 2005, two years after Hall had made his first bet, and oil was at $55 a barrel, Arjun Murti, a Goldman Sachs analyst, predicted that the price would reach $105 ‘in a few years’. This was greeted by widespread scepticism, and Murti was criticised for serving the bank’s interests. Unusually, Henry ‘Hank’ Paulson, Goldman Sachs’s chief executive, was required to defend him. By late spring 2008, as the oil price rose beyond $105, Hall had personally pocketed over $200 million in bonuses, and expected to make even more. Murti was being hailed in some quarters as brilliant.

Hall had traded oil for nearly 30 years. Since he had arrived in Manhattan in 1980, disenchanted by England’s claustrophobic social system, he had metamorphosed into an aggressive trader. ‘I’m basically interested in one thing – business,’ he told his trusted circle. ‘I come in every day to make money.’ Whatever the oil price’s wild fluctuations, and regardless of whether he was earning or losing millions of dollars, Hall coolly controlled his emotions: ‘This is not a zero-sum game because we’ve been doing it for too long to get excited. Emotionally the ups and downs get evened out.’ Over the years Hall had attracted both praise and loathing for perfecting the ‘squeeze’ – causing the oil market to change, and forcing other traders to buy from him at a premium. ‘We’re not here to help others,’ he said. In the old days when trading was carried out on the floor of the stock exchange, and dealers had occasionally yelled, ‘Am I fucking long or fucking short?’, Hall had smiled about the screaming losers who always heaped blame on everyone except themselves.

Experience honed Hall’s pedigree. Unlike his younger rivals, he had started his career in BP’s supply department in the midst of the first oil crisis in 1973. Until then, BP and the other oil majors – Exxon, Mobil, Shell, Chevron, Gulf and Texaco, together known as the Seven Sisters – who controlled 85 per cent of the world’s oil reserves, had perfected a cosy arrangement to fix the world price. Their representatives met regularly to discuss their costs and calculate their required profits. Blessed by a near-monopoly and a surplus of oil, the seven chairmen would travel as statesmen to the Middle East and inform the Arab producers the price the cartel would pay for their oil the following year, usually around $25.25 per ton, or $3.60 a barrel. The chairmen acknowledged each other’s ‘turf’ and, acting like governments, used their intelligence agencies and military supremacy to impose one-sided agreements. The Arab producers meekly signed fixed-price contracts, Exxon formally announced the price, and the crude continued to flow from the Middle East to refineries in Europe and America, although the USA could rely on its own plentiful supplies, supplemented by additional oil from Venezuela and Mexico. Before 1939, Europe imported 90 per cent of its oil from America, but after 1945 it switched to Middle Eastern oil, which cost 20 cents a barrel to produce compared to 90 cents for oil from Texas. Even American oil companies increased their imports. To placate small US producers, who were protesting about competition from Arab oil, in 1956 President Eisenhower limited imports, thus increasing the glut in the Middle East. Four years later, without consultation, Exxon and the other Sisters unilaterally cut prices for oil producers. Resentful of the cartel, Saudi Arabia and four other leading Middle Eastern oil producers met in Baghdad in 1960 to form OPEC, to challenge the Seven Sisters’ ownership of their reserves.

The new, unfocused group confronting the Western cartel remained ineffectual until the Six-Day War in 1967. Resentment against America and Britain sparked the declaration by Saudi Arabia of an oil embargo, but this show of bravado descended into farce when the Seven Sisters efficiently organised increased supplies from Iran and Venezuela, and Saudi Arabia’s income plummeted. The fiasco emboldened Muammar Gaddafi after his coup in Libya in 1969. ‘My country has survived 5,000 years without oil,’ he told Peter Walters, BP’s managing director, during their first tense meeting in 1970, ‘and unless we get more money we will stop supplies.’ A huge spurt in demand (#litres_trial_promo) had prompted Exxon to forecast for the first time a world shortage of oil, and the fear of scarcity, plus America’s increase in imports to 28 per cent of its consumption, served the interests of OPEC. The Seven Sisters, OPEC knew, could only control prices so long as there was a surplus of oil. Armand Hammer (#litres_trial_promo), the chairman of Occidental, was the first to capitulate, reducing production and increasing his payments to Gaddafi in May 1970. Gaddafi’s success encouraged the Shah of Iran, and then the governments of Venezuela and Saudi Arabia, to demand price hikes. The oil companies feared losing their power to threaten the producers with a boycott if they rejected the prices they stipulated. Meeting in New York on 11 January 1971, 23 oil companies agreed, with the American government’s permission, to breach the anti-trust laws, and confront Libya and OPEC. Their unity was short-lived. During negotiations in Tehran and Tripoli in March 1971, the companies’ agreement disintegrated, and prices were increased beyond their limits. ‘We’ll never recover,’ Walters lamented. ‘There is no doubt that the buyer’s market for oil is over,’ admitted David Barran, Shell’s chairman. The Arabs, he noted (#litres_trial_promo), felt betrayed by the West. Sensing weakness, the Libyan and Iraqi governments began partial nationalisation of Western oil interests in 1972. The United States, said Gaddafi, deserved ‘a good hard slap on its cool and insolent face’. The Shah agreed. He nationalised 51 per cent of the oil majors’ Iranian interests and increased prices again. Peter Walters was meeting OPEC representatives in Vienna on 6 October 1973 when he heard that Egypt and Syria had invaded Israel during Yom Kippur, the most holy day in the Jewish calendar. The relationship between the OPEC producers and the Seven Sisters had changed unalterably. The public and the politicians blamed the oil companies for creating chaos and making excessive profits. In the vacuum of considered energy policies, Western governments were accused of perpetuating a ‘fool’s paradise (#litres_trial_promo)’ by relying on arrogant oil executives to supply civilisation’s lifeblood. Eric Drake, BP’s chairman, admitted to Andy Hall and other graduates recruited during that epic year that oil would probably rise from $2.90 to the unprecedented price of $10 a barrel. Prices actually rose to $12, provoking the Seven Sisters’ disintegration and the industry’s transformation. Oil was no longer a concession or a product for refining, but became a tradable commodity attractive to cowboys.

Until 1973, oil traders hardly existed except for a fringe group who, to the irritation of BP and Shell, shipped crude from Russia to Rotterdam to supply West Germany and Switzerland. After the Seven Sisters were disabled, BP and Shell no longer felt obliged to protect the Arabs’ monopoly. Whenever the corporations had a surplus of crude, they traded it for instant delivery in Rotterdam, one of the world’s largest oil-storage areas. Anro, a subsidiary of BP managed by Yorkshireman Chris Houseman, began speculating in oil and refined products based on ‘spot’ prices quoted in Rotterdam, and Shell established Petra, a rival trader in the port. Gradually the two companies replaced the fixed-price contracts agreed with OPEC with contracts based on prices quoted among traders on the day of delivery in Rotterdam. Oil became a traded commodity in an unregulated market, subject only to finance from banks and counter-party risk.

The treatment of oil as a commodity akin to sugar, rice, coal and particularly metal ores caught the attention of Marc Rich, a secretive trader employed by Philipp Brothers, the world’s largest supplier of raw materials, based in New York. Ambitious for wealth, Rich would achieve notoriety in 2000 when, in the last moments of the Clinton administration, the president granted him a pardon on charges of tax evasion. Rich’s journey had begun in the late 1960s. Accustomed to play both sides in order to control the market for any mineral buried in the earth, he and his partner Pincus (‘Pinky’) Green had realised that the Seven Sisters’ control of the oil surplus would eventually be challenged and replaced by the producers’ governments. Like the handful of rival traders in London, Rich understood both the complications and the simplicity of oil. After sophisticated technology had found a reservoir, basic project management would efficiently pipe the crude to a tanker for delivery to a refinery. To earn a real fortune from trading oil, Rich knew, required understanding of refining – heating crude oil to boiling point and separating the parts: naphtha for chemicals and the distillates to make petrol, jet fuel, heating oil, kerosene and diesel. Making a profit from the manufacture of those fuels depended on understanding the constraints of the 600 refineries in the world, each calibrated to process a particular crude from roughly 120 different types. If a refinery calibrated for Iranian crude was denied supplies, the adjustment to process the alternative heavy, ‘sour’ sulphur crude from Saudi Arabia or the lighter ‘sweet’ crude from Iraq was expensive and time-consuming. Profiting from oil, Rich knew, depended on anticipating the circumstances that could cause a disruption of the market or spotting a potential shortage, and securing alternative supplies.

The biggest profits were earned by breaking embargoes, of which none was more high-profile than that against the apartheid regime in South Africa. A company called Sigmoil, loosely connected to Philipp Brothers, dispatched laden tankers from New York to South Africa. In the middle of the Atlantic, the ships’ names were changed by rapid repainting, successfully confusing the hostile intelligence services in South Africa. In that atmosphere, Rich was looking for his own niche.

In early 1973, Rich heard rumours about a forthcoming Arab invasion of Israel. That war, he believed, would lead to an oil embargo and soaring prices. Rich was focused on Iranian oil, which in the event of war would be withheld. If he could accumulate and store Iranian oil, its value would rocket after the crisis erupted. Rich was able to find Iranian officials close to the Shah, the pro-Western dictator imposed on the country after a CIA coup in 1953, who were prepared to break their government’s agreement to supply oil exclusively to the Seven Sisters. Working in the shadows, Rich flew to inhospitable locations to supervise the loading of crude onto tankers destined for refineries in Spain and Israel and, more importantly, storage in Rotterdam. In exchange for selling the oil below the world price to Philipp Bros, but unbeknownst to the company’s directors, the Iranian officials, it is alleged, received ‘chocolates’ (#litres_trial_promo) in their Swiss bank accounts. Even the corrupt, Rich always acknowledged, were clever. In New York, however, Philipp’s directors disbelieved Rich’s information about an imminent war. Fearful of the financial risks of purchasing and storing Iranian crude, they ordered the stocks to be sold. Philipp Bros’ position has always been that they had no idea what Rich was up to.

After the October invasion, as Israel fought for survival, the oil producers met and agreed to increase prices; to prevent any supplies of weapons reaching Israel, they also imposed an embargo on Holland and the USA. In the face of queues and rationing of petrol, there was fear throughout the West of economic devastation. Richard Nixon, fighting to retain his presidency in the midst of the Watergate scandal, supported Israel against what Henry Kissinger, his secretary of state, called OPEC’s ‘political blackmail’. In retaliation after Israel’s victory, the Shah, hosting a conference of OPEC producers in Tehran in December 1973, urged even higher prices than $12 a barrel. Privately, Nixon protested about the potential ‘catastrophic problems (#litres_trial_promo)’ that would be caused by the ‘destabilising impact’ of the price increase. Iran, the Shah replied, needed to realise the maximum from its resources, which ‘might be finished in 30 years’. Whether the Shah believed his prophecy was uncertain, but OPEC’s new power was indisputable.

By then, Marc Rich and Pinky Green had quit Philipp Bros in fury to create a rival organisation. Registered in Zug, Switzerland, Rich’s new company used Philipp’s secrets and key staff to establish a network that spanned the globe, although the paper trail ended either in a shredder in his New York headquarters or in Zug, beyond the jurisdiction of America’s police and regulators. There was good reason for destroying the evidence. Rich’s growing empire was profiting by exploiting regulations introduced by President Nixon in 1973 to mitigate increasing oil prices and to encourage American companies to search for new oil. The regulations priced ‘old’ oil higher than ‘new’ oil. In common with many American oil traders, Rich relabelled ‘old’ oil as ‘new’. Unscrupulous traders, it was officially estimated, made about $2 billion from such practices between 1974 and 1978. Rich would claim that he, like his rivals, had exploited a loophole in badly drafted regulations. However, he had set himself apart from other traders by ostensibly operating from Switzerland, in order to evade American taxes. That might have been ignored if he had not planned to profit by exploiting a crisis in Iran, where oil workers were striking to topple the Shah, disrupting supplies. Oil prices in Rotterdam rose by 150 per cent, the harbinger of what would be called the second oil shock. Anticipating the shortage, Rich had again purchased oil for storage from corrupt Iranian officials. Among his customers was BP, the former owner of the Iranian oilfields, which was anxious to keep its refineries operating. BP’s reliance on Rich increased after the Shah was ousted from Tehran in January 1979 and replaced by the Islamic fundamentalist Ayatollah Khomeini. Fears of an oil embargo pushed prices further up.

On BP’s trading floor in London, Andy Hall watched Chris Moorhouse, the lead trader, regularly run up a flight of stairs to ask Bryan Sanderson, the director responsible for the supply department, to approve contracts to buy oil at increasingly higher prices. Over those weeks Rich resold oil which had cost between $1 and $2 a barrel for around $30. Resentful traders haphazardly tried to compete, and enviously asserted that Rich had paid for the oil with weapons. More seriously, Rich’s oil was occasionally exposed as substandard.

Refineries across the world relied on Iranian inspectors to certify the quality of the oil. Few realised how easy it was for Rich to disguise a tanker of low-quality crude. One tanker dispatched by Rich’s company to supply Uganda’s solitary power station carried, despite the inspector’s certificate, unusable ‘layered’ oil. After a day’s use the power station broke down, and the country’s electricity supply was cut off until another tanker arrived. Rich was aware that he was breaking the US embargo, but his profits were soaring. His good fortune was not welcomed by those queuing for petrol across America and Europe. Big Oil was accused of profiteering from rationing supplies, and Rich was in the firing line after the seizure on 4 November 1979 of 52 American diplomats in Tehran. His profiteering from America’s humiliation sparked a federal investigation into suspected tax evasion.

Rich’s success also aroused the interest of two independent oil traders: Oscar Wyatt, an American famous for running over anyone who got in his way, and John Deuss, alias ‘the Alligator’, a scarred buccaneer based in Bermuda, born 200 years too late. The son of a Ford plant manager in Amsterdam, Deuss’s early career as a car dealer had ended in bankruptcy. His next occupation was bartering oil between opportunistic producers and South Africa and Israel, both of which were excluded from normal trade by embargoes. From the profits he bought a refinery and 1,000 gasoline stations on America’s east coast. Compared to Marc Rich, Deuss and Wyatt were minnows. Rich’s skill, as they both appreciated, was obtaining oil by any means possible, brilliantly mastering the markets and insuring himself against losses by asking Andy Hall to legitimately hedge his daily trade against price fluctuations.

In 1980, Hall arrived in New York to run BP’s nascent trading operation. After BP’s expulsion from Iran and from Nigeria in 1979 for illegally trading with apartheid South Africa (exposed, according to BP’s executives, by Shell, which was eager to remove a rival), the company was seeking new sources of income. BP’s directors had noticed that as OPEC’s control over prices crumbled, BP could trade just for profit – buying and selling oil from other suppliers, and not just for its own use. After the discovery of oil in Nigeria in the mid-1950s and in the North Sea in 1969, the governments in London and Washington encouraged the oil companies to flood the market in order to undermine OPEC’s cartel. Hall, a novice trader, was given a short lesson on the art by Jeremy Brennan, the trader whom he was replacing. ‘To find out market prices,’ explained Brennan, ‘just tell them you want to buy when you want to sell, and that you want to sell when you want to buy. Keep good relations with the other majors and don’t squeeze.’ Hall decided to ignore the advice.

Conditions in America had changed. Although the country was the world’s largest energy producer if its oil, gas and coal were combined, the regulations introduced by Nixon in 1971 to encourage more exploration and keep oil prices down had proved unsuccessful. The fall of the Shah had prompted a new search for more oil and other energy sources, including nuclear power and natural gas, and energy efficiency. President Jimmy Carter encouraged the purchase of fuel-efficient cars, especially diesel engines, which used 25 per cent less gasoline, and greater energy conservation. His initiative was floundering when, on 22 September 1980, Iraq invaded Iran, starting an eight-year war. Overnight, both countries ceased supplying oil, and in anticipation of shortages, inflation and a recession, oil prices soared. The government in Saudi Arabia increased oil production to stem the emergency, and the crisis was short-lived. In 1981 Ronald Reagan, the new president, abolished price controls, and America was promised as much cheap oil as it needed. No one anticipated the turmoil this would cause. America’s oil industry was booming, and the supply gap from Iraq and Iran was filled from the North Sea and Alaska. Then, just as Saudi Arabia increased production, oil demand in the West fell. Prices tumbled, and OPEC members cheated on quotas to earn sufficient income. In retaliation against its OPEC partners Saudi Arabia flooded the market, and prices fell to $10 a barrel, undercutting oil produced in America. To save jobs in Texas, Vice President George Bush toured the Middle East, urging producers to cut production. His task was hopeless. Oil was no longer a state utility but was becoming a private business. Speculators and traders, not least Andy Hall and BP, rather than politicians and the OPEC cartel, were gradually determining prices.

The major oil companies had lost their way. The nationalisation of their assets in Iran, Saudi Arabia, Libya and Nigeria had shaken their self-confidence. Relying for supplies from dictatorships, Peter Walters of BP decided, had proven to be a mistake. Irate shareholders were demanding better profits. The oil companies began searching in the shallows of the Gulf of Mexico and in the North Sea, but refused to stray into the unknown. An offer to Walters in 1974 from the Soviet ambassador of exclusive rights to explore for oil in western Siberia had been rejected as too risky. Without experience in exploration, Walters did not understand the limitations of his strategy. The new world was unstable, and the future was unpredictable. Oil had become a cyclical business. Fearful of a financial squeeze, the American majors diversified into non-petroleum industries which would eventually include coal mining, mobile phones, high-street retailers, nuclear power, chemicals, button manufacturing and minerals. Exxon invested in (#litres_trial_promo) the Reliant car; Occidental bought Iowa Beef Processors; Gulf considered buying Barnum & Bailey circus; BP bought a dog-food factory. Astute trading was another solution to compensate for low prices and the loss of oilfields.

To exploit the political uncertainty, Andy Hall was urged to trade aggressively. In the era before computers and screens, the market was inefficient. Traders were constantly scrambling to identify the last trade in the market and the latest price paid by rivals. In 1981, ascertaining future prices was difficult. At the beginning of the Iran crisis, experts had predicted that oil would rise beyond $40 a barrel, but instead it had remained at around $30, and sometimes lower. Politicians and OPEC’s leaders blamed London’s traders and the Rotterdam spot market. The oil companies, having bought massive quantities of oil to cover every eventuality, were dumping their stocks. The volatility of prices caused OPEC and most of the major oil companies concern, but BP seemed well-placed to profit from the new uncertainty. Unlike other traders, Hall noticed that besides the increasing amounts of oil being imported by the USA and the simplicity of trading tankers of crude oil on the daily Rotterdam spot market, there was an opportunity to speculate about future prices by using schemes devised in the financial markets. The rapid changes in prices made those profits potentially lucrative. The second oil shock had hastened the development of speculation.

The impetus for the change was BP’s discovery of oil in the North Sea. Before the discovery of the Forties field in 1970, few experts had believed that any riches would be found under the grey water. The surprise breakthrough fired a stampede, akin to a gold rush. Among the biggest reservoirs was ‘Brent’, discovered in 1971 beneath 460 feet of water, which would provide 13 per cent of Britain’s oil and 10 per cent of its gas. Developed by Shell across 10 fields and 13 platforms, the reservoirs were 9,400 feet below the sea bed, and the oil was piped 92 miles to Sullom Voe, a terminal in the Shetlands, using unique technology. In 1976 Shell’s experts estimated that production would end in the mid-1980s, and on that basis the oil companies were allowed to take the oil cheaply, without paying special taxes. But as the North Sea reserves’ true size became apparent and their productivity was extended for at least a further 35 years, the British and Norwegian governments imposed swingeing taxes just like other national oil companies, and reaped the same consequences of the oil majors refusing to search for new oil.

Initially, the North Sea produced about 24 tankers of oil every month. As production increased, a few American refineries switched to the ‘light and sweet’ North Sea crude and abandoned Saudi Arabia’s heavy ‘sour’. Although the quantities of this oil were small, their effect on the market was significant. After 1976, North Sea production was controlled by the British and Norwegian governments. To avoid oil shortages in Britain and to thwart profiteering, the government agency BNOC (British National Oil Corporation) intervened at the taxpayer’s expense to undercut OPEC prices, and directed that crude should be sold only to refineries. In the early (#litres_trial_promo)1980s these restrictions (#litres_trial_promo) were breaking down, and North Sea oil was leaking onto the ‘spot market’, attracting dealers in London and New York. Although the quantities traded were small, the free market of Brent oil became the price-setter or benchmark for oil produced in North Africa, West Africa and the Middle East. The Saudis complained of chaos, but the traders loved the opportunities for speculation. BP and Shell fixed Brent prices, and using BP’s oil and information, Andy Hall began trading Brent oil aggressively. Both oil companies had to accept that the market had become opaque.

To introduce transparency into the forward, or futures, market while controlling prices, Peter Ward, Shell’s senior trader and the self-appointed guardian of the Brent market, formalised in 1984 the idea of ‘15-day Brent’. On the 15th of every month the oil majors were assigned a cargo of 600,000 barrels of Brent crude at Sullom Voe for delivery the following month. At that point, once the oil major named the day for delivery, the Dated Brent could be traded, and speculation started. Tankers carrying 600,000 barrels of oil were sold and resold 100 times before reaching a refinery. Ward believed he had created an orderly market at fixed prices. He had not anticipated that Hall and others would profit by legitimately squeezing rival traders. As the oil travelled across the North Sea, it was bought and sold by traders playing a dangerous game – buying more Dated Brent than had been sold, knowing that others had sold more than they had bought, in the expectation of eventually balancing their books. Since the quantity of Brent oil available every month was limited, Hall could profit by buying large quantities for future delivery, hoping that rival traders would eventually be compelled to buy from him at a premium price. Squeezing the market – compelling rival traders needing the oil to fulfil their own contracts to buy at his price – added uncertainty and volatility to prices. As the Dated Brent was sold to refiners, the price of the 15-day Brent rose because there was less on the market, rewarding the squeezer. In that topsy-turvy world, Hall perfected the squeeze, attracting charges of price manipulation. The squeeze, Hall knew, was not illegal. On the contrary, the British system invited speculators to buy large quantities of Brent for future delivery, despite the fact that Hall’s tactics precipitated a 15-year battle to draw a line between aggressive dealing and manipulation of the annual $30 billion trade.

As the spot market grew and prices moved depending on disruption of supplies, Hall became a substantial participant in the futures market for the sale of oil. His advantage over other traders was BP’s own information. Only BP knew how much oil would be piped from its Forties field through its own pipeline to the terminals at Hound Point. Working with Urs Rieder, a Swiss national at BP’s headquarters in London, and under the supervision of Robin Barclay, BP was not only anticipating how prices would vary, but was actually causing the market to change. That power transformed the company’s image. Buoyed by BP’s constant participation in the physical market, Hall traded uncompromisingly against smaller competitors. Leveraging the market to the hilt was not illegal, but entrepreneurial. Rieder’s move from BP to Marc Rich strengthened the relationship between Hall and the American trader. To outsiders, BP had become the Eton of traders. BP’s traders were a special breed, stamped by pedigree and lifelong friendships. Not only were they numerically astute, they were also internationalist, aware of historical, religious and cultural tensions dictating the price of oil. Among them, Hall shone as the prefect or head boy of a new school.

Hall’s casualties included Tom O’Malley, Marc Rich’s successor at Philipp Bros. Shrewd, intriguing and charismatic, O’Malley possessed an instinctive understanding of oil trading, bending rules but, unlike Rich, not breaking them. Profiting from the oil industry’s inefficiency and the market’s ignorance, he occasionally exported cargoes of oil from America’s west coast to the east coast merely to boost prices on the west coast, but he was occasionally stung by Hall’s squeeze when he was contracted to supply Brent oil in New York. To enhance his business and remove the competitor treading on his toes, O’Malley offered Hall a job. Simultaneously, Hall also received an offer from Marc Rich. At the climax of his negotiations with O’Malley, Hall asked for the terms and conditions of his employment and a company car. ‘Terms and conditions,’ snapped O’Malley, ‘is BP bullshit. You come to Philipps to become rich.’ Hall’s resignation from BP in summer 1982 was regarded as a bombshell in London. Rising stars and potential board members never left the family.

Combined, Hall and O’Malley were feared as ‘crocodiles in the water’, and became notorious for analysing markets, buying large, long positions in Brent oil, and holding out if there was insufficient volume until rivals screamed for mercy. In the Big Boys’ game, a rival trader’s scream was an invitation to squeeze harder. Philipp Bros, or Phibro, was good at squeezing, because there were large numbers of small traders – at least 50 in the US alone. To outsiders, Phibro personified the separate world inhabited by oil traders. ‘You’re ignoring the rule, “Don’t steal from thy brethren”,’ London trader Peter Gignoux complained. The British government’s remaining control over North Sea oil prices crumbled as Phibro aggressively traded primitive derivatives and futures against rival traders. The ‘plain vanilla swap’ compelled the customer either to take physical delivery of the oil or to pay to cover the loss.

For the first time, global oil prices were influenced by traders speculating as proprietors, regardless of the producers or the customers. The OPEC countries, especially Saudi Arabia, hated their game, and even Shell was displeased that their precious commodity created profiteers and casualties. In 1983 the market became murkier when Marc Rich remained in Switzerland and escaped facing criminal charges including tax evasion. Despite the scandal, Phibro and others continued to trade with him and Glencore, his corporate reincarnation in Zug. Phibro’s aggression invited retaliation. During that year, Shell took exception to Phibro squeezing Gatoil, a Lebanese oil trader based in Switzerland. Gatoil had speculated by short-selling Brent oil without owning the crude. Subsequently unable to obtain the oil to fulfil its contracts because Phibro had bought all the consignments, it defaulted on contracts worth $75 million. Refusing to bow out quietly, Gatoil reneged on the contracts and sent telexes to all its customers blaming Hall’s squeeze. Shell’s displeasure was made clear at the annual Institute of Petroleum conference in London, where every trader was warned not to attend Phibro’s party featuring Diana Ross. ‘A puerile idea to boycott our party,’ scoffed Hall, furious that the ‘clubby clique of traders around Gatoil and Shell obeyed and we were on the other side’. Shell levied a $2 million charge, and Phibro paid.

Mike Marks, the chairman of New York’s Mercantile Exchange, Nymex or the Merc, attempted to put an end to the chaos in 1983. Dairy products had been traded on Nymex since the market was established in 1872; Maine potatoes were added in 1941; and later traders could speculate on soya beans, known as ‘the crush’. Marks introduced trading of heating oil, an important fuel in America, and crude oil futures, dubbing the price spread ‘the crack’. The reference for prices was the future delivery of West Texas Intermediate (WTI, America’s light sweet crude oil) to Cushing, a small town of 8,500 people including prison inmates in the Oklahoma prairies. Several oil companies were building nine square miles of pipelines and steel container tanks in Cushing as a junction linked to ports and refineries in the Gulf of Mexico, New York and Chicago. Prices quoted on Nymex, based on those at the Cushing crossroads, rivalled those at London’s International Petroleum Exchange, trading futures in Brent and natural gas delivered in Europe. Instantly, the last vestiges Saudi Arabia’s stranglehold over world prices were removed. With the formalisation of a futures market, OPEC’s attempt to micro-manage fixed prices was replaced by market forces. The fragmented market became more efficient, but also murkier. Dictators producing oil were unwilling to succumb to regulators in New York, Washington and London. Instead of sanitising oil trading, Nymex lured reputable institutions to join a freebooting paradise trading oil across frontiers without rules. ‘I wish we were regulated,’ one trader lamented. ‘Why?’ he was asked by Peter Gignoux. ‘So I could bend the rules.’

In 1982, Phibro had faced an unusual problem. The profitable commodities business was handicapped by a lack of finance. Its solution was to buy Salomon Brothers, the Wall Street bank, and begin issuing oil warranties. Manhattan was shocked at a commodities trader owning an investment bank. Overnight, Hall and O’Malley were established as super-league players among oil traders, yet Hall was upset. ‘Traders and asset managers don’t mix,’ he announced. ‘I don’t want to be part of a bank.’ Phibro moved to Greenwich, Connecticut, to be as far from Salomon as possible, operating as a hedge fund before hedge funds became widespread.

Across Manhattan, Neal Shear, a pugnacious gold trader at Morgan Stanley, had watched Hall’s success with interest. Recruited in 1982 from J. Aron & Co., a commodities trader owned by Goldman Sachs, to start a metal-trading business to compete with his former employer, Shear envied the easy profits Hall and Rich were making. Compared to gold, he realised, oil trading was much more sophisticated and profitable. Without transaction costs or retail customers, and blessed by general ignorance about differing prices in Cushing and elsewhere in America, traders could pocket huge profits. In economists’ jargon, oil trading was ‘an inefficient market’. Shear’s business plan was original: ‘Our concept is not to be long or short but flat, to profit from transport, location, timing and quality specifications.’ Initially he wanted Morgan Stanley to copy and compete with Hall and Rich, but Louis Bernard, one of the bank’s senior partners, understood that the rapid changes in oil prices guaranteed better profits than speculating in foreign exchange. On Morgan Stanley’s model, the volatility of oil prices could be 30 per cent, while in the same period foreign exchange could move just 8 per cent. Investment bankers who had traditionally offered their clients the chance to manage risk in foreign currencies could make much more by offering them the chance to manage, protect and hedge crude prices against the risk of price changes. In 1984 Bernard hired John Shapiro, a trader at Conoco, and Nancy Kropp, a trader employed by Sun Oil, to trade crude. To ensure a constant stream of information about the market’s movements ahead of its rivals, the bank leased a few oil storage containers from Arco in Cushing. Hour by hour the traders in New York would be aware of whether there was a surplus or a shortage of WTI in Oklahoma, which determined prices on Nymex. Shapiro invented oil options, explaining the new idea to the oil industry at its annual conference in London in 1985. ‘We’re not taking speculative positions,’ he explained. ‘This is defensive, as a hedge, leaving Morgan Stanley to manage the residual risk. We’ve no desire to do an Andy Hall.’ Andy Hall had also ‘invented’ oil options, offering to the public the chance to invest in the oil trade. In the same year, by a different route, Goldman Sachs established another group of oil traders.

As the gold market deteriorated in 1981, J. Aron & Co., a conservatively managed precious metals dealer, had been sold to Goldman Sachs for $30 million, although the rumoured price was $100 million. Goldman Sachs’s partners had only agreed to buy what one called a ‘risk-averse pig-in-a-poke’ because they assumed that Phibro’s purchase of Salomon’s must be clever, and Aron would give them additional international experience to earn a slice of the commodities trade. Three years later, 30 Aron metal traders were ordered to start trading oil. Under the leadership of Steve Hendel, Charlie Tuke and Steve Semlitz, they were to rival Morgan Stanley. Among their new ventures was speculating in heating oil contracts. By offsetting any order to buy or sell heating oil for future delivery, the bank earned its profit on the arbitrage regardless of future prices. ‘Arbing on the difference in price’ depended on whether the speculator took a bearish or bullish view, but the risk was taken by the customer. The bank’s books were nearly always balanced. Whenever an order to buy was booked, the bank’s traders made sure that the order for the future was fulfilled by finding a supplier. In those early days, neither Goldman Sachs nor Morgan Stanley were proprietary traders betting on the price, and they were blessed that British banks were either too sleepy or too small to compete.

In 1985, to profit from the ‘cash and carry possibilities’ of heating oil and crude, Goldman Sachs’s traders also acquired storage containers in Cushing and New York. The two American investment banks had become players in physical and paper oil. Oil prices, they realised, were determined not only by demand, but also by supply and international events. In that jigsaw, they traded only if they had the edge. Recognising that accurate prediction of prices was impossible, the traders did not bet on prices going in a particular direction, but traded on the volatility itself as Brent fell from $30 a barrel in December 1985 to $9 in August 1986. Fast and furious, dealers traded huge volumes even to earn just half a cent on a barrel. The watershed in their trading – before computer models had eradicated the club atmosphere – was the formal introduction of derivatives (‘Contracts for Difference’), allowing traders to own huge ‘paper’ positions to influence the market. Bankers, oil traders, the oil companies and the OPEC producers were plotting against each other to master and manipulate the market. The trade in futures, or ‘paper barrels’, was as much a banking business as an oil trader’s speciality.

1986 was the beginning of oil’s Goldilocks years. Survivors of the crash were destined to earn fortunes because of the volatility of prices. Regardless of whether these went up or down, the traders could profit. During the boom in the 1970s, oil prices had soared fivefold, and pundits had predicted $100 a barrel. In the mid-1980s, Sheikh Ahmed Zaki Yamani, the Saudi oil minister, became worried that high prices would encourage the West to search for alternative sources of energy. In that event, he anticipated, the floor for oil prices would be $18. Others including Matt Simmons, a Houston banker, predicted a crash. ‘Stay alive till ’85’ became the mantra of groups characterised by Simmons as ‘insular and unreliable’ for failing to understand the effect of the growing excess capacity. Contrary to their expectation, oil prices had fallen despite the Iran-Iraq war. Falling prices appealed to President Reagan. According to rumours, in 1985 he urged King Fahd of Saudi Arabia to flood the world with oil in order to destroy the Soviet economy; at the same time, Margaret Thatcher ended BNOC’s monopoly in the North Sea, deregulating prices of Brent oil. During December 1985, Simmons’s pessimistic forecast began to materialise. Prices were falling from $36 as Saudi Arabia flooded the world with oil, and they fell further as unexpected surpluses of oil from Alaska, the North Sea and Nigeria were dumped on the market. Traders in the speculative Brent market played for huge profits as prices seesawed. The value of 44 to 50 tankers carrying 600,000 barrels of crude oil every month from the North Sea terminals to refineries assumed global importance among the 50 players – oil companies, banks and traders. All crude oil in the world beyond America was priced in relation to Dated Brent, the benchmark of oil prices. Two traders fixing a future price for oil produced in Nigeria would base their contract on the price of Brent on the material day in the future. By squeezing the price of Dated Brent, traders could directly influence the price of crude sold by Nigeria, or Russia, or Algeria. Fortunes could also be made by manipulating the market prices of other oils across the globe based on Brent.

In that hectic atmosphere, a group of traders regularly met at the Maharajah curry house off Shaftesbury Avenue in central London to agree joint ventures to reduce risk and decide what price they would bid for Brent. In the era before the computerisation of the markets, the traders, unable to know at an instant the price of oil elsewhere in the world, relied on gossip and trust, knowing that rivals would pick their pockets whenever possible. The atmosphere in the curry restaurant was akin to a club where ‘everyone was prepared to screw but not kill’. Over 50 per cent of the trading market was governed by self-interest rather than laws. ‘Can you break a law when laws don’t exist?’ asked one club member rhetorically. Unscrupulous traders seeking to achieve the desired price on a Dubai contract would try to squeeze the price of Brent oil on that day. Shrewd traders noticing a rival taking up a perilous position would step aside to avoid a crash. The unfortunates who screamed ‘help’ could expect assistance, but at a price. The hostility was not tarnished by malice. Those meeting in the restaurant were deal junkies playing for pennies on each barrel, and at the end of the day they jumped into their Porsches to party and celebrate all night with Charlie Tuke before starting to trade at 6 o’clock the following morning. Among the reasons to celebrate was the crash of Japanese trading companies in London. In previous years, their traders had been paid commission on turnover and not profits, and were thus keen to accept any contract. Those traders were known as ‘Japanese condoms’ because they would be left holding all the contracts. As oil prices fell in the mid-1980s, the Japanese traders had been forced to pay huge sums to the London traders before their companies closed. ‘Hara-kiri all round,’ toasted the profiteers.

Falling oil prices in early 1986 terrified the Saudi rulers. President Reagan had lifted all controls, allowing supply and demand to determine oil prices. Many predicted huge rises, but instead prices began falling from $26 a barrel in January. By April they were $11. America’s high-cost producers could not compete in the new markets. Domestic production in Texas and California collapsed. Across the country, oil wells were mothballed, dismantled and closed. Laden by huge debts, property prices across the oil regions fell by 30 per cent, followed by bankruptcies and a smashed economy. Hardened oil men grieved about ‘the dark days’. In spring 1986, US vice president Bush flew to Saudi Arabia to plead with King Fahd to stop flooding the market.

OPEC’s first attempt to stabilise prices by cutting production in early May 1986 by two million barrels a day temporarily restored prices to $15. Any OPEC country which broke the rules, Yamani warned, would be punished. OPEC reduced output by another million barrels to 15.8 million barrels a day. Traditionalists believed that Saudi Arabia’s bid to control prices would succeed. Prices rose to $17 on 19 May, but secret sales of Saudi crude to sustain the country’s expenditure exposed Yamani’s political weakness as prices tumbled again to $12. OPEC had lost control. The industry was in chaos. In July prices fell below $10. British prime minister Margaret Thatcher refused a Saudi request to cut production in the North Sea. Her reasons were not political but were intended purely to raise taxes, regardless of the fact that the price collapse was causing havoc in Texas’s oil industry and the American economy. Bush’s plea had been too late. By August that year the customarily riotous Margarita lunches in Houston had dried up, sales of Rolex watches ceased, 500,000 jobs disappeared, bankruptcies proliferated, and Texas was devastated. In the darkest days, oil was $7 a barrel. In October Yamani was fired by the king, and Saudi Arabia cut production from nine million barrels a day to about 4.8 million.

Fearful of continuing low prices, the oil majors’ enthusiasm for exploration and improved production evaporated. Less glamorous, but nevertheless critical to the future, the profits from refining oil began a long, permanent decline. Convinced that low prices would last for years, the major oil companies sharply reduced their investment. ‘It’s the end of the party,’ said Peter Gignoux, noting that the world could no longer rely on the Seven Sisters as guaranteed oil suppliers. Liberated from that responsibility, the major oil companies resorted to skulduggery to reduce their taxes. By churning trades of oil to reduce Brent prices to absurdly low rates, they could reap lucrative tax advantages from the 15-day market. In 1986 Transnor, a Bermudan company, claimed to be a victim of a squeeze over Brent oil orchestrated by Exxon, BP and other oil majors. To seek relief, its directors litigated against the companies in America.

The oil companies became alarmed. The Brent trade was an unregulated international business, not subject to American or British laws. Squeezing Transnor was part of the game to manipulate prices and secure tax advantages. The companies’ initial ploy in the American court was to persuade the judge that 15-day Brent was similar to ‘a forward contract’ used by farmers to secure guaranteed prices for their crops, and was therefore not subject to the Commodities Futures Trading Commission (CFTC), the American regulator.

Created by Congress in 1974 ‘to protect market users and the public from fraud, manipulation and abusive practices’ in the commodities trade, the CFTC initially supervised 13 commodity exchanges with staff recruited from Congress, especially the agricultural committees. Political favourites, some with limited experience, were appointed commissioners to supervise those monitoring the markets. Relying on the traders’ reports submitted to Nymex as its primary tool to identify suspicious price movements, the agency was deprived of adequate funding by Congress, undermining its prestige from the outset. After 1984, as the trade of contracts tripled and the trade in options multiplied tenfold, the 600 staff struggled (#litres_trial_promo) with an inadequate computer system and a falling budget to identify market manipulation and excessive speculation in 25 commodities, the value of which was growing towards $5.4 trillion a month. That bureaucracy was anathema to Exxon and BP. The oil majors adamantly denied the agency’s authority over their business.

Transnor argued the opposite. Its agreement to buy Brent oil, the company argued, was a speculative or hedging ‘futures contract’, which was subject to American law and the CFTC. In 1990 Judge William Conner found in favour of Transnor, ruling that trading Brent was illegal in America. The oil majors were dismayed. Oil traders, they argued, were big enough to look after themselves without a regulator’s protection. To persuade the US government of their cause, they stopped trading with American companies and lobbied the director of the CFTC in Washington to reverse the judge’s ruling. The CFTC, a lackadaisical regulator caring primarily for farmers and agricultural contracts, had never experienced the pressure of oil lobbyists. Within days the companies declared victory. Fifteen-day Brent was declared to be a ‘forward contract’ and beyond regulation. The oil companies could administer their own ‘justice’, especially when they fell victim to a squeeze of Brent oil orchestrated by John Deuss, the sole owner of Transworld.

Transworld was based in Bermuda, with trading offices in London and Houston, and Deuss’s micro-management stimulated the sentiment among his traders that the only compensation for suffering his obnoxious manner was the unique lessons in oil trading he could provide. Oil spikes, Deuss believed, occurred once every decade, and in the intervening years traders should tread water, manipulating the market with squeezes. The best squeezes, he boasted, passed unnoticed.

During 1986, Deuss decided to execute a monster squeeze on the Brent market. Mike Loya, Transworld’s manager in London, was delegated to mastermind the purchase of more oil than was actually produced in the North Sea. In that speculative market, the cargo of a tanker carrying 600,000 barrels of North Sea oil was normally sold and resold a hundred times before it reached a refinery. If prices were falling, traders who bought at higher prices were exposed to losses, while those selling short would expect to profit. Starting in a small way, Deuss and his traders in London bought increasing amounts of 15-day Brent every month. Seeing that by tightening the market they were pushing prices upwards and earning extra dollars, they became bolder. Summer 1987 was the self-styled ‘Eureka Moment’. To allow maintenance work, monthly oil production had been reduced to 32 cargoes. Traders at Shell, Exxon and BP had as usual sold 15-day cargoes, expecting to buy back at the end of the period any oil they needed for their refineries. Now, however, their offers were ignored. Mike Loya, the traders noticed, had bought over 40 cargoes, so owned more oil than the fields produced. And having bought everything, Loya was not selling. Transworld’s squeeze was felt in London and New York. Prices rose and the protests grew. The oil majors needed Brent to produce specific lubricants which were unobtainable from other North Sea crudes. Without that oil, the refineries could not operate. Contractually bound to supply Brent, they were compelled to pay Transworld an extra $2 a barrel, earning Deuss $10 million profit for one month’s work. Unexpectedly, the majors then suffered a second blow. Because of the complexities of oil trading, while 15-day Brent prices increased, Dated Brent prices fell. That fall directly cut the prices of oil produced in West Africa and the Gulf, so the producers lost money on supplying it to other refineries. Deuss’s squeeze had caused chaos. ‘Very painful,’ admitted BP’s senior trader, suspecting that the squeeze had been profitably shadowed by Goldman Sachs and Marc Rich.

After Loya’s summer coup, Transworld’s traders earned more profits from smaller squeezes until, in December 1987, Deuss believed he had the information to strike a spectacular bonanza. Focused on an audacious coup against the oil companies, he was convinced by the golden fable that no regulator, stock exchange or even country could control the oil market. Like every trader, Deuss nurtured his OPEC contacts, and few were more important than Mana Said al Otaiba, the oil minister of the UAE, who was also a co-owner with Deuss of a refinery in Pennsylvania. Al Otaiba convinced Deuss that in order to force up oil prices, OPEC would agree at its meeting in January 1988 to significantly cut production. If OPEC’s production fell, Brent prices would rise.

‘Buy Brent,’ Deuss ordered. Transworld’s traders in London bought 41 out of 42 Brent cargoes for $425 million, but prices barely moved. No other traders appeared to believe that OPEC would cut production. Then prices began to fall. ‘Buy more,’ Deuss ordered, to shore up his position. To achieve a squeeze, he simultaneously also bought Brent oil from rival traders for delivery in the same period. Those traders, unaware of Deuss’s plot, had expected to buy those cargoes from BP and Shell once they were produced. In the common usage, the traders were ‘short’ – selling oil without owning it. As the moment of delivery approached, Deuss demanded delivery of the oil. The unsuspecting traders discovered that no oil was available. Deuss expected to hear screams appealing for mercy. The traders faced two options: either pay Deuss a penalty for defaulting on their contracts, or buy their cargoes from Deuss in order to resell them to him, inevitably suffering a hefty loss. But instead of hearing screams, Deuss became perplexed by the ‘shorts” silence. Unknown to him, Peter Ward, Shell’s trader, had agreed with Exxon to sabotage the squeeze by producing extra oil. ‘Deuss is a buccaneer,’ Ward declared. ‘Let’s teach him a lesson.’ There was, he decided, a fine line between combat trading and corrupt trading.

To embarrass Deuss, a Shell trader gave the details of the failing squeeze to the London Oil Report and BBC television. ‘Everyone’s ganging up against him,’ noticed Axel Busch, the Oil Report’s editor. ‘It’s become a free for all.’ Deuss calculated the cost. Not only could he not afford to pay for the 41 cargoes he had bought, but the storage costs if he did take delivery would be crippling. Urged by his staff to continue buying up to 60 cargoes, Deuss blinked. Unable to bear the risk, he retreated. Summoning his London manager out of an Italian restaurant, he ordered, ‘Sell everything.’ Within minutes, the first six cargoes were sold. Competitors smelled Deuss’s panic. With 35 cargoes remaining, prices collapsed. Transworld lost $600 million. Deuss could pay his debts only by selling his oil refinery. ‘He’s been bagged,’ laughed Peter Gignoux. It was the end of an era. In 1988 the International Petroleum Exchange in London opened a regulated market to trade Brent futures. Refiners could hedge their exposure to prices. Some believed that the squeeze and manipulation had finally been curtailed. But the traders and the oil majors knew that humiliating one buccaneer had not legitimised the trade. The odds, Andy Hall knew, and the potential profits, had only increased.

FOUR The Casualty (#ulink_68c4d7f5-282e-59c4-b691-afd83a6fef8a)

Shell’s directors congratulated themselves on scoring a hit against those disrupting the Brent oil trade. There was a shared pride among the company’s long-time employees about their company’s probity and purpose. Built by Dutch engineers and Scottish accountants, nothing was decided in haste. Decisions were taken only after all the circumstances and consequences had been considered and the benefit to the value chain was irrefutable. Although BP might produce more oil, Shell earned higher profits.

Reared on that tradition, Chris Fay was bullish. With 23 years’ experience in Nigeria, Malaysia and Scandinavia, Fay had become the chairman of Shell’s operations in Britain. Shell’s ten oil-producing fields in the North Sea and others under development were his responsibility. Among the problems he inherited in 1993 was the fate of Brent Spar, a platform in the North Sea used to load crude onto tankers. Erected in 1976, the 65,000-ton, 462-foot-high structure had been decommissioned in 1991, and by 1994 was no longer safe. Dismantling it was a problem. There was no suitable British inshore site, while dismantling at sea would cost $69 million. Shell’s engineers had considered (#litres_trial_promo) 13 options offered by different organisations, and Fay had discussed the alternatives with Tim Eggar, the Conservative minister for energy. With the government’s public approval, Fay confirmed on 27 February 1995 that the platform would be towed 150 miles into the Atlantic and, using explosives to detonate the ballast tanks, would be sunk in 6,600 feet of water. The cost would be $18 million. The only downside of the apparently uncomplicated process was that the metal, alongside innumerable shipwrecks on the sea bed, would take 4,000 years to disintegrate. Neither Fay nor Eggar was concerned. Over a hundred similar structures had been dumped by American oil companies in the sea without protest, creating artificial reefs off Texas and Louisiana. ‘This is a good example of deep-sea disposal,’ claimed Eggar, anticipating that the Brent Spar’s disposal would be followed by that of 400 other North Sea structures.

Two months later, at lunchtime on 30 April 1995, four Greenpeace activists jumped from the Greenpeace ship Moby Dick and occupied the derelict Brent Spar. The rig, announced Greenpeace, was filled with 5,500 tons of toxic oil which would escape and contaminate the sea and kill marine life if it was sunk. Media organisations around the world were offered film of the occupation, with close-ups of Shell’s staff aiming high-pressure water hoses at the protestors. Any viewer who doubted that Shell was the aggressor was reminded by Greenpeace about the company’s poor environmental record. In March 1978 the Amoco Cadiz, a tanker carrying a cargo of 220,000 tons of oil, broke up in the English Channel, contaminating the French coastline. Shell owned the oil and was blamed for the disaster, a tenuous link motivated by anger at Shell’s refusal to boycott South Africa during the apartheid era and by its supply of oil to Rhodesia’s rebellious white settlers despite international sanctions after they declared independence in 1965. The accumulated anger against Shell took Fay and his co-directors in London and The Hague by surprise, especially the accusation that Shell was untrustworthy. Taking the lead from Lo van Wachem, the former chairman of Shell’s committee of managing directors, who remained on the board of directors, Shell had already declared its ambition to lead the industry in the protection of the environment. In advertisements and meetings, directors mentioned the possibility of withdrawing from some activities to avoid gambling with the company’s reputation. This commitment had been disparaged by Greenpeace. To gain sympathisers, the environmental movement was intent on entrenching its disagreements with the oil companies.

Fay and his executives knew that Greenpeace’s allegations were untrue: the platform contained no more than 50 tons of harmless sludge and sand. Greenpeace, they were convinced, had invented the toxic danger as part of its long campaign that mankind should stop using fossil fuels. The battle lines had been drawn after Shell’s spokesmen, in common with Exxon’s and BP’s, had dismissed any link between fossil fuel and damage to the environment. Convinced that the truth would neutralise the Brent Spar protest, Fay appeared on television. But, unprepared for Greenpeace’s counter-allegation that Shell was deliberately concealing internal reports describing the toxic inventory, he visibly reeled, fatally damaging Shell’s image. His personal misfortune reflected Shell’s inherent weaknesses, especially its governance.

The historic division of the Anglo-Dutch company had never been resolved. In 1907 Henry Deterding, a mercurial Dutchman who had gambled with oilfields, investing in Russia, Mexico, Venezuela and California, had negotiated the merger between his own company, Royal Dutch, and Shell Transport, a British company, on advantageous terms giving the Dutch 60 per cent of Royal Dutch Shell. The company’s management, however, had remained divided. Two boards of directors – one Dutch and the other British – met once a month for a day ‘in conference’. Each meeting was meticulously prepared, but serious discussions among the 30 people in the room – 20 directors and 10 officials – were rare. Each director could normally speak only once during these meetings which, remarkably, lacked any formal status. After the ‘conference’ the two national boards separated and made decisions based on the conference’s discussion. Aware that the company had become renowned during the 1970s as a vast colossus employing eccentric people enjoying a unique culture, van Wachem, a self-righteous, abrasive chairman, had imposed some reforms while acknowledging that Shell’s dismaying history had inflamed Greenpeace’s protest. Henry Deterding, infatuated with Hitler, had negotiated without consulting his directors to guarantee oil supplies to Nazi Germany, and in 1936 he retired to live in Germany. After the war, to remove the concentration of authority in one man, the company had created a committee of managing directors with limited powers to influence Shell’s directors. That barely affected the inscrutable aura of an aloof international group of interlinked but autonomous companies immersed in engineering, trade and diplomacy.

As the friends of presidents and kings, Shell’s chairmen did not merely control oilfields, but sought influence over governments. Supported by a planning department to project the corporation’s power, Shell’s country chairmen in Brunei, Qatar, Nigeria and across the Middle East wielded authority akin to that of a sovereign. Yet beyond public view, Shell’s employees worked in a non-hierarchical, teamlike atmosphere, exalting technology and engineers who, in the interests of the industry and Shell’s reputation, occasionally donated their patents and expertise for the industry’s common good. That collaborative attitude was proudly contrasted with Exxon’s. Unlike the American directors, whose principal task was to earn profits for their shareholders, Shell had proudly enjoyed its status during the 1980s as a defensive stock – shares which remained a safe investment even in the worst economic recession. Shareholders were tolerated as a necessary evil, and modern management techniques were disdained, emphasising the company’s increasing dysfunctionality. ‘I’m not saying we enjoyed it,’ said van Wachem about the 1986 collapse in oil prices, ‘but there was no panic.’ With more than $9 billion in cash on the balance sheet, van Wachem’s strategic task appeared uncontroversial. Shell owned Europe’s biggest and most profitable refining and marketing operation, and Shell Oil was the most successful discoverer of new oil in the USA. Nevertheless, van Wachem’s poor investment decisions, combined with a fatal explosion at a refinery at Norco, Louisiana, in 1988, had hit Shell’s profits. In 1990 they fell (#litres_trial_promo) by 48 per cent in the US, and net income in 1991 collapsed by 98 per cent, from $1.04 billion to $20 million, far worse than its rivals. Shell’s poor finances had compelled the sale of oilfields to Tullow and Cairn, two independent companies, and making 15 per cent of the American workforce redundant.

Lo van Wachem’s ragged bequest was inherited in 1993 by Cor Herkströter. The very qualities of Herkströter which attracted praise in Holland led to criticism of him in London and New York as a socially inept, cumbersome introvert whose disdain for financial markets was matched by a conviction that he was God. Content that Shell produced more oil than Exxon and enjoyed a bigger turnover, Herkströter did not initially feel impelled to close a more important gap. By limiting the influence of accountants and advocates of commercial calculations, Shell earned less per barrel of oil than Exxon. Although Shell’s capitalisation was $30 billion more than Exxon’s, the world’s biggest oil company had earned lower profits than its rival since 1981. Complications and compromises had reduced the company’s competitiveness and increased costs. For nearly 20 years, to avoid making unpleasant business-related decisions, Shell had chosen to follow a path of consensus. Emollience was particularly favoured by the Dutch. Although Dutch shareholders owned only 10 per cent of the stock, and over 50 per cent was owned by shareholders in the US and Britain, the Dutch directors disproportionately dominated the company, encouraging its fragmentation between different cultures – Dutch, British and American – and also between the different departments – upstream, downstream and chemicals. To his credit, by May 1994 Herkströter, unlike his more conservative Dutch directors, recognised Shell’s sickness. Calling together 50 executives to review the company’s financial performance, Herkströter concluded that Shell had become ‘bureaucratic, inward-looking, complacent, self-satisfied, arrogant … technocentric and insufficiently entrepreneurial’, all of which was stifling efficiency and the search for new oil. The same sclerosis undermined his authority when Greenpeace boarded the Brent Spar.

‘People realise this is wrong,’ explained Peter Melchett, Greenpeace’s executive director. ‘It is immoral. It is treating the sea as a dustbin.’ Greenpeace’s accusation had aroused public antagonism against Big Oil. All the oil majors were linked with Shell as untrustworthy, environmental spoilers. Across Germany, Shell’s petrol stations were boycotted. In Holland, managers reported that a similar boycott was crippling their operation. The decentralised company had never anticipated that a decision in one country could trigger violent protests in another. Even though the directors knew that Melchett lacked any evidence to undermine Fay’s honest explanation that the platform’s tanks had been cleaned in 1991, the oil executive’s humiliation on BBC television had echoed across Europe. Like his fellow directors, Herkströter was destabilised by accusations of Shell’s dishonesty and by angry disagreements between the company’s managers. In particular, Herkströter was stunned when Shell staff in Germany leaked material to the media to embarrass the company’s senior executives in Holland.

In the House of Commons, British prime minister John Major, unaware of Shell’s internal warfare, solidly defended the corporation. As he spoke, Herkströter and his fellow directors, shaken by the boycott and the demand by European politicians, especially Helmut Kohl, Germany’s chancellor, that Shell abandon its plans, collapsed. Just after Major’s public justification of the disposal of Brent Spar, Shell’s board in The Hague capitulated. ‘They caved in under pressure,’ complained Michael Heseltine, the secretary of state for trade and industry, outraged after Fay telephoned (#litres_trial_promo) and ordered the British government to cease interfering in his company’s business.

The platform was towed to Erfjord, near Stavanger, and dismantling started in July 1995. Melchett was invited to inspect the contents of the tanks, and was shown to have been mistaken. ‘I apologise to you and your colleagues over this,’ he said publicly after negotiations. ‘It was an honest mistake,’ said Paul Horsman, the leader of Greenpeace’s campaign. Although Shell was vindicated, Herkströter did not recover from the stumble. Shell’s directors were exposed as weak – one even said, ‘Greenpeace did a wonderful job’ – while Greenpeace, refusing to concede the high ground, invented a more serious campaign to recover its credibility.

In 1995, the jewel in Shell’s crown was Nigeria. Signed in 1958, Shell’s original deal with the country was hugely profitable. The corporation paid the Nigerian government $2 for each barrel, regardless of the world price, until it reached $100. Thereafter, the royalty was $2.50. Beyond that minimal amount, Shell pocketed the remainder. War and corruption had eroded that windfall over the years. Historically there was no reason why 240 ethnic groups, Christian and Muslim, could exist within a single nation of 140 million people. Oil underpinned the artificial unity that had been constructed by the British colonial government, and keeping that fragile coalition together was the central government’s priority. Any threat of succession was unacceptable, especially that declared in 1967 by General Ojukwu, the leader of the oil-rich eastern region of Biafra. Knowing that the country would disintegrate without oil, the government in Lagos launched a war to crush the rebels. Over three years, Biafra and Shell’s operation were devastated. The recovery after 1970 had been sporadic. The new income created a mirage of universal wealth. If oil sold at $25 a barrel, each Nigerian citizen would benefit, although by only 50 cents per week at most. But even those profits were wasted by the government on white-elephant projects, including an outdated steel mill purchased from Russia. Simultaneously, the new wealth sucked in imports and destroyed local jobs. To alleviate the social upheaval, Shell built hospitals, schools and social centres. Contrary to advice, Shell’s local country chairmen refused to consult the aid agencies and non-governmental organisations about these projects. Rashly, Shell’s executives assumed that the government would provide teachers, doctors and nurses.