Oil

by Tom Bower

  Raymond remained oblivious to the changing mood. Unlike John Browne, he was unversed in Russian culture and sensitivities. While Browne respected Russian history, Raymond saw a greenfield site. Exxon lacked experts who could provide genuine insight about the Kremlin’s intentions, especially Putin’s ambition to use the world’s dependence on Russia’s energy resources as a tool to reassert the nation’s status as a superpower. Whether Putin regarded Khodorkovsky as a serious obstacle to that ambition in summer 2003 is uncertain. Raymond did not suffer any misgivings. Impervious to subtleties, he approached the final deal, as always, by squeezing sentiment out of the negotiations. In July 2003 he visited Putin in the Kremlin. His pitch to the president was familiar: “We can help you elevate your country by extracting your oil resources.” During that visit Mikhail Kasyanov, the prime minister, assured Raymond that Exxon would be allowed to buy a stake in Yukos.

  Raymond, accustomed to negotiating with kings and presidents as an equal, shared their lifestyle. Arriving in Moscow with six bodyguards, he secured motorbike outriders from Moscow’s police department for his limousine’s dash into the city, and the whole top floor of the Kempinsky, Moscow’s most expensive hotel, was assigned to him. Putin would be intrigued to hear about two eccentricities during that visit. Since Raymond intended to leave Moscow on a Sunday, the city’s Baptist church was opened on Saturday to allow him and his wife Charlene the chance to pray.

  During a previous visit to Moscow, Charlene had spotted some sculptured wooden figures in a store that she wanted to inspect again. Exxon’s security officers had declared that revisiting the store was excessively dangerous, so arrangements were made just prior to the Raymonds’ arrival for a room on the Kempinsky’s top floor to be converted into a display and filled with 60 wooden sculptures. After nearly two hours in the room, Charlene announced, “Yes, I’ll take them.”

  Exactly 30 minutes late, Putin entered the Waldorf suite, accompanied by Igor Shuvalov, Sergei Priodka, a foreign affairs adviser, and the Russian ambassador in Washington. Putin would have been conscious that he was nearly the youngest in the room. He and Raymond shared a three-seater divan, while Rex Tillerson and Anna Kunanyansay, Exxon’s Russian-speaking adviser, took chairs. Kunanyansay, a Jewish émigréé from Kiev, had made the arrangements with the Russian ambassador for the meeting. Trusted by Lee and Charlene Raymond, she was suspicious of Putin.

  After a few minutes’ pleasantries, Raymond cut to the chase. His tone was deferential, but not obsequious. “As you know, Mr. President, we have been in negotiations for some time with Yukos.”

  “Yes, I know,” said Putin. “For 25 percent of the shares plus one share. A minority stake.”

  “Well, Mr. President,” replied Raymond, “I think we must be clear. I want you to understand that we will only buy 25 percent if we can see a way to buy total control, and that’s why I’m here to see you today. To check that that’s okay with you. Our ultimate goal is to buy a majority stake in Yukos.”

  Putin did not flinch visibly, but the translators heard exasperation in his reply, “This is the first time I’ve heard that. Khodorkovsky didn’t tell me.” Raymond pursued his theme, explaining that the deal would improve Russia’s relations with America. “Well, we’ll see,” said Putin evasively. “These details are for my ministers. You must deal with them.” Raymond was not discouraged. Putin’s impatience was lost in the translation, and he had not actually rejected the idea of a deal. Raymond failed to spot the significance of Putin repeating three times: “This is the first time I heard about this. Khodorkovsky never told me about this.”

  On September 26, after meeting leaders of the American business community including Raymond at the New York Stock Exchange, Putin flew to see President Bush at Camp David. While he was there he mentioned Exxon’s bid for Yukos, and found to his surprise that Bush was unaware of the deal. Putin did not know that ever since Standard Oil was dismantled by the US government in 1911, American oilmen had been indoctrinated not to confide unnecessarily in government officials, including the president. Inevitably, the rule was broken whenever Exxon needed Washington’s help. After all, despite the corporation’s culture of distrusting governments, America was at the center of its universe.

  Five days later, Raymond arrived in Moscow to participate in a meeting of the World Economic Forum starting on October 2. He was to share a platform with Khodorkovsky. Putin and Roman Abramovich, the oligarch and co-owner of Sibneft, would be in the audience. Before Raymond left Dallas, Khodorkovsky’s demand for $50 billion for his shares had been considered. Raymond, the master of the hard bargain, declared that he would offer $45 billion. The Exxon team flying to Moscow was confident that the deal would be finalized and announced during the conference. Publicists were drafting the announcement.

  On the top floor of the Kempinsky, Raymond waited for Khodorkovsky to haggle over the $5 billion. Khodorkovsky had heard a garbled report of the meeting between Raymond and Putin in New York, which was described as “the final nail in the coffin for Khodorkovsky’s relationship with the Kremlin,” and “the beginning of the end.” Khodorkovsky showed no concern, even after Yuri Golubev, the chain-smoking, heavy-drinking cofounder of Yukos, heard from a Kremlin official that “the meeting in New York was bad.” Raymond was regarded as having been excessively blatant, and Golubev heard that Putin felt misled by Khodorkovsky, and annoyed at being placed in an “uncomfortable position” by Raymond’s “inappropriate behavior.” Self-interestedly, Golubev did not mention to Khodorkovsky Putin’s anger at the oligarch’s failure to mention Raymond’s true ambition.

  In reality, the situation was worse than Golubev imagined. On his return to Moscow Putin had summoned a meeting. Poring over an “oil map” stretched across a conference table, his experts identified the existing foreign ownership of Russia’s oilfields. BP’s recent deal with TNK and Exxon’s prospective purchase of Yukos and Sibneft would place half of the Siberian oilfields under Western control. Oil and gas made up 40 percent of Russia’s exports. Putin became agitated, and rejected the arguments of the modernizers in his government that Western oil majors were more efficient than Russian producers, and their claim that Russia would retain all the profits through taxation. Suspicious that Exxon was conspiring to threaten Russia’s national interest, Putin reflected the familiar mixture of Russian attitudes toward the West — simultaneously craving respect while suffering an inferiority complex. The notion of Russia’s oil being under Western control sparked his insecurity, envy and resentment. His grievances were echoed by the “Gray Cardinals,” his xenophobic ex-KGB cronies. Like their predecessors employed by Yeltsin, they lusted for personal wealth. Allowing ExxonMobil to move further into Russia threatened their ambitions, which were already limited by BP’s deal. By September, Putin was becoming convinced that Khodorkovsky had planned for two years to fund his takeover of Russia by selling Yukos. The president feared that Khodorkovsky could even buy the prosecutor general, or at least organize his dismissal. The resurgence of Putin’s national conscience had been anticipated by a handful of realists in Yukos’s hierarchy: “It’s all crazy to think Putin will allow a crown jewel to be sold to foreigners to benefit a group of Jewish bandits.” But Khodorkovsky, they agreed, was “running high.” The turbulence influenced Khodorkovsky’s negotiations with Raymond.

  Khodorkovsky arrived at the Kempinsky with his trusted translator Peter Laing. Over two hours he argued with Raymond about the $5 billion. Reams of paper were covered with figures as the translators interpreted the sums. “Ego” one of the translators would say, was preventing the two men splitting the difference. “They’re chiseling,” he concluded. Unwilling to concede, Raymond stormed out of the room and slammed the door of his bedroom without saying good night. In hindsight, he would conclude that Khodorkovsky was double-dealing, dangling an alternative deal to Chevron. “The meeting did not go well,” Khodorkovsky told his staff after returning from the hotel. “We won’t be able to do the deal with Exxon the way they wan
t, but let’s keep them involved to keep the pressure on Chevron.” By then, Khodorkovsky’s fate had been sealed.

  In that familiar territory, few were surprised by the news on Saturday, October 25. Late that night Mikhail Khodorkovsky’s private plane was “delayed” on the tarmac in Novosibirsk, Siberia. Suddenly, a group of masked security officers burst into the plane, shouting, “Weapons on the floor or we’ll shoot!” Khodorkovsky was arrested on charges of fraud and tax evasion. His arrest prompted his close associates to flee to Israel and the USA. “This is the signal that politics has trumped even the appearance of rule of law,” said Robert Amsterdam, Khodorkovsky’s American lawyer. But Khodorkovsky’s arrest was popular in Russia, except among the other oligarchs, many of whom fled overseas in their private jets to watch events unfold in safety. Mikhail Fridman arrived in Mexico that night on a private jet, for a planned holiday with friends.

  Rex Tillerson shed no tears. He shared Khodorkovsky’s contempt for the swamp of corruption among ministers with no interest in the country; but he also had no sympathy for the oligarchs. Raymond was upset that his conversation with Putin in New York may have caused Khodorkovsky’s arrest, not least because the Kremlin began pursuing Russians employed by Yukos, causing several to flee to the West. But he expressed no concern that the meeting had contributed to triggering the oil industry’s renationalization, changing the atmosphere for Western business in Russia. “If they don’t understand, then they’ll have to learn,” Raymond told an aide. “We won’t be a junior partner in Russia. We’ll only invest when the terms are right.”

  In December, Tillerson acknowledged the deal was dead. Yukos was under investigation for tax evasion and Khodorkovsky was charged with serious offenses. “Russia is closed,” announced an Exxon executive. “It’s impossible to put the genie back in the bottle.” Western shareholders were about to lose billions of dollars. Putin had done more than terminate a deal; he had curtailed the immediate modernization of Russia’s oil industry with Western technology and the chance to balance OPEC’s power. Ten years after President Clinton exploited America’s Cold War victory to prize the oil reserves around the Caspian Sea from Russian influence, Putin had begun to reverse the humiliation. Russia’s prestige and power, he decided, depended upon high energy prices or, more potently, refusing to commit his government to satisfying all Europe’s energy requirements. Security of supply rather than the price of Russia’s oil and gas would determine the fate of the world’s economy. Satisfying the increasing global demand for oil partly depended on increasing Russia’s oil production from 10 million barrels a day to 12 million. That increase hinged on Khodorkovsky’s modernization of Yukos. After Khodorkovsky’s arrest, Yukos’s self-improvement program gradually withered, Russia’s oil production slipped and China’s growing demand could not be satisfied. Unforeseen, the debacle contributed to the oil crisis in 2008 and the global recession.

  By then Raymond had retired with a record $398 million payoff and pension. Looking back on his Russian experience, he could draw on the Exxon homily that there was nothing new in oil — only the players in each country were different. In the balance of risk, he had won some and lost some, but the cycle had never changed. Exxon was in better shape than it had been when he had taken over. In his Exxoncentric manner he ignored the problems he had created. The mergers and consolidation among the oil majors orchestrated by himself and John Browne had created a new arrogance and blindness toward the oil-producing countries, alienating their governments from granting the oil majors access to their reserves. Putin’s reaction against Exxon was echoed by governments across the globe. In unison, they regarded Exxon, BP and Shell as selfishly unwilling to share their profits. More pertinently, Raymond and Browne, while worshipping the cycle, had misjudged their scripture.

  Both had inherited similar lessons about limiting risk. Their forefathers, they had been taught, had been scorched during the 1960s by investing too much. By the late 1970s the industry was hampered by bottlenecks. Mastering the cycle, Raymond and Browne knew, was perilous, just as predicting oil prices was impossible. Their predecessors had failed to foresee the collapse of oil prices in 1986, 1993 and 1998, and none had anticipated the huge increases after 1973. Learning the lessons had proved difficult. In 2003, Raymond and Browne did not anticipate that the cycle had again turned and prices would rise. More eager to instantly satisfy their shareholders than to care for the long-term security of oil supplies for Europe and the United States, both were buying back shares rather than investing in new oilfields. They would blame oil nationalism for preventing efficient exploration and production, but Raymond’s insensitivity toward Putin justified the president’s suspicion.

  Chapter Two

  The Explorer

  GATHERING THE MASTERS of the underworld at BP’s concrete campus in Houston’s sprawling suburbs in early 2009 was a cruel ritual. The muted light cast a harsh sheen across the weary faces of 12 men and one woman in the “Big Brain Room,” a small cinema formally known as the HIVE, the Highly Immersive Visualization Environment. In the center of the front row sat David Rainey, BP’s head of exploration. Peering at the curved screen through battery-powered spectacles allowing “sight” of the whole reservoir, the audience scrutinized the computer-generated three-dimensional images of a possible oil reservoir four miles below the waves of the Gulf of Mexico. Hand-picked to assess the risks, none of the 13 was a buccaneer; they were rather proven company loyalists temporarily united by one credo: if their $100-million gamble to discover whether oil existed deep in the unknown was successful, BP could pocket $50 billion over 10 years. But they would be cursed, not least by themselves, if their calculations were wrong. For oil explorers, the license to make mistakes was limited. The humiliation of failure was permanent.

  The mood in the HIVE was inevitably influenced by BP’s decision to locate its headquarters within a modern concrete zone. Despite some scattered trees, the disfigured Texan landscape embodied the cliché that oil is either an old, difficult and dirty business or “new, good stuff.”

  “Nothing is more exciting than drilling,” smiled Rainey. The Ulsterman, born in 1954, personified the oilman’s permanent restlessness. Easy oil — “the low-hanging fruit” — was now history, and breaking frontiers to find new oil was “incredibly difficult.” Although BP’s skills in exploration were acknowledged by its rivals, the search beneath the Gulf of Mexico was particularly brutal. Excluded from most playgrounds, at best only one in three of BP’s operations would strike oil.

  At the end of the show the 13 headed for a hotel conference room, each clutching a personalized folder listing 50 potential sites for test holes off West Africa’s coast, in Asia, South America and the Gulf of Mexico. Over the next four days they would decide where to spend more than $1 billion drilling through sand, salt, clay and rock. BP’s future depended on finding new oil but there were no guarantees. Although the exploration business was dependent on science, much remained beyond their control. Even the best geologists tended to deploy just three words: “possibly,” “probably” and “regrettably.”

  Like the others in the room, David Rainey had learned his craft during four years in Alaska. In 1991 he had moved to the Gulf of Mexico. “I’ve been there when we’ve hit,” he sighed, “and also when we missed. A dry hole and you feel like jumping out of the window. The emotions are indescribable.” In 1999 some had been convinced that “Big Horse,” a test drill in the Gulf, was a certainty, but the news from the geologist on the rig that the fossils brought up from the deep were Upper Cretaceous rather than Miocene cast a gut-wrenching gloom across the Operations Room. “We’re 60 million years out,” moaned the blonde team leader. Any oil would have been “overcooked.” Every one of the experts in the HIVE had suffered similar agonies.

  In recent years, dry holes had wrecked major oil companies. The skeletons of Gulf, Texaco, Arco and other past icons mercilessly testified that only the fittest and bravest survived. By placing enough bets to balance the odds, BP
’s executives calculated that what the industry uncharitably called “orphans” would not sink their company. Success depended on taking risks and limiting mishaps, not least thanks to inspired luck. BP had made a fortune in Alaska when Jim Spence, the company’s chief geologist in Alaska, struck oil in 1969 after deciding to drill on the rim of a potential reservoir, because the cost of the license on the “sweet spot” was too expensive. Its rival Arco, drilling in the “sweet spot,” found only non-commercial gas. Alaskan oil saved BP, but did not make the company immune to future errors. In 1983 it invested $1.6 billion to drill in the frozen waste at Mukluk in Alaska. That they would find at least a billion barrels of oil, BP’s geologists told newspapers, was “certain.” Instead, they hit salt water. The oil had leaked away. “We drilled in the right place,” said Richard Bray, the local chief executive, “but we were simply 30 million years too late.” For the next 10 years, BP became complacent and chronically risk-averse, searching for oil in the wrong places.

  Rainey enjoyed the rigorous challenges during those impassioned days in the Exploration Forum. “Nothing gets through on salesmanship and goodwill,” he warned. The debate ranged between “concepts,” immature proposals that were a twinkle in someone’s eye; to “play,” which was work in progress; and finally to “prospects,” which offered a serious chance to find oil. “We’ve got to focus on the big stuff,” Rainey reminded his experts. Like its major rivals, BP could only survive by finding huge reservoirs, or “elephants.” “Little things make no difference to BP,” John Browne had ordained, knowing that finding a small field could take as long as finding a big one. Failure, Rainey knew, would delight his rivals. Across the globe, Shell, Chevron, Exxon and smaller adversaries were holding similar conferences. Amid ferocious competition, the challenge was to accurately assess the cost of failure. Like Exxon and Shell, BP had been accused of being averse to risk, too eager to return money to shareholders rather than to invest in finding new oil. “Volume versus risk,” said Rainey, echoing an oil industry truism. Reducing the 50 potential wells to 20 eliminated some risk. The holes chosen, Rainey predicted, would “glow in the dark.”