Oil

by Tom Bower

  Chapter Eleven

  The Aggressors

  PAUL ADAMS MOVED BP’s oil trading headquarters from Cleveland to Chicago soon after the takeover of Amoco. BP’s senior trader understood the company’s remarkable inheritance from Amoco better than others. BP had become the dominant owner of oil storage tanks in Cushing, the epicenter of pricing WTI oil on the New York Mercantile Exchange. In theory, with 20 percent of the storage, BP’s power to influence Nymex’s prices by choking or flooding the market had become overwhelming. By controlling the amount of oil entering and leaving Cushing’s storage tanks, and managing access to the pipeline network across America, BP’s traders could profit at their rivals’ expense. To BP’s surprise, Robert Pitofsky had failed to comprehensively examine the Cushing connection during his review of the bid. Probably he had not understood oil trading, and assumed that BP would give all the oil companies free access to Cushing on the same terms as its own giant refineries at Texas City and Whiting. After trading oil for 20 years, Adams and his superiors in London were unlikely to ignore their new trump card.

  Soon after the move to Chicago, Chris Moorhouse, BP’s chief of global trading, summoned a three-day conference in a London hotel to discuss “the Prize,” as he called the acquisition of Amoco. “The key,” Moorhouse told the group, which included Adams, “is to look for chances to arbitrage BP’s assets and give BP an advantage.” The priority, he continued, was to “optimize the system; to use trading to get ‘the Froth’” — his expression for profits from simultaneously producing, refining, trading and controlling Cushing. Byron Grote agreed. “Trading must make a bigger contribution to BP,” he said. Grote, like Moorhouse, understood the power of the “Cushing Cushion” and the profitable insanity of Nymex maintaining the landlocked storage complex in the prairies as the key to the world’s oil prices. In passing, he mentioned “What We Stand For,” BP’s recently published code of ethics. The section headed “Vision and Values” made no mention of squeezing the market. Neither Grote nor Moorhouse mentioned John Browne. Pertinently, the chief executive remained perpetually invisible to the traders. Nor did Moorhouse mention Doug Ford, his superior on the main board. Ford, a former Amoco executive who specialized in refineries, knew practically nothing about oil trading.

  BP’s trading advantages had been maximized since the 1992 Gulf War. Over the following years, personal fiefdoms in the regions, products, upstream and downstream had been demolished. Using constantly improved communications, traders had been amalgamated into a global 24-hour organization. Automatically, any event anywhere in the world prompted a reaction from some of the 575 traders and 5,000 support staff. “BP had real country insight at the top level which Glencore, Vitol and Trafigura didn’t have,” admitted Mark Crandall, a founder of Morgan Stanley’s oil trading who later moved to Trafigura, one of the large private traders registered in Switzerland. The most experienced rival traders in New York and Houston were nervous about BP’s institutionalized advantage.

  Jimmy Dyer, a squash-playing BP trader in Chicago, became renowned for exploiting the advantages. “I wouldn’t be long [or short] in the spot this month,” Dyer would say, and thousands of contracts would be influenced. “Dyer’s fast,” Moorhouse told his colleagues. “He sees opportunities others don’t.” Renowned for his energetic trawling of the Internet for information, and for always demanding answers, Dyer had a reputation for pushing to the edge but not beyond. Motivated by the bonus culture, his rivals were not enthralled. “He’s loaded the bullets in the gun in Cushing and he’s socking the rest of the world,” complained a London trader. “He’s coining it going up and coining it coming down.” Charlie Tuke was a wary fan: “If he emptied his tanks, his players on the other side didn’t like him.” The walking wounded called Axel Busch, now at Energy Intelligence, a publishing and information company, and whispered their venom. By owning the physical infrastructure at Cushing, and producing crude oil and oil products, while trading crude and derivatives on Nymex and as OTCs, BP’s rivals suspected the corporation of manipulation of WTI’s prices. No other oil major was similarly empowered or involved: ExxonMobil only traded its own oil; Conoco’s trading was minor; Chevron was still building a trading business after buying BP’s refinery in Singapore, which bequeathed BP’s trading secrets; while Shell’s trading was modest compared to BP’s — only two Shell traders were known to earn over $1 million a year. BP’s operation was also the most aggressive. “BP’s impossible,” its rivals cursed in an agonized chorus. In New York, one medium-size trader spotted BP’s traders bidding against each other to squeeze rivals. “They’re playing WTI to Brent,” he gasped, before noting how they effortlessly reversed the cycle. “Just learn how to navigate around them,” he ordered, dismissing the idea of a formal complaint: “We’re big boys and letting the regulators in is too complicated.”

  Vitol’s senior trader in Houston spotted the same pattern, and told his office: “Never worry about WTI’s fundamental price. Just think, what is BP doing? They can turn Cushing into shortage or surplus. Forget prices, focus on spreads.” BP’s traders, he realized, were even trading against BP itself by speculating against the company’s refineries: “It’s bonuses and easy money for them to take money off their own company.” The Platts manager in Houston watched as BP filled up Cushing and waited. In that city, he quipped, “The rivals earned income trading off the crumbs dropped on the floor by Dyer.” Traders at Morgan Stanley often retreated rather than compete with BP, and Goldman Sachs completely withdrew from some trading to avoid losses. Even the legendary trader Andy Hall regarded his old firm warily during the “loosey-goosey market” between 1997 and 1999. He had earned a fortune buying long and squeezing the shorts, disproving Morgan Stanley’s conviction of the benefits of asset possession to glean market intelligence, but in the months after the Amoco and Arco mergers even the master of the squeeze felt BP’s heat. The halcyon days of squeezing small traders had disappeared. Like his rivals, Hall identified Jimmy Dyer as having “a big impact on prices.” As one trader put it, BP was challenging its rivals: “If you don’t like what I’m doing, I’ll hang you out to dry, but if you like, you can come into the water and play with me.” Despite appearances, the Chicago traders were operating beyond London’s control.

  Chris Moorhouse in London faced a dilemma. Appointed at the last moment in 1998 as a “caretaker” head of trading for six months because the incumbent had fallen ill, Moorhouse was ill suited to challenge his subordinates in Chicago. “Do you intend to take an active role?” Paul Adams asked him. “Because if so, I’m off.” Old-fashioned and dazzled by the “sweep of new trading conditions,” Moorhouse recalled the huge losses he had suffered in 1983 after taking a bad position on crude oil in Rotterdam. “No, I don’t intend to be involved,” he replied. He was hardly equipped to master BP’s squeeze. “You should look on the screens for immediate profits which can be locked in,” he told Adams, “but BP should not be taking long or short positions.” Privately he hoped that his traders knew how to behave, and not to take undue advantage. “The Chicago team know that they have to be careful,” he told his superior after his “caretaker” role was converted into permanency. Too timid to instruct BP’s 70 traders in Chicago and Long Beach not to exploit their advantage, he was reassured by Adams that they could trade without supervision, although Moorhouse would be personally accountable. “We’re on the same wavelength,” he told a colleague in London with evident relief. On past experience, Moorhouse did not expect to be troubled by America’s regulators. Normally, any laws against market manipulation would require compulsory disclosure and supervision, and the relevant laws of that time imposed no such requirements. In any event, there was no evidence that BP’s traders were other than successfully aggressive, but within the law. “I had no alternative but to have complete confidence because I didn’t want to lose Adams,” he would tell a superior. “I knew that there were insufficient controls but I had no power and no responsibility.” Moorhouse could explain that
, despite the allegations about BP manipulating prices in the US, nothing was ever proved. On the contrary, an investigation in 1999 of BP’s alleged manipulation of prices in Alaska discovered no evidence of wrongdoing.

  Paradoxically, at the same moment that BP was suspected of influencing the market by sophisticated methods, its own traders fell victim to a familiar ruse. In 2000, traders employed by Arcadia Petroleum,* a London company owned by the Japanese conglomerate Mitsui, spotted that the widespread use of derivatives since the 1990s to hedge oil offered another chance to squeeze Brent. Although supplies from the North Sea field had fallen to a trickle, traders still used “paper barrels” of Brent as the benchmark to set prices for their contracts across the world. As previously, if Brent’s price was artificially squeezed higher or lower, the manipulator could earn a fortune from related trades across the globe. In 2000, Tom O’Malley, more sensitive than others to the risks of untransparency, noticed some familiar signs. Tosco, his new company, was America’s largest independent refiner and oil distributor, owning 4,500 gas stations. O’Malley had swum against the tide. Battered by the volatile oil prices during the 1990s, the oil majors had abandoned refining as unprofitable. John Browne, uninterested in engineering and aware of refining’s perilous finances, had ordered the sale of some of BP’s refineries, including Grangemouth in Scotland. Exxon and Shell had followed, improving some refineries and selling others. O’Malley had capitalized on these fire sales, paying 10 cents on the dollar, especially for BP’s East Coast refineries. He reasoned that the banning of the construction of new refineries in America since 1976 for environmental reasons would cause a shortage of capacity. Anyone who could overcome the bottlenecks in refining would be guaranteed profits. But just as a potentially lucrative shortage materialized, O’Malley became vulnerable to a squeeze,

  In an earlier era Arcadia Petroleum had stored huge quantities of North Sea oil in South Africa and, as prices moved up, sold consignments to India for huge profits. “A really good play,” commented one rival. In September 2000, O’Malley noticed that Arcadia Petroleum had bought more Brent crude than could be produced or delivered during that month. By that time Brent, the production from multiple fields in the North Sea operated by Shell and Exxon, had declined from 60 cargoes per month to 18. Prices were rising by $3 a barrel along the entire Atlantic basin — in Europe, Africa and East Coast America. Arcadia Petroleum’s plan, O’Malley’s staff believed, was to create a “shortage” to influence the price of WTI in New York. “The most extreme example of an artificial price being created,” Philip Verleger called the conspiracy. “The idea that one could corner, could encompass an entire benchmark market and consequently manipulate potentially other prices is absolutely fascinating and, in my view, astonishing.” BP, O’Malley believed, was also affected. As a result of the squeeze it went short, and Grahame Cook, the head of the company’s European trade, had to compensate Arcadia Petroleum for BP’s failure to deliver a consignment of crude. After this financial punishment, BP became more cautious in trading Brent. O’Malley did not surrender. In March 2001 he filed a $10 million claim in a New York court, accusing Arcadia Petroleum of using “illegal and monopolistic conduct” to force Tosco and other companies “to pay substantially more for crude oil than they would have if Arcadia had not manipulated the market.” The case was settled out of court, and Arcadia Petroleum was not permanently damaged. In 2005 the company was sold after registering an annual post-tax profit of $57 million. By then, Jorge Montepeque had single-handedly taken steps to prevent a similar squeeze. In 2002, “Brent” was expanded to include three North Sea fields — Brent, Oseberg and Forties — which fed into the pipeline terminating at Grangemouth.

  BP had been damaged by the Arcadia Petroleum squeeze. Before it had taken place, Browne had asked whether the company’s trading was bringing it into disrepute, but he was deterred from interfering because of the high profits. A telephone call in 2003 from Adams to Moorhouse changed that. “The CFTC is having a go at us,” said Adams. The Commodity Futures Trading Commission (CFTC) suspected that BP’s trading on Nymex was illicitly seeking to influence the market. Moorhouse did not ask for an explanation or a report. There was nothing, he believed, that London could contribute. “I’ll let you get on with the lawyers and the CFTC,” he said, unaware that the regulator was scrutinizing the recorded conversations of BP’s traders. Soon after, Vivienne Cox was appointed to supervise Moorhouse. “The investigation is taking up a lot of time and effort,” was her only comment. Traders, she knew, often boasted excitedly about their influence and their positions. Frequently they exaggerated, occasionally they said things that were untrue. Illegal trading, she assumed, would not be discovered on the sound tapes. The unresolved question was whether BP’s traders, much of whose pay was made up of bonuses, had become greedy. Rivals suspected there were many casualties in Browne’s race for growth.

  Chapter Twelve

  The Antagonists

  THE NEWS IN AUGUST 1998 that BP was merging with Amoco had ruined Mark Moody-Stuart’s sailing holiday in Greece. “That’s put the cat among the pigeons,” sighed Shell’s stoic chairman, concerned that BP was poised to overtake Shell. Exxon’s purchase of Mobil 16 weeks later compounded his grief. His company, Moody-Stuart realized, appeared directionless, introverted and risk-averse. Even Shell’s technical superiority was slipping. For a year Moody-Stuart had searched for potential purchases, but Shell’s convoluted share and corporate structure obstructed mergers. Chasing a string of pearls rather than the crown jewels, in his words, had exposed the company as slow and unwieldy. Even hostile takeovers for small companies had failed because the financial inducements were unenticing. “Shell,” smiled a rival, “is the plain girl no one has got engaged to.”

  Accepting defeat, Moody-Stuart calculated that Shell’s salvation required a merger of itself. Royal Dutch and Shell Trading should abandon the 60–40 structure created by their founders 91 years earlier. The notion, he knew, was controversial. The problem would be the older, conservative Dutch directors, who feared the eradication of Dutch control. Secretly, Moody-Stuart approached younger directors to seek their support. Two of them, Phil Watts and Steve Miller, the president of American Shell, immediately agreed. The support of Jeroen van der Veer, a young Dutch director, and Maarten van den Bergh, the president of the committee of managing directors, was crucial. To Moody-Stuart’s relief, both appeared to be favorable, although van der Veer would later deny that he gave any pledge of support. Moody-Stuart now appeared to have five votes, which meant the conservatives would be defeated. The principal obstacle, he believed, was Lo van Wachem, the former chairman who had remained on the supervisory board as the guardian of Dutch interests. Despite the split board, van Wachem had continued to dominate the company. Moody-Stuart’s appointment as chairman had been approved by him on condition that he held the position for only three years, and he had vetoed a proposal to extend Moody-Stuart’s tenure. The distrust between the Dutch and the British board members had spurred Moody-Stuart’s initiative. The contrariness among the directors needed to be expunged.

  At a meeting of Shell’s directors in London in October 1998, Moody-Stuart launched a conversation about the company’s future. As anticipated, Lo van Wachem and his supporters were cool, but agreed to continue the discussion at the next meeting in December. As usual, after the meeting the Dutch reverted to their native language, incomprehensible to non-Dutchmen, in the corridor outside the boardroom to protect the privacy of their conversation. Moody-Stuart remained unsuspicious, trusting his four pledges of support. He failed to grasp the intensity of van Wachem’s dislike of British culture, and did not anticipate that Jeroen van der Veer and Maarten van den Bergh would succumb to van Wachem’s entreaties. Both felt that Moody-Stuart was in too much of a hurry, and while they were prepared to discuss changes, they would not be rushed into a merger. They were vulnerable to van Wachem’s eulogy about “respect for the past” and warnings about “betrayal of the greatest talen
ts.” “This is too sensitive,” said van Wachem, appealing to the younger directors to “protect national pride” by “putting the idea on the shelf.”

  An unsuspecting Moody-Stuart arrived at the December meeting to continue the debate. To his surprise, the response was icy. Royal Dutch’s directors, van Wachem was satisfied to see, subsequently voted unanimously against the merger. In a private meeting in his office later that day, van Wachem warned Moody-Stuart never to raise the subject again. The Dutch, he emphasized, would always use their 60 percent share to assert control — the tail would not wag the dog. Biting his lip in the funereal atmosphere, the humiliated chairman remained silent. “I came close to being fired,” he would later acknowledge.

  Days later, on December 14, 1998, Moody-Stuart stood humbled before a group of analysts at Plaisterers’ Hall in the City of London. Van Wachem’s deadline for his retirement by the end of 2000 undermined Moody-Stuart’s credibility. Shell, he knew, had become the underdog to Exxon and BP. The company’s market value had fallen by $43 billion since April. Criticized for allowing the company to have become distracted by woolly sidetracks like publishing a worthy manifesto, “People, Planet and Profits,” Moody-Stuart acknowledged that without a mega-merger, Shell would struggle. “I’m absolutely sure that our group’s reputation with investors is on the line,” he admitted. To create an upbeat mood he pledged that he would be “clearing the cupboard” with sales and dismissals, and that the corporation would reinvent itself. Shell, he said, would be restructured over the next five years, and profits would increase by 50 percent. “We are large enough to be the leading company on our own without any merger,” he said with limited conviction. “Either I deliver or not. I’m sure there will be consequences if I don’t.”