by Tom Bower
Delegation was particularly pertinent in America, which was the heart of BP’s empire, although it was ruled from London. One inherent confusion was ignored. While BP’s organization was based upon a top-down culture, Browne directed an entourage of selected personal assistants known as “turtles” — those privileged to carry his burden on their backs — to cut across the units and deliver the imperial message. They reflected the reality of Browne’s personal management, which was focused on profits rather than technical excellence, the fundamental values at Exxon and Shell. The casualty of Browne’s focusing of authority in London was governance, an alien word among his inner circle. Browne believed that BP’s strength was to centralize authority upon himself. Unlike Chevron, Shell and ExxonMobil, where the machine was entrenched and self-perpetuating, Browne made himself indispensable. After all, he reasoned, BP’s resurrection was entirely his success. He could identify the purchase of Castrol in India and Verba in Germany, the development of alternative energies and his new negotiations with Mikhail Fridman to establish a major foothold in Russia as his most recent successes. But those prizes became irrelevant in early 2002 once the 5.5 percent growth target was missed. Three times in eight weeks, Browne’s prediction was revised downward, finally to 2.9 percent. BP’s share price fell to its lowest in four years. Within the company’s headquarters, some spoke about Browne paying the price for his over-optimism; others mentioned panic. “In 2002, we at BP started stubbing our toes,” observed Doug Ford, the Amoco director appointed to BP’s main board. The financial results in the Gulf of Mexico were poor, there were operational problems in Alaska, and the Sidanco losses in Russia had not been recovered. Browne’s forecasts of record production were unrealized, and his aura of invincibility was dented. Some blamed complacency; others said Browne was presiding over a culture of fear, which prevented his subordinates delivering bad news. His mantra of “more for less” to boost BP’s share price was a poisoned chalice. “We always said BP would have its moment of truth,” said one Shell director. The first casualty was talk about merging with Shell, an unlisted item on the agenda when BP’s directors gathered for their regular board meeting in Seville in September 2002.
Peter Sutherland, BP’s chairman, a physically big man with an engaging intellect, had been particularly irked by Browne’s continuing quest to take over Shell. Ever since he was appointed chairman in 1997, Sutherland, like all BP’s directors, had been impotent before Browne’s juggernaut, rarely able to engage him about BP’s problems or his quest for Shell. Browne’s success in delivering dividends and rising share prices had secured seemingly invulnerable popularity in the financial markets. Although some close to Browne had whispered that the deal had been mooted with Shell’s British directors — a risible idea, considering Phil Watts’s disdain for BP’s technological weaknesses — Peter Sutherland waited before declaring his opposition. The proposed merger, he believed, was delusional. The regulatory, financial and human problems were insuperable. Browne’s ambition to merge with Shell, Sutherland suspected, had encouraged the continuing buyback of BP’s shares and Browne’s refusal to discuss a successor.
Since Peter Backhouse’s premature departure, several other potential successors had also left the company. Much of BP’s experience had been, according to the gossip by the watercooler, “individually strangled” by Rodney Chase. Browne, Sutherland decided, should be judged on his own terms. He confided to a fellow director that he had spotted Browne’s limitations early on, but had been too weak politically to contradict the market sentiment. The City would have been aghast if Sutherland had successfully ousted Browne earlier, yet he deprecated Browne’s fatal vanity. Only “yes men” were tolerated by Browne; dissenters were withered by his intellectual power. “He’s become princely,” said the director. “He only deigns to go to triple-A occasions, and fails to arrive at others. He will only speak to presidents, prime ministers and kings. This does not help the company’s performance.” Another director with nearly 20 years’ experience agreed: “He’s interested in the dynamics of the industry but not in what to do after you buy your latest toy.”
Browne’s allies suspected that Sutherland was encouraging dissent. The more extreme implausibly conjectured that Sutherland, acting as an agent of the American government, was stirring up dissatisfaction to prevent BP’s merger with Shell. Most agreed, however, that Browne’s conceit had damaged his credibility. “His fast-moving, high-wire act has crashed,” admitted one of his allies. Knowing Sutherland’s boast “I never move away from a fight,” Browne suspected that the Seville board meeting would be bloody, but he rejected the notion of defeat. Unfortunately for him, he was trapped. He would be unable to avoid a fight. The first substantive item for discussion was the failure to hit the 5- to 7-percent growth target set in July 2000. An arranged confession by Dick Olver that Browne’s objectives were overoptimistic provoked what eyewitnesses would call “a blazing row between Peter and John.” At the end of the day, spurning the traditional dinner, Browne flew back to London in a huff. Inevitably, the news leaked.
Lord Browne squirmed. The supertanker was holed below the waterline. The same newspaper columnists whom he had wooed now questioned whether he was losing his magic and, reflecting the opinions of Browne’s enemies, whether he was a fallen god. Rather than confront his critics, on Thursday, October 31, 2002, Browne avoided journalists at BP’s annual champagne party at the British Museum. The universal idolization had ended abruptly. Browne’s swagger had become a stagger. “No one should stay chief executive for more than seven years,” a director was told by Peter Sutherland. “Corporations need renewal.” Sutherland suggested that the board should begin considering the succession, but Browne’s considerable achievements prevented the stumble becoming terminal.
At the beginning of December 2002, to counter the suggestion that he was out of touch with his own company, Browne ordered an inquiry to discover why BP had missed its targets. To many, this appeared a mere gesture. In Blairite Britain, the public had become cynical about targets, with their Stalinist overtones, and inconsequential inquiries that appeared designed merely to distract attention from failure. Externally, Browne’s credibility had been injured, but within the corporation he was undiminished, even if he was compelled to retrench. The most noticeable casualty was “Beyond Petroleum.” Internal criticism had eviscerated the operation. Rodney Chase supervised the death. Executives at ExxonMobil and Shell were delighted. In response to BP’s campaign they had increased their own environmental campaigns — Shell by an additional $30 million — and now BP had slackened the pace.
Detractors whispered that Browne’s diligence was slipping. Options to drill for oil off West Africa, the Gulf of Mexico and the Caspian had been allowed to pass. BP’s opportunities to expand in OPEC countries were waived. Browne’s prediction of world recession during 2003 if oil rose to $30 a barrel lacked credibility. And yet, in the most unexpected circumstances, he was about to reestablish his supremacy, especially over Lee Raymond.
Chapter Fourteen
The Twister
MIKHAIL FRIDMAN and his partners were not Browne’s natural allies. Tough wheeler-dealers ignorant about the production of oil could not fit easily into a partnership with a multinational corporation. Browne’s choices, however, were limited. Like BP’s rivals, Browne’s search for assets in Russia was constrained by President Putin’s new conditions, but encouraged by his safeguards. During 2001, Browne considered a deal with Yukos before concluding that Mikhail Khodorkovsky, although keen, would not cede control, and the company was too expensive. “The discussions are terrible,” a banker confessed. “Khodorkovsky and Lebedev don’t make sense. Let’s go with Fridman, the devil we know.” Astutely, Fridman had bought oilfields around Sidanco’s properties, including Samotlor, one of the biggest and oldest reserves in western Siberia. Combining TNK and Sidanco to create Russia’s third-largest oil corporation would reverse BP’s declining reserves by adding four billion barrels, nearly 30 percent of
the total. In summer 2002, Browne finally decided to trust Fridman. “This would be the biggest deal in history,” he smiled. The quest was also a challenge for Fridman. Putin was again changing the rules.
Vladimir Putin, like all KGB officers, enjoyed fostering uncertainty by mixing authority and enigma. His election as president in 2000 signaled to Fridman and other oligarchs the revival of a familiar atmosphere experienced before Gorbachev’s introduction of perestroika. Portraying themselves as hard, wise and untouchable, the trusted siloviki who entered the Kremlin with Putin were all former KGB officers, technocrats and friends employed by Anatoly Sobchak, the mayor of Saint Petersburg whose Soviet outlook had become loathed during Yeltsin’s era.
Fridman, an outsider uninterested in politics and lacking the finesse to cultivate relationships in the Kremlin, had astutely forged a partnership in 1993 with Peter Aven, first as an adviser and then as a 13 percent shareholder in the Alfa Bank. In 1991 and 1992, as the minister of foreign economic relations in Moscow, Aven had enjoyed a good relationship with Putin, his subordinate in Saint Petersburg. Eight years later, Aven was Fridman’s invaluable passport into Putin’s closed circle. Two men, Aven established, formulated Russia’s energy policies. Sergei Priodka, a foreign affairs aide, guarded access to Putin. The second and more important was Igor Sechin. Born in comparative poverty, Sechin had been spotted by Western intelligence services while working during the 1980s as an interpreter for Russia’s military and political advisers in Mozambique and Angola, supporting the socialists Samora Machel in Mozambique and Augustino Neto in Angola during the bitter strife in the former Portuguese colonies. Sechin would confide to the very few who penetrated his steely façade that his fluent Spanish and Portuguese were self-taught. “I never made mistakes in my essays or in the translation tests,” he explained. On his return to Russia, he was initially employed as a translator in the mayor’s office in Saint Petersburg and then promoted at Putin’s suggestion. Sechin, the president believed, was discreet, diligent, loyal and “not interested in money.” The workaholic grandfather of two could be trusted to exclusively pursue the interests of the state and to eschew self-enrichment through corruption. His priority, he had been told in 2000 by Putin, was to repair Russia’s oilfields.
In a doctoral thesis written in Saint Petersburg in the mid-1990s, Putin had developed an argument that Russia’s prosperity and restoration as a superpower should be built by reasserting sovereignty over its natural resources. In a speech in June 2000, he had criticized the Russian oil ministry for tardiness and failing to invest. More foreign expertise, Putin believed, could solve the dearth of management and finance. With the help of Western oil companies, Russia’s production had already increased over the previous two years by 15 percent, providing about 10 percent of the world’s supply. Although unsure about the precise terms of future agreements with Western oil companies, Putin was certain, after reading reports about the improvements executed by Lukoil and Yukos, that the oligarchs’ ownership of the oilfields should be tolerated so long as the state’s interests were unharmed. Sechin was to be the executor of that policy. His learning curve was steep. Uneducated in capitalist economics and competition, he read voraciously, listened to invited experts, encouraged debate and asked questions, harshly castigating anyone who revealed ignorance. He had been angered by Russia’s painful experiences during the 1980s and 1990s, and his approach was colored by instinctive insecurities and suspicions about foreigners, mirroring Putin’s own xenophobia. Western capitalists, Sechin believed, were intent on exploiting Russia, and the oligarchs were equally objectionable. Both groups, Sechin acknowledged, were unfortunately indispensable to fulfill the president’s agenda. As he became more familiar with energy and commerce, visitors spotted a hint of humor. The agenda was still flexible, although he shared Putin’s bewilderment about why Russian oil was priced lower than Brent. After all, he repeated, “Crude is crude.” Unsophisticated about trade, he could not understand that his attempt to establish a futures market in Saint Petersburg would fail after traders discovered his attempt to control prices. Resistant to capitalism and uneasy about the Gorbachev and Yeltsin legacies, Sechin balanced Russia’s integration into the world’s market economy with single-mindedly protecting Russia’s oil interests. As for Russia’s gas industry, Sechin noted, that was the president’s preoccupation.
Gazprom, the owner of about one sixth of the world’s proven natural gas reserves and the source of 20 percent of Russia’s taxes, was infected by corrosive corruption. Since August 1999 there had been a struggle over the company’s fate between Viktor Chernomyrdin, the former prime minister who had become the company’s chairman, and the oligarch Boris Berezovsky. Gazprom’s American shareholders suspected that some Russian directors had sold shares in the company to relatives below market value, and had awarded contracts, especially to build pipelines, to accomplices. Some Gazprom assets, the shareholders found, had been sold for artificially low amounts, especially to Itera, an American company established in 1992 in Jacksonville, Florida, although Gazprom denied any links with Itera. Itera’s 12 employees in Jacksonville, ostensibly trading food with Turkmenistan, actually employed about 7,000 people in 24 countries. As Itera expanded, Gazprom shrank. Following Berezovsky’s complaints about this racket, Putin replaced Chernomyrdin with Dmitri Medvedev and Alexei Miller, both of whom had been Putin’s subordinates in the foreign relations committee in Mayor Sobchak’s office. By refusing Itera access to the Gazprom pipelines, Miller squeezed its directors in America to return the contracts to Gazprom for a pittance. Putin’s attitude toward Western investors would be made evident by his rejection of the American investors’ demand for compensation. Complaints of this nature went unreported as Putin eliminated Russia’s independent media. The beneficiaries were Gazprom’s new executives.
On July 28, 2000, the oligarchs were summoned to the Kremlin. Mikhail Fridman, Viktor Vekselberg and a handful of others gathered in a committee room to await the president. In advance, all had sought to discover the purpose of the unusual gathering. “Messages” from the Kremlin explained that after Chernomyrdin’s removal, Putin wanted to set the parameters of the oligarchs’ influence. When Putin appeared, he told the oligarchs that they could retain their billions, but they were requested to withdraw from politics. Mikhail Fridman’s bank could keep its shareholding in TNK, but would be expected to invest in Russia, and not deposit its profits in foreign banks. Effectively, Putin had deactivated the oligarchs. Without political influence, they joined the ranks of the powerless rich. Berezovsky and Mikhail Khodorkovsky, who were not present at the meeting, decided to ignore the president’s edict.
During 2001, the mood in Moscow changed. The increasing price of oil to $32 a barrel stiffened Putin’s inclination to limit Western companies to difficult projects, especially offshore, and to decline their latest entreaties for PSA agreements. He accepted Khodorkovsky’s claim that PSAs provided an incentive for the Western oil majors to increase costs and to siphon money toward corrupt bureaucrats. By contrast, standard contracts with the oil majors would encourage high profits and the payment of more taxes to the government. Putin, however, was equally hesitant about agreeing any private deals. To Washington’s irritation, he appeared unsure about the mechanics of simultaneously increasing production and limiting Western operators’ profits from Russian oil.
Reports from the Kremlin described a plan proposed by Russia’s minister of trade German Gref, a champion of the free market, to increase production by compelling Russia’s oil companies to improve their operations in existing fields. Under the headline “Gref Says It’s Time to Squeeze Big Oil,” the Moscow Times described Gref’s proposal to intensify production in the existing fields, and block the development of new fields and new pipelines. The Western oil majors and Washington were partially sympathetic to the idea. Russia, many believed, possessed three times more oil and gas than was admitted in the official estimates, but that additional oil was worthless unless the old Soviet
pipeline system linking the oilfields and refineries with military bases was replaced by pipelines from oilfields to ports to supply Europe and the USA. Those arguments were strengthened after the terrorist attacks on September 11, 2001. Strikes in Venezuela’s oilfields and Iraq’s threat to suspend exports increased the world’s dependency on Russian oil. Putin obliged, and was hailed by the White House as a reliable ally against terrorism and a dependable source of oil compared to the Middle East. One landmark had been passed. In October 2001, crude oil had finally arrived at Novorossiysk on the Black Sea through the $2.6 billion pipeline from Chevron’s oilfields in Tengiz. Even though Moscow controlled the pipeline, Washington was relieved to have Moscow as an ally against Saudi Arabia. Ali al-Naimi’s visit to Moscow in November, requesting a small cut in production to reverse the oil glut, had failed to secure even a token half of 1 percent (160,000 barrels a day) response from the Kremlin. A follow-up visit by Mexico’s energy minister seeking Russian support for OPEC actually encouraged Russia to increase production to strengthen its finances. During 2002 Russia produced 8.5 million barrels a day, and briefly overtook Saudi Arabia as the world’s largest producer. Putin’s dilemma was how to reach his target of 10.5 million barrels a day in 2010, and 12 million in 2012, without Western help. Despite his opposition to private pipelines, in April 2003 he did approve Khodorkovsky’s plan to construct a $4.5 billion pipeline from western Siberia to Murmansk, financed by a consortium including Lukoil, TNK and American investors. Completion was set for 2007. Putin’s unreconciled quandary about Western investment coincided with John Browne and Mikhail Fridman finalizing their negotiations.