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

by Daniel Yergin

  Unocal recognized that it could not operate in a vacuum. It needed someone to negotiate with—that a condition for the implementation of the pipeline project is “the establishment of a single, internationally recognized entity” running the country that is “authorized to act on behalf of all Afghan parties.” Who would it be ? Trying to implement this transformative project both for the region and itself, Unocal was struggling to understand the competing factions, especially the Taliban. Were the Taliban “pious people” who would bring some order and stability to the chaotic, violence-wracked country? Or were they militants and fanatical zealots with an altogether incompatible agenda?

  It often happens that when a U.S. oil company is entering a new country, the company will invite representatives from that country to the United States to tour its facilities and learn more about how the company and the industry operates—and to begin to establish the kind of working dialogue that is required when hundreds of millions and then billions of dollars start getting invested. But in Afghanistan, this was much more challenging than is typically the case. In an effort to build some bonds—“these guys had never seen the ocean,” said Imle—Unocal brought a delegation of Taliban to the United States. Included was a trip to Houston to show them the modern oil and gas industry, and to Washington for a visit to the State Department. But Unocal recognized at the time, “no high level US involvement [had] materialized.” Unocal similarly helped sponsor a visit by the Taliban’s hated rival, the Northern Alliance, that followed the same route. Imle gave a similar message to both groups. “We can only deal with you when you stop fighting, form a government that is representative of all factions, and recognized by the United Nations.” Unocal also gave both sides the same present, a piece of communication technology that was a very practical symbol of the advancing technology of the 1990s—a fax machine. The message to both groups was the same: Stay in touch.15

  WHICH SCENARIO?

  In the spring of 1996, Unocal examined a report outlining several scenarios, with a range of probabilities, for the future of Afghanistan. None of them were promising. The highest probability was “a continuation of the warlordism scenario.” In another the non-Pashtuns would break off and form their own state, Khorastan, which would orient itself toward Central Asia. There was also a scenario in which Iran and Pakistan would become much more directly involved on the ground in Afghanistan.

  The least likely scenario in the report was a “triumphant Taliban.” Under that unlikely scenario, it was thought, the Taliban would need economic development to consolidate its hold and “gain popular support”—which, rationally, would lead it to “seek foreign aid and investment.” But that effort would be hampered by the Taliban’s “major human rights violations in their dealings with women, Shiites, and Tajiks.” Yet a Taliban victory seemed dubious, impeded among other things by factionalism and infighting among the Taliban. But the Taliban’s odds might improve for a variety of reasons, including if it were to “receive a substantial increase in outside assistance without similar increase in support” for the government in Kabul.

  One source of support was the ISI, Pakistan’ intellegence agency, which stepped up to offer the Taliban “unlimited covert aid.” But in the spring of 1996, another source materialized. Unbeknownst to most of the world, the virtually unknown Osama bin Laden, avoiding extradition by Saudi Arabia, had moved his retinue from Sudan to Afghanistan and set up shop. He began to substantially bankroll the Taliban. There he also built his own organization, Al Qaeda. It was from his new redoubt in Afghanistan that, in the summer of 1996, he issued his then-obscure fatwah—his “declaration of Jihad against Americans Occupying the Two Sacred Places” and an attack on the Saudi royal family as “the agent” of an alliance of imperialistic Jews and Christians—a document that was faxed to newspapers in London, though with little notice.

  Months later, in the largest mosque in Kandahar, Mullah Omar, the oneeyed leader of the Taliban, would, during his sermon, embrace Bin Laden as one of “Islam’s most important spiritual leaders.” 16

  THE END OF THE ROAD

  By the early autumn, the formerly least likely of the scenarios examined by Unocal now seemed the most likely. On September 27, 1996, the Taliban captured Kabul. They wasted no time imposing their strict version of Islamic law. No cigarettes, no toothpaste, no television, no kite flying. Eight thousand women were summarily expelled from Kabul University, and religious police would beat women pedestrians who were unaccompanied by men.

  But the battle for Afghanistan was not over. The Taliban was still at war with the Northern Alliance; the country was not consolidated; and perhaps there was still the opportunity to engage with some factions within the Taliban. At the same time, Turkmenistan president Niyazov was stoking Washington’s alarm by threatening to turn to Iran as a major export market and transport route for Turkmen gas. Toward the end of 1996, Unocal mustered its confidence and, in an effort to build momentum and diplomatic support, announced that, with partners from Saudi Arabia, South Korea, Japan, and Pakistan, it hoped to start building a pipeline by the end of 1998.

  But this plan was becoming increasingly problematic. In the United States, the entire project was becoming a target of criticism, including from a movement, which was led by the wife of talk-show host Jay Leno, that attacked Unocal for associating with a regime so repressive of women. Unocal sponsored skill training for Afghan women as well as men. It retained an Islamic scholar to try to communicate with the Taliban what the Koran really said about women, but the Taliban wasn’t interested. “Once we understood who the Taliban were, and how radical, this project didn’t look so good,” said Marty Miller.

  Many years earlier, in 1931, a British scholar of Central Asia had observed: “In Afghanistan, both European clothing and unveiling are anathema, and there has been a strong reaction in favor of Islam, the old customs and the old abuses.” That still seemed true 65 years later. The Westerners could not fully grasp how deep-seated were the cultural antagonisms into which they were treading—and how much these antagonisms resonated across history—and what was ahead. Nor did they know how much money Osama bin Laden was already spending on the Taliban—nor what he was brewing in the Afghan city of Kandahar.

  On August 7, 1998, two teams of suicide bombers hit U.S. embassies in Kenya and Tanzania. The attacks were highly coordinated, just nine minutes apart. Kenya was worst hit, with 211 dead and 4,000 wounded. The attack had been masterminded from Afghanistan by Al Qaeda. A few days later, the United States retaliated with cruise missiles aimed at a suspected chemical weapons facility in Sudan and at an Al Qaeda training camp in Afghanistan.

  “It didn’t take us five minutes to know that it was all over,” said Unocal’s John Imle. “We were in regular contact with the U.S. embassy in Pakistan, and no one had ever said anything about terrorism. But now we understood what Bin Laden was doing in Kandahar.” Imle called Unocal’s chief representative, who happened to be on vacation in the United States, and told him to forget about going back to Islamabad, Pakistan, let alone to Kandahar. It was too dangerous for any U.S. businessman promoting a project that so clearly was anathema to the Taliban. A few months later, instead of starting construction, Unocal declared that it was withdrawing altogether from the project.

  Thus, TAP and CAOP were finished before they started. A project that would have opened a wholly new route for Central Asian resources to the great growth market of Asia was never to be. The moon shot never got off the ground. It was aborted before launch by the Taliban and its ally, Al Qaeda, both armed with a militant ideology and a version of religion that was determined to return to the middle ages. 17

  What happened in the 1990s—with the offshore field in Azerbaijan and the Baku-Tbilisi-Ceyhan Pipeline, and Tengiz and the Caspian pipeline—was very significant for the supplies they brought to the markets. Today the total output of Azerbaijan and Kazakhstan is 2.8 million barrels of oil—equivalent to more than 80 percent of North Sea production, and four times what
they were producing a little more than a decade earlier. But these deals were significant as turning points—for the way in which they redrew the map of world oil, for their geopolitical impact, for the consolidation they provided to the newly independent states, and for the way in which they reconnected the hydrocarbons of the Caspian to the world economy—on a scale that could never have been imagined during the first great boom a century earlier.

  More than a decade later, Turkmenistan is still negotiating with Western companies over the development of its natural gas resources. Pakistan is struggling with a domestic Taliban insurgency. And NATO forces, primarily American, are fighting in Afghanistan.

  4

  “SUPERMAJORS”

  Asia had been the target market for TAP and CAOP—the “pipelines that never were.” For Asia was booming. But in July of 1997, one of the most buoyant of the economies, that of Thailand, was slammed by a financial crisis that threatened to destroy much of the country’s recent economic progress. Soon the crisis spread, threatening the whole region and the entire Asian Economic Miracle, with far-reaching impact on global finance and the world economy. It would also detonate a transformation in the oil industry.

  THE “ASIAN ECONOMIC MIRACLE”

  The title of a popular business book, The Borderless World, captured the abounding optimism about the process of globalization in the 1990s that was knitting together the different parts of the world economy. World trade was growing faster than the world economy itself.1 Asia was at the forefront. The “Asian tigers”—South Korea, Taiwan, Hong Kong, and Singapore, and behind them the “new tigers” of Malaysia, Indonesia, Thailand, and the Philippines, plus China’s Guangdong Province—were emulating Japan’s great economic success.

  The Asian Economic Miracle was providing a new playbook for third world economic development. Instead of the inward-looking self-sufficiency and the high trade barriers that had been the canon of development in the 1950s and 1960s, the “tigers” embraced trade and the global economy. In turn, they were rewarded with rapidly rising incomes and remarkably fast growth. Singapore was a beleaguered city-state when it gained independence in 1965. By 1989 its per capita GDP, on a purchasing power parity basis, was higher than that of Britain, which, as the birthplace of the Industrial Revolution, had a twohundred-year head start. Asia also became the foundation for “supply chains,” extending from raw materials to components to final goods. The world was truly being knit together in ways not imagined even a decade earlier.

  The high growth rates in Asia meant rising demand for energy, and, specifically, for oil. These countries became the growth market for petroleum, and there was every reason to think that this Asian economic growth would continue at its fevered pace.

  JAKARTA: “OPEC’S ECONOMIC STARS”

  OPEC petroleum ministers convened for one of their regular sessions in Jakarta, Indonesia, in November 1997. Asia’s buoyant prospects were much on the minds of the delegates. Many of them were considering how to reorient their trade more to the East. Here, after all, it seemed, was their future. But, as if to symbolize how bumpy the road to fast growth could be, they found themselves booked into a not-quite-finished luxury hotel in which the water supply was quite unpredictable.

  After four days of discussion in Jakarta, they agreed to raise their production quota by two million barrels per day. This decision was intended to end the wrangling over quotas and overproduction among members. It was read by some as a bet on Asia’s future, but it also had another, much more specific purpose. Some of the countries, notably Saudi Arabia, were quite aggravated that other countries, particularly Venezuela, were producing at their maximum capacity, not at their quotas, and thus taking market share at Saudi Arabia’s expense. Raising the quota at Jakarta would level the playing field. Now all the exporters could officially essentially produce at their maximum. Market conditions seemed to necessitate the increase. World consumption had risen more than two million barrels per day between 1996 and 1997, and the International Energy Agency was predicting that the world’s consumption would rise by another two million barrels per day in 1998. “Price will hold up,” the oil minister from Kuwait said confidently after the decision was announced. “The rise is a very reasonable one.”

  That judgment was widely shared. An observer described market conditions as nothing less than “the alignment of OPEC’s economic stars.” But, in the heavens above, the stars were silently moving.2

  “ESSENTIALLY ALL GONE”: THE ASIAN FINANCIAL CRISIS

  During the course of the Jakarta conference, two of the delegates to the meeting were taken to dinner by the head of the local International Monetary Fund office. He told them in no uncertain terms that the currency crisis that had begun a few months earlier was only the beginning of a far more devastating crisis—and that the Asian economic miracle was about to crash on the rocks. The two delegates were shaken by what they heard. But the decision to raise production, based upon an optimistic economic scenario, had already been taken. It was too late.

  “Asia was the darling of foreign capital during the mid-1990s,” and it became the beneficiary of a “capital inflow bonanza,” a great flood of lending by international banks. As a result, Asian companies and property developers had taken on much too much debt—and much of it dangerously short-term and denominated in foreign currency.

  It was overleverage in the overheated and overbuilt condo and office building sectors in Bangkok that caused the collapse in July 1997 of Thailand’s currency, which in turn triggered the fall of currency and stock markets in other Asian countries. By the end of 1997, a vast panic was raging over large parts of Asia. Companies tumbled into bankruptcy, businesses closed, governments teetered, people were thrown out of work, and the high economic growth rates gave way to a virtual economic depression in many countries.

  At the end of 1997, Stanley Fischer, the deputy director of the International Monetary Fund, hurriedly flew to Seoul. He was taken into the vault of the South Korean central bank so he could see with his own eyes the state of the country’s financial reserves—that is, how much money was left. He was stunned by what he discovered. “It was essentially all gone,” he said.

  By then the panic and contagion was spreading beyond Asia. In August 1998, after teetering on the edge of crisis, the Russian government defaulted on its sovereign debt, sending that country into a sudden downward spiral. The ruble plummeted in value, and the Russian stock market fell by an astounding 93 percent. The new Russian oil majors could not pay their workers and suppliers. Salaries were slashed; some of the most senior managers were down to $100 a month.

  Wall Street teetered on the edge when the highly levered hedge fund Long-Term Capital Management collapsed. Panic in the United States was averted by fast action by the New York Federal Reserve. In early 1999 the contagion seemed about to sweep over Brazil, threatening what U.S. Treasury Secretary Robert Rubin called an “engulfing world crisis.” An immense rescue effort, mobilizing very large financial resources, was mounted to prevent Brazil from going down. It worked. Brazil was spared. By the spring of 1999, the panic and contagion were over.3

  THE JAKARTA SYNDROME

  The Asian financial crisis had generated enormous economic ruin. As a result, the assumptions at the end of 1997, embodied in the Jakarta agreement, were all wrong. By implementing the Jakarta agreement, OPEC had been increasing its output—just as demand was falling.

  Now there was way too much oil in the world. When there was no more room in storage tanks, seagoing tankers that normally transported oil were turned instead into floating storage. And still there was too much oil. And not enough demand. The price collapsed to $10 a barrel and, for some grades of oil, to as low as $6. These were the kinds of prices that had been seen during the 1986 collapse and had been thought would never be seen again.

  The 1997 meeting in Jakarta would be remembered thereafter by the exporters as a cautionary tale—the “Jakarta Syndrome”—the danger of increasing production when demand was
weakening or even just uncertain. It was a mistake they intended never to repeat.

  THE SHOCK

  The price collapse did something else as well. It set off the most far-reaching reshaping of the structure of the petroleum industry since the breakup of the Standard Oil Trust by the U.S. Supreme Court in 1911. The result was something that would have been unimaginable without the circumstances created by the price crash.

  As oil prices plummeted, the finances of the oil industry collapsed. “ ‘Bloodbath’ may be an understatement,” said one Wall Street analyst. Companies slashed budgets and laid off employees. One of the major companies shrank its annual Christmas party down to some snacks in the cafeteria. DROWNING in OIL was the load lines a the cover of The Economist. With some exaggeration, that captured what had become the widespread conviction that prices were going to be low for the foreseeable future and that the future of the industry was bleak.4