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

‘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 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 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, 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 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

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 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 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, 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 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.