Seven Elements That Have Changed the World

by John Browne

  Rockefeller’s business practices were ruthless and his tactics were often underhand. If a competitor did not agree to being bought out, Rockefeller would give them ‘a good sweating’, cutting the price of oil products in that particular market and forcing them to operate at a loss.53 With no choice but to sell, Rockefeller would get the company at a discount. One by one he squeezed his competitors out of the game. In Cleveland, Standard Oil managed to acquire and shut down twenty-two out of its twenty-six competitors in less than two months. By 1879 it controlled 90 per cent of America’s refining capacity and much of the US oil pipeline and transportation network.

  The public regarded Standard Oil as too powerful, very devious and extremely ruthless. The company’s operations were entirely opaque and they seemed accountable to no one. Standard Oil failed to realise the full scale of public opposition towards them. In 1888, one senior executive wrote to Rockefeller, in a manner sometimes imitated in corporate life even today: ‘I think this anti-Trust fever is a craze, which we should meet in a very dignified way & parry every question with answers which while perfectly true are evasive of bottom facts.’54 In 1911, to restore competition and reduce its power, Standard Oil was broken up under the Sherman Antitrust Act.55

  Rockefeller’s reputation is therefore that of a ‘robber baron’ who sought only personal gain with no regard for the hurt he caused his workers, their families and others in the industry. Most famously, the American journalist Ida Tarbell wrote that it was ‘doubtful if there has been a time since 1872 when he has run a race with a competitor and started fair’.56 Tarbell believed Rockefeller to be ‘the victim of a money-passion which blinds him to every other consideration in life’.57 In this respect Rockefeller was truly successful: he became the world’s first nominal billionaire in 1916.58

  However, Rockefeller’s strong religious beliefs led him to behave in an apparently contradictory manner: he decided to give much of his money away. In his philanthropic gestures, Rockefeller was remarkably forward-looking. In 1882, he gave money to a black women’s school, when higher education for both women and blacks was frowned upon by many. He believed that philanthropy at the time was ‘conducted upon more or less haphazard principles’, and he sought to make it more effective.59 He would take a business-like approach to each potential beneficiary and make sure that he never gave them so much money that they would become dependent on his gifts. He wanted people to be able to help themselves, writing that ‘instead of giving alms to beggars, if anything can be done to remove the cause which lead to the existence of beggars, then something deeper and broader and more worthwhile will have been accomplished’.60 He was in the vanguard of attitudes to ‘self-improvement’.

  Rockefeller’s behaviour is, in some ways, reminiscent of today’s Russian oligarchs. They have accumulated wealth on a similar scale, many having started from poor backgrounds just like Rockefeller. They have also made their money by, at times, foul and unfair means.61 And like Rockefeller, some of the oligarchs have now matured to a point where they want to give some, or all, of what they have earned back to society.62 But this did not seem to be the case when I first encountered them during Russia’s ‘Wild East’ capitalism of the 1990s.

  Russian risks and rewards of oil

  18 November 1997: watched over by the British Prime Minister Tony Blair, and Russia’s First Deputy Energy Minister, Viktor Ott, I signed a contract worth about US $600 million with Vladimir Potanin, one of Russia’s most powerful businessmen.63 The deal was for a 10 per cent share in the oil and gas business Sidanco and it was BP’s first step into the country. Russia had improved since I had first visited in April 1990, but the country was still a wild and lawless place and none of us could forecast in what direction it was going to move. By signing at 10 Downing Street, London, and with Blair and Ott acting as our ‘godparents’, BP had hoped to protect itself against the more underhand of dealings.

  Getting to this stage had not been easy. In the chaos that surrounded the collapse of the Soviet Union, output from the oil and metal companies had fallen dramatically. The cash-strapped government had then sought to sell them off to businesses or individuals in return for loans. As a result, seven individuals acquired many of the state’s assets at what turned out to be a knock-down price, mostly through the notorious ‘loans for shares’ scheme, which came to be known as the ‘sale of the century’.64 The seven individuals became known as the oligarchs; they were the ones resolute enough, and in some ways lucky enough, to come away with an extraordinary prize. Potanin was one of them and, at one stage, his empire controlled about 10 per cent of Russia’s GDP.

  In summer 1998, BP began to notice that Sidanco’s oilfields, held in many smaller subsidiaries, were gradually disappearing. A new bankruptcy law passed earlier that year was being used to acquire the assets at a heavily discounted price. A general manager of one of Sidanco’s subsidiaries would issue short-term debt, which would then be bought up by a third party. On maturity, repayment would be demanded, but the general manager would decline to pay the debt. The third party would then take the subsidiary to trial in bankruptcy court, far from Moscow and without telling BP. It would always win and get the subsidiary at a knock-down price; the general manager would be rewarded for efforts in the scheme.

  In November 1999, BP learnt that Sidanco had lost its biggest asset, Chernogorneft, which was responsible for three-quarters of Sidanco’s production. The field had been auctioned off through the same farcical bankruptcy process to the Tyumen Oil Company (TNK). By now BP had lost most of its initial investment, but if it had allowed itself to be pushed out of Russia it would almost certainly never be able to go back. Russia was too important an oil province for BP to leave and so it had to play TNK at its own game. TNK had borrowed a lot of money to buy up the Sidanco debt and BP was able to trace these loans to a number of Western banks. BP told the banks that the credit they had supplied was being used to support corruption. Slowly the loans dried up. As they did, Mikhail Friedman, the major shareholder of TNK got in touch with BP.

  It turned out that, as is usual in conflicts, the ‘theft’ of Sidanco’s assets was not clear-cut. Friedman was pursuing what he considered to be his legitimate rights as an early shareholder who had been unfairly bought out by Potanin for a fraction of the asset value. Potanin had been weakened by the 1998 financial crash in Russia and so Friedman had decided to take advantage of him. Eventually BP reached an agreement with Friedman: the company would get its assets back, and acquire half of TNK for an investment of $8 billion, BP seemed to be firmly established in Russia. As 2012 drew to a close, though, BP and its partners were ready to sell TNK-BP for a sizeable profit to a state-controlled oil company, Rosneft. In less than two decades, the ‘sale of the century’ had been reversed.

  The oligarchs had become more successful and more powerful. Over time, they wanted to protect their own wealth both from the reach of the government, which could apply the law to its advantage, and from simple theft. In this way they were like the nineteenth-century American robber barons. They used their political influence to keep as much power as possible for as long as possible. In history, the development of oil tends to concentrate power and wealth in the hands of only a few. Even after the ‘dragon’ that was Standard Oil had been slain in 1911, the power of oil continued to remain in the hands of a few.65

  From Standard Oil to the Seven Sisters

  For the first half of the twentieth century the so-called Seven Sisters, consisting of the largest fragments of Standard Oil, along with rival US companies Texaco and Gulf and European companies British Petroleum and Royal Dutch Shell, controlled production from the majority of the world’s oil reserves.66 Working as a cartel, they respected each other’s markets and were able to eliminate other competitors, much as Rockefeller had done in the US.

  The Seven Sisters also received support from their domestic governments. In 1914, Winston Churchill, then the First Lord of the Admiralty, purchased a controlling stake in the Anglo-Irani
an Oil Company for the British government to ensure a secure oil supply for her navy. Similarly, the US government asked its oil companies to participate in arrangements in the Middle East that were contrary to the same laws which had been used to break up Standard Oil.

  The initial success of British Petroleum and Royal Dutch Shell depended on their oil discoveries in the British and Dutch empires. Although these empires were gradually dissolved after the Second World War, colonial attitudes remained and the Seven Sisters continued to exert considerable power over oil-exporting countries until the 1940s.

  The balance of power began to shift from the oil-consuming countries to the oil-producing countries when Venezuela negotiated the first ‘fifty-fifty’ deal in 1943. Under the new petroleum law, government oil revenues would equal the profits after taxes and royalties in Venezuela of any oil company operating there. The fifty-fifty principle soon spread to the Middle East and became standard practice across much of the global oil industry. Many oil-exporting countries wanted more: the oil belonged to them and so, they believed, they should receive the lion’s share of profits.

  The ‘fifty-fifty’ principle was eventually broken in 1957 when Enrico Mattei, president of ENI, the Italian multinational oil and gas company, conceded to an unprecedented 25:75 split between ENI and Iran. Italy wanted a share in the new giant Middle Eastern oilfields, known as ‘elephants’, that were discovered in the 1950s. Mattei was derisive about the close ties between large international oil companies and wanted to weaken their stronghold on the world’s oil supplies. In his aggressive pursuit for reserves, he struck a deal that no other oil company was prepared to agree.

  The weakening of the Seven Sisters along with the sudden discovery of vast new oil reserves provided opportunities for new oil companies to get involved in the game. The growth of new reserves also resulted in a surplus of oil. Unable to compete with low Soviet oil prices, oil companies began to cut the price they were prepared to pay for their oil (the ‘posted price’), but this also cut the national revenue of oil-exporting countries.

  In response, in September 1960 five major oil-producing nations formed OPEC. In doing so they hoped to take control over the setting of the international oil price. However, supplies were abundant and oil companies, which controlled the market outlets, treated the oil-exporting countries with disdain. Rivalries inside OPEC made price setting even harder and so the price of oil fell throughout the decade.67 Not only had OPEC failed to raise the price, they had failed even to defend it.

  In the 1970s demand caught up with supply. Realising the power they now held, in 1973 OPEC unleashed the ‘oil weapon’.

  Anxiety about oil supplies

  On 6 October 1973 a coalition of Arab states led by Egypt and Syria launched a surprise attack on Israel, starting the Yom Kippur War, known as such for commencing on the Israeli holy day of Yom Kippur. By choosing for the attack a day of religious fasting and rest, the Arab forces hoped to catch Israel when it was least prepared. Although Israeli armed forces were strong, they had miscalculated how long their supplies would last. As they ran out of equipment against the Soviet-supported Arab forces, Israel asked for help from the US, who then provided it.

  In response to US support for Israel, Arab members of OPEC cut production by 5 per cent from the September level. They then announced a further 5 per cent cut each month so as to increase pressure on the US. With gradually diminishing oil supplies, the US economy was being stifled.

  The war continued and, later in October, President Nixon announced a $2.2 billion military aid package for Israel. Saudi Arabia, the world’s largest oil exporter at the time, retaliated by announcing a complete embargo of oil shipments to the US. Other Arab states soon followed suit.

  Prices rocketed to over $50 a barrel of oil in today’s money, the highest since the wildcat days of the oil industry at the end of the nineteenth century. The price increases were worsened by OPEC’s announcement in the previous week that it was taking complete authority over the setting of the posted global oil price, raising it by 70 per cent. These events marked the beginning of our modern anxiety over oil supplies.

  At the time I was living in New York and working on Alaskan oil developments. On OPEC’s announcement, the city was thrown into a state of turmoil. Queues for gasoline stations ran for blocks down the street. People would drive from station to station searching for fuel. Even with their tank nearly full, they would wait for hours for a top-up; who knew if there would be any gasoline tomorrow? The embargo galvanised America into action: in January 1974, we received the long-awaited authorisation to build the Trans-Alaska Pipeline to run between our super-giant oil field in Prudhoe Bay in the north of Alaska and the Valdez terminal in the south.68 It would eventually start production in 1976 and at its peak in 1988 supply over two million barrels of oil per day, equivalent to almost 12 per cent of the US’s demand for crude oil.69

  The oil crisis of 1973 marked a new relationship between those who produced oil and those who consumed it. No longer was oil a plentiful resource, the supply of which could always be assured. It was now a political weapon, a vital strategic interest and the cause of frequent crises in the global economy. The next of these crises was to emerge in the Iranian Revolution of 1978. Iran then provided 20 per cent of the world’s oil, and so the global supply was disrupted and the price again rose.

  Iran’s rich oil reserves were a cause of the Iran-Iraq war of the 1980s and also Iraq’s invasion of Kuwait in 1990. Wary of neighbouring Iran’s great oil wealth, Saddam Hussein wanted to increase Iraq’s power, and one way of doing that was to increase his oil reserves. As Iraq invaded Kuwait in August 1990, oil wells were abandoned, disrupting global oil supply once again. Several months later, Iraqi forces fled following a US-led military attack, but not before they had set Kuwait’s oil wells alight, stopping production for months afterwards. We all vividly remember images of the thick black smoke rising from Kuwait’s burning oil wells. BP had developed the Kuwait oilfields and so, being the then sole possessor of information on the fields, cooperated in the clean-up operations.70 Later that year, I visited Kuwait and was shown around the fields. The fires had only just been put out and all that remained was a mass of twisted, molten equipment. The entire desert was black; it looked as though it had been asphalted.

  Unstable politics, increasing demand and OPEC’s tightening grip on oil supplies led to high prices through the 1970s. However, high prices also stimulate greater investment in exploration and production. This is just what happened and by the middle of the 1980s new oil supplies, combined with an economic downturn, caused the price of oil to slump to very low levels, which persisted through the 1990s. This presented oil companies with a new challenge altogether.

  To survive with the low oil prices of the 1990s there was a need for consolidation in the industry so as to benefit from economies of scale. BP was too small. If BP did not acquire another company it would surely have been taken over by another. I began discussions with Larry Fuller, chairman and CEO of Amoco, and on in August 1998 I announced that BP would merge with Amoco, triggering a wave of mergers across the industry: Exxon merged with Mobil, Chevron with Texaco, Conoco with Phillips and Total with Fina and Elf.71 Between 1998 and 2002 the industry went through the most significant reshaping since 1911 and the break-up of the Standard Oil Trust. The biggest deal, the merger of Exxon and Mobil, brought together the two largest companies to have emerged from its 1911 dissolution. Scale brought efficiency, security and clout, enabling these newly created super-majors to compete with states and governments and take on bigger challenges of greater technological complexity. The risks of oil extraction could be spread over a greater number of barrels of oil.

  In the 1990s, oil prices were low and national oil companies (NOCs) lacked the confidence to compete. The size of the super-majors, combined with their expertise, made them valuable partners for producer states. But today the growing size of NOCs combined with high oil prices has once again shifted the balance of
power back towards producer states. Around the world, producer states have reduced the share of rents given to the super-majors. In Bolivia, the government has seized oilfields outright; in Venezuela the government has rewritten contracts to give the national oil company control; and, most recently, in Argentina a controlling stake in the former state-owned energy company YPF was seized from Spain’s Repsol.

  The relationship between the super-majors and oil-producing nations is often tenuous: one side answers to its shareholders, the other to its citizens. Both sides want to extract as much natural wealth as possible; the question of who gets what remains one of power.

  The problem of Ricardo’s rents

  It was 1999 and I arrived at Claridge’s hotel in London where I was to meet Hugo Chávez for the first time since he had become president of Venezuela the previous December. I was hopeful. Chávez had not given details about his plans for his country’s oil industry, but he had said that he regarded continued foreign investment to be of vital importance.

  Since 1993, under the presidential leadership of Carlos Andres Perez and later Rafael Caldera, international oil companies were being invited back into the country as part of the opening of the economy, la apertura.72 The new head of the state oil company Petróleos de Venezuela SA (PDVSA), Luis Giusti, played a central role in this, as, indeed, had BP’s general manger on the ground, Peter Hill. During the years of ‘la apertura’, there was a constant flow of international talent and capital into the country. Billions of dollars had poured in; production from Venezuela’s declining oilfields was being increased. There was a great sense of possibility within PDVSA and international oil companies alike.