Seven Elements That Have Changed the World (10 page)

The financial and technological effort needed to deliver a barrel of oil is extraordinary. To make the oil into petrol takes even more work. It needs to be refined into just those types of hydrocarbons that an engine needs. Even at $4 a gallon, gasoline seems cheap after all this work. It is, after all, cheaper than most bottled mineral water served in chic restaurants in New York City, London or, indeed, Florence, where, a few years ago, I was stunned when offered a small bottle of Tennessee mineral water that cost
more than a whole barrel of oil. And bottling water is certainly not as risky as producing oil.

24 March 1989: the news came through just as I was saying farewell to the BP team on Alaska’s North Slope. The
Exxon Valdez
oil tanker had run aground on Bligh Reef in Prince William Sound. The ship had been sailing outside the normal sea lane to avoid icebergs, but in doing so had run aground on the rocky seabed. We were about to fly back to Anchorage and so diverted the plane to fly over the tanker. As the
Exxon Valdez
came into view ahead of us, we could see her side split open and oil seeping out to form a black smudge around her. Soon, this small pool of oil would spread to cover an area of 30,000 square kilometres.

This was by no means the first or the largest oil tanker spill. As I stared out of the aeroplane window at the
Exxon Valdez
below, I thought of
Amoco Cadiz
, another oil tanker that ran aground off the coast of France in 1978, and of the
Atlantic Empress
, which collided with another ship off Trinidad and Tobago in 1979. Between these accidents 500,000 tonnes of oil was spilt, compared to 39,000 tonnes from the
Exxon Valdez.
However, the Alaskan accident was the first time so much oil had been released into an environmentally important ecosystem.
⁵¹
Storms pushed the thick black oil on to the rocky beaches, covering 2,000 kilometres of pristine coastline and resulting in the deaths of 250,000 seabirds. Many otters and seals were also killed and the herring population, on which many local people depended for their living, was virtually wiped out. Images of the oil slick set against the white backdrop of the Alaskan mountains filled the front pages of newspapers around the world. Seabirds, feathers black and tangled, were held up to the camera lens, an emotional reminder of the dangers of oil extraction.

Oil is a liquid and so spills are hard to contain, while the flammable nature of oil, and the gas found with it, can create a serious danger to human and animal life. On 6 July 1988, while I was working for BP in Ohio, the news came through that there had been a serious accident on Occidental Petroleum’s
Piper Alpha
platform in the North Sea oilfield. A
large number of gas explosions had engulfed the platform in fire. Workers who had not been killed in the blasts were left sheltering in the increasingly smoke-filled accommodation block. Others took their chances and leapt 60 metres into the water below. Of the 226 people on the platform at the time of the accident, 165 died. The incident sent shock waves through the oil industry: everyone realised that it could just as easily have happened to them. Big advances were made in process safety in the wake of the
Piper Alpha
disaster, but they were not enough to prevent the saddest and probably worst day of my working life in March 2005, when an explosion occurred at BP’s Texas City refinery, killing fifteen and injuring more than 170.
⁵²

Most recently and most dramatically, in April 2010 a bubble of methane gas escaped from the Macondo oil well in the deep waters of the US Gulf of Mexico. The blowout preventer had failed; as a result, gas rose up the last sections of drill pipe and reached BP’s
Deepwater Horizon
drilling rig. The gas ignited, causing an explosion that killed eleven people. Macondo became unplugged. Oil began to seep into the ocean and continued to do so for almost three months. I watched with despair as the disaster unfolded and cameras, more than 1,500 metres underwater, showed the oil leaking into the sea. Macondo was the first real-time industrial disaster; you could switch on the TV and watch the oil seeping out every hour of every day.

There are significant risks involved in our extraction of oil resources. Even with lessons learnt from past incidents and the very best of practices, accidents continue to happen. For example, between 2000 and 2010 there were, on average, just over three large oil spills a year, in which more than 700 tonnes of oil were spilt. The unprecedented scale of the Macondo explosion and oil spill was a sharp reminder that, as we push out the limits of technology, we expose ourselves to new things going wrong. In hindsight, the cause of an explosion or spill seems obvious, with mechanical inadequacies amplifying human error. But neither equipment nor human processes can be made entirely risk-free and safe. And this is something we all should remember as we take oil for granted.

Technology underpins oil’s progress but this is merely one side of the story. The oil business is one of the most ruthless and cut-throat in the world. The politics of oil, the characters, companies and countries who
struggle to control reserves, determine how this form of carbon contributes to our lives. In that mix, one individual stands out as having the single greatest impact on the development of the oil industry.

John D. Rockefeller looked upon the early wildcat oil prospectors with disdain. On a visit to Oil Creek, near Colonel Drake’s original oil strike in Titusville, Pennsylvania, he was appalled by their loose morals. Thousands had swarmed to the area in the hope of striking lucky. They brought with them disorder, verging on chaos, sinking wells wherever they could buy land. Where, when and how much oil would be discovered was anyone’s guess and prices fluctuated wildly. Soon, so many men were producing oil that prices began to fall sharply because of overproduction. Rockefeller, then the owner of a Cleveland refinery, decided that something had to be done. In January 1870 five men, led by Rockefeller and his partner Henry Flagler, founded the Standard Oil Company. His goal was simple: to combine the dominant oil companies of Ohio and so reduce excess capacity and take control of the price fluctuations that threatened his business.

Rockefeller was as daring as the early oil wildcatters, but he was also rational, calculating and measured. From an early age he appreciated the economies of scale. As a boy, he would buy candy by the pound, before dividing it into smaller portions to sell at a profit to his siblings. Rockefeller recognised not only the profitability of scale, but also the stability that it brought. He integrated his own oil supplies with his own distribution network and created his own infrastructure, at first making his own barrels, and then buying pipelines, tankers and trains. Rockefeller enhanced Standard Oil’s competitive position and insulated its overall operations from the actions of others in the market. So big were Rockefeller’s operations that he could force discounts from the rail and shipping companies that were not his own, and so undercut competition further.

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.

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.