Seven Elements That Have Changed the World

by John Browne

  Facing Chávez in the hotel room, it soon became clear to me that this was all about to change. A few minutes into the meeting he started on a speech about the ‘evils of foreign oil companies.’73 To Chávez we were the new face of those who had, for centuries, pillaged the natural riches of South America; to rest of the world, Chávez was the new face of resource nationalism.

  The conflict between private oil companies and oil-producing states centres on the problem of rents, an idea first formulated by David Ricardo at the beginning of the nineteen century.74 Ricardo’s Law of Rent assigns a value to land based purely on its intrinsic ‘natural bounty’. Venezuela was traditionally an agricultural nation, dependent on the production of cocoa, coffee and sugar. The low value of these goods could only support a small and poor population; the land had little intrinsic value. The discovery of oil in the early twentieth century created a sudden shift in the Venezuelan economy. The price of oil was high enough so that, after all costs of production and a reasonable return to investors, a surplus was left. This surplus is defined as rent, the inherent value of the land.

  Who should receive this rent and how much should they receive? Is it the oil companies that extract the oil, or the state that owns the land? Both hold a claim. Oil companies take great risks in exploring and developing production in foreign countries – in Alaska, for example, BP nearly walked away with huge losses following a fruitless ten-year search. On the other hand, the land and its ‘natural bounty’ are the property of the state. Any state will want to get as big a share as possible. Companies are invited in to find and develop reserves and, in a perfect world, the rules under which they operate would remain unchanged. However, experience shows that, when oil starts flowing, the state squeezes. The investment is sunk and oil companies are defenceless. But there are only a limited number of times the state can get away with these tactics before investment is frightened away. Eventually, companies leave, taking their highly trained people, expertise and investment with them.

  The progressive oil industry reforms implemented by Giusti and Pérez in the early 1990s were beginning to reverse the economic decline of the 1980s, but Chávez’s revolution put an abrupt stop to this.75 When Chávez came to power in 1998 he quickly denounced Giusti as ‘the devil who had sold the soul of Venezuela to the imperialists’. Now the state wanted all the rent. PDVSA quickly became ‘the cash box’ of the state. With financial control of the company in the hands of the central government, the state could now do what it wanted. Following a strike against his presidency in 2002, Chávez fired almost half the workforce. Many of his allies, largely military personnel, were put in power at PDVSA.

  Since Chávez’s election, Venezuelan oil production has fallen by 20 per cent, from 3.5 million to 2.7 million barrels a day. Fortuitously, increasing oil prices worked in Chávez’s favour, masking the decline in production. But he had lost valuable expertise and investment, severely harming the long-term development of Venezuela’s resources and undermining the contribution that oil could bring to his citizens and the rest of the world.

  A similar story can be told about Libya following the expropriations by Colonel Qaddafi in the 1970s. In one extraordinarily naïve moment three decades later, when I made a visit to him in his tent, he asked me why he had lost all the industry expertise he needed and why his oil production was in decline. He admired other African nations and said he wanted to be like them. He realised they had kept their expertise even after nationalising some of the foreign company interests in their countries,76 but he failed to understand that people go away when there is nothing left in it for them.

  Long-term cooperation is needed between private companies and the state if oil development is to remain innovative and sustainable. Globalism and nationalism often seem incompatible. By striking the right balance between these extremes, resource development can benefit everyone. When handled correctly, the relationship is one of constructive tension, producing oil to meet global demands but also providing wealth to the nation state. And this is a lesson to be learnt again and again. Yesterday’s Venezuela and Libya are not good examples for today’s newly emerging oil states, many of which are in Africa.

  A curse or blessing?

  ‘I call petroleum the devil’s excrement. It brings trouble … Look at this locura – waste, corruption, consumption, our public services falling apart. And debt, debt we shall have for years.’77 What could cause Juan Pablo Pérez Alfonso, one of the founders of OPEC, to denounce oil as the devil’s excrement? In 1948, Alfonso had negotiated the first 50:50 split of rents between international oil companies and the state, greatly increasing the state’s share of oil revenues. Ever since that time he had seen the harmful impact of oil wealth on the Venezuelan economy and society.

  John D. Rockefeller always thought that ‘oil is almost like money.’78 Such easy wealth can breed complacency and, with little to strive for, an oil state’s innovation and competition suffer. Time is spent arguing over who gets the money rather than developing the economy. An economy predominantly based on oil is also highly unstable: when the price is high the economy thrives, but when it crashes, so does the economy. Alan Greenspan, one of the greatest central bankers of our time, was well aware of the distorting effects of oil when he told me that he would advise any African leader who had discovered oil to forget about it, and to hide the news. Such is the perceived curse of oil.

  The potential for development of a nation that is rich with oil can be further stifled in a corrupt system of governance where the rent never makes it into the hands of its citizens. This can happen during civil conflict or in the aftermath following the departures of colonial rulers. Corrupt leaders can remain wealthy and powerful just by controlling key infrastructure. They need pay no attention to their country’s economy or the views of their citizens. This is the ‘oil curse’.79

  In the early 1990s, I was in Angola to discuss BP’s possible involvement in the country’s offshore oil activity.80 As I was driven through the war-torn streets of the capital Luanda, the visible poverty made it clear that Angola was falling foul of the oil curse. The civil war began in Angola immediately after Portugal, which had colonised the territory in 1483, handed back power. It started in 1975 and continued, with some interludes, until 2002. The conflict was between two main opposing political movements, the socialist People’s Movement for the Liberation of Angola (MPLA) and the anti-communist National Union for the Total Independence of Angola (UNITA).

  Angola has great natural wealth in the form of oil and diamonds (a pure form of crystalline carbon).81 In the initial chaos of the conflict, UNITA captured the best Angolan diamond deposits, while MPLA took control of the oil reserves. Two forms of carbon, both sources of great wealth, were funding opposite sides of a civil war. At first, diamonds and oil were only a means to make war. However, the wealth and power they gave both sides of the conflict also made them a reason to continue fighting. Angola’s citizens, caught up in the conflict, fell into deep poverty.

  In 1998, the UK-based NGO Global Witness published a damning report on the impact that the illegal diamond trade was having in supporting the conflict in Angola.82 The report stated: ‘The international community … has become complicit with diamond barons’, helping UNITA to rearm itself in a war which had caused around half a million deaths during the mid-1990s alone.83 Diamonds can be used to hide vast wealth in a minute volume and, by avoiding paperwork, traded without trace. UN prohibitions on the sale of these diamonds were being flouted and companies that did so were not being prosecuted. In particular, Global Witness pointed the finger at De Beers, who controlled around 80 per cent of the world’s diamond trade.84

  In the following year, Global Witness published another scathing report aimed at the Angolan oil industry.85 Oil was, and still is, the main source of revenue for Angola; at the time it represented as much as 90 per cent of the government’s income. Global Witness reported that much of the wealth was being siphoned off by corrupt officials, rather than bei
ng used to help repair the war-torn country. They suggested that BP take the drastic step of publishing the records of all the contractual payments they had made to the Angolan government. And that was exactly what BP did.

  By ensuring transparent disclosure, and the consequent scrutiny of financial flows, BP had hoped to put pressure on the government to use oil money in ways that would benefit the wider Angolan population. In the longer term, it would also limit the taxes BP might have had to pay: if the government used the money wisely they would not come back and ask for more. It was clear that if this idea was to be sustainable, it needed to be made into a standard that applied to all countries. So I went to discuss it with Tony Blair, who agreed to help establish an appropriate institution. In 2002, at the World Summit for Sustainable Development in Johannesburg, Blair announced the creation of the Extractive Industries Transparency Initiative (EITI). The EITI was a mechanism to encourage countries to publish the payments they received from oil, gas and mining companies. Encouraging government cooperation was vital. It does not matter how many companies publish financial records; transparency is only effective if governments also publish spending records for comparison. Only then is scrutiny possible.86

  The EITI is only a small part of the solution to the oil curse suffered by Venezuela, Angola and others, but the transparency it supports is a necessary starting point. There is plenty of room to do more.87 For example, the EITI does not cover how exploration and development contracts are awarded. Corruption is often more subtle than the direct siphoning off of state funds. Officials may give contracts to companies that are less qualified if they think they are more likely to give kickbacks.

  Transparency initiatives, such as the EITI, are currently voluntary. This must change so that there is nowhere for anyone to hide. Companies must disclose all payments to foreign governments in sufficient detail for citizens to see what is happening to their locally generated revenues.88 Perhaps then oil will become more of a universal blessing.89

  Future oil

  Finding and developing new oil reserves and recovering more of the old oil reserves will continue to be essential since demand is expected to keep rising. Over the next twenty-five years, it is expected to increase from eighty-eight million barrels a day to one hundred million, mostly as a result of rapid growth of ownership of cars and trucks in Asia. A sufficient diversity of supplies, and a cushion of capacity to produce more oil if needed, will probably reduce our concerns about shortage. Geopolitics will determine the rest: the level of rent taken by governments and the provision of the right incentives to get the appropriate skills so that their oil can be produced.

  A remarkable shift has recently occurred that could begin to ease the West’s anxiety over oil supplies. What started as a revolution in the production of natural gas quickly spread to the production of oil, and that is where the story of carbon will finish.

  NATURAL GAS

  Galeota Point, the south-eastern peninsula of the island of Trinidad, is the home of much of the region’s diverse wildlife; the tropical ecosystem is an important migratory ‘pit stop’ for many birds on their way across the Caribbean. It is also the home of some of the island’s most significant hydrocarbon reserves, which lie some way offshore.

  In May 2004 Patrick Manning, the Prime Minister of Trinidad and Tobago, was showing me the sights of the island by helicopter. The next stop was the vast tar pits in the centre of the island. The inky blotches stood out in the otherwise tropical landscape, a sure sign of the island’s rich oil and gas reserves. Trinidad contained some of the jewels that BP had recently acquired in its merger with Amoco, and I was there to ensure BP’s growth in the region would continue. BP had made several major gas discoveries in the late 1990s and early 2000s, including the first one in Trinidad’s deep water.

  Natural gas is mostly comprised of methane molecules. These are made up from one carbon atom connected to four hydrogen atoms. It is the simplest bonding of carbon with hydrogen and one of the most abundant energy sources on earth. Manning wanted to ensure that this latest find of natural wealth would be used for his people’s benefit.

  Trinidad had clearly been exploited by its former colonial masters. Spanish conquistadors first settled in Trinidad and Tobago in the sixteenth century. At the turn of the eighteenth century, Great Britain took control of the islands until they obtained independence in 1962. Over time, unsustainable agricultural practices had degraded the natural landscape, while slaves were imported from West Africa to harvest the sugar cane crop. As Manning further explained to me, they had exported the sugar produced on the island, but then could not afford to import the boiled sweets that were made from it.

  With the discovery of oil in Trinidad in 1886, the economic prospects of the country improved. Disused oil barrels were soon scattered over the island, forming the foundations of the Caribbean steel drum culture. The development of gas on Trinidad followed in the late 1950s and was used on the island for the production of ammonia for fertiliser. In the 1970s, new discoveries led to further growth of the island’s gas industry. The government wanted to use gas on the island, rather than export it, and energy-intensive industries became attracted to the area.

  The country’s dependency on oil and gas, as in Venezuela and Angola, brought its own set of problems. The rise and fall of Trinidad’s economy became closely tied to the volatile price of oil, thriving in the seventies when oil prices boomed, but crashing again during the ‘oil glut’ of the eighties. At the same time, poor performance of the local chemical industries pushed the country into a deep recession.

  When I spoke with Patrick Manning in 2004 he was serving his second term as prime minister. His first term was in the early 1990s, when the island’s gas industry was growing fast. It soon became clear that gas was by far the island’s most plentiful resource, oil having reached its production peak in 1978. With the scars of the oil curse in mind, Trinidad decided to use this gas to develop its energy-intensive industries further, creating new ammonia, steel and methanol plants to supply the large export market in the nearby US. In 2004, with a newly discovered set of gas fields, Manning was once again determined to use the island’s natural resources locally. BP helped further by incorporating the local community into its own industry: a gas platform, which went into operation in 2006, was largely constructed in Trinidad using local people and resources.90 Ensuring economic growth and preserving the natural environment around its activities was BP’s mission. If the local people saw harm or did not see a personal benefit from BP’s presence, public opposition could quickly have resulted in it being kicked out of the country.

  But Trinidad is only a small island, and the size of their large gas reserves holds plenty of potential for export as well as supporting local industry. When I met Manning, he explained his plans to form a pan-Caribbean political union, in which he would trade gas for other Caribbean commodities. Even among Trinidad’s Caribbean neighbours there was relatively little demand for gas, and so Trinidad looked further afield to the US. The problem was how to get the gas there cheaply.

  Frozen gas

  In its gaseous form, natural gas always takes up much more space than an energy equivalent amount of liquid oil.91 The energy is therefore extremely expensive to transport. A partial solution was found in the middle of the twentieth century with the development of a technology to liquefy the gas into liquefied natural gas (LNG).92 By compressing the gas and then forcing it through small valves the gas is cooled. This is the so-called Joule Thomson effect.93 By repeating this process several times, the LNG train, as it is called, cools the gas down to a temperature of minus 162 degrees centigrade so that it turns into a liquid. In doing so, the volume is reduced to one-six-hundredth of the gaseous volume, making shipping an economic possibility. Liquefaction is, however, an expensive process: a typical LNG train consumes about the same amount of power as two million domestic refrigerators, costs billions of dollars and takes years to complete. To be profitable, LNG has to be produced on a hu
ge scale and at the right price.

  During the 1980s, LNG from Trinidad could not compete with cheap indigenous gas in the US, where recession had led to an excess supply. So projects to take it to the US were abandoned as was a project to sell gas to Puerto Rico because the buyer would not commit to take the gas for long enough. However, a decade later the US gas surplus had disappeared. There was now a new and profitable export market for LNG. Trinidad’s first LNG train, called Atlantic LNG and operated by BP, came into action in March 1999 at Point Fortin in the south-west of the island. The creation of a new export market sparked new exploration in the country and proven gas reserves grew. Between 2002 and 2005, three more LNG trains were added to Atlantic LNG, fuelling a sustained period of economic growth on the island.94

  LNG enables natural gas to be transported to virtually anywhere in the world that has a terminal capable of receiving the LNG and turning it back into a gas. The development of huge new LNG trains around the world, notably in Qatar and Australia, is transforming a series of regional gas markets into a more global one with the advantage that disruptions to supply, whether caused by political events or natural disasters, can be dampened by quickly sourcing LNG from elsewhere.95 By 2011, the LNG market had expanded enormously and was a hundred times bigger than it had been forty years earlier. It now accounts for a third of all the gas transported internationally in the world. Natural gas has, relatively rapidly, graduated to become a very valuable source of energy. In China, though, 2,000 years ago, natural gas was viewed as a manifestation of evil.

  Pipeline problems

  Around 250 BC, when digging began in the salt mines of Sichuan in China, people thought evil spirits seeped up through cracks in the rock. Workers at the pits would suddenly become weak, lie down and die. At other times, the pits would be rocked by great explosions. Each year offerings would be made in the hope of appeasing the evil spirits. Miners soon realised that these deadly occurrences had a more scientific explanation: an invisible, combustible gas that would rise up through cracks in the rock. By AD 100 they were using these fuel streams to boil brine at the mine site, leaving behind residue salt. Pipelines were the next logical step. By AD 200 the Chinese were using bamboo tubes to collect the gas, caking joints with mud and brine to stop gas escaping from this rudimentary piping system. Natural gas could now be transported to boiling houses for cooking and boiling brine on a much larger, and more efficient, scale.