by Tom Bower
To further tantalize the West, Putin dangled the possibility of the oil majors developing the giant Shtokman field in Russia’s Barents Sea. Only Western oil companies possessed the expertise to exploit the field, 342 miles from the shore and containing an estimated 141 trillion cubic feet of natural gas. Ever since its discovery in 1988, Russia had dithered about granting a license. Five Western companies believed they had won the Kremlin’s approval in 1990, but two years later the agreement was canceled. In 1995, Norsk Hydro of Norway, Conoco, Total and others were encouraged to consider an LNG terminal in the Barents Sea, but that was also abandoned. In 2000, Gazprom signed agreements with Exxon, Conoco, Chevron and Shell, and in 2005 invited their bids to build an LNG plant, but the following year Putin excluded all the American companies.
By October 2006, in the midst of the argument with Shell, Putin had decided that Russia would develop Shtokman itself. Since the country lacked the expertise to do this on its own, nothing could happen, yet Putin flaunted his intention to supply 10 percent of the US’s LNG consumption. He enjoyed the confusion this created, but later agreed to allow Total and ConocoPhillips to develop the field, but without any stake in the gas itself, a deal that other majors rejected for sound financial reasons and, like previous proposals, would probably crumble. The continuing uncertainty annoyed Dick Cheney and President Bush. At the G8 summit in Saint Petersburg they found Putin joyfully dismissing questions about energy security as “misguided colonial-era arrogance.” Unrepentant about cutting off the gas in Ukraine and frustrating Chevron’s plan to export more oil from Kazakhstan by opposing the expansion of the pipeline through Russia or the construction of another one under the Caspian to Azerbaijan to link to the BTC, Putin presented the summit as his personal triumph. “Oil delirium is influencing everything,” Cheney snapped, angry that Putin spurned any agreement that would benefit the West. Putin’s Asian alliance with China and Iran was, said an American visitor, “OPEC with nuclear bombs.”
During the summit and over the following weeks, Jeroen van der Veer and Shell’s lobbyists urged Putin and Igor Sechin not to jeopardize the West’s biggest investment in Russia. Rebuffed, van der Veer asked ExxonMobil’s Rex Tillerson to join Shell in a common front. Pleased not to be in the firing line, Tillerson refused. “I don’t know what’s worse,” he commented. “Having a cost blowout like that, or not knowing it’s going to happen.” Shell’s directors were scathing about ExxonMobil being “content to let others hang out to dry.” The company, Phil Watts had discovered, had been similarly unhelpful during Shell’s arguments with the SEC about its booked reserves. While Shell was being pilloried by the Kremlin, ExxonMobil had not suffered for its increase of costs at Sakhalin 1 from $12.8 billion to $17 billion. The difference, van der Veer knew, was Shell’s political weakness. For Putin to challenge ExxonMobil would be akin to confronting the American government. Shell lacked similar political patronage. The outcome was the suspension by the Russian general prosecutor’s office on September 16, 2006, of Shell’s environmental license to develop Sakhalin 2. Corrupt Russian officials at the ministry for natural resources, said the prosecutor, had been bribed by Shell in 2003 to approve the agreement. No evidence for the claim was ever produced. A court would decide whether to revoke the license because of Shell’s “unqualified project decisions.”
Nine days later, on September 27, Oleg Mitvol was sitting aboard a 160-seater government-owned Ilyushin jet with journalists and representatives of the environmental groups flying toward Sakhalin. The journey bore the hallmarks of government sponsorship. “I needed a plane to deliver some papers to Sakhalin,” Mitvol explained disingenuously, “so I thought, if it’s empty why not take some journalists as well?” Standing on Sakhalin’s muddy hillsides surrounded by his guests, Mitvol identified upturned trees and landslides as examples of Shell’s disregard for the environment. Pointing at two dead fish in a stream, he pronounced the corporation guilty of pollution. “Those roads,” he said during a helicopter ride, “were built without permission; the pipeline is destroying the salmon fisheries, and look at the dredge Shell is dumping into the bay.” Back on land he quipped, “If someone had done this in America, he’d be in jail. Here, he’s sitting in a Mercedes.” He concluded, “This construction cannot go on. We must stop the project and start over again. We want criminal cases for every damaged river. I think I’ll open a criminal case for every tree they cut down. If criminal cases are opened for everything, the company will come to its senses and stop the barbarian activity. Shell could be fined $50 billion.”
Mitvol returned to Moscow triumphant. Although Shell made serious allegations against him, he confused the company’s directors by presenting himself alternately as an independent one-man band and as a mere cog in the government’s machine. Only Vladimir Putin, van der Veer knew, was empowered to halt him. Van der Veer mobilized supporters including Tony Blair, Japan’s prime minister Shinzho Abe and Gerhard Schroeder, the former German chancellor, who was employed by Gazprom, to personally contact the Russian leader. Pressure from Rex Tillerson, Shell suspected, deterred the US State Department and the White House from offering similar help.
Unusually, ExxonMobil’s failure to become involved proved self-destructive. Soon after Mitvol’s return from Sakhalin, ExxonMobil had been told by the ministry of natural resources that the first shipment of crude oil, due to leave Sakhalin 1 in October, would be halted for health and safety checks. Robustly, the company declared that its tanker the Viktor Titov would sail as planned. Just as the Shell directors had anticipated respect for their achievements, ExxonMobil’s managers were proud to have completed a seven-mile horizontal well in 61 days, 15 days ahead of schedule, linking Sakhalin 1’s oilfield to a terminal. A nearby Italo-Russian energy project to build an onshore pipeline, ExxonMobil’s executives noted, was disastrously delayed. Without ExxonMobil or one of the other oil majors, the Texan engineers smiled, the Russians seemed unable to complete difficult projects in their own country. Their self-congratulation was to bear a price. ExxonMobil’s bluff was called by Sechin, and the Viktor Titov remained moored while negotiations began to extract a better deal from the company. Simultaneously, the ministry questioned whether Total’s PSA agreement in Kharyaga in the Arctic remained acceptable. The Kremlin had calculated that $18 billion had been invested in Sakhalin 1, Sakhalin 2 and Kharyaga, but that Russia had received only $500 million in revenue. “Laughable,” was the translation of the Kremlin’s reaction. In Putin’s coterie, the commercial sanity of repaying the investment before taking any profits was derided. The fates of gray whales and spawning salmon were useful tools. “International pressure on Shell’s behalf,” Mitvol said, “will not have an effect. We have to care for Russia’s environment and reputation.”
Fearing that Shell’s investment, worth about $5.5 million at that stage, would be lost, Chris Finlayson visited Alexander Medvedev, Gazprom’s deputy chairman. “I must tell you,” said Finlayson, “if you kick us out, the scrap metal will be worthless.” Medvedev remained impassive. “The oil,” continued Finlayson, “will only flow in 2008.” Medvedev’s expressionless face betrayed no hint of Shell’s fate. The possibility of replacing Shell with Schlumberger had been discussed, but the contractor’s services were limited to production. Schlumberger lacked experience in interpreting and finding solutions in exploration, and only drilled on the spot identified by the customer. It could not operate alone, offshore. Gazprom had no choice. Only Shell possessed the expertise to exploit Sakhalin. Restricted by those facts, serious negotiations started once Medvedev was persuaded that Shell “would not give in.” Initially, Medvedev appeared content to accept Shell’s offer of a 25 percent stake but at a lower price. However, during the following two-hour negotiating bouts, intermediaries told van der Veer that the Russians wanted 50 percent. He panicked. Fearing disruption and huge costs if Shell’s staff was expelled, he did not bargain for a compromise, but utterly capitulated. There was no point, he told his fellow directors, in making sma
ll moves that would be rejected. “We have to take a big step to get a fundamental solution and make Gazprom and the Russian government happy,” he explained. Without testing Gazprom’s resolve any further, van der Veer flew to Moscow to settle the deal with Miller. At the end of his surrender speech, he realized that Miller did not understand. Only gradually, with more help from the Dutchman, did Miller recognize that he had won. “Alexei cannot believe his luck,” observed one of his assistants. “Miller made a lot of progress that morning,” agreed van der Veer. The remaining details were how Gazprom would pay the historic costs, and whether in cash or oil.
Inching toward a financial settlement, Shell rectified its environmental blunders. Two subsea pipelines were relocated away from the gray whales’ breeding grounds, and the pipelines across the rivers were rebuilt. By December 8, the deal between van der Veer and Medvedev was sealed in Moscow. Shell would sell 50 percent plus one share of the Sakhalin development to Gazprom for $7.45 billion, and Gazprom would not be liable for any extra costs in the future. The oil price was calculated at $4 a barrel, lower than for any other Russian project. Shell’s own share in Sakhalin was reduced to 27.5 percent. Once the deal was agreed upon, Shell’s environmental problems suddenly disappeared. Out of step with the new politics, humiliated by his demotion and roundly scorned, Oleg Mitvol complained that his new superior, recruited from Saint Petersburg, was “corrupt.” Mitvol was demoted. “I’ve been replaced by Ludmilla, a former cleaner in Saint Petersburg’s best venereal disease clinic,” he complained. To parade his triumph, Putin insisted that van der Veer return to Moscow and appear on television with him and the chairmen of Gazprom, Mitsui and Mitsubishi to confirm that Sakhalin 2 was under Russian control. Van der Veer agreed. Appearing with Putin on television from the Kremlin would guarantee the contract. “We need a strong signal about the environment,” he said to Putin in German. “Leave it to me,” replied the president. “I’m pleased,” Putin told Russian viewers on December 21, “that our environmental services and the investors have agreed on the way of resolving the ecological problems.” Van der Veer would consider the humiliation worthwhile. Sakhalin was safe, even if Shell had debooked half of its reserves and lost billions of dollars of profits.
Defeating Shell inspired Miller. To raise oil prices, in November 2006 OPEC began to cut production by 1.5 million barrels a day. The small decrease in shipments from the Gulf was noted by the tanker-trackers, the agencies that employ spotters at the oil terminals to physically count tankers and their loads in and out. The creeping increase of oil and natural gas prices, and the growing apprehension in both Asia and the West of energy shortages, animated Miller’s ambition to dominate Europe’s gas supply. With Putin’s encouragement, he set about establishing Gazprom’s presence in Germany, Italy, Hungary and Britain, and then looked to Africa. There was a piquant headiness to challenging Shell in Nigeria, its troubled heartland. The country’s oilfields were in turmoil, and Russia, Miller believed, could appeal to Nigerians as fellow victims of Western exploitation. Disregarding the Soviet Union’s misunderstanding of Africa’s tribal conflicts during the Cold War, Miller felt Gazprom could offer the Nigerian government an alternative to Shell.
New estimates had increased Nigeria’s oil reserves to 140 billion barrels, half of Saudi Arabia’s, and Nigerian oil was cheap to produce. Notionally, Shell’s reserves could have been boosted by the discovery of 1.6 billion barrels in the Niger Delta, but constant strife was hampering production. Shell’s conundrum, Jeroen van der Veer recognized, was its failure to increase its overall oil reserves. The industry was spending five times as much annually as it had less than 10 years earlier — from $80 billion in 1999 to over $400 billion — and it was expected to spend $300 trillion between 2005 and 2050 to produce energy; but Shell was stymied. Local governments, like Nigeria’s, with sufficient reserves to more than double production to six million barrels a day, were standing in the way of its ambitions.
Production in the delta had intermittently restarted in 2003, but gasoline pumps across the country had run dry, projects had been abandoned and Shell was losing its dominant position to ExxonMobil, which had chosen safer offshore locations. The arrest in London in September 2005 of Die-preye Alamieyeseigha, the governor of the oil-rich Bayelsa state, on charges of corruption and money laundering, was hailed as a new opportunity to clamp down on Nigeria’s rampant sleaze. The chance was lost. Allowed bail on a bond of £1.5 million, Alamieyeseigha escaped from Britain in October 2005 dressed as a woman. On his return to Nigeria, his tribesmen, encouraged by antigovernment politicians, launched attacks against Shell’s installations. Repeatedly during 2006, militants in the delta used explosives to destroy pumping stations, sabotaged pipelines and, despite foreign engineers traveling in armored cars, abducted over 150 workers. Retaliation for the kidnappings and the killing of soldiers was messy. Shell paid ransoms to rescue the workers, and suspended operations, while the government dropped bombs on the gangs stealing oil from the pipelines and allowed rampaging troops to burn homes and shops. In those conditions, neither Shell nor the other oil majors could invest to stop spillages. Playing a cat-and-mouse game with the government, Shell halted work on a $6 billion project to end the flaring of about two billion cubic feet of natural gas from 1,000 wells every day, and on the construction of a power station using that gas. In theory, Shell was also committed to building an LNG plant, but Nigeria’s finances were anarchic. In 2006 the oil companies handed about 90 percent of their oil revenue, or $25 billion over three years, to the government, yet the politicians refused to pay Nigeria’s share of the oilfields’ development. “The situation is grave,” admitted Basil Omiyi, Shell’s first Nigerian chairman, appointed in 2004. More than Shell’s entire profits from Nigeria had been reinvested in the country, yet production had fallen. Shell’s local chairman lamented the Nigerian leaders’ cynicism. Similarly, the civil servants, enfeebled by military dictatorships, had lost the tradition inherited from the British of loyalty to the state. On reflection, Shell’s executives realized, their error after 1958 was to assume any responsibility for funding community projects. Participation had become a poisoned chalice. Hospitals had been built by the corporation, but there were no doctors, and Shell’s school buildings stood empty because the state had provided no teachers. Omiyi could not solve the contradiction of compelling the government to use its petrodollars wisely, but not interfering in the country’s affairs. The anarchy of Nigeria could only be solved, all the oil companies realized, by erecting a physical barrier between the oil and the militants.
Shell’s fate depended on Bonga, an offshore oil rig, isolated from the delta gangs, costing $1 billion, producing 150 million cubic feet of natural gas and 225,000 barrels of oil a day, 10 percent of Nigeria’s production. Shell hoped that its revenues would be used by the Nigerian government to repay $3.8 billion owed to Shell and their joint venture. On each $100 barrel of oil, the government took $90, leaving Shell with $3; the remainder was used to finance production. An agreement became unlikely after the arrival of Alexei Miller in Nigeria in early 2008. This challenge to Shell on its own terrain aroused unusual curiosity. Offering “strong technical expertise and financial resources,” Miller was on a mission of revenge against Europe’s decision to restrict Gazprom’s investments. Since Europe received 25 percent of its natural gas supplies from Russia, and anticipated demand doubling by 2030, Miller’s dream was to control western Europe’s energy supplies. He predicted “a great surge” in prices to a “radically new level,” with Gazprom rather than OPEC becoming the world’s biggest energy provider.
His first call had been on Colonel Gaddafi. Western sanctions had been removed from Libya as part of a wide-ranging settlement negotiated with John Browne’s advice by Tony Blair. Fifteen corporations, of which 11 were American, obtained exploration licenses in the first round of bidding in January 2005. To reassure himself of Libya’s reliability, Rex Tillerson met Gaddafi before finally signing for ExxonMobil’s rights. In 2006
, Gazprom also won a license. By 2008, Miller, Tillerson and Jeroen van der Veer were aware that progress was expensively slow in Libya. Importing equipment and staff into the country was a protracted process, causing costs to soar, and Gaddafi reopened negotiations about the profits. Unlike the Western corporations, Miller was uninterested in such complications. He told Gaddafi that Gazprom would buy all of Libya’s oil and gas. He then flew to Lagos and offered to buy all of Nigeria’s natural gas.
By 2016, Nigeria was expected to be able to supply 20 billion cubic meters of natural gas a year. Delivery would be either by Shell’s expensive LNG plant or through a 2,670-mile pipeline across the Sahara to the Mediterranean. Miller secured Nigeria’s agreement to cooperate with Gazprom to build the pipeline for $21 billion. In the wings, rival delegations arrived from China and India. Even the Nigerians, accepting a £2.5 billion loan from China, recognized their new creditors to be “quite aggressive,” secretly seeking to oust the major Western oil companies and control no less than six billion barrels of oil or 15 percent of Nigeria’s production. ExxonMobil, Shell and Chevron would be under financial pressure to match China’s generous financial offers, not only in Nigeria but also subsequently in Ghana. Omiyi, however, was not distressed. The Nigerians would, he believed, be uneasy about the danger of Chinese insensitivity, especially in the delta, and as for the Russians, they could also learn the hard way. If Miller chose to ignore Nigeria’s history and believed in irreversible high energy prices, Omiyi would be pleased to witness him learning the lesson of “cycles.” The initial contract, signed in June 2009, would pledge Gazprom to invest $2.5 billion in Nigaz, a joint venture to develop Nigeria’s gas reserves. In The Hague, there was wry amusement when just after Nigeria had been relieved of repaying $35 billion of debts by Western governments, the government had started borrowing again. Unwilling either to become involved in maintaining law and order in Nigeria or to offer any suggestion of withdrawing from the country, Shell reluctantly agreed to lend at least $3 billion to the government to finance essential exploration. Fifty years’ experience in the country amounted to tolerating costly confusion.
