by Tom Bower
After interviewing nearly 250 key people, I selected a handful to reflect the turbulent era. Over the past 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 seabed. 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 multimillionaire 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 toward $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 are weaved into a narrative that makes no attempt to be encyclopedic, 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 grapple 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 is a story that reveals how we are all simultaneously both the victims and the beneficiaries of conflicting realities in the search, production and trading of oil.
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. After the summer, the prices hovered around $80. 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 Bower
July 2009
Chapter One
The Emperor
NEW YORK, SEPTEMBER 25, 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 that 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 favor.
For 18 months a small team under Rex Tillerson, Raymond’s deputy and heir apparent, had secretly vetted Yukos, a private Russian company that produced 20 percent of the country’s oil. During his negotiations with Mikhail Khodorkovsky, the billionaire Jewish oligarch who controlled Yukos with a 44 percent 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 percent 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 percent 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 okay.” 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 honor 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 Tillerson, 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 o
il-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 Tillerson recognized 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 jeopardizing 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 percent 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 favorable predisposition toward 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 considerable 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 rumors 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 reeducating the Russian engineers. Previously large amounts of oil had been stolen by the oilfields’ managers and organized 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 percent 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 percent 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 Saint 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 Saint Petersburg crowd of hard-faced former KGB and military officers surrounding Putin in the Kremlin, 43-year-old Sechin was regarded by outsiders as a xenophobe resentful of the Jewish oligarchs who controlled about 50 percent 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 percent 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 ruble 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 Saint 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.
