TOM BOWER

The Squeeze
Oil, Money and Greed in the Twenty-First Century

DEDICATION

To George and Sylvia Bower

CONTENTS

Cover

Title Page

Dedication

Preface

1. The Emperor

2. The Explorer

3. The Master Trader

4. The Casualty

5. The Star

6. The Booty Hunters

7. The Oligarchs

8. The Suspect Traders

9. The Crisis

10. The Hunter

11. The Aggressors

12. The Antagonists

13. The Shooting Star

14. The Twister

15. The Gamble

16. The Downfall

17. The Alarm

18. The Struggle

19. The Survivor

20. The Backlash

21. The Confession

22. The Oligarch’s Squeeze

23. The Frustrated Regulator

Acknowledgements

Index

Notes

By the Same Author

Copyright

About the Publisher

PREFACE
VIENNA, 28 MAY 2009

Despite the crowds of journalists and TV cameras jostling in the small entrance hall of OPEC’s Vienna headquarters, the atmosphere was mellow. After the frenzy of oil prices soaring and then crashing during 2008, the arrival of Ali al-Naimi, the dapper Saudi oil minister, seemed undramatic. The small man was smiling after his 20-minute walk from the Grand Hotel, but his serenity was deceptive. Known as ‘Mr OPEC’, or the leader of the Organisation of Petroleum Exporting Countries, al-Naimi had uncharacteristically sought publicity before the 11 members of the price-fixing cartel began their 153rd meeting that morning.

‘We think prices will rise,’ he had puffed during a 6 a.m. run along the Baroque Ringstrasse the previous day. As usual, he was seeking to influence the markets in New York and London. To his satisfaction, over the next 24 hours speculators had bid up oil prices by $1 to $63 a barrel, a 100 per cent increase in eight months. Over the next weeks, al-Naimi hoped, if the speculators could be persuaded, prices would rise by another $20; and then by a further $70 to $150, an all-time high. Billions of dollars had flowed from the Western countries into the oil producers’ coffers in previous years, but al-Naimi was determined to defy economic law. Demand for oil had fallen since the crash in July 2008, record amounts of oil were in storage, and the world had plunged into recession. Yet he was talking up prices. If he was to succeed, he would have to persuade the other OPEC members, an exclusive but quarrelsome club, to endorse his strategy.

Unlike the exotic pageant of presidents and kings who had attended OPEC’s meetings during the 1970s, the 10 ministers and their aides who followed al-Naimi into the shiny office block were colourless placemen. Journalists no longer witnessed dramas like Saddam Hussein embracing his bitter enemy the Shah of Iran in 1975 while the stylish Sheikh Yamani, al-Naimi’s predecessor as the Saudi oil minister, hovered in the background. In those days, the dictators posed as brokers of the world’s future. Having wrested control of their oil from the cabal of dominant Western companies known as the Seven Sisters, the OPEC countries had freed themselves of the imperialist, and occasionally racist, attitudes that had formerly dictated their fates. The American and British corporations, blamed for their wilful blindness about realities in West Africa, Central America and the Arab world, had ceased to be the guardians of the common destiny.

Nevertheless, oil remained the world’s biggest business. Every aspect of mankind’s lives depended on the refinement of crude oil into energy, plastics, chemicals and drugs. For a century the commodity has been on a rollercoaster, swinging from surplus to shortage. Cheap oil has fuelled booms while high prices have plunged the world into recession. Finding a balance has been elusive. Always the target of mistrust, oil has now become a tougher, more unpredictable business than ever before.

In 1975 Anthony Sampson, the redoubtable author of The Seven Sisters, a groundbreaking description of the relationship between the seven major oil companies and OPEC, described the Arab – Israeli war of 1973 as the ‘last battle’ to control the industry. ‘The fascination of oil history,’ he wrote, ‘lies in the ever changing form of the battle to control supply.’ Focused on the ‘collision course’ between the governments of the oil producers, the oil companies and the governments in Washington and London, Sampson, like others, did not anticipate Iraq waging war against neighbouring Iran and Kuwait, or that America would twice lead invasions of Iraq, characterised by some as ‘blood for oil’. He would have been struck, as I was, by the candour of the vice president of one of America’s biggest oil companies whom I asked in passing in 2007, ‘Was George W. Bush’s invasion of Iraq about oil?’ He replied, ‘Absolutely, yes.’ Some argue that the ideological Cold War has been replaced by ‘resource wars’. In Sampson’s era, the ‘resource war’ revolved around disputes about prices between the oil companies and OPEC.

In the two years after the 1973 Arab – Israeli war, the OPEC leaders defied American forecasts that their cartel would collapse, because the consequence of oil prices quadrupling would be a recession in the West. But OPEC’s defiance was rewarded, and despite the nationalisation of many Western-owned oilfields, the unnerved oil companies collaborated with their expropriators. Stripped of their mystique and their arrogance, the American and British giants were transformed into paper tigers. Anxious to guarantee oil supplies and to maintain their share of markets, the companies that had discovered and developed the oilfields and refined the crude became supplicants. To many, OPEC’s ascendancy appeared to be irreversible. Only a few wise oil men mentioned the fact that cycles never changed. Permanently fixing the market was beyond any mortal, even the OPEC nations.

By 1990, OPEC’s lurking threat had indeed diminished. The procession of technocrats following Ali al-Naimi to the second floor of OPEC’s headquarters understood that oil had become democratised: prices were set by traders in New York’s and London’s markets rather than by OPEC’s edict. Yet, even though they were no longer brokering mankind’s destiny, the ministers retained control of 40 per cent of the world’s oil supplies – sufficient to wield considerable influence.

Since oil is the OPEC countries’ principal, and usually only, source of income, the 11 officials who attended that 153rd meeting had every incentive to seek the highest prices. Between the certainty of extracting oil from the Saudi desert for $2 a barrel or risking $100 billion to drill a speculative well four miles below the sea in the Gulf of Mexico, is the insoluble mystery of establishing the true price of a simple product. The conundrum is to identify the dividing line between reasonable businessmen and villains. Since 1990, that division has become obscured.

In that year Daniel Yergin wrote The Prize, a magisterial description of oil’s influence on modern history. Oil, he commented, remains ‘central to … the very nature of civilisation’. But many of the political trends of the previous century which he described were changing. The major oil companies were becoming minnows, and OPEC’s power was being challenged by non-OPEC oil-producing countries, especially Russia and the states around the Caspian Sea.

The moral keynotes were also changing. Historically associated with corruption, civic corrosion and civil war, the relationship between the governments in Washington and London and the oil companies had been a dominant topic for a century. Posing as representatives of mankind’s interests, but beyond mortals’ control, the corporations’ chairmen appeared detached from national governments. Uncertain who was using whom, many debated whether the oil companies should be supported, controlled or investigated. An important theme explored by Yergin and Sampson was the battle waged by America’s federal and state governments against J.D. Rockefeller, the creator of America’s oil industry. The epic legal contests against oil companies had usually ended in the governments’ defeat, spurring public anger about Big Oil. ‘His lack of scruple and his mendacity,’ wrote Sampson of Rockefeller, ‘provoked a continuing distrust of the oil industry.’

Oil provokes irreconcilable emotions. Moralising sermons about oil have never stopped, but since Sampson’s and Yergin’s books, some issues have changed. Destitution in the Niger delta, the contamination of Alaska’s pristine wilderness, the destruction of Canada’s forests and spreading corruption across Africa are all blamed on oil companies. ‘African oil did not create the system or its failings,’ wrote Nicholas Shaxson in Poisoned Wells, accusing Shell, ExxonMobil and the French oil corporation Elf of destroying idyllic communities. Serious authors have claimed that the oil industry is ‘among the least stable of all business sectors’, and that supplies are ‘utterly dependent on corrupt, despotic “petrostates” with uncertain futures’. The riddle is whether, in pursuing their priority of caring for their shareholders and their customers, the oil majors should refrain from interfering in the internal affairs of Third World countries, or accept a duty to prevent the ‘institutionalised pillage’ of impoverished populations and to oversee the fate of their nations’ oil wealth.

These issues continue to be exhaustively debated. Besides the technical and corporate histories, there are many descriptions of evil corporations exploiting the Third World and causing environmental catastrophe. In addition, a new dominant theme has arisen: ‘The End of Oil’. Predictions laced with alarming statistics foreshadow permanent shortages, blackouts and soaring prices. ‘Terminal decline’ is the favoured phrase of those speaking in apocalyptic terms about the world imminently running out of oil. One authoritative tract is Twilight in the Desert (2005) by the investment banker Matthew Simmons, who claims that Saudi Arabia’s oil production is ‘at or very near its peak sustainable volume (if it did not, in fact, peak almost 25 years ago), and is likely to go into decline in the very foreseeable future’. Even Simmons’s critics acknowledge the value of his polemic. If Saudi Arabia’s supply of oil does indeed decline, the world’s destiny is questionable. However, despite Simmons’s insistence that his doom-laden prediction is ‘not a remote fantasy’, Saudi Arabia increased its production capacity from eight million barrels a day in 2005 to 12.5 million in 2009, when the world’s daily consumption was 86 million barrels. In the aftermath of prices crashing in July 2008 and surplus oil sloshing around the world, the prophets of doom disappeared from the television studios and newspapers. Since then, the wailing about the world’s endangered oil supplies has reverted to blaming the oil companies for restricting their investment in the search to find new oil.

Unlike oil’s first century, over the last 20 years no single nation, government, cartel or corporation has controlled its fate. Markets have determined prices and investment; but there has been a twist. Because the oil-producing countries retain up to 90 per cent of the profits, the Western oil companies have the delicate task of persuading what are usually classified as Third World countries to share their wealth and sell access to their reserves. The apparent shift of power to African, Asian and Middle Eastern governments provoked the increasingly fashionable assertion that ‘White people and their companies no longer pull the strings.’ The contention that the former imperialists have been humbled ignores the irrefutable truth that without the ‘white people’s’ technology, organisation and marketing, the oil-producing nations could not prosper. In Africa, Asia and South America, impoverished nations may be ecstatic about the sudden promise of effortless wealth; but it is only realisable with skills invented by Western companies.

In pulling the strands of the oil industry together, this book takes no sides in the arguments among the specialists and partisans. Rather, I have recognised that many of those employed in the oil industry are remarkably intelligent individuals pursuing their ambitions with expertise and inspiration, rather than being inextricably entangled, as the alarmists suggest, in corruption, conspiracies and cover-ups.

United by a smelly, unattractive product, most of the millions of employees who work in the oil industry are strangers to each other. Unlike manufacturing cars or planning a space programme, oil offers no natural bond. The petrol-station attendant, the crews of the supertankers, the offshore engineers, the dedicated geologists, the excitable traders, the sober accountants, the nationalistic politicians, the rig workers in the prairies, deserts and jungles, the refinery workers and the corporate chieftains are all interdependent in their efforts to produce and convert crude oil. Yet there is no bond between them to overcome their separation and rivalry. Oil unites all their destinies, but they are professionally isolated. Since the late 1980s, however, there has been a common thread: some squeeze markets, some squeeze rocks, some squeeze crude oil through refineries, while others squeeze governments and rival corporations. Oil is not a business for fools or the faint-hearted.

To chart for the first time what has occurred over the past 20 years, I have followed the careers of some of the principal personalities who have determined oil’s fate as its price rose from $7 to $147 a barrel. As I interviewed nearly 250 people across the world, I gradually came to understand the perpetual conflict between the oil companies and the nations that control the reserves, the arguments between consumers and the proponents of the end of oil and climate change, the overwhelming influence of the oil traders, the ingenuity of the explorers, the ambitions and frustrations of the chieftains who manage the world’s biggest corporations, and the agendas of politicians anxious to control the world’s lifeblood.

The story of oil over the last two decades is fascinating, but to understand all the disparate elements – the personalities, the corporations, the governments, the traders and the geologists – requires gradual introduction. Unlike the straightforward structure of a standard history or the description of a particular event, this book takes the reader on a journey through the lives and eyes of the major characters who have dominated the industry. As readers become familiar with the labyrinthine complexity of the subject, I hope that, like myself, they will become excited by the discovery of an epic story at the heart of all our lives.

After interviewing nearly 250 key people, I selected a handful to reflect the turbulent era. Over the 20 years, John Browne of BP was undoubtedly the dominant personality in America and Britain. His rival chief executives, including Lee Raymond of Exxon, Phil Watts of Shell and David O’Reilly of Chevron, were similarly robust, but were begrudgingly compelled to follow his course. In a parallel universe are the oil engineers like Dave Rainey, challenging scientific boundaries to discover oil six miles beneath the sea bed. Understanding the technology might seem challenging, but I believe that even laymen will be gripped by the saga. Unknown to the engineers are the oil traders, churning billions of dollars every day in speculation about unpredictable prices. After speaking to dozens of traders and reporters, I chose to follow Andy Hall, an understated multi-millionaire hailed by his generation as a genius. Of all the oil-producing countries, events in Russia became far more interesting than in the OPEC countries. Fortunately, as oil prices rose from $30 a barrel towards $147, I hitched myself to Mikhail Fridman, an oil oligarch in the midst of a fierce battle with BP as President Putin and other politicians, government officials and lifelong experts all sought to influence oil’s fate. Challenging their assumptions and decisions are committed environmentalists. All those personalities and interests found their place in a narrative which makes no attempt to be encyclopaedic, but simply to tell an astonishing story.

This is my eighteenth book, and I have found that a career charting the lives of politicians, tycoons, murderers and charlatans was the perfect background to grappling with the intricacies of the oil industry. Fortunately, I encountered few refusals to my requests for help. Across the world, many key players offered me their insights. What has emerged, I believe, reveals how we are all simultaneously both the victims and the beneficiaries of The Squeeze.

In Vienna in May 2009, Ali al-Naimi was gambling against a squeeze by those speculating that prices would fall. One week after his prediction during his Ringstrasse run, the price of oil had risen from $62 to $68 a barrel. His gamble had been rewarded. Those who had speculated on falling prices had been squeezed by a counter-squeeze, talking up prices. Markets, like the subterranean rocks where oil is found, are unpredictable. Squeezes are often followed by bursts, and there are always casualties. Oil is a uniquely human story.

Tom BowerJuly 2009

ONE The Emperor
NEW YORK, 25 SEPTEMBER 2003

Lee Raymond did not conceal his impatience. The Russian president was 30 minutes late. Speaking in muted voices, the three other men and one woman waiting with Raymond in the Waldorf Astoria suite speculated whether Vladimir Putin had abandoned the meeting. ‘I’m sure he’ll come,’ suggested one. Raymond’s irritation was not assuaged.

Dealing with dictators was usual for Exxon’s 65-year-old chairman and chief executive. In his experience, oil was mostly controlled by feudalists, kleptocrats, zealots and fanatics. ‘Go to the top, do the deal and the rest follows,’ was Raymond’s way. Over recent years the chemical engineer born in South Dakota had encountered many of the world’s oil-rich despots. Renowned for his reserved, focused and analytical manner, he had run all those negotiations just the way he ran ExxonMobil itself – with clockwork efficiency. Oil, according to ExxonMobil’s textbook, never surprises; principles never changed, only the circumstances. Vladimir Putin, Raymond believed, was no different from other authoritarians except that he had nuclear weapons and controlled the world’s biggest oil and gas reserves. That justified the flight from Dallas and the unpleasantness of meeting another stranger.

Although outspoken and prone to steamroller those he disdained by the sheer weight of his intelligence, Raymond was awkward in the limelight. No concessions were offered to friends or opponents. Unglamorous and conscious of his harelip, he personified the arrogance which united the oil world in hatred, envy and admiration of ExxonMobil. Imbued with ExxonMobil’s genes, Raymond’s sense of the world was insular. Most non-Americans, in his opinion, especially those from the Third World, were disagreeable.

Today, however, was not the moment to betray his prejudices. Other heads of state had been exposed to his scorn, but, nearing the end of his 40-year career, Raymond ached to clinch this deal. If, as expected, Putin agreed in principle to ExxonMobil’s $45 billion offer, the company’s status as the world’s biggest oil corporation would remain unchallenged. Merit and the odds, Raymond calculated, were tilted in his favour.

For 18 months a small team under Rex Tillerson, Raymond’s deputy and heir apparent, had secretly vetted Yukos, a private Russian company which produced 20 per cent of the country’s oil. During his negotiations with Mikhail Khodorkovsky, the billionaire Jewish oligarch who controlled Yukos with a 44 per cent stake, Tillerson, a well-dressed Texan who despite appearances was just as tough as his boss, reassured himself that the company would be an outstanding purchase. With oilfields stretching across western Siberia, Yukos was a gem.

During the last weeks, the proposition had improved beyond Tillerson’s original imagination. Putin had approved Yukos’s merger with Sibneft, another private Russian oil company. Together, they would rank fourth in the world league, controlling one third of Russia’s oil production and growing at 20 per cent every year, three times faster than Russia’s state-owned oil industries – and beyond Putin’s control. The marriage of the two companies had been blessed by Mikhail Kasyanov, the prime minister, as ‘a flagship for the Russian economy.’ Combining Yukos’s production of 2.16 million barrels a day – no less than 2 per cent of the world’s output – with ExxonMobil’s similar production would eclipse all ExxonMobil’s rivals. Tillerson’s main concern remained the Kremlin’s reaction. In mid-2003 he had asked Khodorkovsky if the deal was politically acceptable. Khodorkovsky had replied emphatically, ‘Let me take care of this. I’ve spoken to Putin and it’s OK.’ Nothing, Tillerson believed, had changed in the last three months. On the contrary – the meeting with Putin was intended to seal the deal.

Khodorkovsky’s self-confidence was reassuring to the inflexibly direct Tillerson, who would be described by Dave Godfrey, a New York lawyer representing Yukos, as a ‘caricature of the top arrogant Czar giving out that it was an honour for me to negotiate with ExxonMobil’. Having successfully established an oilfield on Sakhalin, a Russian island in the Pacific, as ExxonMobil’s most profitable operation, Tillerson felt comfortable navigating through Russia’s political and economic turbulence. Khodorkovsky, he reassured Raymond, could deliver. Naturally, Raymond did not entirely rely on Tillerson. He had met Khodorkovsky in Dallas and Moscow, and got on well with him. Money cemented their mutual respect. Raymond, like Tiller-son, was inclined to accept Khodorkovsky’s good faith. But while Raymond acknowledged that there were events he could not control, Tillerson lacked awareness of the limits to ExxonMobil’s authority. The heir, most agreed, was nicer and more personable than the chairman, but not as wise. The less kind regarded them as more or less identical ExxonMobil models, except that Tillerson smiled.

As the chairman of the world’s biggest privately owned corporation, Lee Raymond’s priority was to look after the interests of ExxonMobil’s shareholders. ‘ExxonMobil is a company, not a government,’ he would tell those who urged the corporation to consider global warming, social inequalities and international relations with the oil-producing countries. Those topics, and especially ExxonMobil’s relationships with Third World governments, had become critical in recent years. Maintaining production had become a problem for all the major oil companies – ExxonMobil, BP, Shell, Chevron and Total. ExxonMobil in particular was engaged in contractual disputes about its operations with several governments. Like all the oil majors, the company was handicapped in its search for new reserves by Third World governments refusing to grant access on acceptable terms. In the Middle East, South America and Asia, self-interested nationalism was denying ExxonMobil commercially advantageous deals. This was partly a result of Raymond and his rivals alienating the rulers of the oil-producing nations. Unable to gain access on their terms to those countries, the oil majors held back, pleading that exploiting their reserves was ‘risky’, ‘unprofitable’ or ‘unviable’. Even in Saudi Arabia, the company’s trusted partner and the world’s biggest oil supplier, there was animosity. At the end of some particularly acrimonious negotiations with Crown Prince Saud al Faisal, Raymond had become exasperated by the Kingdom’s refusal to give Exxon a fair return. ‘We have better things to do with our money,’ he snapped. ‘If you don’t agree to what I’m offering, I’m off to play golf.’

The consequences of declining oil supplies to the global economy were incalculable, and the danger of a shortage was accelerating, although ample reserves lay under the earth. Russia’s vast untapped oil reserves promised some relief from that vicious circle. Both Raymond and Tiller-son recognised Russia as representing ExxonMobil’s best opportunity to reverse the company’s recent stagnation. Khodorkovsky was offering Raymond the ultimate prize, but more was at stake than ExxonMobil’s fortunes. Access to Russia’s oil would reduce OPEC’s supremacy and its self-interested pursuit of higher prices. Ever since the collapse of the Soviet Union in 1989, Russia had been a magnet for oil prospectors, and over the previous decade the Western oil majors had negotiated profitable deals. Some were judged, particularly by President Putin, to be excessively profitable, exploiting Russia’s vulnerability after the collapse of communism. Nevertheless, oil and gas had become the cornerstones of the country’s economic growth. Winning Putin’s trust, Raymond knew, was critical to completing the deal. If he failed, the Russian president’s antagonism could contribute to jeopardising the global economy. Those wider concerns had not troubled Raymond during his negotiations with Khodorkovsky. As always, ExxonMobil’s interests were his sole concern.

Fortunately, the risk of Putin blocking Exxon’s deal with Khodorkovsky had, in Raymond’s opinion, been lifted three months earlier when the president had visited London to witness Mikhail Fridman, another oil oligarch, sign an agreement with John Browne, BP’s chief executive, to sell 50 per cent of TNK, Russia’s third largest oil company, for just $10 billion. Raymond did not underestimate the importance of that deal, which was the largest ever foreign investment in Russia. It confirmed Putin’s favourable predisposition towards BP and, irritatingly, Browne’s decisive influence over the industry. Since 1998 Browne had not only transformed BP from an also-ran into a major challenger to Exxon, but by acquiring American oil companies he had set the pace. Raymond’s ambitions were frequently compared to Browne’s achievements.

‘He’s a bandit,’ Raymond had said in testament to the diminutive Browne’s tough negotiating skills in Alaska, where Exxon and BP shared pipelines and other facilities. Raymond disliked the Englishman’s aggressive takeovers, belligerence and business model. Although both had earned their reputations cutting costs, he dismissed Browne as a generalist and a non-engineer. ‘We don’t have hero leaders like BP,’ Raymond’s associates would observe. ‘BP,’ Raymond would say, ‘will have its moment of truth.’ Some suspected that Raymond’s unease sprang from his disapproval of Browne’s homosexuality. While tolerated within Exxon, homosexuals were barred from claiming partnership benefits for expatriate expenses and services, and overt displays of their sexual preference were discouraged. Raymond refused to add sexual orientation to Exxon’s non-discrimination agenda. Others believed Raymond was irritated by Browne’s transformation of BP from a withered wreck to challenge Exxon’s rank as number one. After two groundbreaking takeovers, a successful rebranding of BP as an environmentally friendly corporation, and big oil strikes in the Gulf of Mexico, there were rumours about Browne seeking a merger between BP and Shell to claim Exxon’s crown as the world’s largest oil producer. Closing the Yukos deal would terminate that menace.

‘If BP can do it, anyone can do it,’ was the attitude among the Exxon executives waiting for Putin in New York. ‘BP’s deal is borderline, and Exxon can do better.’ Mikhail Fridman, a tough operator, had offered TNK around the industry before BP bit, but Yukos was more enticing. The irritant was Browne’s success. Like Exxon, in the aftermath of the TNK purchase all BP’s smaller rivals, including Total, ConocoPhillips and Chevron, felt compelled to find a similar deal in Russia.

In common with all the oligarchs, Khodorkovsky had obtained his original fortune illicitly. Smart, intelligent and arrogant, he was not flashy. Despite his wealth, estimated by Forbes to be $8 billion, the 40-year-old owned no yachts, was driven in a standard S-class Mercedes and a small BMW, employed just one bodyguard, owned only one house in Zhukovka, the billionaires’ enclave outside Moscow with its own clubs and restaurants, and was entranced by the latest electronic gadgets and toys. He was never seen flaunting a mistress, owned only one private jet, and, like all Russia’s billionaires accustomed to the wreckage caused by vodka, he rarely drank. His ambitions nevertheless were serious. Since buying Yukos for $350 million in 1995 he had, with the help of Joe Mach, an abrasive and brilliant American oil engineer hired from Schlumberger, the world’s biggest provider of services to the oil industry, transformed the company’s fields by re-educating the Russian engineers. Previously large amounts of oil had been stolen by the oilfields’ managers and organised criminals, and no one cared about water contaminating the wells. The oligarchs, many suspected, merely wanted to strip the assets and carelessly allow oil production to decline. Khodorkovsky had transformed Yukos into Russia’s best oil company. Valued at $1 billion in 1999, it was worth $40 billion by 2003, and he retained a 44 per cent stake. Overseeing 100,000 employees from his gleaming headquarters, Khodorkovsky would quietly listen to advice, never yell, and never waste time with stupid ideas. Driven by ambition, he had stopped his public relations managers propagating the message of beating Lee Raymond and turning Yukos into Exxon, instead promoting the idea of selling stakes in Yukos as a stepping stone to political power in Russia.

Khodorkovsky’s ambition to topple Vladimir Putin was undisguised. During his conversations with Raymond in Moscow in early 2003, he anticipated his supporters winning 40 per cent of the seats in the Duma, the Russian parliament, and himself becoming prime minister after the elections in December that year. By June 2003 he was assumed to have bribed sufficient members of the Duma, including some of Putin’s supporters, to defeat the government’s legislation on tax reform. If the legislation became law, Khodorkovsky was heard to predict, Putin would ‘get fired’. Putin’s irritation had not troubled Khodorkovsky, and relations between the two had deteriorated as the oligarch flaunted his ability to bribe members of the Duma in the months before the elections. Russia’s internal strife did not concern Exxon’s chairman, although he knew that the Kremlin was the only obstacle to a deal. ‘I’ll look after the government,’ Khodorkovsky had reassured Raymond. ‘Don’t rely on that,’ Raymond was advised. ‘We need our own approach.’ Other than Putin himself, only three other people could decide Yukos’s fate, and those power-brokers, everyone assumed, were not sure themselves what would happen next. Igor Sechin was among those who could provide reassurance.

Igor Sechin was Putin’s trusted ‘Mr Oil’ in the Kremlin, the gatekeeper to Russia’s oil policy. The two had become friends while working together for the mayor of St Petersburg, Anatoly Sobchak, during the Yeltsin era. Sechin was also chairman of Rosneft, a state-owned oil company. A key member of the ‘siloviki’, the St Petersburg crowd of hard-faced former KGB and military officers surrounding Putin in the Kremlin, 43-year-old Sechin was regarded by outsiders as disdainful of the Jewish oligarchs who controlled about 50 per cent of Russia’s economy. Convinced that Sechin would oppose a deal between Yukos and Exxon, Exxon’s representatives in Moscow had sought an alternative route through the Kremlin’s hierarchy to secure Putin’s approval. Igor Shuvalov, Putin’s economic adviser, was chosen as the conduit. Based at Old Square, the former Communist Party headquarters linked to the Kremlin by an 800-yard tunnel, Shuvalov had heard about Exxon’s ‘equity investment’ in Yukos soon after Khodorkovsky initially approached Tillerson. Since the size of Exxon’s proposed stake was deliberately concealed, he had no reason to object. ‘I will inform the boss and get back to you,’ he had said. One week later, Shuvalov telephoned Exxon’s office: ‘This is interesting. We are supportive.’

Since then, greed had infected the negotiations. As Exxon’s experts grasped Yukos’s true value, caution was abandoned. A desire for a 20 per cent stake was replaced by wanting everything. ‘We hunt for whales, not sardines,’ said Raymond. ‘We won’t be a junior partner in Russia. We’ll only invest in Russia when the terms are right.’ Khodorkovsky also became greedy. Aware that the oil majors needed new reserves and were envious of BP’s deal, he wanted top dollar for his shares. The timing, he said, was perfect. The rouble had devalued, and Yukos was aggressively valued. At $35 a barrel, oil prices, he believed, were peaking. Like every oil executive, he could not imagine where oil prices were heading over the following five years.

In June 2003, Khodorkovsky anticipated success. To celebrate Yukos’s record profits, he rented a luxury yacht to sail from Moscow to St Petersburg. Four days later, his business partner Platon Lebedev was arrested and charged with fraud. ‘Don’t worry,’ Khodorkovsky told his entourage. ‘He’ll be in jail for three months and then we’ll get him out.’ No one was quite sure whether Khodorkovsky genuinely believed his own bravado, but he refused to flee Russia. ‘I’m not going to become the next insane Berezovsky,’ he said, referring to the oligarch who, after helping Putin to power, fled as a permanent exile to London. In the event Lebedev was found guilty of tax evasion and sentenced to eight years’ imprisonment.

Raymond remained oblivious to the changing mood. Unlike John Browne, he was unversed in Russian culture and sensitivities. While Browne respected Russian history, Raymond saw a greenfield site. Exxon lacked experts who could provide genuine insight about the Kremlin’s intentions, especially Putin’s ambition to use the world’s dependence on Russia’s energy resources as a tool to reassert the nation’s status as a superpower. Whether Putin regarded Khodorkovsky as a serious obstacle to that ambition in summer 2003 is uncertain. Raymond did not suffer any misgivings. Impervious to subtleties, he approached the final deal, as always, by squeezing sentiment out of the negotiations. In July 2003 he visited Putin in the Kremlin. His pitch to the president was familiar: ‘We can help you elevate your country by extracting your oil resources.’ During that visit Mikhail Kasyanov, the prime minister, assured Raymond that Exxon would be allowed to buy a stake in Yukos.

Raymond, accustomed to negotiating with kings and presidents as an equal, shared their lifestyle. Arriving in Moscow with six bodyguards, he secured motorbike outriders from Moscow’s police department for his limousine’s dash into the city, and the whole top floor of the Kempinsky, Moscow’s most expensive hotel, was assigned to him. Putin would be intrigued to hear about two eccentricities during that visit. Since Raymond intended to leave Moscow on a Sunday, the city’s Baptist church was opened on Saturday to allow him and his wife Charlene the chance to pray.

During a previous visit to Moscow, Charlene had spotted some sculptured wooden figures in a store which she wanted to inspect again. Exxon’s security officers had declared that revisiting the store was excessively dangerous, so arrangements were made just prior to the Raymonds’ arrival for a room on the Kempinsky’s top floor to be converted into a display and filled with 60 wooden sculptures. After nearly two hours in the room, Charlene announced, ‘Yes, I’ll take them.’

Exactly 30 minutes late, Putin entered the Waldorf suite, accompanied by Igor Shuvalov, Sergei Priodka, a foreign affairs adviser, and the Russian ambassador in Washington. Putin would have been conscious that he was nearly the youngest in the room. He and Raymond shared a three-seater divan, while Rex Tillerson and Anna Kunanyansay, Exxon’s Russian-speaking adviser, took chairs. Kunanyansay, a Jewish émigrée from Kiev, had made the arrangements with the Russian ambassador for the meeting. Trusted by Lee and Charlene Raymond, she was suspicious of Putin.

After a few minutes’ pleasantries, Raymond cut to the chase. His tone was deferential, but not obsequious. ‘As you know, Mr President, we have been in negotiations for some time with Yukos.’

‘Yes, I know,’ said Putin. ‘For 25 per cent of the shares plus one share. A minority stake.’

‘Well, Mr President,’ replied Raymond, ‘I think we must be clear. I want you to understand that we will only buy 25 per cent if we can see a way to buy total control, and that’s why I’m here to see you today. To check that that’s OK with you. Our ultimate goal is to buy a majority stake in Yukos.’

Putin did not flinch visibly, but the translators heard exasperation in his reply, ‘This is the first time I’ve heard that. Khodorkovsky didn’t tell me.’ Raymond pursued his theme, explaining that the deal would improve Russia’s relations with America. ‘Well, we’ll see,’ said Putin evasively. ‘These details are for my ministers. You must deal with them.’ Raymond was not discouraged. Putin’s impatience was lost in the translation, and he had not actually rejected the idea of a deal. Raymond failed to spot the significance of Putin repeating three times: ‘This is the first time I heard about this. Khodorkovsky never told me about this.’

On 26 September, after meeting leaders of the American business community including Raymond at the New York stock exchange, Putin flew to see President Bush at Camp David. While he was there he mentioned Exxon’s bid for Yukos, and found to his surprise that Bush was unaware of the deal. Putin did not know that ever since Standard Oil was dismantled by the US government in 1911, American oil men had been indoctrinated not to confide unnecessarily in government officials, including the president. Inevitably, the rule was broken whenever Exxon needed Washington’s help. After all, despite the corporation’s culture of distrusting governments, America was at the centre of its universe.

Five days later, Raymond arrived in Moscow to participate in a meeting of the World Economic Forum starting on 2 October. He was to share a platform with Khodorkovsky. Putin and Roman Abramovich, the oligarch and co-owner of Sibneft, would be in the audience. Before Raymond left Dallas, Khodorkovsky’s demand for $50 billion for his shares had been considered. Raymond, the master of the hard bargain, declared that he would offer $45 billion. The Exxon team flying to Moscow were confident that the deal would be finalised and announced during the conference. Publicists were drafting the announcement.

On the top floor of the Kempinsky, Raymond waited for Khodorkovsky to haggle over the $5 billion. Khodorkovsky had heard a garbled report of the meeting between Raymond and Putin in New York, which was described as ‘the final nail in the coffin for Khodorkovsky’s relationship with the Kremlin’, and ‘the beginning of the end’. Khodorkovsky showed no concern, even after Yuri Golubev, the chain-smoking, heavy-drinking cofounder of Yukos, heard from a Kremlin official that ‘the meeting in New York was bad’. Raymond was regarded as having been excessively blatant, and Golubev heard that Putin felt misled by Khodorkovsky, and annoyed at being placed in an ‘uncomfortable position’ by Raymond’s ‘inappropriate behaviour’. Self-interestedly, Golubev did not mention to Khodorkovsky Putin’s anger at the oligarch’s failure to mention Raymond’s true ambition.

In reality, the situation was worse than Golubev imagined. On his return to Moscow Putin had summoned a meeting. Poring over an ‘oil map’ stretched across a conference table, his experts identified the existing foreign ownership of Russia’s oilfields. BP’s recent deal with TNK and Exxon’s prospective purchase of Yukos and Sibneft would place half of the Siberian oilfields under Western control. Oil and gas made up 40 per cent of Russia’s exports. Putin became agitated, and rejected the arguments of the modernisers in his government that Western oil majors were more efficient than Russian producers, and their claim that Russia would retain all the profits through taxation. Suspicious that Exxon was conspiring to threaten Russia’s national interest, Putin reflected the familiar mixture of Russian attitudes towards the West – simultaneously craving respect while suffering an inferiority complex. The notion of Russia’s oil being under Western control sparked his insecurity, envy and resentment. His grievances were echoed by the ‘Grey Cardinals’, his xenophobic ex-KGB cronies. Like their predecessors employed by Yeltsin, they lusted for personal wealth. Allowing ExxonMobil to move further into Russia threatened their ambitions, which were already limited by BP’s deal. By September, Putin was becoming convinced that Khodorkovsky had planned for two years to fund his takeover of Russia by selling Yukos. The president feared that Khodorkovsky could even buy the prosecutor general, or at least organise his dismissal. The resurgence of Putin’s national conscience had been anticipated by a handful of realists in Yukos’s hierarchy: ‘It’s all crazy to think Putin will allow a crown jewel to be sold to foreigners to benefit a group of Jewish bandits.’ But Khodorkovsky, they agreed, was ‘running high’. The turbulence influenced Khodorkovsky’s negotiations with Raymond.

Khodorkovsky arrived at the Kempinsky with his trusted translator Peter Laing. Over two hours he argued with Raymond about the $5 billion. Reams of paper were covered with figures as the translators interpreted the sums. ‘Ego’, one of the translators would say, was preventing the two men splitting the difference. ‘They’re chiselling,’ he concluded. Unwilling to concede, Raymond stormed out of the room and slammed the door of his bedroom without saying goodnight. In hindsight, he would conclude that Khodorkovsky was double-dealing, dangling an alternative deal to Chevron. ‘The meeting did not go well,’ Khodorkovsky told his staff after returning from the hotel. ‘We won’t be able to do the deal with Exxon the way they want, but let’s keep them involved to keep the pressure on Chevron.’ By then, Khodorkovsky’s fate had been sealed.

In that familiar territory, few were surprised by the news on Saturday, 25 October. Late that night Mikhail Khodorkovsky’s private plane was ‘delayed’ on the tarmac in Novosibirsk, Siberia. Suddenly, a group of masked security officers burst into the plane, shouting ‘Weapons on the floor or we’ll shoot!’ Khodorkovsky was arrested on charges of fraud and tax evasion. His arrest prompted his close associates to flee to Israel and the USA. ‘This is the signal that politics has trumped even the appearance of rule of law,’ said Robert Amsterdam, Khodorkovsky’s American lawyer. But Khodorkovsky’s arrest was popular in Russia, except among the other oligarchs, many of whom fled overseas in their private jets to watch events unfold in safety. Mikhail Fridman arrived in Mexico that night on a private jet, for a planned holiday with friends.

Rex Tillerson shed no tears. He shared Khodorkovsky’s contempt for the swamp of corruption among ministers with no interest in the country; but he also had no sympathy for the oligarchs. Raymond was upset that his conversation with Putin in New York may have caused Khodorkovsky’s arrest, not least because the Kremlin began pursuing Russians employed by Yukos, causing several to flee to the West. But he expressed no concern that the meeting had contributed to triggering the oil industry’s renationalisation, changing the atmosphere for Western business in Russia. ‘If they don’t understand, then they’ll have to learn,’ Raymond told an aide. ‘We won’t be a junior partner in Russia. We’ll only invest when the terms are right.’

In December, Tillerson acknowledged the deal was dead. Yukos was under investigation for tax evasion and Khodorkovsky was charged with serious offences. ‘Russia is closed,’ announced an Exxon executive. ‘It’s impossible to put the genie back in the bottle.’ Western shareholders were about to lose billions of dollars. Putin had done more than terminate a deal; he had curtailed the immediate modernisation of Russia’s oil industry with Western technology and the chance to balance OPEC’s power. Ten years after President Clinton exploited America’s Cold War victory to prise the oil reserves around the Caspian Sea from Russian influence, Putin had begun to reverse the humiliation. Russia’s prestige and power, he decided, depended upon high energy prices or, more potently, refusing to commit his government to satisfying all Europe’s energy requirements. Security of supply rather than the price of Russia’s oil and gas would determine the fate of the world’s economy. Satisfying the increasing global demand for oil partly depended on increasing Russia’s oil production from 10 million barrels a day to 12 million. That increase hinged on Khodorkovsky’s modernisation of Yukos. After Khodorkovsky’s arrest, Yukos’s self-improvement programme gradually withered, Russia’s oil production slipped and China’s growing demand could not be satisfied. Unforeseen, the débâcle contributed to the oil crisis in 2008 and the global recession.

By then Raymond had retired with a record $398 million payoff and pension. Looking back on his Russian experience, he could draw on the Exxon homily that there was nothing new in oil – only the players in each country were different. In the balance of risk, he had won some and lost some, but the cycle had never changed. Exxon was in better shape than it had been when he had taken over. In his Exxoncentric manner he ignored the problems he had created. The mergers and consolidation among the oil majors orchestrated by himself and John Browne had created a new arrogance and blindness towards the oil-producing countries, alienating their governments from granting the oil majors access to their reserves. Putin’s reaction against Exxon was echoed by governments across the globe. In unison, they regarded Exxon, BP and Shell as selfishly unwilling to share their profits. More pertinently, Raymond and Browne, while worshipping the cycle, had misjudged their scripture.

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

TWO The Explorer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

THREE The Master Trader

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FOUR The Casualty

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

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

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

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

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

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

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

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

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

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

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

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,’ 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 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 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, 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 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 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 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 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’: ‘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

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 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 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. 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 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 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.

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’, ‘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 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 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 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, he could not easily bluster about leaving. To his relief, Gorbachev bowed to threats 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’ 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 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. 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, 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,’ 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, 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’. 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, 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.

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