by Tom Bower
The year 2007 was Shell’s hundredth anniversary. Although profits had risen by 8 percent, and the corporation planned to spend $33 billion in exploration and production, the volume of oil produced had fallen by 5 percent, and would drop again in 2008, the sixth annual fall in succession. The big projects in Sakhalin, the Athabasca tar sands, Qatar natural gas, Kazakhstan, Australia, Norway, Nigeria and the Na Kika field in the Gulf of Mexico with BP promised to improve Shell’s replacement rate to 124 percent, but its current production was barely keeping pace with depletion. Individually, each enterprise, relying on high oil prices to justify the investment, was typical of the industry, but combined, they presented an offputting picture of the corporation. Compared to ExxonMobil and even BP, Shell did not present a self-confident image. Ever since the failed merger in the late 1990s and the deflated merger after the reserves scandal, the corporation’s culture of compromise rather than decisiveness had suggested a bloated, uncertain management. Even Shell’s self-confidence about the flagship “green” agenda had withered.
In 2002, Phil Watts had congratulated Shell on achieving a target set in 1990 to reduce its greenhouse emissions by 10 percent. Without that initiative, said Watts, emissions would have increased by 30 percent that year. To match BP’s financial commitment to an environmental program at Stanford University, Watts contributed $3.5 million toward a Shell Center for Sustainability at Rice University in Houston. That had been followed by announcements of investments to develop solar power, grow marine algae in Hawaii to produce vegetable oil as a biofuel, inject carbon dioxide emitted from a Norwegian power plant into offshore oil wells, and build wind farms, especially a giant project deploying 341 turbines in the Thames Estuary to supply 1,000 megawatts of electricity per hour, or 25 percent of London’s needs. Shell’s investments in renewable energy were costing it about $1 billion over five years. All those projects, condemned by Rex Tillerson as “moonshine,” were offered as proof of Shell’s commitment to the environment. Tillerson’s skepticism was based on Shell’s development in 2000, with Chevron as a minority partner, of the extraction of oil from tar sands in northern Alberta, Canada, at an initial cost of $3.5 billion. Tar sands were the world’s most expensive and environmentally damaging source of oil, and depending on oil prices, Shell expected to dispatch at least 100,000 barrels a day from Alberta to the United States. The company had simultaneously promoted a $750 million program for developing solar energy. Shell needed another dose of rebranding its green credentials in the aftermath of the Sakhalin battle, but the expensive competition among the oil majors over “greenness,” van der Veer knew, had become skewed. Europe’s target to use 20 percent of renewables for its energy by 2020 was undermined by the refusal of China and the US to price carbon on similar measurements as the European Union. In any event, van der Veer realized, producing renewable energy actually damaged the environment. The use of biofuels involved deforestation, damage to the countryside and increased food prices. The problem was how to stage an elegant exit from the competition.
Since 2000, Chevron, like other oil and gas companies, had established subsidiaries to develop renewable energy sources. The company had spent $1.5 billion on hydrogen, biofuels, advanced batteries, and wind and solar technologies. In a huge advertising campaign to project Chevron as a supporter of human rights, a fighter against illnesses and a friend of the environment, the corporation promised to provide oil “more intelligently, more efficiently, more respectfully,” and never to stop looking for alternatives. Millions of dollars were spent on a film commercial recorded in 22 locations in 12 countries and showing images including an amputee athlete, mountaineers and a child taking its first steps, with the slogan, “Imagine that, an oil company as part of the solution.” Not to be outdone, BP, the inventor of “green oil,” had invested about $1.5 billion every year on solar cells, wind power, hydrogen and biomass ventures. “This is not an obscure policy issue, it’s about the future of the world,” said Vivienne Cox, BP’s head of alternative energy, in 2005, committing BP to spending $8 billion over 10 years without any prospect of profits. Even ExxonMobil, despite Rex Tillerson’s antagonism, cofounded the Global Climate and Energy Project at Stanford University and spent $712 million in 2005 on “green” issues. Spending only a small fraction of its profits on “greenness” reflected Tillerson’s conviction that renewables would contribute no more than 2 percent of total energy supplies by 2030, and even then only with state subsidies. Unlike ExxonMobil, which Tillerson believed existed solely to produce oil and natural gas, Shell was navigating through irreconcilable extremes. There was an incongruity, Shell executives realized, about oil companies campaigning to wean their customers away from oil. Commercial relationships were being undermined, and in a lopsided world, promoting heavily subsidized, uncommercial substitutes for oil could prompt a decline in consumption, and thus undermine investment to find more oil. The prospect of financial losses persuaded van der Veer to contemplate a partial retreat from environmentalism to focus on hydrocarbons.
For some months Shell’s analysts had anticipated that the world’s demand for oil would grow from about 85 to 100 million barrels a day. Shell’s dilemma was its inability to profit from increasing demand by supplying conventional fuels. Production from its own reserves had not increased, and the replacement of those reserves had fallen from 158 percent in 2006 to 17 percent in 2007. Van der Veer speculated about “smart technology” providing new reserves from the Canadian tar sands, but the contradiction of a “green” oil corporation relying on that source was obvious. During the summer of 2007, van der Veer questioned whether renewables could provide even 20 percent of global energy by 2050. The public, he believed, had been misled that wind and waves could provide an alternative to fossil fuels. Posturing for publicity purposes was harmless, but relying on the profitability of renewables was foolish. His thoughts coincided with Al Gore’s global-warming documentary An Inconvenient Truth winning an Oscar, the publication in Britain of the Stern Report on the inevitability of climate change, and President Bush abandoning his former skepticism to declare that the US should be “actively involved if not taking the lead” in limiting emissions. Oil traders across the world were thrilled by the convergence of these arguments. The more Gore speculated about a world without oil or becoming “less dependent on unstable and threatening oil-producing nations,” the more the fear of oil supplies peaking grew. Although Gore liked to quote Sheikh Yamani that “The Stone Age came to an end not for a lack of stones, and the Oil Age will end, but not for a lack of oil,” the difficulties of an oil company simultaneously anticipating an oil shortage and global warming increased Shell’s confusion. Van der Veer decided to limit Shell’s commitment to protecting the environment. First, in December 2007, the costly plan to inject carbon dioxide released from power stations into North Sea oil wells was abandoned. One week later, to the distress of its subcontractors, Shell sold its solar business. Next van der Veer abandoned Shell’s 33 percent stake in the London Array, the giant North Sea wind farm, the cost of which had increased from £1 billion in 2003 to £2.5 billion. The British government’s subsidies were insufficient, and the cost would barely justify the electricity generated. Only America, van der Veer realized, provided sufficient subsidies. By March 2009 he would abandon all new investment in wind and solar renewables. Shell had lost too much from what he called “technology baths.” Oil companies would not lead the renewables market. Alternative energy was not a substantial business for oilmen, casting doubt for some on the future of the industry.
The sharp differences between the oil majors were rapidly disappearing. BP, van der Veer was pleased to see, was similarly modifying Browne’s commitment to the environment. Its plan to inject carbon dioxide into oil wells near Aberdeen had been abandoned, the land banks for wind farms in the US, China and India were being reassessed, and BP was buying a 50 percent stake of Husky Energy to develop a $5.5 billion project in Canadian tar sands over eight years. BP’s renewables headquarters in
County Hall was closed, and the green commitment was effectively abandoned. Like Shell, BP was undeterred by Greenpeace’s accusations that it was “dishonest and irresponsible,” “a climate villain” committing “climate crime.” Accusations of “sheer greed” were ignored. In March 2008, as oil prices were heading toward $140 a barrel and Shell’s net reserves remained stubbornly at 11.9 billion barrels, van der Veer pledged to expand Shell’s daily production of 155,000 barrels of oil from tar sands by 500 percent. In the end, as Lee Raymond had argued, oil companies existed for a single purpose, and their fight for survival was hard enough without pandering to unprofitable sidelines.
Chapter Twenty-two
The Oligarch’s Squeeze
ACCUSTOMED TO ARGUMENTS, Mikhail Fridman and the oligarchs assumed that relations with BP’s executives would improve after their bruising negotiations during 2003 to finalize the shareholders’ agreement. Instead, the wounds barely healed.
During the first months, the Russian partners appreciated the imposition of corporate processes to merge a multinational organization with a disparate Russian company. By spring 2004, the reorganization of TNK’s oilfields, refineries and sales organization by BP’s experts was increasing turnover and profits. Deciding it was time to cash in, Fridman flew to London to meet John Browne. The anniversary of their agreement would trigger the first of three annual payments in BP shares. The first payment was worth about $1 billion. Fridman explained to Browne that the oligarchs wanted all three payments immediately. Markets were booming, and they wanted cash to invest. At no cost to BP, Fridman had arranged that the Deutsche Bank would advance $4.2 billion against all the shares. To avoid a personal confrontation with a noisy Russian with more money than sense, Browne made what appeared to be a positive response: “Okay, I understand your point, Michael,” he said. On his return to Moscow to finalize the deal with the bank, Fridman was told by Robert Dudley: “John said you both agreed not to change the agreement.” Fridman was outraged. In his opinion, Browne’s behavior displayed the arrogance of a large corporation. Despite the 50/50 agreement, their partnership was not equal. Soon afterward, Dudley repeatedly excused himself from his weekly lunches with Fridman.
John Browne only partially understood the oligarchs. His talent with politicians and businessmen was to listen and empathize, sensing the mood and adjusting his approach accordingly to cut a deal, but his flair was eclipsed by Fridman. Browne regarded his Russian partners as tough opportunists with shady pasts and unpredictable futures. He assumed that, like all oligarchs, they measured success by humiliating those who failed and by indulging themselves in the kind of baubles he also personally valued — yachts, private planes and unlimited luxury. But Browne did not grasp Fridman’s unemotional attitude toward the oil industry and its engineers. Twinkling, “I’ve never lost a battle yet,” Fridman regarded oil as just another merchandise — like the computers or furs he traded in the dying days of the Soviet Union — by which to earn money. His pleasure was the intellectual challenge of constructing a business empire like John D. Rockefeller’s or J.P. Morgan’s. Anyone obstructing his accumulation of wealth, regardless of his skills, was disposable.
Robert Dudley, Fridman decided by late 2005, fell into that category. BP’s blameless ambassador did not seem to embrace his new environment. His deference to notions of scrupulous governance offended the oligarchs’ mind-set; it extended even to rewriting the minutes of board meetings to slant decisions in BP’s favor, which seemed no more than a childish game to men disdainful of bureaucracy. In return, Dudley complained that Fridman never expressed his personal thanks for BP’s impressive progress in Siberia. But the unbridgeable chasm was their attitude toward money. While the American was delighted to earn about $2 million a year, the oligarchs focused on increasing their personal fortunes by billions of dollars.
Browne told Dudley to pay little heed to his Russian partners. The shareholders’ agreement specifically entrusted BP and Dudley with complete management authority over TNK-BP. Browne and Dudley believed that rather than controlling the company, the Russians had, in the image of one BP executive, “discovered a 600-pound gorilla sitting in their front room. They had not bargained for what they’re getting.” In an uncertain truce, Viktor Vekselberg had reported a bruising encounter with Browne about money. “Don’t forget BP is very big,” Browne had shouted. “Don’t try and push me around!” He appeared to have forgotten just how the oligarchs had accumulated their wealth. “Shouting,” Vekselberg replied, “only works if you have real power.” Browne quoted the shareholders’ agreement to verify BP’s impregnable status. His own obstinacy was also rooted in money. The combination with TNK had transformed BP into the world’s second-largest private oil producer, against the trend of static or declining production suffered by Shell, ExxonMobil and Chevron. For 13 consecutive years, BP had replaced 100 percent of its production. With new agreements in Azerbaijan, Egypt, Angola, Libya and Oman, BP’s reserves guaranteed that it would maintain its size for over 40 years. That achievement, Browne hoped, would save his reputation despite his failure to deliver 5.5 percent annual growth. He ignored the weakness of BP’s position in owning an equal 50 percent share with partners with different interests. Complicating the relationship was Kovytka in Irkutsk, which was estimated to contain two trillion cubic meters of natural gas, America’s consumption for three years. Vekselberg was insistent that the concession should be exploited, and Browne agreed. The only hurdle was building a 3,000-mile pipeline to China, the nearest market, which would cost at least $14 billion.
Tony Hayward, BP’s head of exploration and production, supervised the negotiations with the Chinese, and awaited permission from the Russian government to build the pipeline. To his surprise, Gazprom ridiculed the deal. Hayward, complained Alexei Miller, “had opened up all his cards at the outset and sold the gas to the Chinese cheaper than necessary.” Without a satisfactory contract, Gazprom would not allow a pipeline to be built. Hayward assumed he could persuade Miller to change his mind, but he misunderstood the situation. Miller was not a mere state employee pursuing Russia’s national interests, but a state oligarch assumed to have amassed a personal fortune. Behind his back, executives employed by Gazprom were using inside information to tender for capital projects on behalf of private businesses that included profitable padding in the contracts. Within Gazprom’s family, exposure for corruption was deemed to be “unacceptable.” Having successfully sabotaged German Gref’s plan to break up Gazprom, Miller was intent on securing Kovytka as another jewel in Gazprom’s expanding empire. Kovytka’s situation would be familiar to admirers of the novel Catch-22. The Russian government complained that since TNK-BP was failing to produce sufficient gas as prescribed by its license, the concession would be revoked. Entering into an Alice in Wonderland world of mirrors, TNK-BP appealed that decision in a Siberian court, but lost after the judge decided he lacked jurisdiction. A bewildered Hayward accepted this as “just one of those bumps in the road” and agreed to sell Kovytka to Gazprom for between $700 million and $900 million, only to discover that Vekselberg intended to invest on TNK-BP’s account over $200 million in a pilot project in Irkutsk, while simultaneously insisting that Gazprom would have to pay a much higher price for TNK-BP’s stake. “Vekselberg’s as cunning as a fox,” Miller complained. The stalemate contributed toward the worsening relations between BP and the oligarchs.
Assuming that by the end of the four-year agreement there would be an argument, Browne wanted to grab the profits as oil prices rose. Dudley’s management was making the plan work. TNK-BP was a petroleum engineer’s dream. Within two years, its production had risen by 30 percent and profits had increased twentyfold. In 2004–05, BP and its Russian partners earned $9 billion in dividends. Unlike Shell, ExxonMobil and the other oil companies in Russia, BP was making billions of dollars without the risk of being crucified by the Kremlin. The only hitch was Fridman and his partners. To Browne, it seemed they only wanted more money, and were looking for excuses
to express their dissatisfaction. Their first complaint was about TNK-BP’s staffing. Over 100 BP employees and their families had been sent to Moscow at TNK’s expense for short tours. The temporary staff did not impress the oligarchs. “They’re not committed to TNK-BP,” German Khan complained, despite the remarkable results achieved in the oilfields. The oligarch who shadowed Dudley as the unappointed chief executive griped, “We’re not expanding. We’re losing entrepreneurship and opportunities.” Browne and Hayward preferred not to listen. Despite the tension, Browne’s meeting with Putin on April 22, 2005, was reassuring. On the eve of visiting Germany to boost Gazprom’s 40 percent share of the country’s gas supplies, the president supported BP’s presence in Russia. If BP was secure, wondered Browne, what was the oligarchs’ fate? Ever since Yukos and Sibneft had been seized and Putin’s intention to reassert control over Russia’s natural resources had become explicit, Browne had monitored speculation about the fate of the oligarchs’ shares in TNK-BP. Briefed by his advisers, he assumed a cozy understanding between Gazprom and the Kremlin that the partners would be presented with a fait accompli to sell their stake. Fridman, he guessed, was in the midst of secret negotiations.
