The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  The oil companies, he announced, were ready to begin the engineering, with the objective of beginning construction as soon as possible. As he made this declaration, almost as if on cue, on the dark historic waters behind him the shadowy silhouette of a large tanker glided by, illuminated only by its own lights. Its silent message seemed to be, How many more of these tankers could the Bosporus take? The pipeline had to be built.

  Many obstacles had to be overcome. The first was to convince a sufficient number of the AIOC partners that the pipeline was commercial and get them to sign up for it. Another was the sheer enormity of negotiating so many incredibly complex multiparty agreements that were required to build and operate and finance the pipeline, involving countries, companies, localities, engineering firms, banks, and financing agencies, among other parties. Here the United States played a key role by facilitating an intergovernmental agreement, and myriad other agreements, which otherwise, in the words of one of the company negotiators, would have taken “years to arrange and negotiate.”14

  Another continuing obstacle was the opposition of nongovernmental organizations (NGOs) on various environmental and political grounds. Would the pipeline be buried three feet underground, where it was accessible to repairs, or fifteen feet, where it would not be? (Three feet won out.) Much intense debate ensued as to whether the proposed route was a threat to the Borzhomi springs, the source of Georgia’s most famous mineral water. One tense negotiating session with the president of Georgia went on until 3:00 a.m., and then had to be extended another hour when a functioning photocopier could not be found in the presidential palace. The route, in the end, was not changed, but the consortium ending up paying the Borjomi brand water company about $20 million to cover the potential “negative reputational impact” of the pipeline. As it turned out, the reputational impact was surprisingly positive; the head of the Borjomi water company is said to have later described the episode as the best global advertising the mineral water could have ever gotten, and, better yet, it was free advertising.15

  “OUR MAJOR GOAL”: PETROLEUM AND THE NATION-STATE

  The BTC pipeline has been described as “the first great engineering project of the twenty-first century.” The 1,099-mile-long pipeline had to cross some 1,500 rivers and water courses, high mountains, and several major earthquake fault zones, while meeting stringent environmental and social impact standards. Four years and $4 billion later, the pipeline was finished. The first barrels arrived at the Turkish oil port Ceyhan, on the Mediterranean coast, in the summer of 2006, where they were welcomed in a grand ceremony. It had been twelve years since the “deal of the century” had been signed.

  As would be expected, an Aliyev was there at the very forefront among the dignitaries who proclaimed the importance of the day for the countries involved, the region, and the world’s energy markets. But it was not Heydar Aliyev; it was his son Ilham, the new president of Azerbaijan. Heydar Aliyev had not lived to see that day. For Aliyev, the KGB general and Soviet Politburo member who had gone on to become Azerbaijan’s premier “native son,” had passed away three years earlier at the Cleveland Clinic in the United States. But this day was the demonstration that his strategy had worked, that oil—and how he had played it—had given Azerbaijan a future that in 1994 had seemed almost unattainable. Petroleum had consolidated Azerbaijan as a nation and established its importance on the world stage. Or, as Ilham Aliyev had put it before taking over as president, “We need oil for our major goal.” Which was, he said, “to become a real country.”16

  Azerbaijan is also strategically important because it is a secular, Muslimmajority state situated between Russia and Iran. Today Azerbaijan’s offshore ACG field—a $22 billion project—ranks as the third-largest producing oil field in the world. Petroleum flows ashore at the new $2.2 billion Sangachal Terminal, just south of Baku, then moves into a forest of pipes and a series of tanks where it is cleaned and prepared for transit. Then the oil, now fit for export, all converges into a single forty-two-inch, crisp white pipeline. That is it—the much-debated Baku-Tbilisi-Ceyhan pipeline. The pipeline extends flat out on the ground for fifty feet and then curves down into the earth and disappears from sight. It bends and twists its way, mostly underground, until it surfaces again, 1,768 kilometers—1,099 miles—later at Ceyhan, where more than a million barrels a day flow into the storage tanks that fleck the Mediterranean shore, waiting for the tankers that will pick up their cargoes and take them to world markets. After all the battles of the great game, all the clash and clamor of the Caspian Derby, all the maneuvering and diplomacy, all the negotiating and trading and deal making, it all comes down to science and engineering and construction—the platforms and oil complexes in the Caspian Sea, and the $4 billion underground steel tubular highway that has reconnected Baku to the global market. As it carries oil, that pipeline also seems to be carrying the cargo of history, connecting not only Baku and Ceyhan but also the beginning of the twenty-first century back to the beginning of the twentieth.

  Subsequently, a second pipeline was built parallel to the BTC to carry gas from the offshore Caspian Shah Deniz field, one of the largest gas discoveries of recent decades, to Turkey. The pipeline, known as the South Caucasus Pipeline, was no less challenging technically, but politically a good deal easier. The hard work had been done by the oil line. The South Caucasus Pipeline further consolidated the Caspian with the global energy market.

  But Azerbaijan was only part of the Caspian Derby. Another round was being played out across the Caspian Sea.

  3

  ACROSS THE CASPIAN

  In the summer of 1985, spy satellites spinning high above the earth picked up something startling—a huge column of flames on the northeastern corner of the Caspian Sea, with plumes that stretched a hundred miles. It was an oil field disaster on a scale visible from space. A well being drilled—Well 37—in the newly opened oil field of Tengiz, in the Soviet Republic of Kazakhstan, had blown out, sending up a powerful gusher of oil, mixed with natural gas. It had caught fire, creating a flaming column that reached 700 feet or more into the air. The gas was laden with deadly hydrogen sulfide, which inhibited recovery efforts. The USSR Ministry of Oil had neither the capability nor the equipment to bring it under control. At one point the Ministry, desperate and at wit’s end, considered an “atomic explosion” to get the well under control.

  That option was never implemented. “We managed to intercede in time,” said Nursultan Nazarbayev, then the republic’s premier.

  Eventually American and Canadian experts were recruited to help. It took two months to put out the fire and four hundred days to get the well fully under control. This disastrous and costly blowout underlined the technical challenges facing the Soviet oil industry. But the burning “oil fountain” also illuminated something else: Kazakhstan might have world-scale petroleum potential.1

  KAZAKHSTAN AND THE “FOURTH GENERATION” OF OIL

  Kazakhstan today, one of the newly independent countries of the former Soviet Union, is a large nation in terms of territory, physically almost the size of India, but with a population of 15.5 million. A little over half is ethnically Kazakh, 30 percent ethnically Russian, and the rest other ethnic groups. With the exception of the new capital Astana, most of the population lives on the periphery of the country; a good part of the country is grassy steppe. During Soviet times, “each of the Union republics occupied a particular place in the division of labor,” as Nazarbayev put it, and Kazakhstan’s role was as “a supplier of raw materials, foodstuffs, and military production.” A quarter of its population had died during Stalin’s famine in the early 1930s. It was where Stalin exiled ethnic groups he did not like, where Nikita Khrushchev unleashed his disastrous “virgin lands” program to try to rescue Soviet agriculture, and where the Soviet Union tested its nuclear weapons. It was the place from whence the Soviet Union launched its spy satellites and where Russia today shoots tourists into space, at $20 million a shot.

  Kazakhstan had had a small lo
cal oil industry going back to the nineteenth century, an eastern extension of the great Azeri boom that had made the Nobels and the Rothschilds into oil tycoons. If West Siberia had been the giant “third generation” of Soviet oil, then it was expected that Kazakhstan, centered in Tengiz, would be a key part of the “fourth generation.”

  But Kazakhstan’s development was held back in the 1980s by lack of investment and technology in the face of difficult and unusual challenges, as evidenced at Tengiz. As former Soviet oil minister Lev Churilov wrote: “Exploration and production equipment stood frozen in time, with few technological advances after the 1960s.” In the effort to bolster the faltering economy and facilitate technology transfer, in the final years of the Soviet Union, Mikhail Gorbachev had tried to lure in foreign investors. Under that umbrella, a controversial American promoter named James Giffen brought together a group of U.S. companies that would serve as an investment consortium. 2

  TENGIZ: “A PERFECT OIL FIELD”

  One of the companies in the consortium was Chevron, which after looking around the Soviet Union came to focus on Tengiz. The company was deeply impressed by the huge potential. A “perfect oil field” is the way one Chevron engineer described it. With what was finally estimated as at least 10 billion barrels of potential recoverable reserves, Tengiz would rank among the ten largest oil fields in the world.3

  There were, unfortunately, a few ways in which it was not quite perfect. One was the problem of the “sour gas,” so-called because of the heavy concentrations of poisonous hydrogen sulfide. Sickeningly noxious with its rotten-egg-like smell, hydrogen sulfide is so toxic in large concentrations that it deadens the sense of smell, potentially dulling the ability of people to respond to inhaling it before it is too late. It would take considerable engineering ingenuity and a good deal of money to solve that problem. Other problems included the generally poor condition of the field and the enormous investment that would be required. There was an additional problem that would come to loom quite large—location. Tengiz was a far-off field with no real transportation system.

  In June 1990, the Soviets signed a pact with Chevron that gave the company exclusive rights to negotiate for Tengiz. It was a very high-priority deal. For in the words of Yegor Gaidar, Moscow regarded Tengiz as “the Soviet Union’s trump card in the game for the future.”

  But the Soviet Union was experiencing what Nazarbayev called “the distinctive symptoms of clinical death throes. The state organism sank into a coma.” When it collapsed altogether, Nursultan Nazarbayev became president of the independent nation of Kazakhstan. His communist days were over. He was now a nationalist, who would now look not to Marx or Lenin for his role model, but to Lee Kuan Yew and the emergence of modern Singapore. And never again, he said, would Kazakhstan be “an appendage.”

  The Tengiz field loomed as absolutely crucial to the new nation’s future; it was what Nazarbayev called the “fundamental principle” underpinning the country’s economic transformation. But it was in very poor shape. In many parts of the oil field, electric power was available only two hours a day. Tens of billions of dollars of investment would be required to bring the field up to its potential.4

  THE PIPELINE BATTLE

  After arduous negotiations, Kazakhstan and Chevron came to agreement on how the immense and immensely expensive field would be developed. It would be a 50-50 deal in terms of ownership but not in terms of the economics. Eventually, after various costs were recovered, the government take would be about 80 percent of the revenues. Chevron would fund much of the estimated $20 billion investment until Kazakhstan started receiving cash flow, which would fund its share. Nazarbayev hailed this as “truly . . . the contract of the century.” It was certainly a very big deal, with the objective of increasing output tenfold. Extraordinarily complex engineering was necessary to produce from very deep, very high-pressure structures, and then to treat the sour gas and separate the toxic hydrogen sulfide from petroleum.

  Geography presented an additional challenge—getting the oil out of the country to world markets. The route was obvious—a 935-mile putative pipeline that would go north out of Kazakhstan, curve west over the top of the Caspian Sea, and then straight west for 450 miles to the Russian port of Novorossiysk on the northern coast of the Black Sea. From there oil would be transshipped by tanker across the Black Sea through the Bosporus Strait and into the Mediterranean. In other words, the pipeline would have to traverse Russian territory.

  What was not obvious was how to get it done—not physically, but commercially, and even more so, politically. The battle would be no less contentious than the struggle over the pipelines out of Azerbaijan, no less complicated in the clash of ambitions and politics. It would also be caught up in the complex post–Cold War geopolitical struggle to redefine the former “Soviet space” and the relationships among Moscow, the Near Abroad, and the rest of the world. The players here would include Kazakhstan, Russia, the United States, and, later, China; Chevron and other oil companies; as well as the Persian Gulf oilproducing nation of Oman. Improbably, at the center of it all, at least for a time, was a flamboyant Dutch oil trader, John Deuss, whose penchant for high living included stables with champion jumping horses, two Gulfstream jets, yachts, ski resorts, and a variety of homes. His involvement in Kazakhstan was bankrolled by Oman, with which he had developed a very close relationship.

  Chevron, so focused on the Tengiz field itself and also the risks that went with it, had left it to Kazakhstan to finance and organize the pipeline. “We hadn’t planned on building a pipeline,” said Richard Matzke, the head of Chevron Overseas Petroleum. “We felt that the pipeline would be a national asset, and there would be objections to foreign ownership across Russian territory.”

  Kazakhstan, still building its institutional capability as an independent nation-state, had turned to Deuss, who, with Oman, would be the “principal sponsor” of the pipeline. What, one might ask, was a Dutch oil trader with Omani money doing trying to build a pipeline across Russia? Deuss had been functioning as a senior oil adviser to the newly independent nation of Kazakhstan and had helped arrange an Omani line of credit for Kazakhstan in its first months of independence. Deuss had won the Kazakhs’ trust. His Omani backer put up the money to initiate what would be called the CPC—the Caspian Pipeline Consortium.

  Deuss and Chevron were soon at loggerheads. Chevron now realized that Deuss would be able to extract high tariffs and make a huge profit on the pipeline and also get what he was really after—control of the pipeline. “That wasn’t going forward,” said Matzke.

  What followed has been called “one of the most prolonged and bitter confrontations of the era.”

  Kazakhstan loomed large to Russia. The two countries shared a 4,250-mile border, and the large ethnic Russian population testified to Kazakhstan’s close links. The Russians resented the growth of U.S. influence in the newly independent states, including in Kazakhstan, and what they saw as an American initiative to cut them out of the action in their natural sphere, the Near Abroad.

  More specifically, the Russians regarded Tengiz as “their oil.” They had found it, they had drilled for it, they had begun to develop it, they had put money and infrastructure into it—and it would have been the great new field. But it had been snatched from their hands by the collapse of the Soviet Union. They were determined to extract maximum recompense and ensure that they participated in Tengiz. The two sides were constantly at odds. “It took six years to talk the Russian side round to building the oil pipeline,” recalled Nazarbayev. “The oil lobby in Russia put tremendous pressure on Boris Yelstin to get him to convey the ownership of the Tengiz oil field to Russia. I had many disagreeable conversations . . . about this.”

  Once, at a meeting in Moscow, Yeltsin said to Nazarbayev, “Give Tengiz to me.”

  Nazarbayev looked at the Russian president and realized that he was not joking. “ Well,” Nazarbayev replied, “if Russia gives us Orenburg Province. After all, Orenburg was once the capital
of Kazakhstan.”

  “Do you have territorial claims on Russia?” Yeltsin shot back.

  “Of course not,” Nazarbayev replied.

  With that, the presidents of independent countries, both of whom had risen up together in the Soviet hierarchy, burst out laughing. But Nazarbayev had no intention of giving way. For, if he did, Kazakhstan would have become Russia’s “economic hostage”—and, once again, “an appendage.”5

  “THE MAIN THING IS THAT THE OIL COMES OUT”

  But with no progress on resolving the ownership and economics of the pipeline, Kazakhstan’s frustration was growing. It needed a go-ahead on oil; its economic situation was desperate. GDP had shrunk almost 40 percent since 1990, and its nascent enterprises could not get international credit. Nazarbayev’s anger over the impasse between Deuss and Chevron mounted. “The problem is that the money has to be invested,” the irate Nazarbayev declared. “What difference is it to me if it is Americans, Omanis, Russians? The main thing is that oil comes out.”6

  As it was, the oil was coming out, but only with great difficulty and improvisation. As production rose, Chevron started shipping 100,000 barrels a day by tanker across the Caspian to Baku. Then, what seemed to be the entire Azerbaijani and Georgian rail systems were mustered to move the oil on to the Black Sea. Chevron was also leasing six thousand Russian rail tank cars to move additional oil to the Black Sea port of Odessa, which, to make things more complicated, was now part of Ukraine. Once again, it seemed back to the nineteenth century in terms of logistics. And that just would not do.

  John Deuss had a particular patron in Oman, the deputy prime minister. But then this minister was mysteriously killed in an auto collision in the middle of the desert. Thereafter Oman’s support for Deuss dwindled away at remarkable speed. At the same time, Kazakhstan canceled Deuss’s exclusive rights to negotiate for financing for the pipeline. The United States was becoming alarmed at the delay in getting the transportation issue settled and the resulting risks to the financial stability and thus the nationhood of Kazakhstan, which had been very cooperative on a number of issues—most notably in disposing of the nuclear weapons left behind in its territory after the collapse of the Soviet Union. Without the oil pipeline, this particular “newly independent” state was certainly going to be less independent. Having a freebooter—oil trader John Deuss—ending up with control of something so strategic and significant for global energy security as the major export route for Kazakh’s future oil was definitely seen as a problem. Finance would be key to whether Deuss’s plan would go ahead. It became clear that Western loans were never going to be available to finance John Deuss to become the pipeline arbiter of Kazakh oil. With that, Deuss faded out of the picture.