by Tom Bower
On October 12, oil hit $36 a barrel, sufficient to persuade Shell that extracting oil from the Athabasca tar sands in Canada would be profitable. This prompted OPEC to speak of producing more oil to reduce prices and make the tar sands uneconomic, but prices remained high in early 2001. America’s energy policies had become incoherent. Using fuzzy phrases about comprehensiveness, environmental friendliness and integration of energy, George W. Bush, the new president, talked about his intention to “modernize conservation,” meaning that drilling would be allowed in Alaska. But the energy industry’s high expectations of Bush sank as California plunged into darkness. No new power station had been built in the state for over 30 years, and deregulation, which Bush supported, had lurched the state’s energy companies toward bankruptcy. Rather than simplifying the importation of energy from neighboring states, California’s electricity-generating corporations discovered that it was either loss-making to provide local energy, or that they had become the victims of Enron’s manipulation to demand uneconomic prices to supply power from outside the state. Although the 38 days of blackouts during 2000 and 2001 were caused by financial shenanigans, they profoundly awakened America’s sense of its need for secure energy supplies.
Then, in mid-2001, oil prices unexpectedly fell. Russia’s oil production rose, undermining OPEC’s squeeze, and concern about shortages disappeared. Proven reserves had increased by 12.3 billion barrels in 2000, and would rise by a further 3.7 billion in 2001. Despite low investment and increased consumption, the world’s reserves of oil and natural gas had risen consistently since 1985. “I am positive,” Sheikh Yamani predicted from the sidelines in July, “there will be a crash in the price of oil.” New discoveries and cuts in consumption, he forecast, would neutralize OPEC’s 13 percent cut in production in 2001. The oil glut had returned. After the terrorist attacks on September 11 in New York and Washington, the Western economies dived, and oil fell in November to $17 a barrel. “Has there ever been greater uncertainty for the direction of oil prices?” asked Bob Williams, a researcher for PennEnergy. No one could foretell whether prices would soar or collapse. The “crisis” days of peaking at $32 were mere memories as al-Naimi begged Russia to cooperate with OPEC and cut daily production by two million barrels to force prices up. President Putin refused, causing al-Naimi to fear that prices could fall to $14 in 2002, draining Saudi Arabia’s cash reserves. Fear of recession gripped the market. In Global Oil Trends 2002, CERA predicted that falling demand would cause prices to fall to $6. In Congress, the same politicians who the previous year had demanded punitive action against OPEC sought to renew sanctions against Iran and Libya for another five years. Libya’s ambition to increase production of its high-quality sweet crude by three million barrels a day was blackballed. Even ExxonMobil ran a protesting advertisement: “Unilateral economic sanctions are rarely effective but do discourage development of non-US energy supplies that would add to global supply diversity. This sanction is ripe for revision.”
During 2001, Watts’s self-confidence grew. The temporary surge in oil prices had increased the company’s profits to $1.5 million per hour, enabling it to deposit $11 billion in the bank, part of the estimated $40 billion in cash accumulated by the oil industry. Shell shared a problem with its rivals — how to spend that money. Compared to the late 1980s and the 1990s, when the oil-owning countries controlled 90 percent of the world’s reserves, encouraging the oil majors to explore for new reserves, those countries had become restless and resistant to the majors. In Venezuela, the Caspian and Russia, resistance was growing. The paradox of the oil majors declining during an oil glut frustrated Harry Longwell of Exxon. “The challenge,” he admitted while leading Exxon’s search for an extra 1.6 billion barrels a year to restore the corporation’s depleting reserves, “is production replacement. That’s becoming more difficult.” While Exxon, despite its difficulties, found more oil than it sold in 2000, Shell’s oil and gas reserves, despite the new relaxed booking criteria, actually fell, relegating the company to joint second in the league. Unable to invest all its allocated funds to find new oil deposits, Shell spent $4 billion in the first quarter of 2001 buying back shares, emulating Exxon’s $2.35 billion buyback in 2000. Big Oil, it had been suggested two years earlier, could survive with fewer assets. Opinion now swung in the opposite direction.
One option arose in Saudi Arabia, where the king offered Shell and ExxonMobil the chance to invest $16 billion in a natural gas processing plant, to spend between $5 billion and $10 billion on exploration in the Red Sea, and to build pipelines and petrochemical, electric and desalination plants. Exxon’s share would be $8.5 billion. After examining the offer, both companies regarded the price to participate in Saudi Arabia’s exploration ambitions as “the entrance fee to the poker game.” The chance of profits in the near term was fanciful, and 9/11 put an end to the idea. Claiming to be outraged by Western media criticism of their country’s connection to the terrorists, the Saudis withdrew their offer. By then, Watts had decided that Shell needed instant growth. A spending spree, he told his directors, was essential to restore the company’s reserves. Endlessly, Shell’s planners number-crunched in their efforts to strengthen Watts’s presentations. Despite the Dutch directors’ 1995 veto of the proposed purchase of British Gas, he reopened the case for a bid. Eventually, in 2001, the Dutch directors agreed to offer $17 billion, valuing BG’s oil reserves at $16 a barrel. Watts disagreed. “We’ll only get it with a slam-dunk bid at $20 billion,” he countered, valuing the reserves at $22 a barrel. Doubting that oil prices would rise, the Dutch directors refused even to consider offering more than 40 percent above the share price. In 2009, after the stock market crash, BG would still be worth about $50 billion.
Reducing his ambitions, Watts next sought the board’s agreement to bid for Enterprise, a British oil company floated in 1984 with five oilfields in the North Sea. Managed by Graham Hearne, Enterprise had additional oilfields in Norway and a share of the Tahiti field in the Gulf of Mexico, and was operating the Bijupira and Salema offshore projects in Brazil, which produced about 250,000 barrels a day. Considering the company’s potential 10 years earlier, shareholders had lost confidence in Hearne. Like Lasmo, another British oil company, Enterprise had failed to use its North Sea fields to expand and to gain a place among the major players. Together, Lasmo and Enterprise symbolized Britain’s squandered opportunity.
Enterprise had been created in 1983 by a Conservative government ideologically opposed to the state producing oil and gas, and keen, regardless of Britain’s long-term energy security, to immediately receive a large amount of cash. Convinced that there would always be a surplus of oil supplied by BP and Shell, Margaret Thatcher privatized the North Sea’s reserves in 1986, just as prices crashed. This was followed in July 1988 by an explosion on the Piper Alpha platform, killing 167 workers. By then, civil servants had fled from the shrinking Department of Energy. Floundering without any considered policy, over the following years the government repeatedly altered the tax rates, replaced ministers of energy and changed policies. “NIMTO” — Not in My Term of Office — became a Whitehall spoonerism describing deliberate inactivity. Compared to other oilfields, North Sea costs were high — $5 a barrel compared to $2 in Indonesia. New drilling in the North Sea declined however from 224 wells in 1990 to 116 in 1993, but at the same time, by using the new technology (especially horizontal drilling) to develop mature fields, the oil companies transformed uncommercial into commercial fields, and increased production sixfold, from 669 million barrels in 1991 to 920 million in 1993. On that basis, Norman Lamont, on the eve of his dismissal as chancellor in May 1993, again changed the tax rates, reducing incentives to reinvest profits and search for new fields. Although North Sea oil made up 7 percent of the world’s production, Lamont was dubbed the “Driller Killer” because oil companies received no relief for unsuccessful exploration. Earning profits, the companies complained, was harder than ever. Gordon Brown, the new chancellor following the election of To
ny Blair’s Labour government in May 1997, continued Conservative policies, levying supplementary taxes, ignoring John Browne’s warning that, as had happened in Venezuela, British policies would hasten a decline in discovery and production. In 2002, Brown’s taxes had, according to the oil companies, stopped the development of 315 discoveries.
The oil industry in the North Sea may have been winding down, but Enterprise owned other assets. Based in opulent offices in Trafalgar Square, Graham Hearne was surrounded by expensive paintings, which attracted some criticism of supposed decadence. To predators, Enterprise appeared mollycoddled, aimless and weak, especially in the wake of Hearne’s failed bids for Lasmo in 1994 and 1998. After Lasmo was bought by ENI, Enterprise’s shareholders wanted their money. “It’s a one-way bet,” Watts told his board, suggesting that Shell buy a 25 percent stake from Norwich Union for £1.5 billion. His directors objected that that was too much, and that Shell should rely on organic growth. “We need bigger reserves,” countered Watts. “We must buy them.” Following further arguments, Watts was allowed to approach Hearne and Sam Laidlaw, the chief executive. Enterprise had just rejected a bid from ENI.
When Watts and Walter van de Vijver arrived at Hearne’s corporate apartment in Whitehall Court, they got stuck in the elevator. Once released, Watts made little attempt to seduce his prey. Pulling out a legal yellow notepad, he said, “This is what the lawyers told me to say.” The offer, snapped Hearne, was “derisory.” In repeated meetings, Watts and van de Vijver increased the offers. In their opinion, “It was a game with Hearne’s enormous ego” and his personal demands. The truth is impossible to ascertain. Clearly there was bad blood, and a climate of mutual suspicion. “He wanted to keep the paintings on the wall,” recalled Watts. “He wanted the company apartment,” Hearne spat back, saying that he feared the paintings would mysteriously disappear after a sale. Despite his fears that Hearne might still sell to ENI, Watts abandoned Shell’s valuation of Enterprise’s shares at 600 pence and agreed to pay 725 pence per share, making a total of $7 billion, a hefty premium that attracted public criticism. In his defense, Watts would say that Shell recovered the full price within four years, thanks partly to an inherited stake in the lucrative Tahiti oilfield in the Gulf of Mexico.
Watts proved less savvy by simultaneously selling Shell’s oilfields in Rajasthan in India to Cairn Energy for £4 million. Two years later, Cairn found one billion barrels of oil, and the wells were valued at over $1 billion. Watts hoped that the loss would be more than recouped by spending $14 billion on refineries, gas stations and Pennzoil, making Shell the world’s biggest producer of lubricants. Instead, he received more criticism. Compared to John Browne and Lee Raymond, neither Wall Street nor the City of London was enamored of Shell’s chairman. “They’ve bought flowerpots, not even a greenhouse,” was one comment. Some distrusted Watts’s three-year strategy to maintain the annual growth of profits at 5 percent, his commitment to reduce costs, and his intention to focus on developments in Nigeria, China and Brazil — the first $1 billion investment by a foreign company in Brazil since privatization began in 1997. Ignoring the company’s strengthening balance sheet and Watts’s claim of “robust profitability,” the mood within Shell in The Hague grew somber. Dislike of Watts hastened the transfer of departments, including gas and power, from London to Holland. The Dutch were entrenching their advantage, yet Walter van de Vijver was fretting. Shell’s oil and gas production was not, as Watts had predicted, increasing, and its additional new reserves were questionable. Failure to meet the published targets, complained van de Vijver, endangered his inheritance of the chairmanship. In hindsight, Shell’s senior directors had reached a perilous crossroads.
At the time, Watts was unfazed by van de Vijver’s criticism. Russia, he hoped, would partly satisfy Shell’s hunger for new reserves. Until the Sakhalin 2 contract had been signed in 1994, he had been denied access to key people in Moscow, but thereafter he felt on stronger ground to expand Shell’s investments, visit ministers and establish a personal relationship with Vladimir Putin when the Russian president visited Britain just before Christmas 2001. Watts was invited to Chequers, the prime minister’s country home, to meet Putin. “Don’t steal my time,” warned John Browne, another eager supplicant. Sitting by a roaring fire in the Elizabethan mansion in Buckinghamshire, Watts proudly brought Sakhalin “to the fore of Putin’s mind.” “We must capture the market,” he told him. “It’s worth $45 billion to Russia over its lifetime. So don’t miss it, Mr. President.” Watts believed that his message had been accepted as Putin stood up and said in English, “Mr. Watts, I wish you and your family a blessed Christmas.”
Buoyed by that apparent warmth, Watts believed that the Russians would approve Shell’s expansion to Zapolyarnoye, a gas and oil field, and Salym, a group of oilfields in west Siberia. Insensitive to the changing political mood but aware that “the Russians are ruthless people to negotiate with,” during his next visit to Moscow he successfully harried Mikhail Kasyanov, the prime minister, out of a cabinet meeting to sign a letter of support for Shell’s interests to Dmitri Medvedev, the head of Gazprom who would become Russia’s president. To seduce Medvedev, Watts had secured the royal box in a London theater for a performance of My Fair Lady. Shortly after, Shell was awarded the license for Salym, but Moscow’s latent antagonism toward Western oil companies threatened its revocation.
The doubts among Moscow’s politicians about the sale of the country’s mineral wealth had not disappeared. Unlike BP, which had constructed a network of advisers in Moscow, Watts relied for information on Andy Calitz, the local manager of Shell’s operation in Sakhalin. Neither Watts nor Calitz had anticipated one unusual consequence of Moody-Stuart’s reforms. Because of a historic anomaly, Shell’s operation in Russia was reporting to Holland through the company’s office in Dubai. To Russian officials, humiliated by the disappearance of the Soviet Union and the slow recovery from financial collapse, the link to Dubai confirmed their suspicion that Shell regarded Russians as primitive natives. Watts and Shell’s directors were unaware that changing circumstances in the Kremlin, and Russia’s increasing oil production, were propelling the corporation toward a self-made calamity.
Chapter Thirteen
The Shooting Star
BUYING AMOCO AND ARCO had transformed the slightly built, soft-spoken John Browne’s reputation. Voted Britain’s “most admired chief executive” in 2001, an accolade that would unprecedentedly be repeated for the next two years, Browne became entranced by the spotlight, and felt invincible on his pedestal. “The best is yet to come,” he predicted. Employees and audiences hung on his attitude rather than challenging his opinions. The focus was upon him as the embodiment of BP. With the benefit of cost-cutting and the temporary oil price increases, BP’s shares rose 11 percent in the year after the mergers. The glory was only tarnished by a handful of skeptical BP directors. “He’s going for sizzle, not substance,” complained one associate, carping about “St. John the Divine.” The visionary CEO would brook no interference. But Browne, the minority suspected, was perpetually seeking the next challenge and forgetting to micromanage the details of the business. Delivering targets was delegated, and anyone mentioning problems was banished. Those who cited names of potential successors caused his particular resentment. Dominance was his style. Even when an executive made a presentation to the board, Browne would offer an introduction and a summary. In the glow of success, the doubts about his “sizzle” were rejected as churlish. No one dared steal his thunder. Undeterred, Browne evangelized about BP’s image.
Stung by the ambiguous attitudes toward Bad Big Oil during the Arco bid, Browne pondered how to rebrand BP, consolidating the new acquisitions, and to rid the industry of the legacy of the Exxon Valdez and Brent Spar. At the same time he had become preoccupied by his latest passion: to save the planet from global warming. The energy companies, he believed, could lead the campaign to limit climate change. In a speech at Stanford University in May 1997, Browne had p
roclaimed BP as the first “green” oil major. To win over environmental sympathizers, he committed BP to reducing carbon dioxide emissions and supporting the 1997 Kyoto Protocol on climate change. BP, he said, would invest $1 billion in a solar business by 2010, as a contribution to the target that half of the world’s energy needs could be met by renewables by 2050. Besides solar energy, he would later commit BP to invest $8 billion over 10 years in alternative energies, including a biofuels program, and would donate $500 million to a 10-year research program at the University of California at Berkeley to develop bioenergy. His speech, publicized as the first occasion on which an executive of a major oil company had pledged his opposition to climate change, was widely reported and welcomed. But not by Mark Moody-Stuart, who telephoned Browne to complain that climate change had been mentioned earlier in Shell’s annual report. Graciously, Browne agreed to drop further claims to be “the first.” By then, his speech had become a mere foretaste of a more fundamental initiative. After long discussions with the advertising agency Ogilvy & Mather, Browne had decided to rebrand BP as “Beyond Petroleum.” The slogan was originally intended merely for internal use, but Browne seized on it to relaunch the corporation. The new BP, his mission statement would explain, intended to “reinvent itself as an energy company people can have faith in and inspire a campaign that gives voice to people’s concerns, while providing evidence of BP’s commitment, if not all the answers.”