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

скачать книгу бесплатно


By 1992 Shell’s 5,000 Nigerian staff, 20,000 contractors and 270 expatriate staff had rebuilt most of the wells, replaced equipment destroyed during the war and sought to compensate for losses. But, in the rush for oil, Shell applied standards that would have been unacceptable in Europe or America. Toxic gas was flared from the wells, and oil spills, seeping across farmland and rivers, remained untreated. Nevertheless, only one million barrels of oil a day, half of Nigeria’s capacity, was produced, and even that was affected by corruption. Every year the company’s auditors arrived from Europe to unearth endemic corruption among the company’s local employees. Systematically, some of Shell’s Nigeria managers gave contracts to friends and received backhanders, or paid inflated invoices and pocketed the cash. The auditors found hefty sums paid for ‘travel expenses’ to politicians and government officials and their families. Usually the same expenses were also paid by the government, and the officials kept the difference. At the top level, vast sums of money received from Shell in royalties and taxes were diverted by Nigeria’s politicians and officials to private offshore bank accounts. Brian Lavers, Shell’s country chairman until 1991, had been under pressure to pay bribes to government officials and local chiefs. To avoid participating in any illegal activity, Shell’s board agreed to pay middlemen, farmers and tribal chiefs as ‘consultants’ and for ‘services’ to build social amenities including schools, roads and cinemas. Beyond the company’s control, these were constructed for inflated prices, allowing Shell’s local managers and their friends to steal considerable sums of money. Despite his equally fierce opposition to the Nigerian government’s corruption, Philip Watts, Lavers’s successor, had no alternative but to reluctantly agree under pressure in 1991 to expand Shell’s operation in the country. The company increased the number of rigs searching for oil from seven to 22, agreed to pay higher royalties and, critically, agreed in return for a bonus to increase the country’s officially registered oil reserves from 16 billion barrels to 25 billion barrels. ‘I arrived in this job (#litres_trial_promo),’ said Watts, ‘absolutely determined to make a difference on issues I felt strongly about. You’re talking to someone who was in the eye of the storm.’

Bureaucracy, inflation, ageing equipment, pollution and soaring taxes amid general lawlessness were just part of Watts’s inheritance. Watts, a seismologist, had worked in Borneo, the Gulf of Mexico, the North Sea and Holland before arriving in Nigeria. Intelligent and opinionated, he was intolerant of those he disdained, not least the local criminals. Oil had turned Nigeria into a magnet for villainy. In the Niger delta, 40,000 square miles of swamps and creeks where the Niger flows into the Atlantic, gangs of Ogoni tribesmen were systematically drilling into Shell’s pipelines to divert up to 80,000 barrels of oil every day into barges moored on the creeks. The cargoes were sold to untraceable tankers, chartered by European traders, anchored in the delta or offshore and resold to uninquisitive refineries, especially in nearby Ghana. The European traders could also be the victims. Lured by a succession of telephone calls, a Glencore representative arrived in Nigeria carrying a suitcase filled with several million dollars in cash to buy oil. After the suitcase was handed over, the ‘sellers’ disappeared. If that misfortune gave Watts wry amusement, the Ogoni gangs’ activities caused headaches. Explosions while siphoning oil caused numerous deaths, and the thefts from pipelines caused spillage across farmland and in rivers. The environmental damage placed Shell under pressure to pay compensation to farmers, which in turn encouraged some of them to sabotage pipes in order to claim compensation. Attempts by Watts to crack down on corruption, theft and sabotage endangered Shell’s employees. Increasingly, they could only work if protected by armed militias. Continued civil unrest forced many oil wells to close down. 2,470 security officers were employed to protect the operational staff. Although Shell’s directors in Holland condemned the use of guns as ‘intolerable’, the nature of the corruption in Nigeria left no alternative.

‘There’s a staggering skimming of government funds paid straight into Swiss bank accounts,’ Watts exploded. Since each Shell ‘country’ was self-financing for expansion, Watts’s ambitions were frustrated by the government’s refusal to pay Nigeria’s share of the bill. Most of the $7 billion received every year by the government in taxes and royalties simply disappeared. Hundreds of millions of dollars which the government was contractually obliged to contribute to develop new reserves had been deposited in Swiss bank accounts by corrupt officials. A succession of ministers, Watts discovered, had ‘not only stolen the eggs but refused to even feed the goose’. In the face of wholesale corruption, even Nigeria’s banks refused Shell’s requests for loans and overdrafts. Watts’s predicament was complicated in December 1993 by a military coup led by General Sani Abacha and the slump of Nigerian oil prices to $12. The new dictator repressed (#litres_trial_promo) striking protestors and arrested the trade unions’ leaders in the oilfields, but failed to address Shell’s complaints. Exasperated, Watts threatened the minister of finance and the governor of the central bank. ‘If we can’t pay wages or finance our development,’ he warned, ‘I’ll make sure it’ll be in the press. Even my driver will be protesting in the street.’ Talking tough appealed to Watts, although the corporation’s conflict of interests – eagerness for more oil, collaboration with corrupt rulers, disregard for tribal sensitivities and discounting the social damage caused by the oil spillages – could not be disguised during an international protest.

In 1990, Ken Saro-Wiwa, a 49-year-old writer and poet, launched a campaign outside Nigeria on behalf of the Ogoni tribe, who inhabited 1.3 per cent of the oil-rich delta and produced 1.5 per cent of Nigeria’s oil. After 30 years of oil production, the Ogonis’ farmland, water and air were polluted by oil spillages and the ‘acid rain’ produced from the gas flaring above their crops and villages. In compensation, they received little income from the oil royalties. With Shell’s knowledge, central government ministers refused to remit even the agreed 1 per cent of the revenue to the locality, and national politicians never visited the region. Until he extended his campaign against the Nigerian government to America and Europe, Saro-Wiwa’s efforts had been fruitless. But the crusade and his encouragement of an armed uprising in the delta altered Shell’s relationship with the government. The Biafran experience had taught the company that any interference with oil revenues, or any demand for secession, would be squashed.

To protect Shell’s oilfields, Watts felt justified in appealing to the government for protection from constant vandalism. ‘We’re not a bottomless pit of money,’ he explained. Although the uprising was wrecking Shell’s operations in Ogoniland, only 3 per cent of the company’s worldwide production was threatened. During 1993, as the disturbances increased, Watts requested the support of 1,400 armed policemen, in return for which he would provide logistics and welfare. At the company’s expense, ‘mobile police’ armed with AK-47 rifles, some of whose uniforms bore Shell’s insignia, were dispatched as an ‘oilfield protection force’ to the delta. As reports of death and destruction in Ogoni villages reached Europe and America, Shell was accused of financing ‘kill and go mobs’ to brutally suppress the uprising. Amid chaotic scenes, Shell withdrew its staff and stopped pumping oil. The Ogonis would claim that on 1 December 1993 Watts thanked the inspector general of the police for his cooperation ‘in helping to preserve (#litres_trial_promo) the security of our operation’. His gratitude was premature.

Beyond Nigeria, Saro-Wiwa’s description of the delta’s desolation and the Nigerian government’s oppression of the Ogonis aroused fierce protests. Shell was urged to exploit its financial influence and persuade the government to cease the violence and grant the Ogonis independence. Herkströter, supported by younger directors including Mark Moody-Stuart, the British heir apparent, resisted those demands. ‘We have to work with the government,’ the directors agreed. ‘We don’t have a mandate to interfere.’ Recalling the outrage during the 1960s about American multinationals including ITT and United Fruit directly interfering in South American affairs, Shell’s directors declared, ‘We don’t get involved in politics.’ In arguments with representatives of the relief agencies, Moody-Stuart insisted, ‘Even if the government steals money, we cannot do anything about it. We are guests in the country and cannot intervene.’

In May 1994, Saro-Wiwa was arrested for inciting the murder of four chiefs and government officials who had been attacked by a crowd of Ogoni youths in a meeting hall and hacked to death. The price of Nigeria’s oil, said protestors in the electrified atmosphere, was blood. The promise by Abacha in July 1994 that the death penalty would be imposed on ‘anyone who interferes with the government’s efforts to revitalise the oil industry’ chilled Saro-Wiwa’s supporters, especially the striking oil workers.

Brian Anderson, who replaced Watts as the local Shell chairman in 1994, visited General Abacha. Like many Europeans, he had assumed that Saro-Wiwa would receive a short sentence. Nurtured by Shell’s straitjacketed culture, Anderson was immune to the nuances of the dictatorship, and his report to The Hague after his first conversation with the general did not raise any alarm. One year later, after a prejudiced trial, Saro-Wiwa was condemned to death. Only after the verdict and another visit to the general did Anderson realise his mistake. By then it was too late to influence Shell’s directors. Like a supertanker, they were impervious to shocks that required an immediate change of course. By then, Saro-Wiwa’s fate had become an international issue. Across America and Europe he was portrayed as the victim of Shell’s conduct, and the company was accused of polluting the Ogoni farmlands and of failing to protest against the rigged trial while financing the government’s destruction of the delta. President Clinton, Nelson Mandela and other international leaders protested to Abacha. The World Bank, Church leaders, Greenpeace, Amnesty International, PEN, the International Writers’ Association and even members of the Royal Geographical Society demanded that Shell abandon its operations in Nigeria. The opprobrium spread across all of Big Oil. Accused of exploitation, corruption, environmental damage and murder, Shell was urged to intercede and prevent Saro-Wiwa’s execution.

In The Hague, Cor Herkströter and his board maintained their composure. Shell men never flapped. Shell’s ‘Business Principles’, a set of guidelines committing the company to an apolitical role, had been adopted in 1976 and subsequently updated five times. According to those principles, Shell’s duty was to be decent but not evangelical. Multinationals should not interfere in sovereign states. ‘We must be part of the furniture,’ everyone agreed. ‘It’s ridiculous that we should intervene against a military dictatorship,’ said one director, to approval. ‘If we left,’ said another, ‘we would cut off Nigeria’s nose and our own. The French would replace us in a flash.’ The company’s huge investment needed to be protected, not least because after years of frustration there was still hope that the Nigerian government would agree to build a plant to liquefy and ship the country’s vast deposits of natural gas in tankers as LNG (liquefied natural gas). Shell was the master of the complicated technology necessary to freeze natural gas to minus 160°C, at which temperature it became liquid gas, which could be shipped around the world. Six hundred cubic metres of natural gas could be condensed into one cubic metre of LNG. The profits would be huge. Only a minority of British directors understood that Shell’s investment in Nigeria was becoming disproportionate to the profits. The capital, they believed, could have been better spent elsewhere. That British minority believed that standing aside from Nigeria’s political battles had been mistaken, and that Shell should have taken more interest in the delta’s environment years earlier. Yet in the midst of the storm, changing course had become too difficult. There was no alternative but to support the wrong decision. ‘I never doubted that Shell would stay the course,’ said Watts. ‘We resiled from protest,’ observed a Dutch director. ‘Shell should not be blamed for an unjust government.’ ‘Shell doesn’t get involved in politics,’ announced a spokesman. Questions were referred to the British, Dutch and American governments, which equally failed to make any forceful protest and opposed sanctions, although Nigeria exported 40 per cent of its oil to the US. At the very last moment Shell and the three governments did protest to General Abacha, but on 10 November 1995 Ken Saro-Wiwa and his eight fellow defendants were executed. Greenpeace blamed Shell’s silence for the deaths. ‘It is not for commercial organisations like Shell,’ replied a company spokesman, ‘to interfere in the legal process of a sovereign state such as Nigeria.’

Stigmatised as international pariahs, Shell’s directors realised on reflection that earlier intervention by the corporation might have stopped Saro-Wiwa’s execution. Nevertheless, amid appeals for international sanctions, Anderson and Shell’s directors met in London to decide whether to push ahead with the plan to build an LNG plant for Nigeria’s natural gas. One month later, on 15 December 1995, 30 years after suggesting the idea, Dick van den Broek of Shell signed an agreement with the Nigerian government to build a $3.8 billion LNG plant. He had threatened that failure to sign would terminate any future agreements with the company. Shell’s directors were ecstatic. Ninety per cent of the LNG output had been pre-sold, and Shell was a 25.6 per cent shareholder. Shortly after, Shell agreed to build a giant platform offshore, in an area called Bonga. These deals aggravated suspicions about Shell’s conduct during the Saro-Wiwa affair and its promise to return to the Ogoni region if its workers’ safety was guaranteed by local communities. Many critics believed that Shell’s managers in Nigeria had refused to protest against Saro-Wiwa’s execution because of collaboration with the regime. Those censuring Shell included the World Council of Churches, whose report accused the company of polluting the Ogoni area by dumping oil into waterways and of showing ‘inertia in the face of the government’s brutality’, which included intimidation, rape, arrests, torture, shooting and looting. God, said the Council, damned Shell in Nigeria. Shell denied all the charges. Exonerating itself of any responsibility because it had withdrawn from Ogoniland in 1993, Shell derided the report for regurgitating old and previously discredited allegations, 99 per cent of which, it declared, were fabrications. But the company could not win. The criticism nevertheless prompted Herkströter to admit that Shell’s culture had ‘become inward-looking (#litres_trial_promo), isolated and consequently some have seen us as a “state within a state”’. Mark Moody-Stuart was among the few who became openly disturbed that the company had misjudged the situation. ‘We should have been more patient,’ he admitted, ‘and less angry and offered more. There are lessons to be learned.’ ‘Nigeria,’ lamented John Jennings, a Shell director, ‘is like a house falling down. All we can do is patch it up so it leans but doesn’t collapse.’ Watts was philosophical. ‘In oil, mistakes get buried in the mists of time.’ In June 2009, Shell would pay $15.5 million in compensation to settle a lawsuit with Saro-Wiwa’s family, while admitting no wrongdoing.

Few Nigerians had attended Watts’s farewell party from Nigeria in 1994, but Shell’s directors were relieved that the company’s investments in the country were secure. General Abacha had been persuaded that without Western expertise, Nigeria’s oil production and income would diminish. Unlike Venezuela and Indonesia, Nigeria had no intention of expelling the oil majors. Both sides agreed they needed stability. In view of the continuing violence targeted against the president, Brian Anderson accepted the permanent protection of Nigerian soldiers for Shell’s employees. The corporation’s archives for 1995, Shell’s annus horribilis, were sealed. Reviving the company had become critical to its future prosperity.

Shareholders were demanding improved profits. Years of cautious under-investment, Herkströter realised, were no longer sustainable. The company had been bruised like the other oil majors by the fall of oil prices, and its poor financial performance had been undermined by choosing only ultra-safe investments and its failure, other than in the Gulf of Mexico, to find ‘elephants’. To improve value per share, Herkströter decided to stop the company befriending presidents and kings, and to focus on reform of its financial controls. Localness, previously Shell’s strength, was to be curbed. Fiefdoms were abolished. One third of the headquarters staff were made redundant, and the power of the resident chairman in each country was reduced in favour of Exxon’s method of governance through central control. The survivors were ordered to stop playing politics and start earning money. But Herkströter’s headlines did not translate into action: little happened other than a costly joint venture in America with Texaco and Saudi Aramco (the Arabian-American Oil Company) which would prove disastrous. To prevent the balance of power tilting towards the British directors, Herkströter marshalled the Dutch directors to reject Mark Moody-Stuart’s proposed purchase of British Gas (BG), a substantial oil exploration and production company, for £4 billion. Moody-Stuart was ‘very upset’, observed Phil Watts. In 2008 BG would be worth about £35 billion.

Herkströter was equally inept in his attempts to restore Shell’s reputation. ‘We are now being asked to solve political crises in developing countries,’ he said in October 1996, ‘to export Western ethics to those countries and attend to a multitude of other problems. The fact is we simply do not have the authority to carry out these tasks. And I am not sure we should have that authority.’ That opinion was opposed by Mark Moody-Stuart and Phil Watts.

Primed by his experiences with Brent Spar and Nigeria, Watts put together a list of tasks under the heading ‘Reputation Management’. For Watts, Brent Spar had been ‘a life-changing experience … We had done a technically excellent job but we had all missed the big trick. A time bomb was ticking – we missed it and we all thought we were doing our best … We never dreamt we would get that much attention.’ But if Brent Spar was Watt’s ‘big wake-up call’, he found that Nigeria ‘keeps us awake all the time’. By April 1996 he had compiled a list of initiatives, including ‘Ethics, Human Rights, Political Involvement, and the key items for the review of the Business Principles’. The ‘stewardship over (#litres_trial_promo) Shell’s reputation’ was Watts’s priority.

Greenpeace’s campaign against the oil companies had focused on Shell’s exploration in the West Shetland islands. Ignoring the environmental lobby, Herkströter realised, was pointless. The initiative, he noted, had been seized by BP’s John Browne. Spotting the tide of opinion, Browne had, amid fanfare, delivered a speech at Stanford University urging the world to ‘begin to take (#litres_trial_promo) precautionary action now’ to protect the environment. Shell’s directors agreed to embrace the same ideology. The corporation crafted public statements promoting its intention to be more open, to acknowledge human rights and to protect the environment by including renewable energy projects in its core business plan. In the future, said Herkströter, Shell would engage with Greenpeace to discuss the reduction of greenhouse gases in coal gasification and biofuels. Satisfied that he had fulfilled the public relations requirements, Herkströter approved the purchase of one fifth of Canada’s Athabasca tar sands for C$27 million, a relative pittance. The total estimated reserves were 1,701 billion barrels of oil. Shell anticipated extracting 179 billion barrels. Exploitation of the tar sands was uneconomic while oil was at $15 a barrel, but would be profitable once the price hit $40, although the process offended Shell’s newfound commitment to protect the environment. The tar’s extraction would require the felling of 54,000 square miles of forest, an area the size of New York state, and as a consequence wildlife would be killed and water polluted. Huge amounts of power would be required to create the steam or hot water needed to separate the bitumen from the clay, and more power and chemicals were required to separate the light petroleum from the bitumen. The whole process created three times more carbon than conventional oil operations. In The Hague, the purchase was mentioned as manifesting Shell’s ability to play both sides of the argument.

At the end of 1997, Herkströter retired. Mark Moody-Stuart, his successor, was dissatisfied with his inheritance. Appointed as ‘Mr Continuity’, Moody-Stuart, a Cambridge geologist and a Quaker who loved sailing, regarded his predecessor’s changes as timely but ineffectual. Few of the reforms had materialised. ‘Shell needs drastic remedial measures,’ he said, while fearing that the majority of Dutch directors would resist even the appointment of senior directors from outside the corporation. Shell had already missed out on two important investments. Approached by the governments of Angola and Azerbaijan to develop their oil, the company had refused requests for preliminary cash bonuses, and the opportunities were seized by BP and Exxon. Under Herkströter, Moody-Stuart lamented, Shell had even ignored the middle way. Adrift and unacclimatised to the new world, Shell had allowed its long-nurtured relationships with the governments of Oman, Nigeria and Brunei to deteriorate, and earnings were falling. In 1998 the company’s profits were $5.146 billion, compared to $8.031 billion in 1997. ‘There will be a coming crisis (#litres_trial_promo) if we don’t change,’ warned Moody-Stuart. ‘Change is a pearl beyond price.’ The obstacles were Shell’s fragmented culture, divided management and entrenched country barons who had successfully frustrated Herkströter’s reforms. To many British employees, the Dutch engineers’ arrogance was stultifying. Convinced of their superiority, they regarded their rivals at Exxon, Chevron and especially BP with measured contempt. Yet some refused appointments in unpleasant oilfields, preferring to remain in the comfort of European and American offices, focused on investment and process rather than practical work on the ground. Convinced of the righteousness of science and engineering, the LNG department had seriously advocated building a terminal near the Bay Bridge in San Francisco.

‘I’m clearing out the cupboard,’ Moody-Stuart announced, planning instant surgery. Offices around the world were closed and country chairmen demoted, 4,000 staff were dismissed, 40 per cent of the chemicals plants sold, $4.5 billion of bad investments written off, capital spending cut by one third and, most dramatically, American Shell lost its independence. Appallingly managed and beyond financial control, US Shell represented 22 per cent of the company’s assets, yet contributed only 2.6 per cent of its earnings. Walter van de Vijver, a 42-year-old engineer, was dispatched to integrate the American company with its European owner. The cost of Moody-Stuart’s surgery was huge. Shell’s net income fell by 95 per cent, from $7.7 billion in 1997 to $350 million in 1998. There was little optimism that things would improve. The oil price in 1998, Moody-Stuart believed, was ‘likely to stay at $10’, and the likelihood of it going above $15 was ‘low’. At those prices, Shell’s profits, like BP’s and Exxon’s, were certain to fall further.

Moody-Stuart’s parallel agenda was to reform Shell’s ‘Business Principles’. A team had been working since September 1997 to develop a five-year strategy to resolve dilemmas involving human rights, global climate change and environmental problems. A larger question was whether any of these activities made sense in a ‘world of $10 oil’. Moody-Stuart was emphatic that his strategy was to generate profits ‘while contributing to the well-being (#litres_trial_promo) of the planet and its people’. By then Watts had completed his study to alter Shell’s reputation. To boost employees’ self-esteem and to celebrate the ‘transformation process’, Moody-Stuart agreed that Watts, the new head of exploration and production, should stage a stunt. At a conference of 600 Shell executives in Maastricht in June 1998, Watts was propelled onto the stage in a spaceship, dressed in a spacesuit. ‘I have seen the future and it was great,’ he yelled to his audience, all of whom were wearing yellow T-shirts emblazoned with the slogan ‘15 per cent growth’. The onlookers were, remarked one eyewitness, ‘gobsmacked’ by Watts’s attempt to remake his ‘dour, pedantic image’. Everyone understood his agenda, however: Shell’s reserves were falling, and targets needed to be stretched. Managers were formally urged to ‘improve our effectiveness’. The message was ‘improve the score card’. At the end of his presentation, Watts urged his flock to sing Beethoven’s ‘Ode to Joy’ (#litres_trial_promo): ‘Somewhat over the top,’ Moody-Stuart admitted. ‘We all do foolish things occasionally.’ Galvanising morale had been important. The oil majors were facing a torrid time. Those that failed, Moody-Stuart knew, would be buried alive. Executives from four American oil companies – Mobil, Amoco, Arco and Texaco – had approached Shell seeking mergers or to be bought. Shell’s split structure made that impossible. The company, Moody-Stuart knew, needed a counterplot to resist the unexpected challenge posed by BP.

FIVE The Star (#ulink_baea12aa-5f3b-5094-90cb-052a68bdc0e8)

John Browne understood oil better than most. Shell’s Mark Moody-Stuart, Chevron’s David O’Reilly and Exxon’s Lee Raymond could not match Browne’s intellect and bravado, but none had as much to prove. Employed by BP since leaving Cambridge University, the son of a BP executive who had met his Romanian mother, a survivor of Auschwitz, in post-war Germany, Browne understood that trouble and taboos had been inherent within BP since its creation. During his youth he had lived with his parents in Iran and had witnessed the company’s arrogance and subsequent humiliation. The industry’s rollercoastering battles ever since encouraged his taste for audacious gambles to rebuild a conglomerate lacking geographical logic and natural roots.

BP was founded on disobedience and survived by maverick deeds. The original sinner was William Knox D’Arcy, a wealthy Australian who arrived in Persia in 1901 on a hunch that oil could be discovered there. D’Arcy negotiated a 60-year concession over 480,000 square miles of desert. For seven years his team drilled unsuccessfully across an area twice the size of Texas, until in 1908 he was ordered by Burmah Oil, a Scottish investor, to stop. Having started yet another test bore D’Arcy’s team ignored (#litres_trial_promo) the message and, detecting a strong smell of gas, struck oil. There was no natural reason why that fortuitous discovery should have evolved into the formation of a famous company. Culturally, the directors of the new Anglo-Persian Oil Company based in Glasgow were embarrassingly ignorant about their faraway asset. In contrast to the American oil companies which had spawned an integrated market built on discoveries in Texas and across the prairies, Anglo-Persian, which became BP, was a colonial concession sponsored by the British government. Managed by retired military officers recruited particularly from the Indian army, its staff clung to their suzerainty. Amateurs in marketing and untrained to supervise refineries and chemical industries, they aspired to be gentlemen, and were generally indifferent to indigenous politicians, especially Arabs and Iranians, whom they regarded as inferior. Unlike Shell’s country chairmen, soaked in local cultures and enjoying rapport with host governments, BP’s managers carelessly alienated their hosts, offhandedly oblivious of Iraq’s and Iran’s vast oil wealth.

Little changed before the nationalisation of BP’s oilfields in Iraq in 1951. Sir Eric Drake, the corporation’s conceited chairman, assumed that the confiscation would be compensated by increasing oil prices and the discovery of new reserves in Libya, Nigeria and Abu Dhabi, or by expanding into petrochemicals and shipping. Over the next 20 years, BP balanced the escalating demands of the Shah of Iran, the bellicosity of OPEC and Arab nationalism, especially in Libya, by finding new oil in Alaska in 1968 and the North Sea in 1970. The problem was (#litres_trial_promo) the directors’ lack of commitment to exploration. The discovery of a new field, noted the exploration department in 1971, evoked the reaction, ‘What on earth are we going to do with all this oil?’ Terry Adams, BP’s director in Abu Dhabi, was expected to embody that casual attitude. To finance a pipeline in Alaska, Adams was ordered in early 1973 to sell half of BP’s share in Abu Dhabi’s offshore interests to a Japanese company for $736 million. ‘This is top secret, none of the locals need to know,’ BP’s manager Roger Bexon told him, referring to Sheikh Zaid, the leader of the state. In his anger after the sale was announced, Sheikh Zaid nationalised half of the Anglo-Japanese investment. The Japanese never believed that BP was unaware of the impending confiscation, and the Abu Dhabians griped about BP’s lack of respect. Insouciantly, the British pleaded ignorance, underestimating the profoundly negative consequence of their arrogance.

Arab irritation compounded BP’s problems in the region after the 1973 war. In succession, the company’s oilfields in Kuwait and Libya were nationalised. Overnight, BP’s plight was dire; the company had become entirely dependent on the discovery of oil in Alaska and imminent production in the North Sea, and it had fallen in rank from membership of the Big Three to seventh among the Seven Sisters. Morale was flagging, and there were even fears that BP faced extinction. Unlike the precise management processes at Chevron, Mobil and Exxon, which ran in harmony regardless of the identity of the individual chief executive, BP’s direction depended upon the chairman’s vision. ‘There are no sacred cows,’ declared Peter Walters, appointed chairman in 1981, who advocated retrenchment. BP’s focus was to be entirely oil. Following Exxon and Shell, Walters slowly reversed the diversification into non-oil businesses and ordered a $6 billion sale of all the nutrition manufacturers and mineral interests. He seemed unable to do much more to salvage the company from the morass. Impaired by the British government’s nonchalance, BP was crippled by debts, aggravated by the government’s order to repurchase about 10 per cent of the company’s shares from the Kuwaiti government which had been bought during a disastrous flotation. In an industry dominated by Exxon and Shell, BP had hit the buffers, destabilised by debt. Walters never recovered his self-confidence.

Two BP directors in America regarded Walters’s cuts and style as merely scratching the surface rather than offering a revolution. In 1983, Bob Horton, a brash 46-year-old fellow of the Massachusetts Institute of Technology, and his 35-year-old deputy John Browne had arrived at BP’s American headquarters in Cleveland, Ohio, to supervise BP’s 54 per cent investment in Sohio, the successor to the Standard Oil Company of Ohio, the original John D. Rockefeller corporation. The purchase had given BP an entrée into Alaska, but London had failed to prevent the American directors buying a copper-mining company, wasting $6 billion of Alaskan profits. ‘Sohio’s completely out of control,’ exclaimed Horton. ‘They’re losing $1 billion a year.’ Originally acquired in 1970, Sohio was Horton’s platform to prove his credentials as Walters’s successor. As head of BP chemicals in 1980, he had closed 20 plants and fired two thirds of the workforce. The cure at Sohio in May 1987 was to buy total ownership for $7.9 billion (£2.5 billion) and dismiss swathes of staff. Sohio, Horton and Browne proudly announced, would earn profits of $560 million within two years. Renamed BP America, it represented 53 per cent of BP’s total assets. From Ohio, the warts of BP’s culture in London were glaring. Deprived of courage, hope and energy, BP could only be resuscitated if the employees’ historical aversion to risk was replaced by American entrepreneurship. Their successful remedy in Cleveland, Horton and Browne decided, should be applied to the whole company after they returned to London in 1989.

Like most oil men, Horton and Browne believed in 1989 that ‘demand had peaked’, and oil would remain cheap because high prices stunted demand. Exxon, Mobil, Chevron and other more powerful competitors argued that prices were unpredictable, and survival depended upon cutting costs. Horton encouraged Walters to follow the herd. ‘BP cannot survive with this culture,’ he told Walters after listing eleven layers of management. ‘It’s sclerotic. Get rid of the brigadier belt. Too many have a vested interest to sabotage change.’ Starting from scratch, said Horton, BP needed to be repositioned and to duplicate Shell’s ‘wonderful worldwide brand’. Browne, as the new chief executive of exploration, echoed that criticism. In June 1989 he commissioned a presentation for investors in London and at the Rockefeller Center in New York. ‘This is dreadful,’ he said after previewing the slides. ‘We’re declining.’ BP’s access to 70 billion barrels of reserves had dropped to four billion, and were not being replaced. Production was falling from 1.5 million barrels a day to below one million. While its rival Shell had successfully retained profitable oil and gas fields in Nigeria, Oman, Malaysia, Brunei and Holland, BP would go out of business unless it found new, big prospects. Tom Hamilton, the American chief for international exploration, was told by Browne to present a scenario for a new strategy. ‘I’m going away with my family on holiday,’ explained Hamilton. ‘Take the company plane and come back early,’ ordered Browne. ‘I’ll need 90 days to do it,’ replied Hamilton. ‘You’ve got three days to calculate the best odds to discover more oil,’ replied Browne. In September 1989, Browne commissioned new exploration operations in Yemen, Ethiopia, Vietnam, Angola, Gabon, Congo, South Korea and the Gulf of Mexico.

Few doubted the need for brutal surgery. Peter Walters’s retirement in early 1990 provided the opportunity for change. Persuaded by Bob Horton’s presentation about his achievements and by his argument in favour of a cultural revolution, the board unanimously picked ‘Horton the Hatchet’ as BP’s new chairman and chief executive. ‘Project 1990,’ said Horton, ‘is my personal crusade to revolutionise the company.’ Twelve thousand employees would be dismissed and $7 billion of assets sold. Horton espoused drama as a resolution to the crisis.

Eighty-two committees at BP’s London headquarters in Finsbury Square were axed, leaving just four. The eleven layers of management were also reduced to four. To inspire enthusiasm and to reincarnate BP’s 120,000 staff as open-minded and freethinking, Horton participated in ‘cultural change workshops’ with 40 senior staff to discuss the ‘new vision and values’. His propagandists praised ‘the terrific buzz which motivated us to get the change moving’, but others carped that the balance between pain and progress was wrong. Horton had chosen Jack Welch’s operation at General Electric as his model for a centralised, focused corporation. In the oil business, no one could ignore Lawrence Rawl, the chairman of Exxon. Although Exxon was, in Horton’s opinion, ‘wildly overmanned and too engineer- and lawyer-led’, Rawl consistently produced successful results. Horton’s public predictions, accompanying jerky attempts to build solid corporate foundations, compared poorly with Rawl’s rare but pertinent statements about Exxon’s unflustered deliberations. As oil prices gyrated in late 1990 from $40 down to $31, Rawl cautioned that uncertainty made investment decisions difficult: ‘This is a long-term business (#litres_trial_promo). We cannot turn the money off and on every time someone clears his throat in the Middle East or elsewhere as the price goes up and down.’

The ‘cough’ was Iraq’s invasion of Kuwait in August 1990. America’s oil industry was still struggling. Oil production had fallen every year since 1986 by between 2.5 and 6.5 per cent. Banks remained reluctant to lend because of the continuing uncertainties. The oil business, it was said, was as safe as rolling dice in Las Vegas. Even Exxon lacked sufficient money and personnel to instantly boost production. The US government offered no leadership to fashion a new energy policy. In 1988 America had believed that George Bush Snr was the oil industry’s dream candidate, although as Ronald Reagan’s vice president he had offered it no help, and he had in fact campaigned for the presidency as an environmentalist. During his single term, Bush would dilute an Energy Bill giving the industry minor tax relief, would not limit imports, and would cancel the sale of eight offshore leases. Texans, surrounded by abandoned derricks, were angry that the president sent the army to Kuwait out of fear of losing 1.5 million barrels of oil a day, but that no one appeared to care about Texas’s similar losses since 1986. Their anger spread to contempt for east coast liberals and Californian environmentalists who nevertheless still harboured a sense of entitlement that energy should be abundant and cheap. Hoping for a cautious recovery from that economic devastation, Horton concluded that ‘the fundamental realities (#litres_trial_promo) point to higher oil prices’. BP, he decided, needed to change fast.

The hyperactive Horton lacked Rawl’s gravitas. He misunderstood Exxon’s foundations, created in around 1865, and built on vast untapped reserves of oil. Ever since John D. Rockefeller’s retirement in 1897, the corporation had been led by domineering personalities moulded by Exxon’s character and caution. Unlike that prototype, Horton was not fashioning himself as a conservative, sober, confident chieftain, but was duplicating the caricature of a brash American chief executive. After four years in Cleveland, he had forgotten that BP was a British Boys’ Club, uniting in a collegiate atmosphere people who had lived, worked and played together for 25 years. Running too fast, he was failing to implement his own plans. Instead of focusing on the cuts, he ordered BP to expand despite the continued recession. At a time when the price of oil was about $16 a barrel and slipping, he expected that it would rise to $21 or even $25. Convinced of his own genius, he welcomed personal publicity. Impulsive and careless with his language, he told the first journalist invited into his office: ‘I’m afraid because I am blessed by my good brain which is in advance of my colleagues’, I tend to get to the right answer rather quicker and more often than most people.’ (He would forever regret this remark: ‘It came out wrong, and I have had it hung round my neck ever since – never ever did I think I was a genius, far from it.’) The cover of Management Today featured Horton holding a hatchet, while Forbes magazine photographed him sitting on a throne. There was gossip within BP’s headquarters about Horton asking his secretary, ‘Should I go to a charm school?’ His insensitivity bewildered his colleagues. Newspapers began reporting Horton’s unpopularity, one asking: ‘When Robert Horton and his wife return from their holiday in Turkey, many BP staff will hope that their plane will crash.’ David Simon, a managing director, was told that Horton concealed such criticisms from his mother. ‘Good God,’ exclaimed Simon. ‘Horton has a mother!’ Another executive told Horton to his face, ‘Why don’t you bugger off to Chessington Zoo and watch the gorillas and monkeys?’ ‘Why?’ asked Horton. ‘Because you might learn a lot.’

Relations between Horton and his fellow directors were not improved after they arrived at Heathrow airport on 23 June 1992 to fly to Alaska for a board meeting. Horton was overheard having an unseemly argument with the BA employee at the check-in desk. The atmosphere at the board meeting was fractious. BP would record its first quarterly net loss of £650 million ($1.24 billion) after its income fell by 82 per cent, compared to a £415 million profit in 1991. The debt had increased to $16 billion and the share price had slid from 332 pence in June 1990 to 209 in June 1992. ‘We’re bleeding cash like crazy,’ said one director, querying why the proposed cuts had not materialised, especially at the refineries. ‘You can count on BP’s DNA to find an inspired route out of the trouble,’ countered a Horton sympathiser, only to be crushed by another director: ‘Exxon and Chevron don’t get into trouble.’ Oblivious to the storm, Horton insisted during the board meeting that BP should pay a normal dividend to please investors. ‘Could you wait outside?’ he was asked by the banker Lord Ashburton. Beyond his hearing, the reckoning was swift. ‘He’s spent too much time with ambassadors and playing politics in Washington,’ said one voice. ‘And he’s spent too little time on the details of the business,’ added another. ‘Bob is ambitious, abrasive and arrogant,’ concluded a third. ‘We need a change.’ The mood was summarised by Ashburton: ‘There’s been a build-up of small flakes which has become quite a lot of snow on the ground.’ Three weeks later the non-executive directors, including Ashburton and Peter Sutherland, met at Barings bank in the City on a Saturday morning to decide Horton’s fate.

The unsuspecting chief executive was summoned the following Wednesday. ‘Robert,’ said Ashburton, ‘the board has decided to ask for your resignation.’ ‘My God,’ exclaimed Horton, shocked that his fate was even being discussed. ‘I was brought down as laughable,’ he reflected. ‘I got a head of steam. My mistake was believing change could be done so fast. I should have shown more tenderness.’ The public announcement was stripped of any charitable sentiment. ‘Hatchet Horton’s’ decapitation matched the cultural change he had championed, except that his dismissal was interpreted by outsiders as the final collapse of a stodgy giant. BP, rival oil companies believed, would shortly be receiving the last rites.

Horton was replaced by David Simon, a trusted team player with expertise in refining and marketing. ‘This is about the style of running the company at the top,’ Simon said about his predecessor. ‘It’s not that I don’t have an ego. It’s just that it’s not terribly important to me.’ Simon, a cerebral linguist, acknowledged his limitations. ‘Look, chaps,’ he frequently smiled during meetings, ‘you know I’m not very bright, so could you explain this in simple language?’ Six weeks after Horton’s dismissal, BP halved its dividend. Horton’s intention to copy Exxon and centralise BP was reversed. Power was devolved to trusted subordinates who would be accountable to business units, an innovation introduced by McKinsey & Company, the management consultants. That suited John Browne, the head of exploration and production and the heir apparent. Although Browne’s admirers described an occasionally soft and lonely character, fond of ballet and opera and not inclined to socialise, he espoused confrontation to resolve problems. BP’s style, he believed, should not attempt to mimic Exxon’s. Hierarchies and conformity were to be destroyed, and to encourage initiative there would be informal lunches, no lofty titles, and meetings between forklift drivers and accountants. Outsiders were greeted by charm, but employees understood the ground rules of a self-styled alpha male: ‘One mistake and you’re out.’ His lesson from Sohio was the importance of consolidation and cuts.

‘I’m astute enough to know what I’m doing,’ Browne told Tom Hamilton. In 1991, after working with him for six years, Hamilton admired Browne’s negotiating skills and passion to reduce costs, but questioned his limited experience. In his early career Browne had chopped and changed between jobs, spending just nine months at the Forties field in the North Sea and the same amount of time in Prudhoe Bay, never staying long enough to see his mistakes emerge. Not only was his knowledge about operating in the mud and sand of oilfields superficial, but he lacked any taste for solving engineering problems. Working in an office filled with monitors displaying information to feed his appetite for facts, he concealed his limitations by obtaining detailed dossiers on every face and every issue in order to brief himself before meetings. Browne’s impressive ability to absorb information, Hamilton feared, produced blindness about the whole picture and an inability to anticipate what could go wrong.

That weakness, Hamilton believed, stemmed from Browne’s addiction to the wisdom handed down by McKinsey. Persuaded during his studies at Stanford in California that BP’s experts could be replaced by consultants, he appeared to become a financial executive surrounded by accountants focused on balance sheets to satisfy the shareholders, rather than harnessing engineering skills to manage a project. ‘To save money,’ Browne had argued, ‘we can buy in what we need.’ In Browne’s opinion, Hamilton did not understand the skill required to direct BP’s limited cash towards prospective windfalls. BP’s technicians, he felt, needed to be business-oriented. Making profits was his only criterion, whether by improved technology, lower costs, reduced interest payments or higher volumes. ‘The engineers in Aberdeen gold-plate everything,’ he complained. ‘They’re inefficient and wasteful.’ BP’s engineering headquarters at Sunbury, infamous for pioneering ‘space grease’ and constantly reinventing the wheel, was to be closed. Browne saw no incongruity in an oil and chemical corporation relying on hired freelance engineers. ‘If this goes wrong, John,’ Hamilton warned, ‘there’ll be no place in the world to run and hide.’

Browne’s conception of himself as a different kind of oil executive leading a different kind of oil company did not appeal to Hamilton. The final straw was an argument about cutting costs during an 18-hour flight to inspect an oilfield in Papua New Guinea. Browne’s antagonism towards BP’s traditional embrace of engineers irritated Hamilton. ‘We may have to turn back, John,’ he cautioned halfway through the helicopter flight across the jungle. ‘Cloud could prevent us landing.’ Just before they arrived, sunlight burst through the clouds. ‘So why so many problems?’ chided Browne. Hamilton resigned soon after, avoiding the profound change Browne demanded in exploration. Profits, said Browne, depended on cutting costs, especially exploration costs, by 50 per cent, from $10 to $5 a barrel, while at the same time finding enough new oil to start replacing BP’s depleting reserves in 1994.

Accurate forecasts of oil prices had become impossible after 1986. For the first time, prices were varying during a cycle of boom and bust. Conscious that the oil majors had invested too much during the 1960s, Browne pondered the revolutionisation of the industry’s finances. The new challenge was to balance the cost of exploration and production with the potential price of oil five years later. Oil companies, Browne knew, could only prosper if the cost of exploration and production matched market prices once the crude was transferred from the rocks to a pipeline. The yardstick for BP, the measure of future success, would be to equal Exxon, the industry’s most efficient operator. Exxon’s net income per barrel – the income divided by production – was about one third of BP’s. In costing all new projects, Browne ordered that regardless of whether oil prices were low or high, BP would only invest if profits were certain. With losses of £458 million in 1992, the new wisdom reflected BP’s plight. The corporation could not risk losing more money. If his plan was obeyed, Browne predicted, BP’s annual profits by 1996 would be $3 billion.

Predictions were also offered by McKinsey, which in 1992 forecast the atomisation of the major oil companies into small, nimble operators. The consultants foresaw excessive costs burdening the oil majors, restricting their operations. Too big and too expensive to run, they would give way to small private companies and the growing power of the national oil companies. By the end of the century, according to McKinsey, the Seven Sisters would shrink and their shares would no longer dominate the stock markets. Browne rejected that scenario, believing that only the majors could finance the exploration and production necessary to increase reserves. He would be proved partly wrong. Although the oil majors’ capitalisation in 2000 was 70 per cent of all quoted oil companies (McKinsey’s had predicted that their value would fall below 35 per cent in the stock markets), Browne was underestimating – albeit less than his rivals – the resurgence of nationalism. The national oil companies were increasingly relying on Schlumberger, Halliburton and other service companies and not the majors to extract their oil. But, fearful of excessive costs, he was attracted by McKinsey’s formula to replace BP’s conventional management structure. To a man interested in the dynamics of the industry but not in the minute detail of ‘what you had to do after you bought your latest toy’, the idea of establishing competing business units answerable to a chief executive was appealing. By contrast, Exxon had neutralised individual emotions and relationships to standardise the response to every problem and solution. Depersonalising employees to serve BP’s common purpose, Browne believed, would be self-destructive. BP, he knew, was too raw and too fragile to emulate Exxon’s self-confidence. The company’s staff would be encouraged to use their own initiative in the field. Taking risks was necessary for BP to survive and grow, but those risks would be subject to Exxon’s style of ruthless control of costs from headquarters.

‘We’re stamp-collecting in exploration,’ Browne told Richard Hubbard, the company’s senior geologist. ‘We either make money or walk away.’ He reduced the number of countries where BP was exploring from 30 to 10, and sacked 7,000 employees. ‘We must focus only on elephants,’ he ordered. ‘It’s the New Geography,’ acknowledged David Jenkins, the head of technology. BP was heading for unexplored areas previously barred by physical and political barriers.

The new ventures included offshore sites in the Shetlands, the Gulf of Mexico, the Philippines and Vietnam. The most important risk was a 50 per cent stake in the search for oil under 200 metres of water at the Dostlug field in Azerbaijan, and a $200 million search at Cusiana, 16,000 feet up in the Colombian jungle. Colombia, Browne told analysts in New York during a slick presentation in 1993, was to be the hub of BP’s growth: ‘We estimate that the field contains up to five billion barrels of oil.’ His optimism was conditioned by self-interest, but would yield an unexpected benefit. Oil prices, David Simon predicted (#litres_trial_promo) in 1992, would remain at $14 a barrel until 2000, half the 1983 price accounting for inflation. The Arab countries, Simon was convinced, would welcome BP back, ‘and we’ll get our hands on cheap oil’. While OPEC complained to the British government about North Sea production undercutting the Gulf’s prices, some OPEC countries, suffering reduced income, were reversing their hostility towards foreign investment. Production in Venezuela had fallen since the nationalisation of its oilfields in 1976. BP was invited to bid to return to over 10 fields, including the Pedernales field, abandoned in 1985. Browne’s excitement, compared to Shell’s cagey hesitation, gave BP the image of a well-oiled machine. Other decisions by Browne suggested the contrary. During his ‘good news’ speech in New York he declared that the tar sands had no future, investing in Russia was too risky, and BP would not invest in natural gas in Qatar because ‘the project will not provide a good return’.

Browne’s self-confidence was fed by the inexorable monthly rise of BP’s share price. Helped by cuts in the cost of refining and marketing, and in exploration from $4 billion in 1990 to $2.7 billion in 1994, and by the sale of $4.3 billion-worth of assets including 158 service stations in California, profits were rising – in one quarter by 92 per cent. The transformation of BP’s operation in Aberdeen from loss into profit sealed Browne’s reputation. Oil production had expanded in the North Sea, especially at the Leven field, and the company was certain to extract more oil from Alaskan fields newly acquired from Conoco and Chevron. Since the US preferred Alaska’s light sweet oil to Saudi Arabia’s sour oil, OPEC would suffer. ‘One swallow doesn’t make a summer,’ David Simon cautioned, conscious that oil prices were low and that BP still relied for its entire reserves on Alaska and the North Sea, both of which were nearing the peak of production. Nevertheless, it seemed that the struggle to recover was succeeding. Browne’s admirers spoke of (#litres_trial_promo) his magic restoring a dog to its place as one of the world’s oil majors. In 1995 BP became the industry’s darling, overtaking Chevron, Mobil and Texaco with profits of $3 billion. Debt had been halved from $15.2 billion to $8.4 billion. ‘We’ve clawed our way back,’ cheered Simon, who in July 1995 became chairman, with Browne as chief executive. ‘We’ve put them through painful changes.’ Browne’s ambition to promote himself as a different kind of oil executive and BP as a changed company had triumphed beyond expectations.

Browne’s skill was to highlight his achievements and bury his failures. Several of his ambitious hunts for elephant oil reserves had produced ‘orphans’. In Colombia, the earlier focus of euphoria, the company had become embroiled in a public relations battle with a left-wing pressure group over BP’s involvement in a civil war, the narcotics business and a regime of terror waged by paramilitaries employed to protect BP’s 450-mile oil pipeline. The alleged victims were native farmers whose land had been portrayed in an orchestrated campaign as confiscated, their water reserves depleted and their livestock slaughtered. Worst of all, the oil wells were producing less than half what Browne had anticipated. After substantial criticism (#litres_trial_promo), BP would eventually compensate the farmers. BP’s rivals were suffering similar disappointments. On the basis of promising geology, Mobil had invested heavily in Peru. ‘I mean, this was classic,’ said Lou Noto, the company’s president. ‘This is the classic way (#litres_trial_promo) of how to do it. Yet we came up with a dry well – $35 million later.’ Exxon had similar failures in Somalia, Mali, Tanzania, Mozambique, Nigeria, Chad and Morocco. Shell wasted money in Madagascar and Guatemala. Arco had wasted $163 million drilling 13 orphans in Alaska. Over the previous decade, about $14 billion had been dissipated in unsuccessful attempts to repeat the last big finds in the North Sea and Alaska. Those discoveries had cut OPEC’s share of the world’s oil production from 50 per cent in the 1970s to 30 per cent in 1985. In 1994, OPEC’s share rebounded to 43 per cent, while it retained 77 per cent of the world’s reserves. Shell fired 11,000 of its 106,000 worldwide workforce. In the same year, American production fell to 6.9 million barrels a day, the lowest since 1958, and the country became a permanent net importer of oil. With demand for oil rising, OPEC’s influence appeared certain to increase. Those statistics encouraged Browne in 1995, despite his earlier reservations, to seek opportunities in Russia.

Russia’s oil could replenish the oil majors’ reserves and counter OPEC’s influence. Despite the bribes and the gangsters, none of the oil chiefs jetting into Russia on their private jets from Texas and California hesitated to assert their indispensability in saving Russia from destitution, and US vice president Al Gore did not pause to consider the consequences of flying to Kazakhstan in December 1993 to encourage the country’s split from Russia, spiting the nationalists in Moscow and St Petersburg. On the contrary, causing anger among the Russians excited President Clinton and others in Washington. Russia’s debt crisis, declining oil production and political instability, they believed, presented an unmissable opportunity. With the US importing half its oil consumption, Clinton made the diversification of supplies a priority, and the Caspian could offer at least 200 billion barrels. To win the gamble, the politicians combined with BP’s John Browne, Exxon’s Lee Raymond and Ken Derr of Chevron to display utter indifference to Russia’s gradual collapse.

SIX The Booty Hunters (#ulink_2852a5a4-a7e0-5238-a1dc-62f213230ca8)

The introduction of democracy wrecked Russia’s oil industry. To secure political popularity in 1989 for ‘Glasnost’ and ‘Perestroika’ – openness and reform – Mikhail Gorbachev had diverted investment from industry to food and consumer goods. Blessed by reopened borders, free discussion in the media and the waning of the KGB, few in Moscow noticed the crumbling wreckage spreading across the oilfields in western Siberia, an area of 550,000 square miles, nearly the size of Alaska.

Finding oil in that region after the Second World War had been effortless. Gennady Bogomyakov, the first secretary of the Communist Party in Tyumen province, was famous during the 1950s for increasing production from the easiest and best fields ‘at any price’, regardless of the environmental cost or human welfare. In that plentiful region, Russia’s oil men were blessed with outstanding science, but cursed by problems they themselves caused – poor drilling, damaged reservoirs, neglected equipment and reckless oil spills. Instead of cleaning up the mess, wells were abandoned and the engineers moved on to new fields. Rather than halting the destruction, Gorbachev’s encouragement of a consumer revolution inflamed it. Overnight the flow of money from Moscow to pay for repairs and salaries and to drill new wells stopped. Angered by Moscow’s indifference to their deteriorating working conditions, poor housing and food shortages, the oil workers in 1990 began to produce less oil, the first decline since 1945. The relationships between companies in different regions also began to fracture. Oil companies in Siberia found difficulty in persuading factories in Azerbaijan to supply equipment, especially pumps; and some oilfields in Azerbaijan, the Caspian and western Siberia refused to supply crude oil to refineries.

After the disintegration of Soviet control over Eastern Europe, Gorbachev was confronted by national governments in Azerbaijan and Kazakhstan, both oil-rich states, agitating for independence. He remained blithely unaware of the potential problems until the country was struck by shortages of fuel. Petrol stations closed in Moscow, and airlines stopped flying. Beyond the major cities, towns were dark, visitors wore overcoats in their hotel rooms and the harvest in Ukraine was jeopardised. Living standards were falling, and there were threats of strikes. Reports from Siberia warned Gorbachev: ‘The situation is very serious. It is creating an explosive atmosphere.’ The rouble’s value began sliding, Russia’s international debt rose, and the country’s oil companies began bartering oil for equipment, or even demanding dollars for domestic sales. Russia’s daily oil production fell during 1989 from 12 million barrels a day to 11 million. ‘The atmosphere is exceedingly tense despite government promises,’ a trade union leader told the Kremlin. Gorbachev’s indecision, complained L.D. Churilov, president of the government oil company Rosneft, was causing the crisis.

As oil production in 1990 declined towards 10 million barrels a day, Gorbachev was urged that only foreign investment and Western technology could rescue Russia’s economy from collapse. There were precedents for similar appeals. Ever since the first gusher of oil had burst through a well in Baku in Azerbaijan in June 1873, Russia had allowed foreign companies to produce oil on its territory when times were bad. After the Bolshevik revolution in 1917, and again after the Allied victory in 1945, foreign oil companies had been lured into Russia, only to be expelled as production and prices improved. In 1990, admitting that Russia’s plight was ‘catastrophic’, Gorbachev appealed to Germany (#litres_trial_promo) for help. His choice was odd: Germany was almost the only Western country without any expertise in oil production. After his invitation was extended to all Western oil companies, many seized the opportunity as an alternative source of oil following Iraq’s invasion of Kuwait. In contrast to the turbulence in the Middle East, Gorbachev appeared to be offering Western oil companies safe investment opportunities in 12 vast areas, totalling the size of the United States, with more oil and gas than the whole of the Middle East. Only a fraction of the oil under the Siberian plains and the Arctic had been extracted.

Despite the lack of any formal agreements, the oil companies could not resist the opportunity. Loïk Le Floch-Prigent, the chairman of Elf, the corrupt French national oil company, led the way. ‘I’m the boss,’ Le Floch-Prigent insisted, refusing to work with any Russian partner. The French were followed by ENI of Italy, another corporation tinged by corruption whose former chairman, Gabriele Cagliari, would later ‘commit suicide’ in prison, suffocated by a plastic bag. Then came the Anglo-American majors. Exxon and Mobil focused on western Siberia, Chevron sent a team to Kazakhstan, BP and Amoco competed in Azerbaijan, Marathon Oil, a second-division oil corporation based in Houston, snooped around Sakhalin, on the Pacific coast, all jostled by experts representing smaller companies. The Western prospectors had suspected that Russia’s oil industry was, like its military services, ‘Upper Volta with missiles’, an image conjured in the 1970s by a Western intelligence agency, comparing the impoverished West African country with Soviet Russia. None appreciated that the best of Russia’s geologists and engineers were as talented as their Western counterparts; but nor had anyone imagined the chaos of Russia’s oil production. Mediocrity had suffocated the flair.

The detritus was staggering. Thousands of wells had been damaged or abandoned. By 1989, isolated from the West, Russia’s proud oil engineers had been unaware of technological developments in the outside world. Unable to drill beyond 10,000 feet and ignorant about horizontal drilling, the Russians had constantly pumped water into the rocks to maintain the volume of oil, leaving 80 per cent of the wells contaminated. Poor engineering, bad cement, imprecise drills, failing compressors and mechanical breakdowns had caused a gigantic stain to spread across the landscape. During 1989, thousands of corroded pipes in western Siberia had broken, spilling about 51 million barrels of oil onto the ground and into rivers. Most of them remained unrepaired. The catastrophe was reflected in a single report presented to Gorbachev. In 1980, new wells had produced about 2.85 million barrels a day, but a decade later the rate had fallen to 1.28 million. Only Western expertise could reverse Russia’s predicament. The benefits would be mutual. The oil majors needed new sources of crude oil, and Russia offered enormous potential.

A handful of oil executives moved around carefully ‘to smell the coffee and get to know the relevant people’, but they encountered deep-rooted suspicion. Russia’s oil men questioned the motives of those who, after decades of NATO’s embargo preventing Russia’s purchase of Western technology, demanded access on a grand scale on their own terms. ‘Seventy years of mutual misinformation and mistrust must be set aside,’ said Tom Hamilton, newly appointed as president of Pennzoil, a medium-sized American oil corporation. The distrust was partly a legacy of Cold War enmities, particularly doubts about America’s motives after the publication of a CIA prediction in 1977 that poor conditions in Russia’s oilfields would compel the country to import oil by 1985. The forecast was mistaken, but Russia’s plight was, in the Russians’ opinion, linked to a 1985 visit to Washington by Saudi Arabia’s King Fahd. President Reagan had urged the king to increase oil production in order to cripple Russia’s earnings from oil exports, which amounted to about 40 per cent of its foreign income. Oil prices had in fact fallen (#litres_trial_promo) from $50 a barrel in 1985 to around $25 in 1990, increasing Gorbachev’s panic and the Russian oil men’s suspicions. Veterans who knew their history were aware that in 1917, Western oil men had rushed into Russia hoping to pick up bargains and prevent the Bolsheviks undercutting their cartel by flooding the world with cheap oil.

Andy Hall of Phibro, among the first Western visitors to western Siberia, was undeterred by such misgivings. The region was being promoted by Houston entrepreneurs as an opportunity to acquire oil reserves for pennies a barrel, and Hall was persuaded that although it had been exploited over the previous 50 years, new technology could produce huge windfalls of oil and profits. The uncertainty created by the Gulf War encouraged his confidence, shared by most Western oil men and governments, that Russia would provide a secure supply of oil, free of OPEC’s interference. The lure to invest was made more tempting by Phibro’s trading losses. Hall had overestimated the potential volatility of prices caused by the war and the early stages of the 1991–92 recession, resulting in losses at Phibro’s refineries at St Rose, Louisiana, and in Texas. He had also failed to balance the increasing demand for diesel and the decreasing demand for petrol, which required different crude oils. In the first nine months of 1992, Phibro lost $34 million. Calculating the odds as a trader without the advice of independent specialists, Hall assumed like others that the Kremlin’s invitation was genuine, and that profitable oil from western Siberia would compensate for the refining losses. His company White Nights promised to invest $100 million and to hire the best expertise.

Hall’s investment was exceptional. The oil majors were uninterested in providing Russia with technical advice or investing in old oilfields. Their aim was to find new Russian oilfields and book the reserves. Mobil was focused on Yakutia, 1.25 million square miles of virgin territory, five times the size of Texas, with only a few wells but guarantees of vast reserves. Amoco’s team headed for Novy Port, 1,400 miles north-east of Moscow, on the Yamal peninsula (#litres_trial_promo), committed to spending tens of millions searching for oil and gas while surrounded by people surviving among leaking pipes, polluted soil and water, with high levels of cancer and without adequate heating in a region where the temperature fell to –27 Celsius in winter. Texaco, led by Peter Bijur, began prospecting in Sakhalin, an oil- and gas-rich island on Siberia’s Pacific coast. Conoco excitedly signed deals (#litres_trial_promo) to develop oilfields in the Arctic Circle and at Shtokman, a giant discovery in the Barents Sea. Chevron offered to invest in Kazakhstan. The temptations for local politicians were overwhelming.

In the barren Kazak desert – a harsh, unexplored, landlocked region of nearly 200,000 square miles – the Russians had found large flows of ‘very high quality’ oil in the early 1980s. With proven reserves of 39.6 billion barrels of oil and 105.9 trillion cubic feet of gas – 3.3 per cent and 1.7 per cent of the world’s proven reserves – and huge deposits of minerals, no one doubted that Kazakhstan could become one of the world’s top 10 energy producers. A thousand wells had been drilled, but by 1990, with less than 20 per cent of the oil extracted, most had been abandoned. Russian failure had been worse along the shallow waters of the Caspian Sea. According to folklore, the villagers had dug wells for water in the mid-1970s and found oil. In the mid-1980s, Russian engineers realised that the Tengiz deposits, on the north-east shore of the Caspian, were among the world’s biggest. The light, honey-coloured crude was perfect for refining into petrol. But the Russian engineers were unable to erect rigs in 400 feet of water; a pipeline 282 feet below the surface fractured because of poor-quality welding, and an offshore platform was blighted by fires. Exploring beyond the shallow waters had been impossible because the Russians had never mastered horizontal or air drilling, which would mean that the oil, mixed with poisonous gas and under hydrostatic pressure, risked exploding. Two billion roubles spent since 1979 had been wasted. Conceding that their performance would not improve and fearing environmental damage, the Russians had acknowledged the obvious. Only Western technology could reach Tengiz’s 16 to 32 billion barrels of oil, trapped under half a mile of salt, 5,400 metres beneath the sea bed. Existing technology could recover between six and nine billion barrels from one of the world’s largest and deepest fields. Future technology could reach the remainder.

Despite the political, financial and engineering problems, Ken Derr, the chairman of Chevron, decided to gamble the corporation’s fortunes on the prospect. Chevron’s foundation, in its previous incarnation as Standard Oil of California (Socal), had been rooted in the discovery of oil just north of Los Angeles in 1879. The company’s glory years had taken place in Saudi Arabia. In 1938, Socal’s employees had found the first oil in the desert, and over the following 35 years the company, cooperating with Texaco in Aramco, had sporadically flourished, not least after it identified the giant Saudi oilfield Ghawar in the 1950s. But the corporation, one of the Seven Sisters, wilted after the Saudi government progressively nationalised Aramco’s oil wells. The 1980s were Chevron’s nadir, as inferior technology yielded a string of dry holes. Fearing that its future was at risk without new oil, in 1984 Chevron merged with Gulf, an independent oil company created by the Mellon family, operating in the Middle East. Ken Derr would admit that the merger had been a ‘cataclysmic event (#litres_trial_promo)’, ‘just messy’ and ‘a paper nightmare’. The cumbersome sale of 1,800 oil wells owned by Gulf – one well was sold for $12 – spawned an expensive and stodgy bureaucracy.

Struggling with unprofitable oil and gas processing plants in America, and trying to reinvent Chevron’s image, Ken Derr decided to copy John Browne. Like all American oil companies, Chevron had been compelled by Congress’s restrictions to search for new oil overseas. The corporation’s experience had been unhappy. $1 billion had been lost in the Sudan, and millions of dollars had been wasted in unsuccessfully searching for oil in China. After Chevron abandoned production off the Californian coast, its earnings were the lowest of all the oil majors – 10 per cent compared to 23 per cent among the leaders, largely because it cost Chevron $6.18 to extract a barrel of oil, compared to Arco’s $3.65. The company decided to sell off its American assets and, by acquiring foreign oilfields, to redefine itself as a global company. In 1985 it had owned 3,400 oilfields in America. By 1992 only about 400 remained, but Chevron’s suffering had not ceased. The corporation’s fate was balanced on a knife-edge. Despite optimistic pledges, its oil reserves would slump (#litres_trial_promo) in 1994 to 6.9 billion barrels, and production was also falling, by as much as 15 per cent a year. To save the corporation, Derr placed less importance on improving the quality of Chevron’s engineering than on emphasising ‘return on capital’ and ‘fixing the finances’. Like Browne, he understood the value of a considered gamble, and he chose to bet $2 billion on Kazakhstan initially.

Kazakhstan offered to reverse Chevron’s slow demise, although there remained the unresolved question of finding a route for a pipeline to transport the oil to a harbour. Desperate to secure new reserves, Derr decided to ignore that problem. In June 1990, after negotiating between rival factions in Moscow and Kazakhstan, Chevron signed an agreement with the Russian government to explore and produce in the Caspian region. The estimated cost over 40 years was $20 billion. Payments would be staggered, depending upon the success of the operation.

The Western oil men travelled noisily. The local workers in the Russian oilfields felt patronised by American prospectors seeking a Klondike bonanza. The knowledge that production (#litres_trial_promo) in Russia had fallen by 9 per cent in January 1991 gave the Americans a discomforting brazenness. ‘We know what to do,’ one Western oil executive told a Russian minister. ‘We’re taking risks with our money, so don’t interfere with us.’ The explicit threat was that those employed by Amoco, Texaco, Chevron and other corporations would leave if the Russians caused them to be dissatisfied or made their risk excessive. But none of the foreign oil men understood the attachment Russians felt towards their ‘natural riches’, or the psychology of people emerging from 70 years of communist dictatorship. Instead of sympathising with their plight and satisfying Russian hunger for technology with an ‘option value’ agreement, the American oil majors insisted that any investment would need to meet American standards of due diligence. Irritation rankled among Russians already dismayed by the introduction of the market economy. Gorbachev’s supporters were criticised for succumbing to the capitalists’ greed for Russia’s raw materials. Chevron’s concession in Tengiz especially inflamed Russian fears about a ‘dirty deal’ by which ‘Russia will be plundered and sold for a mere song,’ while Chevron pocketed a $100 billion windfall. The news of Chevron producing oil at Tengiz’s well No. 8 in June 1991 gave Russia’s media (#litres_trial_promo) the excuse to attack capitalists for exploiting Soviet resources under the guise of perestroika. Old nationalists spoke about the sale of the family silver. Regardless of Russia’s desperation, they urged, foreigners should be forbidden to profit from its wealth. Buffeted by the opposition and fighting for survival, Gorbachev capitulated. Instead of maintaining the slow conversion from communism towards a market economy, he switched back to secure the hardliners’ support. On 22 March 1991, Russia announced a 40 per cent tax on all oil exports.

Andy Hall was staggered. His $100 million investment was threatened by this unexpected turn. Unlike the oil majors (#litres_trial_promo), he could not easily bluster about leaving. To his relief, Gorbachev bowed to threats (#litres_trial_promo) from the American administration on Chevron’s behalf and replaced the 40 per cent with a 3 per cent levy. Two weeks later, on 19 August, Gorbachev was arrested during an attempted coup. Released after three days, the president was too feeble to resolve the worsening oil crisis. Kazakhstan had declared independence, and in November 1991, as Chevron was planning to start exploration, President Nazarbayev arrived in London to meet BP experts to review the Chevron agreement. As Russia’s oil production fell to eight million barrels a day, the Kremlin feared that the country’s oil supply would shortly become crippled. Fearing chaos and unable to prevent his support splintering, Gorbachev suspended some oil exports on 15 November. He was too late. On 25 December the former mayor of Moscow Boris Yeltsin, a corrupt, alcoholic populist, became the new president of Russia.

Oil compounded the political pandemonium of Yeltsin’s inheritance. Laws were drafted to privatise state-controlled industries and property, but the first stage of dismantling the Soviet command economy was the overnight abolition of import controls on 2 January 1992 by Yegor Gaidar, the acting prime minister. Russia’s oil production fell to 7.5 million barrels a day, inflation rose to 740 per cent, and Russia’s bureaucracy was fragmenting as Gaidar, anticipating a counter-attack by the communists entrenched in the bureaucracy, decided to privatise Russia’s industries by giving stocks and shares to the managers and workers. In the oilfields, the managers, ignoring orders and laws, lost any incentive to maintain production, and seized their opportunity to grab the spoils. Yeltsin’s dilemma was profound. Russia’s economy was based on cheap oil, up to 47 per cent of which was regularly wasted during generation and heating. Although the government had increased the price paid for oil from 2 cents to 48 cents a barrel, the same oil was being resold in New York for $19 a barrel. In an unruly economy, Yeltsin’s officials were powerless to order local bosses to pay the oil workers, or to direct that oil be supplied to the refineries, or to command the oilfields to hand over the dollars earned from exports. While petrol was being sold in Moscow in vodka bottles and refineries were limiting production, Yeltsin floundered, issuing ineffectual decrees asserting state control over oil and gas production and exports. On the brink of complete breakdown, the state was even short of sufficient dollars to hire American specialists to seal a huge blowout of a well in Mingbulak in Uzbekistan. Almost 150,000 barrels of oil had been burning every day since 2 March, but news of the inferno only reached Moscow at the end of April. Alarmed by the chaos, in April 1992 Loïk Le Floch-Prigent commissioned a newspaper campaign in Moscow to persuade Russians to pull back from the brink of disaster and trust Elf. His appeal was ignored. On 18 May 1992, to dissuade oil workers from striking, the Kremlin shipped trainloads of roubles to western Siberia to pay wages and raised the price paid to the producers to $3 a barrel.

In late December 1991, the Soviet Union split into 15 independent states. The rulers of Kazakhstan, Azerbaijan and Turkmenistan, determined to keep all the profits from their oil and gas, voiced their historic antagonism towards Russia. In Russia itself the managers of the oilfields also dug in, withholding supplies. Caught in the middle of the political battle, Western oil executives became perturbed. Despite their enthusiasm to develop Russia’s riches, the country’s officials were uncertain about their own authority and were powerless to remedy the absence of laws, valuations, taxes and balance sheets as understood in the West. The oil executives’ requests for enforceable contracts and proper accounting to safeguard their investment were met by blank stares, while their intention to earn profits aroused resentment. In that atmosphere, the oil majors reconsidered the risk of investment. ‘When we make multi-billion-dollar decisions,’ said John O’Connor of Mobil, pondering whether to develop oilfields in northern Siberia, ‘you have to have confidence that the system is predictable and stable. All these things are absent.’

By September 1992, paralysis gripped the Russian oil industry. Twenty-five thousand out of 90,000 oil wells had been closed. In the Kremlin, Viktor Orlov, a former natural resources minister and chairman of the government’s oil committee, warned Yeltsin about ‘very irrational and wasteful’ management of the Siberian oilfields. Russia’s production, he suggested, could fall to six million barrels a day, only just over half the rate in 1988. At the beginning of 1993 the forecast worsened. During a meeting in the Kremlin in April, Vladimir Medvedev, the president of the union of oilmen, told Yeltsin, ‘The crisis is deteriorating into a catastrophe.’ With 20 per cent of Russia’s oil wells idle, production could fall in 1995 to four million barrels a day, a million less than the country consumed. Yeltsin’s dilemma appeared insoluble. The country was beset by inflation, unpaid bills, unpaid workers, an unstable rouble and crumbling infrastructure in the oilfields. With Moscow and the provinces disputing each other’s authority, Siberian oil companies were illegally exporting their production, and Russian customers were not paying for their supplies. To increase output by just one million barrels a day, Yeltsin was told, would cost $15 billion. Restoring production to 11 million barrels a day to sustain the country’s foreign earnings would cost over $50 billion and would require Western expertise. Not only was that amount unaffordable, Yeltsin knew, but the country was divided over whether to admit foreign investment. Even part privatisation required the removal of political and legal uncertainties over the ownership of resources. Yeltsin was incapable of resolving that conundrum. ‘Russia has been a big disappointment for many people,’ said Elf’s spokesman in Volgograd. ‘At first people thought it might be the new Middle East.’ In the five years since Russia had opened its doors, the foreign rush had become bogged down by the Duma’s indecision, changing laws and taxes. Oil men were accustomed to problems, and could console themselves with the truism, ‘This is where the oil is,’ but none had anticipated being stymied by three straightforward deals which unexpectedly antagonised Russian sentiment.

In 1992, Marathon Oil signed an initial agreement with government officials in Moscow to exploit the oil and gas on a territory known as Sakhalin 2, a frozen island in the Pacific Ocean, 6,472 miles and seven time zones from Moscow. In the tsarist era, criminals were sent into exile on Sakhalin, and in 1983 MiG fighters flew from the island to shoot down KAL 007, a Korean passenger plane. Across that bleak 28,000-square-mile shelf in the Sea of Okhotsk, oil production was possible only during the summer. Between October and June, storms, strong currents and seven-foot-thick ice packs prevented work.

Oil had been produced onshore since 1923. In 1975, assured by the Russian government that there were between 28 and 36 billion barrels of oil under the sea, a Japanese company drilled some wells, but lacking expertise and money, its quest was soon terminated. A second agreement with another Japanese exploration company in 1976 ended in the early 1980s after the Japanese concluded that the venture was uneconomic. In November 1991, anxious to exploit the reserves, the Russian government issued an invitation to major Western oil companies to tender for a licence. Most were interested, but nearly all became deterred by Russian politics. Valentin Fyodorov, the governor of Sakhalin, demanded that the successful company lend his region $15 billion to develop the infrastructure for a new republic. Reluctantly, some companies agreed, only to become involved in an intense debate in Moscow about whether foreign exploitation of Russian energy should be permitted. Some Russian politicians rejected outright any sale, some opposed catering to Fyodorov’s audacious demands, while others argued that, in the midst of its current financial crisis, Russia had no alternative but to sell its mineral wealth for hard currency.

Eventually, in April 1992, Marathon, in partnership with the Japanese company Mitsui, was allowed to start a feasibility study. Soon after, Mobil and Shell were inserted into the consortium as junior partners. To protect its investment from Russia’s punitive tax regime, Marathon negotiated over the following two years a Private Sharing Agreement (PSA) with the Russian government, giving the Americans a majority stake in the $4 billion venture and excluding any Russian participation. The PSA fixed unchangeable terms for the taxes and royalties payable by Marathon throughout the project’s life. After the agreement was signed in 1994, Russian legislators, officials and ministers, realising that Russia would receive little income from the sale of its own oil until all the costs incurred by Marathon to develop the project had been repaid, began arguing with officials in Moscow’s oil, geology and finance ministries. Marathon anticipated making tax-free profits for 25 years before Russia earned anything. To protect its hugely favourable agreement, Marathon had successfully insisted that any dispute was subject to international arbitration rather than the Russian courts. The Russian negotiators, failing to hire Western bankers and lawyers as advisers, had unquestioningly accepted Marathon’s terms, and were ridiculed for gullibly falling into an American trap to profit from Russian oil. The critics ignored reality. Russia was technically incapable of producing oil in Sakhalin, and without a PSA agreement, no Western oil company could risk developing the island’s reserves. Those arguments eventually prevailed, and Marathon’s deal was approved by the Duma.

Despite the souring mood, Exxon’s Rex Tillerson persuaded the Russian government to sign a second PSA for Sakhalin 1, a neighbouring area, albeit on less favourable terms than Marathon’s. Exxon was allowed only a 30 per cent share of the project, with Rosneft holding 40 per cent. Exxon would receive 85 per cent of the profits, while the Russian government took 15 per cent. Tillerson was pleased. Like Marathon, Exxon had successfully exploited Russia’s misfortunes, with little regard for the consequences. With the support of President Clinton, Exxon had sought to make profits for shareholders rather than to win the Russian government’s trust and thereby secure a lasting balance to OPEC. In Tillerson’s opinion, Exxon’s commercial priorities were paramount. Success in Sakhalin, he hoped, would tempt the Kremlin to allow Exxon’s exploration in the Barents Sea and the Kara Sea, an Arctic zone potentially containing eight trillion cubic metres of natural gas, the world’s biggest reservoir. If developed, the natural gas could be piped through the Yamal peninsula system, another huge Siberian energy basin. Those hopes were to be dashed. After the Russian government signed a PSA agreement with Total of France, PSAs were banned. Resurgent nationalism was stymieing Western oil companies across Russia, and even Chevron’s ambitions in Kazakhstan.

Chevron’s fraught negotiations to develop Tengiz had been stabilised by John Deuss. The trader famous for Brent squeezes was representing the government of the oil-rich Gulf state of Oman. Seeking investment opportunities, Deuss, flying his Gulfstream between Almaty in Kazakhstan, Europe, Washington and Jackson Hole, Wyoming, brokered the ‘deal of the century (#litres_trial_promo)’ between Kazakhstan and Chevron. His intention was to profit through the financing and ownership of a new pipeline to transport Tengiz’s oil to a port. Chevron’s success depended on the pipeline, which, despite Kazakhstan’s independence, was subject to the Kremlin’s veto if the proposals were deemed to be unfavourable. Ken Derr appeared untroubled by that hurdle. Desperate to reverse Chevron’s decline, and haunted by the company’s loss of $1 billion in Sudan during the 1980s, he was prepared to gamble on securing the oil first, only afterwards negotiating a pipeline’s construction.

The preliminary agreement to develop Tengiz, an area twice the size of Alaska, had been signed by Derr and President Nazarbayev of Kazakhstan on 18 May 1992 in Washington. In the initial $1.5 billion investment the Kazak government, advised by Morgan Guaranty Trust and Deuss, had persuaded Derr to reduce Chevron’s share of the income from 50 per cent to 20 per cent. Over 40 years the Kazak government expected to make $200 billion.

In public, Chevron’s success in Kazakhstan was credited to its technical superiority. The Kazaks and the Russians, it was said, could not manufacture the special quality of steel pipes needed to resist Tengiz’s corrosive crude oil, or provide the drills to reach 23,000 feet amid toxic hydrogen sulphide gas. In reality, Chevron’s breakthrough to secure the oilfield had been due to a combination of risk and dubious practices during excruciating negotiations which were saved from stalemate by James Giffen and John Deuss. The two maverick traders were consulted by Chevron to fashion a deal with Kazak and Russian politicians. Giffen, a 62-year-old New Yorker acting on behalf of other oil companies, was suspected of paying $78 million between March 1997 and September 1998 into Swiss bank accounts via the British Virgin Islands for the benefit of Kazakhstan’s President Nursultan Nazarbayev and some ministers. Nazarbayev was alleged to have used some of the money to buy jewellery, speedboats, snowmobiles and fur coats. On 31 March 2003, Giffen was arrested at JFK airport under the Foreign Corrupt Practices Act and charged with bribing Kazak officials. Two months later, J. Bryan Williams of Mobil pleaded guilty to evading taxes on a $2 million bribe connected to Mobil’s purchase of a stake in Tengiz costing $1.05 billion. Mobil (before merging with Exxon) had paid Giffen’s company, the Mercator Corporation, $51 million for work on the Tengiz deal, although Mobil insisted that Giffen was working for the Kazakh government and not them at the time. Giffen admitted depositing money in the Swiss bank accounts, but insisted that he had acted with the approval of the US government. The CIA, the State Department and the White House, he said, had encouraged his relationship with Nazarbayev. The prosecution remains in limbo, with Giffen on $10 million bail. The problem, as Chevron’s executives acknowledged, was the immutable relationship between corruption and securing oil supplies in the Third World. Giffen was accused of paying an immediate $450 million deposit to sweeten Nazarbayev’s interest. Ostensibly the payment was to finance Kazakhstan’s share of the investment, but the FBI would subsequently allege that the money was a bribe.

Derr’s success relied on pressure exerted by Vice President Al Gore and the White House on President Yeltsin and his ministers. Similarly, Andy Hall hoped that a visit by Ron Brown, the US secretary of commerce, would rescue some return from Phibro’s $100 million investment in White Nights, which by 1993 had become a disaster. His Russian partner had demanded extra money, which Hall called ‘outright expropriation’, and local government officials frequently ‘reinterpreted’ the terms of the contracts and changed the law to demand extra taxes. Hall felt naïve and a fool for rushing in after Exxon had rejected the project. ‘They just raised the taxes whenever it looked like we were going to make money,’ he complained. ‘I didn’t enjoy it.’ Brown’s protests against arbitrary rules and taxes imposed on American investors did secure the Russian government’s agreement to review taxation, but his announcement of success inflamed the nationalists, and Phibro would lose (#litres_trial_promo) nearly all of its $100 million. In New York, Salomon Brothers wrote off $35 million, curbed Hall’s trade in oil products and fired staff. Hall was not personally blamed. ‘He’s made a sickening amount of money in Nigeria,’ rued a competitor, impressed that Hall had successfully speculated in Nigerian crude, buying at $12 a barrel and watching the price rise to $20. ‘He’s an untouchable.’ Phibro had also, Hall acknowledged, earned ‘bucketfuls’ of money trading Iranian, North African and Persian Gulf crude. But, he insisted, ‘We’re always staying above board. Nothing illegal or involvement with the rinky-dinky stuff.’ His trader’s shrewdness did not prepare him for investment in Russia. ‘This is what happens when amateurs go into the oil business,’ chuckled an Exxon executive.

Exxon’s aversion to risk benefited BP and Amoco in Azerbaijan. Azerbaijan, on the landlocked Caspian Sea, was regarded by Russians as the birthplace of the world’s oil industry. Oil had for centuries seeped through the earth to the surface there and been used by locals for domestic fuel. Small refineries had been built before Robert Nobel, a Swedish industrialist, arrived in Baku from St Petersburg in 1873, searching for walnut trees from which to manufacture gun stocks for the tsar’s army. Instead of wood, Nobel bought a refinery, and began to successfully compete against the kerosene sold locally by Standard Oil. Baku flourished as an oil town until 1945. After the Allied victory over Nazi Germany, Stalin abandoned the region and directed his engineers to explore in the virgin areas of western Siberia. Forty years later they returned to Baku, and in 1987 discovered oil beneath 980 feet of water in the Caspian Sea. In October 1990 BP signed an agreement with Caspmorneftgas, the Soviet ministry of oil and gas, to develop that reservoir. Soon after, the Soviet Union collapsed and Azerbaijan became independent. BP’s choice was either to risk millions of dollars in Azerbaijan, or to compete with Chevron in neighbouring Kazakhstan.

Chevron was intent on betting everything on Kazakhstan, yet the Kazak government was tempted to choose BP. In November 1991 President Nazarbayev arrived in London to meet BP experts to review the deal he had signed in June 1990 with Chevron. Tom Hamilton had been dispatched by BP to Tengiz. ‘The more I looked,’ he had reported to Browne, ‘the more I disliked. There’s abundant crude but too much baggage including 10,000 local staff.’ Investing in Tengiz, he advised, was too risky. Critically, the building of a pipeline to transport the crude to a port across Iran or Russia had not yet been decided, and Kazakhstan’s claim to oil from the Caspian Sea lacked clarity. With oil at $15 a barrel, Hamilton recommended that Azerbaijan was a better bet.

In October 1992, Ed Whitehead negotiated on BP’s and Statoil of Norway’s behalf to pay $40 million for the exclusive rights for a consortium of oil companies to establish whether Azerbaijan possessed commercially viable reserves. The licence lasted for just 36 months. While three teams negotiated in Baku, Moscow and London, another was dispatched to establish the viability of the deposits. Across the Caspian’s shallow waters it found leaking pipes, abandoned equipment and decrepit offshore rigs, visible relics of the bedlam of the Soviet era. Beneath the sea there was, according to Soviet estimates, 3.5 billion barrels of oil. To transport it, an existing pipeline called ‘the northern route’ passed through neighbouring Russia to the Black Sea. Hostile towards Azerbaijan since independence, Russian prime minister Viktor Chernomyrdin and the foreign ministry threatened to veto Azerbaijan’s oil exports by limiting the pipeline’s use.

Negotiating with Moscow was straightforward compared to the governments in Azerbaijan. Two presidents had come and gone since Ed Whitehead arrived in Baku before Heydar Aliyev, a former chief of Azerbaijan’s KGB, grabbed power in a coup in June 1993 in which British agents were alleged to have offered weapons to Aliyev’s supporters. To ease the third attempt to secure a concession, John Browne organised for ex-prime minister Margaret Thatcher to visit Azerbaijan, and BP offered the government’s leaders $70 million as a ‘bonus’ to finalise the $7 billion development. Having put itself in prime position to be awarded the licence, in early 1994 the BP team awaited Aliyev’s agreement to sign the contract which since 1992 had been increasingly tilted in Azerbaijan’s favour (#litres_trial_promo). Inevitably, there was a twist.

The successful negotiations, led by Al Gore and British prime minister John Major, to persuade Chernomyrdin to allow the consortium’s use of Russia’s pipeline to the Black Sea, prompted Aliyev to declare, as a negotiating ploy, that foreign help was no longer required. In a region infested by corruption, intrigue and wars, the demand by Marat Manafov (#litres_trial_promo), a pistol-waving associate of Aliyev’s, for a final $360 million bribe to allow the Western consortium to continue negotiations was the last straw. Officially, the tendering process was halted until a new contract could be agreed. Browne calculated his response. Appealing to the dictator was pointless. The time had come, Browne decided, to call the government’s bluff. ‘Circumstances change (#litres_trial_promo),’ Phil Maxwell of BP told journalists as he emptied his desk in BP’s Azerbaijan headquarters, the mansion of a former oil baron, before flying back to London. Maxwell explained that BP was cutting its staff in Baku from 80 to 30 until President Aliyev resolved the uncertainty and was reconciled to competing on the world market. For some weeks the Azerbaijani government prevaricated. The president wanted a large number of investors in order to protect the new state from Russian aggression, and he wanted to play the oil companies off against each other. Unusually, BP, Statoil, Amoco and the five other minor partners in the consortium remained united. Aliyev’s bluff was called. The country’s financial fate and his survival, he knew, depended on producing oil within four years. Even if oil remained at $15 a barrel, Azerbaijan’s income would be $100 billion over the field’s lifetime, a phenomenal windfall. The Azeri government blinked. The agreement, dubbed ‘the Billion Dollar Experiment’ by Exxon and ‘the Contract of the Century’ by Aliyev, justified a celebration. One thousand guests were invited to the signing ceremony and dinner on 20 September 1994 in Baku’s Gulistan Palace. The star guest would be John Browne. Others invited included William White, the US deputy secretary of energy, eagerly promoting Chevron’s and other American involvement in the region.

Browne did not stay overnight in Baku, but left midway through the Azerbaijan government’s celebratory banquet following the signature of the ‘Contract of the Century’ to take his private jet back to London. ‘That was not good politics,’ President Aliyev later told BP’s local representative, who concurred with his view. Browne was unconcerned. A done deal meant moving on. The political settlement, he believed, was best executed by others: Aliyev would be invited to London in 1997 to meet Queen Elizabeth at Buckingham Palace. The local settlement between Azerbaijan, Russia and Turkey was delegated to Terry Adams, BP’s appointee to chair the consortium of 13 shareholders. ‘Without a pipeline there will be no development,’ said Adams, who had also advised against BP’s investment in Kazakhstan after anticipating Chevron’s problems with building a pipeline. While President Clinton unconvincingly posed as an ‘honest broker’, Adams chose to negotiate in Moscow. With the help of British diplomats, he successfully arranged in October 1995 to use the northern route pipeline through Russia to the Black Sea, and began planning a new pipeline, avoiding Russia, through Turkey to the Mediterranean. Piping Caspian oil and gas to Turkey became BP’s and Adams’s recurring problem. Ignoring the cost and the political complexities, President Clinton was determined to wrest control of Caspian oil from Moscow, regardless of the anger this aroused in the Kremlin. Turkey had become critical to the West’s strategic interests.

In Washington, Bill White (#litres_trial_promo), the deputy secretary of energy, and Rosemarie Forsythe, the Caspian expert on the National Security Council, urged Clinton to adopt policies to divert the region’s oil to the West regardless of Russia’s historic links. Rejecting those who urged the administration to act generously towards Russia, Forsythe displayed petulant anger at Russia’s failure to provide a level playing field for Western oil companies. To outwit Moscow, she supported the construction of pipelines from Tengiz and Azerbaijan which bypassed Russia. Aggravating Moscow did not trouble Forsythe, who would be described as ‘Amoco’s ambassador to the NSC (#litres_trial_promo)’. An alternative policy was advocated by Strobe Talbott, the president’s special envoy to Russia. To encourage Russia’s reformers to increase investment and to Westernise the country, he favoured a conciliatory approach. Securing Russia’s trust, he argued, would guarantee Russian oil supplies to the West over the long term. Forsythe rejected that measured approach. She was particularly irritated that ENI, the Italian energy company, seemed to enjoy favourable treatment compared to American oil companies. The Italian outsider had traditionally undercut the Seven Sisters’ cartel during the 1950s, first in Iran, and then in North Africa and Russia. Now, the Italians once again seemed to be exposing the oil majors’ vulnerability in the oil-producing nations. Clinton fought back. Unwilling to reconcile the contradictory policies among his staff, he pursued American interests regardless of the consequences during a meeting he and Al Gore held with Yeltsin soon after the signing ceremony in the Gulistan Palace. America’s oil companies, he told the Russian president, were entitled to Caspian oil. Resolutely, Yeltsin replied that the pipeline and Azerbaijan’s oil were Russia’s and not America’s interest.

As proof of his influence, there was an outbreak of violence (#litres_trial_promo), murders and bomb blasts across Azerbaijan. President Clinton’s priority was to protect oil supplies, regardless of the background of those with whom he would have to deal to do so, and with American support Aliyev reasserted his authority. Clinton’s success encouraged the administration to further humiliate Russia. Seeking allies around the Caspian to separate the oil-rich countries from Russia and pipe their crude to the Mediterranean, Clinton and Gore encouraged Exxon, Chevron and other Western oil companies to act under the ‘shield of government’, blatantly antagonising Moscow. ‘Happiness is Multiple Pipelines’ read a bumper sticker handed out by American diplomats fizzing enthusiastically about ‘to the victor the spoils’.

To transport Azerbaijan’s oil, Clinton had been urging BP to build the BTC pipeline from Baku to Ceyhan, a blue-water port on the Mediterranean, bypassing Russia. In Clinton’s opinion, completing the pipeline would put the seal on Russia’s defeat and American ascendancy in the region. BP refused the president’s entreaties until its technicians had determined whether Azerbaijan’s fields would yield five billion barrels, making it financially justifiable. That would not be established until 2001. BP’s experts would discover that the reservoirs were better than anticipated: they expected not five but 9.5 billion barrels of oil to lie beneath the Azeri seas, a true elephant.

Clinton’s demands to build a pipeline for Kazakhstan’s oil would prove more difficult to fulfil. The ideal route to the Mediterranean, avoiding Russia, was through northern Iran. But American sanctions imposed in 1979 excluded that option. Classified as a rogue state, Iran, combined with Libya and Iraq, possessed 23 per cent of the world’s known oil reserves (923 billion barrels), but in 1996 contributed only about 6 per cent of global production (3.6 million barrels a day). The sanctions had proven to be counter-productive. Iran relied on oil for 90 per cent of its foreign earnings, yet was compelled to use 33 per cent of its production for domestic energy and to import electricity from Turkmenistan. In an attempt to relieve the nation’s poverty, the Iranian government was developing nuclear energy in order to release oil for exports, and was encouraging China to exchange nuclear and missile technology for oil. In 1997 Clinton was warned that China would increase its dependence on imported oil from 12 per cent in 1995–96 to 40 per cent by 2000, and would increasingly depend on Iran. That growth would inevitably impinge on America’s needs. Over half of America’s daily consumption of 18 million barrels of oil was imported, and about five million barrels came from the Gulf, which had 65 per cent of the world’s reserves. China’s increasing consumption of oil could be accommodated if Western oil companies were allowed to develop Iran’s natural gas fields in South Pars, an area bordering Qatar under 220 feet of water with an estimated 300 trillion cubic feet of gas and some oil. Initially, Clinton had agreed.