The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (50 page)

‘This could be accomplished through a haircut to the principal of official-sector loans, but that is unlikely to be politically palatable in northern Europe,’ says Buchheit. ‘The alternative is a long-term stretch-out of the maturity date of the loans. A stretch-out would allow northern European politicians the dignity of saying to their taxpayers: “Citizens, we shall get every euro back that we lent to those countries, perhaps not in our lifetimes, but sometime down the road.”’

There is an amazing contrast with how the Americans, Europeans and Japanese dealt with the Latin American debt crisis of the 1980s and 1990s. During that crisis also, it was publicly denied that there would be write-offs. Quietly, though, banks were padded up, accountants pressured and loan-loss provisions made, all of which meant that, after a few years, the banks that lent the defaulters the cash ended up bearing the losses. But the banks survived. In the euro crisis, instead, governments and central banks stepped into the firing line instead of the banks. So taxpayers face taking the hit that their banks did not.

‘It’s the equivalent of the guys in the tumbrel watching the folks going to the guillotine and right at the last moment saying: “Why don’t we change places?” Then you hop into the tumbrel and then they get out,’ Lee Buchheit told me.

‘Those who so fiercely opposed any form of sovereign-debt restructuring in Europe, and the senior management of the ECB was probably the epicentre of this sentiment, did so in the belief that such a step would threaten the very existence of the European monetary union. Far better, they argued, to monetise every sovereign-debt instrument south of the Rhine than to risk the demolition of the euro itself.’

Frankfurt absolutely does not say this, even privately. No German politician was really saying this either, at the opportune moment to win a mandate, in the run-up to Germany’s 2013 federal election. The decision to bail out banks funding the Eurozone periphery, and then haggle later on about who would pay for the fact that the banks did not, was the fundamental judgement call. No one has been held to account on this. The ECB does, however, quietly seem to be preparing the ground for a massive centralisation of power.

If the ECB has its way, the Eurozone will have essentially a single banking system, a single currency, and a strict straitjacket on the capacity of its member-states to borrow. Right now, however, it takes credit for cunning manoeuvres that temporarily calm the storm, while blaming the acute social problems that have emerged on individual nations.

In December 2012, in the ECB’s ground-floor conference centre, I asked Mr Draghi if record Eurozone unemployment was a ‘price worth paying’ for saving the euro. ‘It is hard to say whether it is a price worth paying,’ he replied. ‘This question should rather be addressed to the policy-makers that created this situation to begin with. Let us not forget that we are in this situation… because of the poor policy-making, or the lack of policy-making, in the years before the crisis. The crisis has simply highlighted these disequilibria that already existed. It has highlighted that our banks were not properly capitalised. It has highlighted that the budgetary and debt positions of our governments were not sustainable, and, finally, it has highlighted that our euro area governance ought to be vastly improved. What is happening now is the direct outcome of the policy decisions that have been implemented in order to respond to these disequilibria that were unsustainable. I agree that it is a very hard price to pay, but it is unavoidable.’ Journalists do not normally ask him about unemployment.

Frankfurt, like Berlin, blamed the scourge of youth unemployment on national governments. Even prime ministers elected on the slogan ‘Austerity is killing us’, would turn a little coy when asked who was doing the killing. Germany? The ECB? Enrico Letta, Italian prime minister from April 2013, responded to the question thus: ‘Of course, it was the debt. Italy made enormous mistakes in the past raising the debt and now we need to have structural reforms, reduce the debt, but at the European level we need growth policies, not the austerity policies of the last three years.’

Draghi felt the contractionary impact of budget cuts could be mitigated by German-style structural reforms to increase export competitiveness and create jobs and growth. But basically, yes, unemployment was a price worth paying for the policies designed to save the euro. It won’t be the only price. Draghi faces a rollercoaster ride of persuading European politicians to set up some sort of permanent transfer system, essential to mitigate these types of problems in parts of the Eurozone. The perennial debate about whether Greece will leave will be the least of the worries of those who move into the new Eurotower. They are planning a novel architecture for Europe to deal with fiscal excess, banking mania and rampant unemployment – as well as over-priced pizzas.

Mario Draghi is ‘a solutions-orientated guy’ according to one of his colleagues around the doughnut-shaped table. But he has a lot of solutions to find. And Draghi is not just president of the European Central Bank. In the absence of any leadership elsewhere, Draghi is the de facto president of Europe.

Dramatis personae

Jake Ulrich, ‘the Carbon King’

Magne Normann, a hydrocarbon general

Dr Ashti Hawrami, oil minister of the Kurdistan Regional Government (KRG) in northern Iraq

Tariq Shafiq, a co-author of the Iraqi central government draft oil law

Sheikh Yamani, former Saudi oil minister (1962
–86)

Jim Covert, developer

Anatoly Paramonov, Gazprom official who runs the control room of the Central Operations and Dispatch Department of Gazprom

Alexander Medvedev, Gazprom official

Yana Sukhushina, editor, Gazprom TV Project 24

Dmitri Nureyev, manager at Pestovoy number 16

Andrus Ansip, prime minister of Estonia (2005
–)

Palan Halder, farmer in West Bengal

Jairam Ramesh, former Indian minister for power

Rahul Bajaj, Indian industrialist

Arthur Tait, carbon trader working for Gazprom

Andris Piebalgs, former European Commissioner for Energy

Professor Paul Klemperer, UK government adviser on auctions, and Oxford University academic

Ed Miliband, UK energy secretary (2008
–10)

Jake Ulrich is the Carbon King. He is the hydrocarbon version of the Man from Del Monte, a bounty hunter traversing the world’s hot and cold spots trying to find fresh sources of warmth. Up until the financial crisis that meant the natural gas that heated most of Britain’s homes and fuelled its cookers. Britain and Europe’s North Sea reserves had peaked, and Ulrich’s problem these days is that there aren’t too many of the world’s suppliers of gas and oil that like to say ‘Yes’.

Ulrich’s job is part geopolitical negotiator, part businessman, part financier. When I met him in 2008, crude oil prices had just reached $100 a barrel for the first time. Although he had seen at least two oil-rich presidents in the previous week, it was Jimmy Carter, US president during the 1970s oil crisis, that he invoked in our interview. In 1977, he reminded me, a cardigan-clad President Carter famously told Americans to wear a sweater and turn their thermostats down to save energy. Ulrich’s message? High-cost energy is here to stay and people should adjust. ‘I do think we will see people change their behaviour,’ he said. ‘I think people will use less energy. I hate to go back to the Jimmy Carter days in the USA, but maybe it’s two jumpers instead of one.’

So, three decades after Carter’s speech, one of the two leading figures at Centrica, Britain’s biggest energy-supply company, was giving out the same message. ‘I think people will change the temperature they keep the house,’ Ulrich told me. ‘They’ll be more cognisant of energy waste, they’ll buy better appliances.’

The message went down badly in the popular press. Ulrich’s house was besieged by journalists, and the details of his executive pay package were splashed across the pages of the tabloids. People resented the fact that they were being told to adopt a more Spartan lifestyle by a multimillionaire. But his predictions were, of course, quite right.

A leaked industry report suggested that UK domestic gas prices could surge by 70 per cent, and then remain there, if oil prices stayed at $100. Ulrich’s efforts to source alternatives to North Sea oil were being hampered by rampant resource nationalism – the escalating tendency for countries with significant energy reserves to use their position as a geopolitical bargaining tool. By far the easiest, cheapest and greenest way to counter this tendency is for consumer countries to pursue energy efficiency on a national scale. The average internal temperature of a British house is 18 degrees – 5 degrees higher than in 1970. So it is clear that we have been spoiling ourselves. What Ulrich was signalling was the necessity of changing our behaviour – what economists might call ‘demand destruction’. In simple terms, we need to turn down the national thermostat, and face the fact that we are entering a ‘two jumpers’ era, an era that marks the end of cheap, easy energy. But there is no sign yet that we are prepared to give up on the pursuit of hydrocarbons in the earth, even while carbon dioxide accumulates in the atmosphere.

So it’s a global battle to acquire the carbon under us and clean up the carbon over us, too.

The oilman they call ‘the General’ surveys the terrain from Fishkhabour, a remote village at the northwestern tip of Iraq. A Turkish army observation post is visible on the other side of the River Khabur, the tributary of the Euphrates that marks the tense frontier between Iraq and Turkey. Turkish fighter jets can sometimes be heard in the skies above. Kurdish PKK rebels lurk in the nearby hills. Welcome to black gold’s very last land frontier.

To the west of Fishkhabour lies Syria. But the General’s interest is not in borderlines, but pipelines. Two pipelines, to be precise: one large, one somewhat smaller. The large one, which serves as Iraq’s main northern oil artery, can be seen snaking its way north into Turkey. It is now gushing with black gold after years of routine sabotage by Kurdish insurgents. And then there’s the General’s own gutter-sized mini-pipeline. At this moment, in 2008, it just falls short of merging with its larger cousin. The gap is no more than 10 metres. ‘We do not have approval to link into that pipeline at present,’ says the General. ‘We have been producing oil for a few months now, it’s test production, but we intend to have a tie-in with the existing infrastructure through Iraq and into Turkey.’

The General, despite his nickname and his aviator glasses, is not a military man. Nor is he a Kurd, a Sunni or a Shia. His name is Magne Normann, and he is the first foreigner to hit new oil in Iraq, not just since the fall of Saddam in 2003, but since the late 1970s. A geologist, expert driller and occasional diplomat, Normann works for DNO, a tiny Norwegian oil company. The General and his band of local Kurds, expats and hired Chinese drillers struck oil at their first attempt, and there is more than a hint of
There Will Be Blood
about their quest to export it.

An area of natural oil seepage lies a few hundred metres from the Norwegian and Kurdish flags that mark the entrance to DNO’s £150 million facility at Tawke, in Iraqi Kurdistan. It’s littered with jerry cans used by local villagers to collect free fuel supplies. ‘This is plain crude oil straight from the ground. It’s engine quality,’ says Normann as he stirs a stick through the slimy warm sludge bubbling to the surface.

He has reason to be elated. This brand-new field has 800 million barrels of oil in reservoirs deep underground. Officially Tawke ranks as a ‘giant’ field, but by Iraqi standards it is a tiddler. As the price of oil settles at around $100 per barrel, it should make a handsome profit for DNO and the Kurdish and Iraqi governments. And DNO has beaten even the reserve-hungry major oil companies to the prize.

‘Nobody else wanted to go here,’ says Norman with some pride. ‘We were the first international oil company that had the guts to go to northern Iraq, and we made a discovery on the first exploration well we drilled. So far we can say we have been very successful.’

But there is a hitch. The DNO deal has been reached with the Kurdish Regional Government (KRG), and is yet to be signed off by Iraq’s central government Ministry of Oil. In Baghdad the oil minister has threatened to blacklist any company signing oil concessions with the Kurds. For the General this means that the new oil discovery cannot yet be exported through his pipeline. The KRG oil minister Dr Ashti Hawrami says, ominously, that Baghdad’s approach smacks of ‘former regime tactics’. ‘This is new oil for Iraq. We are doing our bit for Iraq. I just wish my colleagues in Baghdad would do the same,’ says Hawrami.

Making the deal with the Norwegians and co-opting their expertise has helped the KRG bypass Baghdad entirely. The Kurds passed their own regional oil law after squabbling in the federal parliament in Baghdad over the terms of a proposed national oil law. The physical reality of DNO’s ready-to-pump pipeline is now an audacious bargaining chip for the KRG. The Kurdish leadership is now dropping strong hints that it will soon announce unilateral export of oil.

Tariq Shafiq, a co-author of the central government’s draft oil law and a veteran Iraqi oil engineer, says that this action could bring about the disintegration of Iraq. ‘What Kurdistan gets will have to be given to others,’ he says. ‘It will create the envy of those who do not have oil. Oil is not distributed evenly throughout Iraq. They are really trespassing on Iraq’s property and that is going to create damage beyond repair if they don’t stop.’

The flags of Kurdistan and Norway flutter in the gusts of wind that swoop down the Tawke valley. The General does not want to talk politics, but he is confident he will soon get the export licence he needs to start earning hard currency for the $80 billion of oil stuck in the rock beneath his feet.