Blowout

by Rachel Maddow

  Russian drillers had pushed daily production past the Soviet-era benchmark of ten million barrels of oil for the first time ever. Russia was exporting more oil and gas than any country except Saudi Arabia. And much of the cash take flowed right back into the Kremlin. The two most important energy companies in Russia were once again state owned: Sechin’s crocodile act had grown Rosneft from a fourth-rate company accounting for about 4 percent of Russia’s crude production to a behemoth producing close to half of it. And that would continue to be his modus operandi. Any Russian oil venture that showed any technological promise or any promising assets, Igor ate it. And so, ever-larger Rosneft, along with Gazprom—the state-owned entity that enjoyed a near monopoly in natural gas—became ATMs for the Putin government.

  Now, do not think this cash windfall wafted down from the heavens and alighted upon the Russian population. While the median household in the oil exporter Norway enjoyed an income of more than $50,000, and Saudi Arabia about $25,000, the median household income in Russia was less than $12,000. Oil exporters such as Algeria, Venezuela, Qatar, Kuwait, and of course Saudi Arabia held back enough crude that their citizens at least got fuel at rock-bottom prices. Russians received no such break. And even if a Russian could afford an entire tank of full-price petrol, the state of the roads made driving dicey. A trip on any of the major thoroughfares connecting Moscow’s international airport to downtown was an obstacle course of potholes, some of them, according to the writer Peter Podkopaev, “large enough to dislodge wheels from vehicles.” Neither did those glorious energy export revenues fill the pockets of the minority shareholders of Rosneft and Gazprom.

  But this was the game plan for oil and gas all along. Putin and Sechin had never seen the country’s most valuable natural resources as a tool for swelling Russian household income or the bank accounts of their investors. The possibilities inherent in democracy and capitalism had not exactly captured the imaginations of these two modern Russian leaders. “[Sechin’s] doctoral dissertation in 1998 on oil transport networks drips with contempt for market forces,” The Economist explained in a profile of Russia’s oil tsar. “Whereas market economies evaluate projects based on expected returns on investment, Mr. Sechin praised the Soviet nuclear-weapons and space programmes, which he said operated on a different principle: ‘at any price necessary.’ ”

  Putin and Sechin believed their energy industry was about restoring Russian honor, about winning prestige in the eyes of the world, à la the cosmonautical Soviet space program or the Soviet nuclear arsenal. Most of all they were convinced they could use all that Russian oil and gas, à la nuclear warheads and ICBMs, for power and leverage in advancing Putin’s foreign policy aims. Russian oil and gas would be treated as the property of the president, and they could and would be weaponized to serve the president’s purposes. By the time Putin was regaining the presidency in 2012, this stealth weapons program was well under way; it was mature, even. Trace it back to his first term, back in 2005, when President Putin glommed on to a new foreign policy strategy proposed by his chief economic aide titled “Energy Superpower.”

  Putin had seen the value in this plan right away and acted on it. At a state visit in Berlin in September 2005, he persuaded the German chancellor, Gerhard Schröder, to sign on to a partnership to build a new 750-mile pipeline under the Baltic Sea to carry Gazprom gas into Germany. Gazprom would then take large ownership stakes in the new Nord Stream pipeline and new storage facilities across Europe. The European Commission nodded in approval of Nord Stream, especially after proposals to extend the pipeline into the Netherlands, Britain, Sweden, and Finland. News of the deal came as a relief to Western Europe, where natural gas reserves were dwindling so fast there was fear they’d be entirely depleted in five years. Europeans desperately wanted and needed that plentiful Russian gas to heat their homes and run their factories.

  On New Year’s Day 2006, Putin offered Europe a little demonstration of just how vital was his proposed new pipeline and just how desperate things could get if it went unbuilt. That day, as the frigid season was setting in across Europe, Gazprom made sudden drastic cuts in its supply of gas into Ukraine, which at that time held the only extant pipelines from Russia into the rest of Europe. Ukraine predictably siphoned off the gas it needed from the supply transiting through its landscape into other European countries. Gas deliveries into Austria dropped by a third the next day; gas deliveries to Hungary fell by 40 percent on the day following. Slovakia, also down 40 percent, declared a national emergency. Industrial output in Bulgaria and Romania ground to a stop. While these and other European nations shivered in panic, the Russians pointed the finger at Ukraine for stealing the natural gas bound for them, and insisted Gazprom customers could not rely on Ukraine to play fair with EU-bound gas. By the time the Russians made peace with Ukraine and turned the spigot back on, the new Nord Stream (which bypassed the allegedly pilfering Ukrainians entirely) was the talk of Europe.

  When Russia hosted the G8 summit in St. Petersburg six months later, Putin’s government chose as its theme international energy security. Russian representatives used the summit to offer the West a deal. It ran like this: We Russians are tired of your constant carping about our human rights and free speech violations. Let’s just put all that to the side and have a proper business relationship. We’ll be your energy supplier. In fact, we will guarantee enough energy for every house and factory in Europe. You’ll never have to worry about that again. All you have to do is pay us for the fuel and stop with the moralizing. Sounded like a pretty fair trade at the time. Much of Europe signed on the dotted line, waving away concerns that it essentially made the Continent beholden to Russia for its productivity as a region on earth.

  By the time the Nord Stream project broke ground in 2010, Team Putin had proposed a second and longer pipeline, South Stream, which would carry gas from Russia across the Black Sea and then as far as Austria and Italy. As he had done with Chancellor Schröder of Germany, who became the chairman of the shareholders committee of Nord Stream after he lost his government job to Angela Merkel, Putin cut Prime Minister Silvio Berlusconi and his favorite Italian energy company into the South Stream deal. “Schroeder and Berlusconi were firmly ensconced as Putin’s new friends after the fallout with [U.S. president George W.] Bush and [British prime minister Tony] Blair,” Mikhail Zygar wrote in All the Kremlin’s Men. “Putin found it so much easier to deal with these two European cynics, and the feeling was mutual.” Berlusconi, in particular, was a role model for Putin according to Zygar: The Italian prime minister “had used his business empire to win elections and then used politics to further enrich his business. That made Berlusconi a natural ally of Putin’s. Neither man ever criticized or found fault with the other.”

  Nord Stream had been on line for almost six months in March 2012, when Putin won a third presidential term. Russia was supplying the European Union 40 percent of its natural gas imports while cutting Ukraine out of the deal. Gazprom supplied every single cubic meter of imported natural gas up the line to EU members Bulgaria, Slovenia, Slovakia, Latvia, Estonia, and Finland. It supplied about a third of Germany’s natural gas imports (as well as a third of its oil imports). Add to that, Russia had completed a new pipeline for pumping oil into China, the country with the fastest-growing economy and the fastest-growing energy needs on the planet. Meanwhile, construction on the South Stream project was about to commence, adding Austria and Italy to Gazprom’s soon-to-be-satisfied-but-wary customers.

  To discerning eyes in 2012, a map of the two pipelines transiting much of the continent appeared, as Zygar puts it, “like a pair of giant pincers with which Russia would squeeze Europe.” With Gazprom as his instrument for natural gas, and Rosneft the same for oil, this was just the sort of global hydrocarbon leverage Putin had long desired. And it came just at the moment Rosneft was in the process of overtaking ExxonMobil as the world’s biggest publicly traded oil company. Sechin’s baby was producing
more crude oil than all of China’s energy companies, market analysts pointed out, and double that of Nigeria’s.

  “Rosneft has grown dramatically in the last ten years. Not by chance, but because Rosneft is Vladimir Putin’s vehicle to reassert state ownership over a fair chunk of Russia’s oil fields,” Forbes reported just after the company choked down BP’s choice Russia assets. BP ended up with a 20 percent stake in Rosneft after the strong-arm takeover of TNK-BP, which made the firm deeply and literally interested in the success of Russia’s signature industry. Even BP’s (maybe poisoned) Bob Dudley had been welcomed back into the fold, now that he would be pulling for Rosneft as a minority partner. “We are glad that BP has made a decision to remain one of the biggest investors in the Russian economy,” Putin said, “thus admitting vast prospects of Russia’s oil and gas industry and Rosneft’s big potential.”

  So Putin’s whole Energy Superpower strategy was working.

  Except that it wasn’t. And not just because BP was a pretty homely dance partner in the wake of the Deepwater Horizon debacle.

  There were more substantial problems in 2012, and almost all of them of Putin’s making. Gazprom, for instance, wasn’t really able to keep up with all the new European demand, because its production capabilities, uh, sucked. It’s not as if Gazprom grew big because it deserved it, or because it was good at what it did; it wasn’t, at a fundamental level. The company hadn’t invested in new technologies, because as a state-sanctioned monopoly propped up by the Russian government and therefore free from competition, it really hadn’t needed to. “Gazprom is what one would expect of a state-owned monopoly sitting atop huge wealth—inefficient, politically driven, and corrupt,” was the U.S. State Department’s assessment. Dig deep enough in the company accounting ledgers and you’d find that Gazprom lost about $40 billion a year to corruption and waste. That’s a loss nearly equal to its annual profits.

  Industry watchers gave Gazprom no points for having diversified its portfolio by adding a large Russian media company. A media company? Why was the state gas company buying TV stations? Well, why not? Gazprom was better understood not as an energy company but as a big battering ram President Putin used to get stuff he wanted. So yes, inefficient, money-bleeding, crappy Gazprom owned a television station and a bunch of other media properties, but only because Putin had arranged it in order to silence one of the few remaining critical voices in the Russian press. Vladimir used his security forces to arrest and to intimidate the critic who owned the media company, and then he used Gazprom as the piggy bank to buy the company at a steep jailhouse discount. Independent television journalism in Russia was thus dealt another blow, and Putin would instead have another reliable mouthpiece for the Kremlin’s party line.

  For pure waste, though, little in the Gazprom history measured up to the Nord Stream gambit. “We’re spending money like hell,” said Managing Director Matthias Warnig, an old pal of Putin’s from their spy days. Nord Stream was a pipeline project that was built from both sides at once—from Russia and from Germany. Same pipeline, same materials, same building standards. But the Russian side of the construction project (led by the Rotenberg brothers of St. Petersburg, and remember them) cost three times as much, per mile of pipeline, as the German side did. That money was not going into the pension and health fund of the Russian pipe fitters’ union; it went into the pockets of Putin and his pals. The founder of Grant’s Interest Rate Observer, James Grant, sized up Gazprom and rated it, simply, “the worst managed company on the planet.” Congratulations, citizens of Russia, that’s the hash your government managed to make of the globe’s biggest supplies of natural gas.

  On the oil side, the Energy Superpower strategy posed even bigger problems. Putin had been gangstering up the Russian oil industry for years. Eschewing competition that might encourage innovation and meritocratic success, Putin instead just smashed and grabbed any homegrown enterprises that proved resourceful or entrepreneurial or attractive to legitimate investors—goodbye, Yukos. He harassed foreign interlopers, too. He invented a dubious environmental violation bill of attainder, to force Shell Oil to hand over controlling interest to Gazprom in a $20 billion project in the far east of Russia. The consequences for Russia could be overlooked when oil prices remained high, but the rotten core problem was pretty clear to anybody who was paying close attention. Like Thane Gustafson, for instance, who had just finished his book about the Russian energy industry, Wheel of Fortune. Putin and the Russians “have essentially been coasting on the assets inherited from the Soviet Union,” Gustafson explained in talks promoting his book back in 2012. “Virtually all of Russian oil comes from fields that were already known in Soviet times. There have been very few new discoveries that are producing today. The drama of this situation is that the inheritance is now starting to run down….Russian oil experts are saying to Putin, ‘Mr. President, if you do not address this problem you’re going to be having a decline in production after 2015.’ ”

  The possibility of a true reckoning was all the more ominous because Russia had no other dynamic commercial enterprise to fall back on. “Russia took home only 0.2 percent of the 1.3 million overseas patents awarded since 2000 by the U.S. Patent and Trademark Office, lagging behind the state of Alabama in total annual awards,” Karen Dawisha wrote in Putin’s Kleptocracy. Oil and gas was the whole ball game in Russia; energy exports accounted for more than half of its government revenue in 2012. “We’re talking about addiction,” Gustafson said at the time. There was still plenty of oil and gas underfoot in Russia. But it was in the tight shale formations, or offshore in the Arctic seas, and it was going to be both difficult and expensive to get. “Bottom line is Russia is not running out of oil, but it’s running out of cheap oil,” explained Gustafson. “That looks pretty bleak….Putin’s in trouble….It’s curtains for Pauline. But wait. Here comes the hero. Here comes the handsome hero.”

  The personification of that handsome hero, a former Boy Scout and University of Texas Longhorn Marching Band drum section leader turned ExxonMobil CEO, came to call at a private residence on the outskirts of Moscow on April 16, 2012. When Igor Sechin ushered Rex Tillerson into the palatial mansion built by the Soviet leader Georgy Malenkov, the current occupant, Vladimir Putin, greeted him as a most welcome visitor—perhaps even a savior. He was there to shake on the new details of the expanded partnership he and Igor Sechin had been working out since the promising Sochi visit seven months earlier.

  Aside from being the possessor of impressive (and very valuable) technological prowess—or so it was said—Tillerson had shown himself a savvy strategist, both in business and in geopolitics. Why was Exxon (under Tillerson) welcomed with a bear hug when Shell and BP and even Exxon (before Tillerson) had all been roared at and given such a hard time? Well, for one, Tillerson was not making boneheaded Lee Raymond–esque demands about getting majority control of Rosneft; Rex made clear—in word and in deed—that he was fine with Putin staying in charge; he just wanted to be a good minority partner. He also seemed dialed in to the foreign policy game afoot in Russia. Since Tillerson’s visit to Sochi the previous summer, ExxonMobil had reportedly throttled down its efforts to tap natural gas in Poland. Poland becoming its own natural gas supplier—let alone an exporter to rival Russia—was a positively disgusting idea to Putin. ExxonMobil shutting off that possibility—and indeed declaring it “not commercially viable”—was a fine hostess gift for Tillerson’s Russian excursion. “ExxonMobil’s failed shale-gas wells in Poland,” a reporter for Bloomberg had written, “may hobble the nation’s effort to become one of the world’s major energy resources and dismantle Russia’s dominance of Eastern European natural-gas markets.”

  Credentialed news photographers were there to record the moment Tillerson joined hands with President-elect Putin in one of the drawing rooms of the Malenkov mansion in mid-April 2012. Inauguration Day in Moscow was three weeks away. Putin wanted the world to take heed of the contours and th
e ambitions of the ExxonMobil-Rosneft megadeal, especially the fact that ExxonMobil was giving as well as it was getting. Rosneft received 30 percent stakes in a handful of ExxonMobil’s projects in North America, from Alberta, Canada, to the Gulf of Mexico. In exchange, ExxonMobil was getting a crack at unlocking all that hard-to-get oil and gas in the tight formations in Siberia, in the Black Sea, and, most important and most difficult, in the Arctic waters of the Kara Sea. The up-front costs would be enormous. The project could be on line for more than twenty years. Total spending might well run into the hundreds of billions. But the risk seemed manageable to Tillerson. Everyone involved—everyone—understood that Putin would be in charge, indefinitely. Obiang-like. Unchallenged. And Putin would deliver on that promise to remake the federal tax structure of the Russian Federation to accommodate the desires of the oil majors. The mineral extraction tax on the Black Sea properties was to be capped at 10 percent and on the Kara Sea at just 5 percent. Most crucially, Putin offered a guarantee that this tax structure would remain in force for a minimum of fifteen years after the project began to produce oil and gas “on an industrial scale.”

  Putin stood over Tillerson’s right shoulder as the Texan affixed his name to the agreement. When the ink was dry, the two men raised a glass of champagne and toasted the future. This was “an historic day for ExxonMobil and Rosneft,” Tillerson told Putin.