by Tom Bower
In Washington, the Department of Transportation ordered a team to start intensive testing of the pipelines, and Chuck Hamel lost no time in contacting the staff of Congress’s two energy committees. The pipes, he asserted, had not been cleaned or examined with a “smart pig” since 1992, and were filled with sludge. Congressman Dingell, an avid conservationist but no longer the chairman of the House Energy Committee, did not wait for an official report or replies from BP. After the committee’s investigators had spoken to BP’s staff, he wrote to Bob Malone: “I have concluded that BP’s cost-cutting was severe enough that some BP field managers were considering measures as draconian as reducing corrosion inhibitor to save money.” He asked BP for all the records of pigging from 2000 to 2005, and to provide all e-mails referring to any reduction of corrosion inhibitor.
A review of the e-mails unearthed Kip Sprague’s opinion that the testing was “a joke.” Reluctantly, that e-mail was included in the bundle sent to the committee, but other more incriminating ones were excluded. Before their delivery, Dingell had received from Norman Mineta, the secretary of the Department of Transportation, an interim report about the pipelines’ maintenance. Some pipes, it appeared, had not been cleaned with a smart pig since 1990. The tests, according to BP in that year, had been “terminated due to high volumes of debris present in the pipeline.” That policy, Mineta told Dingell, “does not represent sound management practices for internal corrosion control.” By early August the Department of Transportation’s inspectors had found 16 “significant anomalies” of “unexpectedly severe corrosion” at 12 locations, and even a small leak in the eastern sector of the Slope. The logs of BP’s staff, reported the inspectors, exposed a haphazard regime of checks at intermittent intervals, missing corrosion by “a few feet.” In London, Browne agreed to increase the maintenance budget in Alaska by 15 percent, to $74 million. The following day, August 7, another pipeline in Alaska split. Within 24 hours the US government ordered the closure of the whole Alaskan oilfield. Eight percent of America’s entire daily oil supply, 400,000 barrels, was cut off. BP immediately agreed to replace 16 miles of pipeline suffering “severe corrosion,” at a cost of $150 million, and to increase maintenance spending in 2007 to $195 million. The company’s carefully nurtured reputation was being shredded.
In BP’s London headquarters at No. 1 St James’s Square there was anger. Not with Browne or the managers in Alaska, but about the “exaggerated hyperbole over a 30-square-foot area of contamination,” the regulatory agencies’ motives, American politics, and BP’s mistake in overreacting. “We’re not dealing with an apocalypse,” shouted one director. “All this talk about cost-cutting is an absurd exaggeration.” The board, naturally enough, relied on what Browne told them about the nature of the incident, and about safety and cost-cutting in Alaska, and did not undertake their own investigation.
Five days later, under pressure from the oil industry, the US government agreed to reopen half of the pipeline. Browne tried to dismiss the three successive catastrophes — Texas City, Thunder Horse and Alaska — as “a series of unrelated events.” Compounding BP’s predicament, at the end of June the CFTC announced that the company was to be prosecuted for manipulating the prices of propane gas in February 2004. “It would have been better if July had been canceled,” Browne quipped when unveiling BP’s interim results in August. His hopes of limiting the damage by admitting responsibility, offering generous compensation and joking were being undermined by Chris Knauer, an investigator for the House Energy Committee. During a trip across Alaska, Knauer met Maureen Johnson, responsible for BP’s maintenance on the North Slope. Her hesitant replies to his questions persuaded him to report to Joe Barton, the chairman of the House Energy Committee since 2004, “It doesn’t smell right, why did it happen?” BP’s predicament was unappealing. Over the previous years, Browne and his lobbyists had plied their charm and the company’s narrative across the capital, endlessly presenting the chief executive to congressmen, senators and the most senior politicians in the White House as the European equivalent of the legendary GE chairman Jack Welch. Methodically, Browne had worked through the celebrity list, especially Senator Jeff Bingaman, the chairman of the Senate Energy Committee, John Dingell, Joe Barton and Dick Cheney. All were friends of Big Oil, and all felt betrayed by Browne.
Congressman Joe Barton’s distrust of Browne and BP’s staff was growing. Recalling FTC chairman Robert Pitofsky’s suspicions that BP wanted to dominate the West Coast oil supply by total ownership of Alaskan production, Barton wondered whether there was a link between the shutdown in Alaska and new allegations of BP’s manipulation of propane prices. He suspected Big Oil of plotting a conspiracy, a suggestion Browne ridiculed. Chuck Hamel bolstered this theory when he delivered a copy of Coffman’s five-year-old report. With hindsight, the consequences of BP’s cost-cutting appeared irrefutable to Barton, who was persuaded that the company’s “chronic neglect in Alaska [had] directly contributed to the shutdown.” On August 11 he wrote to Browne accusing BP of dishonesty. The company’s past assurances that the leak in March was an anomaly, he wrote, and that the corrosion control program was working, were untrue. The evidence of corrosion, he continued, “contradicts everything the Congress has been told. The fact that BP’s consistent assurances were not well grounded is troubling and requires further examination.”
Steve Marshall was summoned to testify to Barton’s committee on September 7, 2006. In the high-ceilinged, wood-paneled room, Barton looked down upon Browne’s representative. Accused of systematic neglect, Marshall’s defense was, “I am not a pipeline expert.” As he looked up at the politicians on the dais, he must have grasped the seriousness of BP’s plight. Five years after BP had received the Coffman report and refused to use “smart pigs” despite the danger of corrosion, events suggested his culpability. “I am even more concerned,” Barton told Marshall, “about BP’s corporate culture of seeming indifference to safety and environmental issues. And this comes from a company that prides itself in their ads on protecting the environment. Shame, shame, shame.”
Eleven days later, Marshall’s reputation was again attacked. Chris Knauer and members of the Oversight and Investigations Subcommittee working for Barton obtained a report written by Vinson & Elkins, a firm of lawyers, describing the atmosphere for those employed by Richard Woollam as “fraught with workplace intimidation and harassment from senior management.” Congressional staff had found an e-mail dated February 5, 2003, and headed “Authorisation for Expenditure” in which the proposal for a permanent pig had been rejected as too expensive. BP, the congressmen quipped, no longer stood for “Beyond Petroleum,” but for “Big Problems,” “Broken Pipelines” and “Bloated Profits.” Recalled to testify again, Marshall was told by Democratic Congressman Bart Stupak, “We are now learning that there were a number of troubling personnel problems in BP’s corrosion management program… over the past several years… These problems apparently caused a ‘chilling’ atmosphere in workers’ ability to report health and safety issues,” deterring the report of potential problems. Why, Marshall was asked, had he tolerated the intimidation of the Corrosion Inspection and Chemicals Group (CIC)? Congressmen were renowned for using crude hyperbole on occasions such as this, but that was little consolation for Marshall. He had no defense. After arriving in Alaska in 2001, he admitted, “We had a poor relationship with our workforce. I worked hard to change that. We have done a lot, but we still have a long way to go.” His attempts to improve matters in 2003 had failed. Woollam had been ordered to undergo “sensitivity training,” but had resisted the instruction to cease intimidating employees, and in 2004 he had been reassigned to Houston. Woollam refused to testify to the committee by pleading the Fifth Amendment, as protection from self-incrimination. “It’s a corporation rotting from within,” commented a member of Barton’s staff. In London, Peter Sutherland and his fellow directors were convinced that BP had become the victim of grotesque political opportunism. The company was sufferi
ng its Exxon Valdez moment. Nevertheless, Sutherland again concluded, John Browne, once an asset, had become a liability.
“Beyond Petroleum” was haunting the company. The unmistakable green-and-yellow sunburst logo promoting BP as the world’s second largest solar producer, with plans to invest $8 billion in wind generation in southern California and Scotland, was vocally lambasted by Chuck Hamel as “greenwash.” Oilmen, Hamel told the politicians and others flocking to his home by the Potomac in Washington, “play Russian roulette like you wouldn’t believe.” Browne complained that BP was a victim of Hamel, but Robert Malone, a Texan, was realistic: “I don’t believe in bad luck. For many the shine has come off BP over the last year as we have stumbled operationally.” To halt BP’s relentless slide, Browne appointed Malone as BP America’s chairman, and once again sought out a celebrity to limit the damage. Judge Stanley Sporkin, a distinguished retired lawyer, was hired to review BP’s systemic disregard of employees’ complaints. Barton was unimpressed: “You apparently have done a 180-degree turn and are doing now what you should have done years ago… Your former corrosion manager took the Fifth Amendment… But I find it hard to imagine that no executive further up the chain of command was aware of what was going on.” Even Browne’s agreement to spend $550 million over two years to improve integrity management program in Alaska could not forestall the backlash. BP’s lawyers had discovered incriminating internal documents and e-mails about cost-cutting and the nonuse of inhibitors in Alaska. These could have remained undisclosed if, in March 2007, Congressman John Dingell had not planned a hearing to allow BP an opportunity to describe its success in clearing the oil spill and describe progress on the repairs. Dingell believed that BP would be denying the allegations of drastic cost-cutting, but the box of new documents delivered to the committee on the lawyers’ insistence made that impossible. In public, BP’s spokesman murmured, “These documents are not really important,” but the evidence reignited hostility. “Everything in these documents,” said Joe Barton, “suggests that BP is trying to do the right thing in public while fighting like a tiger in private.” BP had become a punching bag. Its rivals believed that the corporation was heading toward a temporary graveyard, and blamed BP for increasing the general mistrust of the oil industry.
John Browne was fretting, although not about BP’s problems in America, but his own fate. He was due to retire in February 2008 at the age of 60. If Exxon could extend Lee Raymond’s contract for two years, he thought, BP could do at least the same for him, and extend his by three years. To avoid the issue, he had delayed the nomination of a successor. Ignoring Peter Sutherland’s impatience, he hoped to remain in place, an attitude that was supported by several important advertising executives and bankers enriched by contracts from BP, who agreed that the corporation needed Browne’s talents to steer a route out of danger. With Browne’s encouragement, the Financial Times had some years earlier unprecedentedly published eulogistic descriptions of his achievements on three consecutive days. Their glowing effect still lingered. Sutherland’s public expostulation about “this madness” had not deterred Browne from approving Merrill Lynch circulating a note to clients on Friday, July 21, 2006, describing Browne’s retirement as a “medium-term risk” for BP. Investors were advised to write to the company suggesting that Sutherland step down to allow Browne to inherit the chairmanship.
Browne’s long campaign to remain was addressed by Sutherland on the same day. The whole board had agreed at its recent meeting in Venice that Browne should leave in summer 2008, the hundredth anniversary of BP’s first oil strike, after his sixtieth birthday in February. Browne was summoned to Sutherland’s office. The directors, he told Browne, had agreed that he should announce his retirement. The appropriate moment would be the following Tuesday, at the end of his announcement of BP’s latest results. Visibly angry, Browne refused. The next day, Anji Hunter, Tony Blair’s trusted former assistant whom Browne had hired to assist with BP’s public relations, was marrying a well-known television presenter at St James’s church in Piccadilly. Among the 360 guests, including much of the Labour Party establishment, would be sympathetic journalists. For years Browne had relied on these admirers to sustain his heroic profile, and latterly to campaign for his indispensability to BP. To sabotage Sutherland’s timetable for his departure, Browne decided to launch a public campaign to embarrass the directors. At the wedding Browne met journalist Andrew Neil, now editor-in-chief of a small publication, Sunday Business, for the first time. Coincidentally, the following day the paper featured a report describing a popular demand that BP’s board retain Browne beyond his retiring age. “That’s put the canary among the pigeons,” sighed a BP executive early on Sunday morning as he awaited Sutherland’s irate telephone call.
Sutherland summoned Browne to his office on Monday morning. “You’ll say unambiguously tomorrow that you’re going,” he bristled. “I’ll think about it,” replied Browne. When the Irishman hit back with a sharp ultimatum Browne, visibly shaken, agreed to withdraw. He only asked that his departure should be delayed until the end of 2008. Sutherland agreed to the seven-month extension. In return, Browne would cooperate to find his successor. Since John Manzoni had left BP under a cloud, Tony Hayward was the obvious candidate. But Sutherland remained dissatisfied. While Lamar McKay, a former Amoco manager, was negotiating across Washington to resolve BP’s major crisis — or, as Browne’s critics snapped, “to clear up the mess” — Browne’s continued presence would be damaging. Ten years earlier, David Simon, the former chairman, had said to an executive, “There are two things you don’t want in BP. First, to work for John Browne; second, to have John Browne work for you.” Sutherland had been an admirer of Browne’s relentlessness. Ten years later, he was no longer prepared to play along.
Chapter Twenty-one
The Confession
EVEN VLADIMIR PUTIN, usually cool and unflappable, was shaken by the news. Revenge was inevitable. Jeroen van der Veer, the chairman of Shell, had confessed on July 21, 2005, that the cost of developing Sakhalin 2, the giant oil and natural gas operation in the Pacific, had spun out of control. The reports to the Kremlin suggested extraordinary duplicity.
Two weeks earlier, on July 7, Alexei Miller, Gazprom’s chief executive, had met van der Veer at the Shell Centre in London to sign a new agreement for Sakhalin. Ever since the original PSA was signed in 1994, the Kremlin had felt cheated. At that time, oil was $15 a barrel, and few imagined that prices would go much higher. Facing bankruptcy, Russia had swallowed the extortionate conditions demanded, giving generous tax advantages and, more remarkably, Marathon and then Shell permission to own 55 percent of the project without any Russian partner. Eleven years later, to moderate the imbalance, Miller had enticed Shell to improve Russia’s dividend. After months of negotiations, Miller had been persuaded that the revised PSA agreement for Sakhalin 2 was fair. In exchange for transferring 25 percent plus one share to Gazprom, Miller agreed that Shell could retain 30 percent of the operation, and receive a license to develop a 50 percent interest in Zapolyarnoye-Neocomian, a giant gas field in western Siberia. The crunch for Miller and Dmitri Medvedev, the head of Gazprom, was Shell’s $10 billion costs to develop Sakhalin. Once that money was spent and Sakhalin was operational, Gazprom would receive 25 percent of the profits. The natural gas would also enhance Gazprom’s power to play West against East through the pipelines, and gain a profitable foothold in Asia.
Unknown to Miller, one aspect of the new contract, buried in the small print, removed Gazprom’s power to veto board decisions. Just before the deal was signed in London, Shell and its Japanese partners had changed the rules. To veto any board decision, a shareholder needed more than 25 percent of the shares. Van der Veer had not told Miller about that change before they signed the contract. Gazprom, he knew, was a corrupt and inefficient Goliath. Worth about $360 billion and controlling about 20 percent of the world’s natural gas, potentially 1,200 trillion cubic feet, Gazprom had been strengthened by rising energ
y prices, but Miller’s ambitions were restricted by the company’s inability to meet the demand for gas. Plans to develop new sources in the Yamal Peninsula, Shtokman on the Arctic shelf, eastern Siberia and Kovytka relied on foreign expertise and expensive pipelines, which were beyond Gazprom’s finances. Without Shell, Miller knew, Sakhalin 2 could not be developed. “The deal is fair,” van der Veer had said, feeling no need to guide Miller to the passage in the small print that had apparently been missed by Gazprom’s lawyers in Moscow. He would later say that he was unaware of that clause.
Alexei Miller arrived late at Shell’s headquarters on July 7. London was paralyzed by that day’s suicide attacks on the city’s public transport system. After exchanging brief comments with van der Veer about the carnage across the capital, the two men signed the agreement, held a brief press conference, shook hands and launched themselves back into the chaos to cross the River Thames.
Ever since Phil Watts had squeezed the estimate to build Sakhalin under $10 billion in order to win the directors’ approval, Shell’s accountants had grappled with endless studies in their attempts to control the spiraling costs. Shell’s mistake was to have adopted Marathon’s original plan, dividing operations between the oil in the north of the island and the LNG plant in the south, connected by a 500-mile pipeline. No Shell director had understood the complexities of building and joining two offshore platforms, a plant to liquefy natural gas into LNG and a condensate refinery, with a pipeline crossing 1,086 streams and rivers inhabited by shoals of salmon. Shell’s predicament was caused by self-deception. To secure the directors’ support and to satisfy Phil Watts’s hunger for reserves — Sakhalin would add at least one billion barrels of oil and 17.3 trillion cubic feet of gas to Shell’s reserves — the costs had been artificially squeezed. Watts’s justification was that Sakhalin would be a “sweetener deal” to secure more contracts in Russia. Walter van de Vijver had been the first to spot the discrepancies, and after his departure rigor mortis set in. Malcolm Brinded, the new head of exploration and production, had spoken about restoring control over the costs, but to little effect; Shell’s accountants sought to avoid censure for their original underestimate; and Paul Skinner, the downstream director, suggested that the company should abandon Sakhalin and instead spend the money on refineries and developing the Canadian tar sands.
