Oil

by Tom Bower

  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 aboveboard. 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 Saint 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 neighboring Kazakhstan.

  Chevron was intent on betting everything on Kazakhstan, yet the Kazakh 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 license 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 neighboring Russia to the Black Sea. Hostile toward 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 organized for ex–prime minister Margaret Thatcher to visit Azerbaijan, and BP offered the government’s leaders $70 million as a “bonus” to finalize the $7 billion development. Having put itself in prime position to be awarded the license, in early 1994 the BP team awaited Aliyev’s agreement to sign the contract, which since 1992 had been increasingly tilted in Azerbaijan’s favor. 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 September 20, 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 n
orthern 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 toward 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 that 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 Westernize the country, he favored 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 favorable 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 antagonizing Moscow. HAPPINESS IS MULTIPLE PIPELINES read a bumper sticker handed out by American diplomats fizzing enthusiastically about “to the victor go 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 fulfill. 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 percent of the world’s known oil reserves (923 billion barrels), but in 1996 contributed only about 6 percent of global production (3.6 million barrels a day). The sanctions had proven to be counterproductive. Iran relied on oil for 90 percent of its foreign earnings, yet was compelled to use 33 percent 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 percent in 1995–96 to 40 percent 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 percent 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.

  In 1995, Conoco signed a $1 billion agreement through a Dutch affiliate with the Iranian government to extract 120,000 barrels of oil a day from South Pars. Throughout the negotiations Conoco’s executives had kept US officials informed. The company was offering no credits or special technology, and since no Iranian would enter America, it was assured that the agreement was legal. In fact, American companies were already annually buying 23 percent of Iran’s oil exports, worth $3.5 billion, to supply US refineries calibrated for Iranian crude. Forty-four other countries were also using Iranian oil, especially Japan. In the integrated, and increasingly tight, international oil market, American sanctions against Iran, Libya and Vietnam were harming US oil companies. America’s rivals had benefited from the sanctions against Vietnam and Libya, which forbade exploration in those countries by US companies. Nevertheless, ignoring logic and reality, on March 20, 1995, Clinton abruptly extended the sanctions by an executive order stopping Conoco’s agreement with Iran. His ostensible purpose was to punish the country for supporting terrorism and developing nuclear weapons. The immediate casualty, besides Conoco, was oil exports from Kazakhstan and Azerbaijan. Both countries enjoyed “oil swap” agreements with Iran, exchanging oil shipped across the Caspian for Iranian exports into the Mediterranean. Spotting an opportunity, five months later Total of France combined with Gazprom of Russia (30 percent) and Petronas of Malaysia (30 percent) in signing a $2 billion agreement with Iran to develop the same reserves. To deter retaliation against Total, the French government announced that American sanctions would be “illegal and unacceptable.” This anticipatory defiance was ignored in Washington. To curtail Total’s ambitions, Clinton supported the Iran-Libya Sanctions Act in 1996, which empowered the US government to punish foreign companies helping proscribed countries to develop energy projects. Soon after, Total withdrew from Iran. Simultaneously, Gazprom’s attempt to raise $1 billion on US markets with the support of the US Export-Import Bank faltered. Iran’s ambitions were frustrated, and the operators extracting Qatar’s natural gas were able to continue to siphon supplies from its neighbor’s reserves. President Clinton’s decision to prevent the development of oil supplies from countries deemed to be enemy states roused little debate in America. Few perceived the contradictions miring his policies. Clinton’s advisers spoke about oil remaining plentiful and cheap, yet his motives for aggressively seizing oil reserves along Russia’s borders signaled America’s growing dependence on imports.

  In 1995, many Russians were convinced that the US government had drawn a map carving up Russia’s oil wealth among American oil companies. To the suspicious, the drop in oil prices from $20 a barrel in 1991 to $15 in 1994 appeared to prove an American conspiracy to deny Russia value for its natural resources. No one in Moscow understood how much America’s domestic oil industry had also suffered during that period. In July 1991, 251,000 out of 660,000 wells in America had been closed down. Russian prime minister Viktor Chernomyrdin’s response to nationalist anger was to restore Russia’s control over
Kazakhstan’s oil. A proposed pipeline to be built by the new Caspian Pipeline Consortium (CPC) to transport Tengiz’s oil was forbidden until Russia’s unspecified demands were met. Chernomyrdin also reneged on his 1993 promise that Chevron would be allowed to pump 120,000 barrels of oil a day through Russia’s existing network. Ken Derr’s trust in Russian assurances was dashed. The fate of the $1.4 billion pipeline appeared to be controlled by John Deuss, a man loathed by Derr, representing the ruler of Oman, a desert state at the entrance of the Persian Gulf.

  In the battle to decide the CPC’s negotiations with Russia, Derr, with the White House’s support, was unwilling to compromise in any deal with Deuss about the ownership and the cost of the pipeline. The outcome of their personal battle depended upon Chernomyrdin’s preference. Although the construction of the pipeline had been approved by the Duma on August 30, 1993, Chernomyrdin’s cooperation wavered depending upon the personalities involved, the chance of bribes and disputes about funding. Chevron’s fate looked bleak, and Derr panicked. Fearing that Chevron had lost billions of dollars, he slashed investment by 90 percent. Enviously, he noted that BG and the Italian oil company Agip had united with Gazprom on March 2, 1995, to develop the enormous Kashagan oil and gas reserves in Kazakhstan. The CPC pipeline project remained at a stalemate until, in December 1995, Chernomyrdin was persuaded to isolate Deuss and expel Oman from the project. Mobil and Lukoil, an independent Russian producer partly financed by Arco, joined Chevron as partners. Yeltsin and Kazakhstan’s President Nazarbayev agreed in 1996 to build a 935-mile pipeline from the Caspian to the Black Sea. Derr was left on the sidelines while the fate of Russia’s oil and natural gas became the central issue in a colossal struggle for power.