by Tom Bower
Stigmatized as international pariahs, Shell’s directors realized on reflection that earlier intervention by the corporation might have stopped Saro-Wiwa’s execution. Nevertheless, amid appeals for international sanctions, Anderson and Shell’s directors met in London to decide whether to push ahead with the plan to build an LNG plant for Nigeria’s natural gas. One month later, on December 15, 1995, 30 years after suggesting the idea, Dick van den Broek of Shell signed an agreement with the Nigerian government to build a $3.8 billion LNG plant. He had threatened that failure to sign would terminate any future agreements with the company. Shell’s directors were ecstatic. Ninety percent of the LNG output had been presold, and Shell was a 25.6 percent shareholder. Shortly after, Shell agreed to build a giant platform offshore, in an area called Bonga. These deals aggravated suspicions about Shell’s conduct during the Saro-Wiwa affair and its promise to return to the Ogoni region if its workers’ safety was guaranteed by local communities. Many critics believed that Shell’s managers in Nigeria had refused to protest against Saro-Wiwa’s execution because of collaboration with the regime. Those censuring Shell included the World Council of Churches, whose report accused the company of polluting the Ogoni area by dumping oil into waterways and of showing “inertia in the face of the government’s brutality,” which included intimidation, rape, arrests, torture, shooting and looting. God, said the Council, damned Shell in Nigeria. Shell denied all the charges. Exonerating itself of any responsibility because it had withdrawn from Ogoniland in 1993, Shell derided the report for regurgitating old and previously discredited allegations, 99 percent of which, it declared, were fabrications. But the company could not win. The criticism nevertheless prompted Herkströter to admit that Shell’s culture had “become inward-looking, isolated and consequently some have seen us as a ‘state within a state.’” Mark Moody-Stuart was among the few who became openly disturbed that the company had misjudged the situation. “We should have been more patient,” he admitted, “and less angry and offered more. There are lessons to be learned.” “Nigeria,” lamented John Jennings, a Shell director, “is like a house falling down. All we can do is patch it up so it leans but doesn’t collapse.” Watts was philosophical. “In oil, mistakes get buried in the mists of time.” In June 2009, Shell would pay $15.5 million in compensation to settle a lawsuit with Saro-Wiwa’s family, while admitting no wrongdoing.
Few Nigerians had attended Watts’s farewell party from Nigeria in 1994, but Shell’s directors were relieved that the company’s investments in the country were secure. General Abacha had been persuaded that without Western expertise Nigeria’s oil production and income would diminish. Unlike Venezuela and Indonesia, Nigeria had no intention of expelling the oil majors. Both sides agreed they needed stability. In view of the continuing violence targeted against the president, Brian Anderson accepted the permanent protection of Nigerian soldiers for Shell’s employees. The corporation’s archives for 1995, Shell’s annus horribilis, were sealed. Reviving the company had become critical to its future prosperity.
Shareholders were demanding improved profits. Years of cautious underinvestment, Herkströter realized, were no longer sustainable. The company had been bruised like the other oil majors by the fall of oil prices, and its poor financial performance had been undermined by choosing only ultrasafe investments and its failure, other than in the Gulf of Mexico, to find “elephants.” To improve value per share, Herkströter decided to stop the company befriending presidents and kings, and to focus on reform of its financial controls. Localness, previously Shell’s strength, was to be curbed. Fiefdoms were abolished. One third of the headquarters staff were dismissed, and the power of the resident chairman in each country was reduced in favor of Exxon’s method of governance through central control. The survivors were ordered to stop playing politics and start earning money. But Herkströter’s headlines did not translate into action: little happened other than a costly joint venture in America with Texaco and Saudi Aramco (the Arabian-American Oil Company), which would prove disastrous. To prevent the balance of power tilting toward the British directors, Herkströter marshaled the Dutch directors to reject Mark Moody-Stuart’s proposed purchase of British Gas (BG), a substantial oil exploration and production company, for £4 billion. Moody-Stuart was “very upset,” observed Phil Watts. In 2008 BG would be worth about £35 billion.
Herkströter was equally inept in his attempts to restore Shell’s reputation. “We are now being asked to solve political crises in developing countries,” he said in October 1996, “to export Western ethics to those countries and attend to a multitude of other problems. The fact is we simply do not have the authority to carry out these tasks. And I am not sure we should have that authority.” That opinion was opposed by Mark Moody-Stuart and Phil Watts.
Primed by his experiences with Brent Spar and Nigeria, Watts put together a list of tasks under the heading “Reputation Management.” For Watts, Brent Spar had been “a life-changing experience… We had done a technically excellent job but we had all missed the big trick. A time bomb was ticking — we missed it and we all thought we were doing our best… We never dreamt we would get that much attention.” But if Brent Spar was Watts’s “big wake-up call,” he found that Nigeria “keeps us awake all the time.” By April 1996 he had compiled a list of initiatives, including “Ethics, Human Rights, Political Involvement, and the key items for the review of the Business Principles.” The “stewardship over Shell’s reputation” was Watts’s priority.
Greenpeace’s campaign against the oil companies had focused on Shell’s exploration in the West Shetland islands. Ignoring the environmental lobby, Herkströter realized, was pointless. The initiative, he noted, had been seized by BP’s John Browne. Spotting the tide of opinion, Browne had, amid fanfare, delivered a speech at Stanford University urging the world to “begin to take precautionary action now” to protect the environment. Shell’s directors agreed to embrace the same ideology. The corporation crafted public statements promoting its intention to be more open, to acknowledge human rights and to protect the environment by including renewable energy projects in its core business plan. In the future, said Herkströter, Shell would engage with Greenpeace to discuss the reduction of greenhouse gases in coal gasification and biofuels. Satisfied that he had fulfilled the public relations requirements, Herkströter approved the purchase of one fifth of Canada’s Athabasca tar sands for C$27 million, a relative pittance. The total estimated reserves were 1,701 billion barrels of oil. Shell anticipated extracting 179 billion barrels. Exploitation of the tar sands was uneconomic while oil was at $15 a barrel, but would be profitable once the price hit $40, although the process offended Shell’s newfound commitment to protect the environment. The tar’s extraction would require the felling of 54,000 square miles of forest, an area the size of New York State, and as a consequence wildlife would be killed and water polluted. Huge amounts of power would be required to create the steam or hot water needed to separate the bitumen from the clay, and more power and chemicals were required to separate the light petroleum from the bitumen. The whole process created three times more carbon than conventional oil operations. In The Hague, the purchase was mentioned as manifesting Shell’s ability to play both sides of the argument.
At the end of 1997, Herkströter retired. Mark Moody-Stuart, his successor, was dissatisfied with his inheritance. Appointed as “Mr. Continuity,” Moody-Stuart, a Cambridge geologist and a Quaker who loved sailing, regarded his predecessor’s changes as timely but ineffectual. Few of the reforms had materialized. “Shell needs drastic remedial measures,” he said, while fearing that the majority of Dutch directors would resist even the appointment of senior directors from outside the corporation. Shell had already missed out on two important investments. Approached by the governments of Angola and Azerbaijan to develop their oil, the company had refused requests for preliminary cash bonuses, and the opportunities were seized by BP and Exxon. Under Herkströter, Moody-Stuart lamented, Shell had
even ignored the middle way. Adrift and unacclimatized to the new world, Shell had allowed its long-nurtured relationships with the governments of Oman, Nigeria and Brunei to deteriorate, and earnings were falling. In 1998 the company’s profits were $5.146 billion, compared to $8.031 billion in 1997. “There will be a coming crisis if we don’t change,” warned Moody-Stuart. “Change is a pearl beyond price.” The obstacles were Shell’s fragmented culture, divided management and entrenched country barons who had successfully frustrated Herkströter’s reforms. To many British employees, the Dutch engineers’ arrogance was stultifying. Convinced of their superiority, they regarded their rivals at Exxon, Chevron and especially BP with measured contempt. Yet some refused appointments in unpleasant oilfields, preferring to remain in the comfort of European and American offices, focused on investment and process rather than practical work on the ground. Convinced of the righteousness of science and engineering, the LNG department had seriously advocated building a terminal near the Bay Bridge in San Francisco.
“I’m clearing out the cupboard,” Moody-Stuart announced, planning instant surgery. Offices around the world were closed and country chairmen demoted, 4,000 staff were dismissed, 40 percent of the chemical plants sold, $4.5 billion of bad investments written off, capital spending cut by one third and, most dramatically, American Shell lost its independence. Appallingly managed and beyond financial control, US Shell represented 22 percent of the company’s assets, yet contributed only 2.6 percent of its earnings. Walter van de Vijver, a 42-year-old engineer, was dispatched to integrate the American company with its European owner. The cost of Moody-Stuart’s surgery was huge. Shell’s net income fell by 95 percent, from $7.7 billion in 1997 to $350 million in 1998. There was little optimism that things would improve. The oil price in 1998, Moody-Stuart believed, was “likely to stay at $10,” and the likelihood of it going above $15 was “low.” At those prices, Shell’s profits, like BP’s and Exxon’s, were certain to fall further.
Moody-Stuart’s parallel agenda was to reform Shell’s “Business Principles.” A team had been working since September 1997 to develop a five-year strategy to resolve dilemmas involving human rights, global climate change and environmental problems. A larger question was whether any of these activities made sense in a “world of $10 oil.” Moody-Stuart was emphatic that his strategy was to generate profits “while contributing to the well-being of the planet and its people.” By then Watts had completed his study to alter Shell’s reputation. To boost employees’ self-esteem and to celebrate the “transformation process,” Moody-Stuart agreed that Watts, the new head of exploration and production, should stage a stunt. At a conference of 600 Shell executives in Maastricht in June 1998, Watts was propelled onto the stage in a spaceship, dressed in a spacesuit. “I have seen the future and it was great,” he yelled to his audience, all of whom were wearing yellow T-shirts emblazoned with the slogan 15 PER CENT GROWTH. The onlookers were, remarked one eyewitness, “gobsmacked” by Watts’s attempt to remake his “dour, pedantic image.” Everyone understood his agenda, however: Shell’s reserves were falling, and targets needed to be stretched. Managers were formally urged to “improve our effectiveness.” The message was “improve the scorecard.” At the end of his presentation, Watts urged his flock to sing Beethoven’s “Ode to Joy”: “Somewhat over the top,” Moody-Stuart admitted. “We all do foolish things occasionally.” Galvanizing morale had been important. The oil majors were facing a torrid time. Those that failed, Moody-Stuart knew, would be buried alive. Executives from four American oil companies — Mobil, Amoco, Arco and Texaco — had approached Shell seeking mergers or to be bought. Shell’s split structure made that impossible. The company, Moody-Stuart knew, needed a counterplot to resist the unexpected challenge posed by BP.
Chapter Five
The Star
JOHN BROWNE UNDERSTOOD oil better than most. Shell’s Mark Moody-Stuart, Chevron’s David O’Reilly and Exxon’s Lee Raymond could not match Browne’s intellect and bravado, but none had as much to prove. Employed by BP since leaving Cambridge University, the son of a BP executive who had met his Romanian mother, a survivor of Auschwitz, in post-war Germany, Browne understood that trouble and taboos had been inherent within BP since its creation. During his youth he had lived with his parents in Iran and had witnessed the company’s arrogance and subsequent humiliation. The industry’s roller-coastering battles ever since encouraged his taste for audacious gambles to rebuild a conglomerate lacking geographical logic and natural roots.
BP was founded on disobedience and survived by maverick deeds. The original sinner was William Knox D’Arcy, a wealthy Australian who arrived in Persia in 1901 on a hunch that oil could be discovered there. D’Arcy negotiated a 60-year concession over 480,000 square miles of desert. For seven years his team drilled unsuccessfully across an area twice the size of Texas, until in 1908 he was ordered by Burmah Oil, a Scottish investor, to stop. Having started yet another test bore, D’Arcy’s team ignored the message and, detecting a strong smell of gas, struck oil. There was no natural reason why that fortuitous discovery should have evolved into the formation of a famous company. Culturally, the directors of the new Anglo-Persian Oil Company based in Glasgow were embarrassingly ignorant about their faraway asset. In contrast to the American oil companies that had spawned an integrated market built on discoveries in Texas and across the prairies, Anglo-Persian, which became BP, was a colonial concession sponsored by the British government. Managed by retired military officers recruited particularly from the Indian army, its staff clung to their suzerainty. Amateurs in marketing and untrained to supervise refineries and chemical industries, they aspired to be gentlemen, and were generally indifferent to indigenous politicians, especially Arabs and Iranians, whom they regarded as inferior. Unlike Shell’s country chairmen, soaked in local cultures and enjoying rapport with host governments, BP’s managers carelessly alienated their hosts, offhandedly oblivious of Iraq’s and Iran’s vast oil wealth.
Little changed before the nationalization of BP’s oilfields in Iraq in 1951. Sir Eric Drake, the corporation’s conceited chairman, assumed that the confiscation would be compensated by increasing oil prices and the discovery of new reserves in Libya, Nigeria and Abu Dhabi, or by expanding into petrochemicals and shipping. Over the next 20 years, BP balanced the escalating demands of the Shah of Iran, the bellicosity of OPEC and Arab nationalism, especially in Libya, by finding new oil in Alaska in 1968 and the North Sea in 1970. The problem was the directors’ lack of commitment to exploration. The discovery of a new field, noted the exploration department in 1971, evoked the reaction, “What on earth are we going to do with all this oil?” Terry Adams, BP’s director in Abu Dhabi, was expected to embody that casual attitude. To finance a pipeline in Alaska, Adams was ordered in early 1973 to sell half of BP’s share in Abu Dhabi’s offshore interests to a Japanese company for $736 million. “This is top secret, none of the locals need to know,” BP’s manager Roger Bexon told him, referring to Sheikh Zaid, the leader of the state. In his anger after the sale was announced, Sheikh Zaid nationalized half of the Anglo-Japanese investment. The Japanese never believed that BP was unaware of the impending confiscation, and the Abu Dhabians griped about BP’s lack of respect. Insouciantly, the British pleaded ignorance, underestimating the profoundly negative consequence of their arrogance.
Arab irritation compounded BP’s problems in the region after the 1973 war. In succession, the company’s oilfields in Kuwait and Libya were nationalized. Overnight, BP’s plight was dire: the company had become entirely dependent on the discovery of oil in Alaska and imminent production in the North Sea, and it had fallen in rank from membership of the Big Three to seventh among the Seven Sisters. Morale was flagging, and there were even fears that BP faced extinction. Unlike the precise management processes at Chevron, Mobil and Exxon, which ran in harmony regardless of the identity of the individual chief executive, BP’s direction depended upon the chairman’s vision. “There are no sacred c
ows,” declared Peter Walters, appointed chairman in 1981, who advocated retrenchment. BP’s focus was to be entirely oil. Following Exxon and Shell, Walters slowly reversed the diversification into non-oil businesses and ordered a $6 billion sale of all the nutrition manufacturers and mineral interests. He seemed unable to do much more to salvage the company from the morass. Impaired by the British government’s nonchalance, BP was crippled by debts, aggravated by the government’s order to repurchase about 10 percent of the company’s shares from the Kuwaiti government that had been bought during a disastrous flotation. In an industry dominated by Exxon and Shell, BP had stalled, destabilized by debt. Walters never recovered his self-confidence.