Investigative journalist Tom Bower gathered firsthand information from sources all over the world, including politicians, corporate heads, and traders to compile the definitive history of oil. It is a story of high stakes and oil-exploring rivalries. Bower lays out the oil industry and its players in a way that highlights a sense of greed, intrigue, and arrogance.
Read an excerpt of the book below, and then head to the "GMA" Library to find more good reads.
GATHERING THE MASTERS of the underworld at BP's concrete campus in Houston's sprawling suburbs in early 2009 was a cruel ritual. The muted light cast a harsh sheen across the weary faces of 12 men and one woman in the "Big Brain Room," a small cinema formally known as the HIVE, the Highly Immersive Visualization Environment. In the center of the front row sat David Rainey, BP's head of exploration. Peering at the curved screen through battery-powered spectacles allowing "sight" of the whole reservoir, the audience scrutinized the computer-generated three-dimensional images of a possible oil reservoir four miles below the waves of the Gulf of Mexico.
Hand-picked to assess the risks, none of the 13 was a buccaneer; they were rather proven company loyalists temporarily united by one credo: if their $100-million gamble to discover whether oil existed deep in the unknown was successful, BP could pocket $50 billion over 10 years.
But they would be cursed, not least by themselves, if their calculations were wrong. For oil explorers, the license to make mistakes was limited. The humiliation of failure was permanent. The mood in the HIVE was inevitably influenced by BP's decision to locate its headquarters within a modern concrete zone. Despite some scattered trees, the disfigured Texan landscape embodied the cliché that oil is either an old, difficult and dirty business or "new, good stuff." "Nothing is more exciting than drilling," smiled Rainey. The Ulsterman, born in 1954, personified the oilman's permanent restlessness. Easy oil — "the low-hanging fruit" — was now history, and breaking frontiers to find new oil was "incredibly difficult." Although BP's skills in exploration were acknowledged by its rivals, the search beneath the Gulf of Mexico was particularly brutal. Excluded from most playgrounds, at best only one in three of BP's operations would strike oil. At the end of the show the 13 headed for a hotel conference room, each clutching a personalized folder listing 50 potential sites for test holes off West Africa's coast, in Asia, South America and the Gulf of Mexico. Over the next four days they would decide where to spend more than $1 billion drilling through sand, salt, clay and rock. BP's future depended on finding new oil but there were no guarantees. Although the exploration business was dependent on science, much remained beyond their control. Even the best geologists tended to deploy just three words: "possibly," "probably" and "regrettably."
Like the others in the room, David Rainey had learned his craft during four years in Alaska. In 1991 he had moved to the Gulf of Mexico. "I've been there when we've hit," he sighed, "and also when we missed. A dry hole and you feel like jumping out of the window. The emotions are indescribable." In 1999 some had been convinced that "Big Horse," a test drill in the Gulf, was a certainty, but the news from the geologist on the rig that the fossils brought up from the deep were Upper Cretaceous rather than Miocene cast a gut-wrenching gloom across the Operations Room. "We're 60 million years out," moaned the blonde team leader. Any oil would have been "overcooked." Every one of the experts in the HIVE had suffered similar agonies.
In recent years, dry holes had wrecked major oil companies. The skeletons of Gulf, Texaco, Arco and other past icons mercilessly testi- fied that only the fittest and bravest survived. By placing enough bets to balance the odds, BP's executives calculated that what the industry uncharitably called "orphans" would not sink their company. Success depended on taking risks and limiting mishaps, not least thanks to inspired luck. BP had made a fortune in Alaska when Jim Spence, the company's chief geologist in Alaska, struck oil in 1969 after deciding to drill on the rim of a potential reservoir, because the cost of the license on the "sweet spot" was too expensive. Its rival Arco, drilling in the "sweet spot," found only non-commercial gas. Alaskan oil saved BP, but did not make the company immune to future errors. In 1983 it invested $1.6 billion to drill in the frozen waste at Mukluk in Alaska.
That they would find at least a billion barrels of oil, BP's geologists told newspapers, was "certain." Instead, they hit salt water. The oil had leaked away. "We drilled in the right place," said Richard Bray, the local chief executive, "but we were simply 30 million years too late." For the next 10 years, BP became complacent and chronically risk- averse, searching for oil in the wrong places.
Rainey enjoyed the rigorous challenges during those impassioned days in the Exploration Forum. "Nothing gets through on salesman- ship and goodwill," he warned. The debate ranged between "concepts," immature proposals that were a twinkle in someone's eye; to "play," which was work in progress; and finally to "prospects," which offered a serious chance to find oil. "We've got to focus on the big stuff," Rainey reminded his experts. Like its major rivals, BP could only survive by finding huge reservoirs, or "elephants." "Little things make no differ- ence to BP," John Browne had ordained, knowing that finding a small field could take as long as finding a big one. Failure, Rainey knew, would delight his rivals. Across the globe, Shell, Chevron, Exxon and smaller adversaries were holding similar conferences. Amid ferocious competition, the challenge was to accurately assess the cost of failure.
Like Exxon and Shell, BP had been accused of being averse to risk, too eager to return money to shareholders rather than to invest in finding new oil. "Volume versus risk," said Rainey, echoing an oil industry tru- ism. Reducing the 50 potential wells to 20 eliminated some risk. The holes chosen, Rainey predicted, would "glow in the dark."
His self-confidence reflected oil's changing fortunes. Twenty years earlier oil had sold at less than $10 a barrel. Without money, exploration was limited. In the late 1980s the Gulf of Mexico had been classified as an area where inadequate technology prevented new oil being found. Rising oil prices since 2003 had invigorated the search, and technologi- cal advances delayed the death certificate. With prices hovering around $25 a barrel, the public assumed that the international oil companies would continue to produce unlimited supplies. The oil chiefs knew the opposite. Finding new oil was becoming harder, and opportunities to enter oil-producing countries were diminishing, although new tech- nology consistently embarrassed the pessimists. Within the Big Brain Room were the architects of BP's latest success, which had restored the company's credibility. In 2004 "Thunder Horse," a 59,500-ton, semi- submersible cathedral, the world's biggest platform, had been towed from Korea and positioned over an "elephant" reservoir in the Missis- sippi Canyon, identified by the US Department of the Interior as Block 778, 125 miles south of New Orleans. Designed to extract an astound- ing 250,000 barrels of oil and 200 million cubic feet of natural gas from four miles beneath the waves every day, it led to chatter among the Gulf's aficionados that BP was overtaking Shell, the pathfinder in the region.
Since 1945 oil had been extracted from the Gulf's shoreline waters, especially by Shell. For years the deep-water limit was assumed to be 1,500 feet. John Bookout, the head of Shell's exploration in the Gulf, challenged that assumption, believing that the Gulf, like Prudhoe Bay in Alaska, would minimize America's reliance on imported oil. In May 1985 the drill ship Discoverer Seven Seas began boring 12 exploratory wells in 3,218 feet of water. Oil was found, and a Ram-Powell platform weighing 41,000 tons was towed to the site. That project, also financed by Amoco and Exxon, confirmed that oil could be recovered from the depths and be piped 25 miles along the seabed to terminals.
Bookout next focused on the nearby Mars field, 130 miles south- east of New Orleans. In 1987 Conoco had lost millions of dollars drilling dry holes there. Unable to afford further exploration from rigs floating 3,000 feet above the seabed, the company sold the rights to Shell. Bookout was convinced that the drill should have been placed just 400 yards away. Soon after Shell's purchase, Jack Golden, BP's head of exploration in the Gulf, offered to buy a third of Shell's invest- ment in return for sharing a proportion of the cost. Passive invest- ment, or "farming in," by competitors was not unusual in big projects.
Even the mighty oil corporations needed to mitigate their risks. Golden had regretted BP's tardiness in bidding for the US government's first round of 10-year licenses for deep-water exploration in the Gulf, and his irritation was compounded by Shell's perfunctory rebuff of his offer. Shell's executives did not want to share their potential profits, especially with BP. Over the previous decade they had enjoyed watch- ing BP's struggle to survive, and some hoped their rival might even go out of business, allowing Shell to absorb the wreckage. But just one year later the companies' fortunes were reversed. Shell had wasted $300 million drilling a succession of dry holes in the Chukchi Sea off Alaska. In urgent need of finance, the same executives had reluctantly agreed to Golden's offer to share in the Mars field. In return for pay- ing 66 percent of the well's costs, BP would receive one third of Mars's income. In May 1991, Shell struck oil. "Getting Mars was a bonanza in 1988," said Bob Horton, BP's chief in America. "Mars saved BP from bankruptcy." Dean Malouta, Shell's skilled Greek-Italian inventor of sub-sea technology, would bitterly agree: "We are crazy to give BP a lifebelt. They brought nothing to the table except money."
Shell's discovery, and the introduction of new engineering tech- niques, washed aside a whole lexicon of uncertainties and prejudices that had gripped the Gulf's explorers. Not only had Shell's engineers drilled deeper than anticipated, but the gush of oil was far greater than anyone had expected. Even before the rig for Mars was built and towed from Italy, Shell had broken another world record. In 1993, using a rig tied to the seabed by barn-size anchors in 2,860 feet of water, the company's geologists had found a giant reservoir called Auger 5,000 feet below the seabed, while in 1995 at the nearby Mensa field, abandoned in 1988 as technically too difficult, Shell's new technology and about $290 million enabled oil and gas to be extracted from 5,400 feet.
Finding those big reservoirs of oil had been coups for the geologists. In their Houston office, John Bookout's team had plotted and recreated an area of the Gulf called the Mississippi Basin. Located just beyond the mouth of the Mississippi River, they traced where the river's sand had been deposited 25 million years earlier, and deduced the sites of potential oil reservoirs. Their findings were confirmed in 1995. Pre- dictions that production at Mars would peak at 3,500 barrels a day were far outstripped as it hit 13,500 barrels a day, with the promise of 30,000 in the future. Dean Malouta was an equal architect of that success. At Auger's wellhead, 5,412 feet below the sea's surface, Shell installed a production system and pipeline to bring the oil onshore. The production rig was held in position by six thrusters on its hull, linked by computers to acoustic beacons on the ocean floor that transmitted signals to hydrophones on the rig. Shell's triple success reinforced the entrenched despondency in BP's offices across town.
Ever since David Rainey arrived in Houston in 1991, the gloom in BP's headquarters had been seared on his mind. After three years' work, BP had hit yet another dry well. "Sycamore" in the Gulf's KC Canyon had wasted $20 million. Jack Golden had taken the failure personally. "Every time we hit a dry hole," the wizened American explorer told Rainey, "we look back and see that we didn't have to do this." In the race for survival, Golden was as conscious as others that the oil majors' share of the world's reserves had fallen to 16 percent, and the national oil companies, driven by politics rather than economics, were less inclined to give them access to their oilfields. Five years later, BP's continuing depressing record imperiled the company's existence.
At least BP could rely on its share of the profits from Shell's success at Mars — where two more reservoirs would be found at deeper levels, promising to deliver 150,000 barrels a day — and learn lessons from Shell's success, replicated in "Bongo 1," 14,700 feet below the sea off Nigeria's coast. "We're taking two years off and focusing on learning," Golden declared.
In 1996, Shell's success turned sour. The company struck a suc- cession of dry holes in the Gulf, as did their rivals at BP, Texaco and Amoco. After the seventh dry well, everyone stopped. Exxon's explorers congratulated themselves for their refusal to risk millions of dollars just as oil prices were falling, and for waiting until others had neu- tralized the hazards. The failures coincided with the US government's announcement of a second auction of leases for deep-water explora- tion in the Gulf. Shell's breakthrough should have triggered a boom to buy new leases, but the rash of dry wells caused head-scratching across Houston.
The explorers gradually realized that a mile-thick layer of salt beneath the seabed, below the silt that had poured out of the Mis- sissippi River and above the oil-bearing rocks, was causing scientific mayhem. Finding oil relies on plotting formations of rock created up to 60 million years ago. Based on a century's experience, geologists know which rocks are likely to contain oil. Their knowledge guarantees some predictability in the Middle Eastern deserts, the Siberian tundra and the North Sea. In those areas, the question was not whether oil would be found, but whether the quantity was sufficient to make its exploita- tion commercially viable.
Identifying rock formations 70,000 feet below the Gulf's surface was technically feasible. Ships dragging seismic equipment were regu- larly crisscrossing the Gulf, firing sound bops to the seabed and, every millisecond, recording the pattern of echoes zooming back from below. Old-timers recalled watching pallets of magnetic tape of seismic data being unloaded by forklift trucks: processing them through nine-track computers took three months. Twenty years later, all that informa- tion could be stored on an iPod and analyzed by computer within two hours. But either way, the results in the Gulf were notoriously inaccu- rate. As the seismic soundwaves passed through the salt, the ricocheting bops from the rock strata were grossly warped. "Recording the sound through salt," Rainey realized, "is like photographing through frosted glass. The image and the sound is distorted." Identifying the location of oil through salt was impossible. Shell's early successes had been due to nothing more than luck. "Don't worry," David Jenkins, BP's head of technology, assured John Browne. "You'll find more Mars-like oilfields once we can see through the salt."
Texaco and Amoco had developed computer programs to show two-dimensional images of rocks, slightly reducing the risk of dry holes. During the 1990s the experts predicted that 3D, and even 4D, images would further reduce the risk but only drilling produced con- clusive evidence. On the grapevine, BP's executives heard Shell's boasts about its success with Chevron at the Perdito field in the Gulf, which it claimed was the result of superior seismic processing. "It's a strong indi- cator of our success," said Dean Malouta. Rainey was dismissive about Shell's reliance on seismic evidence rather than "human experts." In wild frontier areas, Rainey believed in geology. He could cure the salt problem, but the cost would be $100 million. BP could not commission any trials unless a rival corporation agreed to share the expenditure.
At the time, BP was a junior partner with Exxon in unsuccessfully exploring a block in the Gulf called Mickey. Faced with poor seismic images, Rainey tried to persuade BP's richer associate to finance more expensive tests. The latest computers producing three-dimensional images of the rocks were being fed seismic data recorded by ships trav- eling half a mile apart. BP had financed the development of software using seismic echoes recorded from cables just 12 meters apart, con- siderably improving the 3D image. But gathering raw data across a 300-square-mile block would be hugely expensive. "We need to go back from geophysics to geology," Rainey explained to Exxon's geolo- gists. "We need to put everything back in its proper place." Renowned for their technical excellence, Exxon's executives are also infamous for believing that anything not invented by Exxon is certainly wrong. Ideas offered by an enfeebled, recently denationalized British operator were thus automatically suspect. Unlike BP, Exxon had focused on finding oil in West Africa, especially Angola, and with its enormous spread of interests the corporation lacked the financial imperative to find oil in the Gulf of Mexico. However, Exxon's technicians were eventually convinced to finance the experiment, and Rainey's idea was proven to be correct. Other oil companies were spurred to adopt the enhanced seismic measurements, reducing the cost for BP.
By itself, the intense mapping of rocks was worthless. Identifying the location of oil depended upon producing accurate geological maps.
The oil companies raced to recruit mathematicians and geophysicists to compose computer programs based on algorithms to rectify the seis- mic data. Rainey's challenge was to recruit better mathematicians than his rivals, especially Amoco, the master in this field. The breakthrough coincided with BP leasing a nine-square-mile block called Mississippi Canyon 778 off Louisiana, recently abandoned by Conoco after a suc- cession of dry wells.
The opportunity to buy the block arose after Conoco had failed to find oil at Milne Point in Alaska. As oil prices slid, the company needed to cut its losses, and BP agreed to trade Milne Point for acreage in the Gulf of Mexico. Nonchalantly, the BP negotiator said, "There's a value gap in the deal. We'll agree if you throw in Block 778." Conoco's negotiator was happy to oblige. Conoco, the BP team believed, had committed a cardinal error by misreading the geology at an unexplored depth. Concealing BP's calculations from its rivals across town, Rainey was confident of success, even though the whole Mississippi Canyon area covered 5,000 square miles.
"Everyone in the Gulf is making the same mistake," Rainey said in 1996. "The model's wrong. We're focusing on the geophysics." Rainey was convinced that his unique understanding of the Gulf would enable him to pinpoint a reservoir: "Shell and Chevron are fixated by seismic tests. They're too rigid. They're forgetting about the geology." While Alaska's rocks had taken three years to master, the complications in the Gulf took 40 years to understand. "Everyone in the Gulf is focused on 'top down,' relying only on the seismic and forgetting the rocks! It should be 'bottom up.' " Rainey insisted that BP's rivals were looking at seismic images corrected by computers, and not at the rocks them- selves. In their quest to find the rocks that 10 to 20 million years ago had heated up and generated oil, they had ignored the key factor: less dense than rock, oil attempts to escape. "The deeper I go, I can see the traps, but I can't see the hydrocarbons," said Rainey. "We need to find the plumbing" — shorthand for the "migration pathway" where the oil had flowed and become trapped.
Peering at the 3D images generated by the computers in the HIVE, Rainey reminded his team: "The Gulf is the most complex area on the planet. You've got to stay humble because you can never crack the Gulf. Just as you think you have mastered it, some rocks come up and kick you in the backside. Science is helpful but in the end suc- cess depends on human understanding." The team debated whether the white columns spiraling out of the rocks on the screen were salt or sand. If they were sand, the oil would have leaked away and a $100- million test drill would be wasted. "Follow the salt," Rainey urged. The salt was an obstacle, but also an asset. The secret was to find a lump or hill rising within the rock: that would be the trap where the oil would gather, unable to leak out, sealed by the impenetrable salt.
"I need people who think like a molecule of oil — where will it go into the rock?" said Rainey. In his efforts to resolve the problem he had abolished the demarcation between geologists and geophysicists. Working together, they could determine whether the rocks had ever contained oil and whether the oil was still trapped. Like the pioneers in the space race, Rainey sought innovations, but the best he could hope for was an informed guess.
Risk is the oxygen of oil companies. Success and survival depend on tilting the risk in the company's favor. In January 1996, Jack Golden told John Browne that BP's explorers had understood the lessons of Sycamore and the salt. The corporation, he urged, should make the leap. His team calculated that, rather than their rivals' estimates of 10 billion barrels of oil within the rocks below the Gulf, there were probably 40 billion barrels. In the second round of bidding for 10-year leases in the Gulf, BP should outbid Shell and Chevron. Browne agreed: the company would buy more acreage in ultra-deep water than any of its rivals.
The investment coincided with the industry's slide toward disaster. 1998 was a dog year in the oil trade. The price of oil slumped below $10 a barrel, the lowest in 50 years. There was surplus of production, and cut-price gasoline was being sold across America and western Europe.
The protection enjoyed by vested interests was crumbling. Thousands of experienced engineers were fired, rigs lay unused or could be hired for 25 percent of the old rates, and bankruptcies ravaged the indus- try. "I can't tell you absolutely this is the bottom, but we haven't seen anything like this," admitted Wayne Allen, the chairman of Phillips Petroleum. Potentially, the only profitable activity was deep-water drill- ing in the Gulf of Mexico, but hiring rigs to drill to a new-record 7,625 feet below the seabed and bore down to 12,000 feet cost $200,000 a day. New rigs were being designed to moor in over 10,000 feet of water and drill nearly 30,000 feet into the rock. The 3D image of Block 778 suggested there was oil somewhere four miles below the sea bed. A test bore in Block 778 would cost $100 million. The unanswered ques- tion was, where precisely to drill a 12-inch hole four miles through the rock?
At first, the debate among the 13 explorers was sterile. Red dots from lasers darted around the screen, identifying strengths and weak- nesses for the drill's path. At last the discussion became animated, and a route was chosen. The privilege of naming Block 778 was given to Cindy Yeilding, an attractive blonde geologist — an unusual sight in a male-dominated world. Having a passion for Neil Young's music, she chose "Crazy Horse," the name of his band. Protests soon arrived from the Sioux Indians, defending the memory of their chief, so the plot was renamed "Thunder Horse."
On January 1, 1999, Rainey and Yeilding sat in a bland, window- less second-floor office, dramatically named the "Operations Room," following the progress of a computer-guided drill gouging 29,000 feet through silt and salt toward the porous sandstone and shale where they believed oil had been trapped for eight million years. Only two rigs in the world were able to drill to such depths. Fortunately one of them, Discoverer 534, had already been hired by Amoco, which had just been bought by BP. The cost was $291,000 per day. Reservoir engineers had produced a computer program to steer the bit around perilous flaws, after which it was hoped that oil would gush through the metal cas- ing to the surface. Several drill bits were broken and replaced, but the geologist on the rig reported that the rocks brought up from the depths were the right age. "We're at 13.6 million years," he told Houston, hop- ing that fossils 14.7 million years old, indicating the possible presence of oil reserves, would soon appear. In real time, Rainey and Yeilding scrutinized the constantly changing numbers flashing on a bank of screens for evidence of oil. One sensor attached to the drill reported whether gamma rays detected clay — a negative reading indicated oil. Another sensor measured resistance to electricity — a positive reading indicated oil and gas, because neither conducts electricity. For the next 186 days other members of the team followed the drill's progress on their laptops, at Starbucks or in their beds at night.
"Our sandbox has just got bigger," Rainey exclaimed on July 4, as the drill's sensors reported oil. Nine months later, the size of the reser- voir was confirmed: one billion barrels of oil, the biggest-ever discovery in the Gulf of Mexico. "The prize was beneath the salt," said Rainey, ordering everyone to secrecy until all the neighboring acreage had been signed up by BP. After weeks of around-the-clock work, the explorers and their families discreetly celebrated their success with champagne and dinner.
Around Houston, BP's triumph was greeted with mixed emotions. In normal times, the city fathers would have been thrilled. More oil would mean a boom, but at $10 a barrel, that was not going to happen. The American public, seemingly prepared to pay more for a bottle of water than for a gallon of gasoline, were manifestly ungrateful for any Big Oil success. Unaware of the technological achievements involved, the oil industry was taken for granted by a generation of Americans who had grown up regarding cheap gasoline as their God-given birth- right. Filling their gas tank did not make anyone feel good. Ever since nearly 11 million gallons of oil had spilled from the tanker the Exxon Valdez into Alaska's pristine waters in March 1989, the public's antago- nism toward Big Oil had become entrenched. Big Oil had overtaken Big Tobacco as a focus of hatred. Within the American public's DNA was a belief that oil was a decrepit rust industry unfairly extracting tax from honest citizens. Few appreciated that Thunder Horse would frac- tionally reduce America's dependence on imported oil, which provided 60 percent of its daily consumption. "Guns, God and Gasoline" may have represented freedom for many Americans, yet the oil companies, apparently ambitious for ever more power while remaining unresponsive to the public, were neither understood nor trusted.
In that hostile environment, BP's achievement was acknowledged only by its rivals. The company's reputation had been soaring since 2000 because of aggressive acquisitions. Exxon, Shell and Chevron anticipated their own successes, although the timing was uncertain. While the kingdoms of the major oil companies were diminishing, BP, the largest oil producer in America, was more admired than hated. David Rainey was proud to have met the architect of that success, BP's chief executive John Browne.
As the guest of honor at a packed dinner in Houston in August 2002, Browne had been hailed as a hero. BP's dapper chief execu- tive, regarded as an idealist and a maverick, was loudly applauded for describing the Gulf as the "central element" of BP's growth. No one in his audience underestimated BP's importance. The company had become the Gulf's largest acreage-holder, and owned a third of all the oil discovered there. In the oil business, strong personalities made the difference, and Browne, like an evangelist, was wooing his audience. "We're going to spend $15 billion here over the next decade," he prom- ised, "drilling between four and seven wells every year." His enthusi- asm was understandable. Oil that had been inaccessible in 1998 was now, he knew from Rainey, within their grasp. If the Houston team was successful, BP would outdistance its competitors. Only a hand- ful of doubters suspected that Browne loved being treated like a rock star more than he loved rocks and their contents. Older members of his audience knew that oil had always attracted the ambitious and the larger-than-life. The same man who controlled 90,000 employees and pledged to serve mankind could also behave unaccountably. That was the nature of multinationals.
Exploration for new oil had barely increased over recent years. Since the mid-1970s, over 1,800 new wells in the Gulf of Mexico and in the Atlantic Ocean off Brazil, Angola and Nigeria had promised to deliver 47 billion barrels of oil. But, like a herd, the major oil companies assumed that prices would not rise, and feared risking their profits and their share prices. Their investment in the search for more oil was cut, and many wells had been abandoned. Yet, on reflection, Thunder Horse was recognized as marking a small revolution, and formerly abandoned areas were reconsidered. "Elephants" meant big, fast profits. Thunder Horse meant there were at least another 100 billion barrels of oil to be found under the sea in the Gulf and the Atlantic. Those who believed oil supplies would "peak" between 2011 and 2013 were challenged to reconsider their doom-mongering predictions. The only disadvantage was the cost. Convinced that oil would not rise above $30 a barrel, Browne congratulated himself that his sharp reduction of BP's costs would ensure Thunder Horse's profitability.
Positioning the Korean-built steel rig 6,050 feet above a small hole in the seabed caused jubilation among BP's beleaguered staff. "The serial number of each piece of equipment is 001," exclaimed Rainey with pride. No one on the platform expected to actually see oil. Gush- ers of crude soaring into the air were relics of history. Oil produced in the Gulf was diverted as it emerged from wells into the Mardi Gras system, a network of about 25,000 miles of pipelines crisscrossing the seabed from Texas to Florida. BP's task was to link Thunder Horse to the system. The obstacles were the depth and distance to the terminals: divers could not survive a mile beneath the surface. But finding elegant solutions to apparently intractable problems caused oilmen's hearts to beat faster. BP's answer was to use robotic underwater vehicles, powered by batteries and guided by sonar from the Houston control room, to find a route for the pipes to cross the furrowed, steep Sigsbee escarpment of mountains and valleys, and then to lay and weld the pipes and valves. On July 18, 2005, Thunder Horse was nearly ready. But then Hurricane Dennis hit the Gulf of Mexico, and under American regulations every engineer was compelled to abandon the rig.
The team closed the operation down, but those who gave the order from Houston forgot that the complicated procedures had never previ- ously been executed. After the hurricane passed, the returning teams discovered the rig tilting at a dangerous angle. Defective valves in the hydraulic control system had allowed water to drain out of the ballast tanks. Oil was also leaking from equipment on the seabed that linked the well to the pipeline. BP's engineers attributed the problems to the poor quality of the manufacturers' work. None of BP's designing engineers had taken into account the fact that only valves manufactured from nickel could sustain the extraordinary pressures and temperatures on the seabed; and the welding had been faulty. The flaws were superficially simple, and exposed BP to ridicule from its rivals. Sending divers to carry out repairs a mile down was impossible, and the damage was too great to repair with robots. The equipment would have to be brought to the surface. It was not clear where the blame lay, but the sums involved were too large to reclaim from the designers and the Korean shipyard. Publicly, BP reported that the rig would be unusable until 2007, and that the repairs would cost £250 million. Such optimism caused wry smiles across Houston.
In normal times, the employees of the major oil companies coop- erated to serve their common interests, but in the competitive atmosphere of the time mischievous gossip raged across Houston, and the spirit of BP's humiliated team faltered. Thunder Horse was more than just a tilting platform — it was symbolic of the company. "Poor design and supervision," smiled Shell's head of design about the calamity. "BP always shoot from the hip," said a Shell technician, characteristically dismissing the abilities of a rival. "Their technology and engineering is second rate. They're always coming to us for help." He dismissed BP as a late arrival, hanging on to Shell's coattails, copying its rivals or outsourcing. A colleague agreed that BP was a fast follower, depending on "off-the-shelf go-buys."
David Rainey was indignant at such criticism. History, he believed, undermined Shell's claims of superiority. He felt the company had rested on its laurels, and that following the success at Mars it had been closed to new ideas in the Gulf. "Deep Mensa," an $80 million well bored by Shell in 2001, had been a disaster. Technicians monitoring the data witnessed the "crash out" — the uncontrolled vibrations that smashed the drill as it struggled through fractured rock. Even the best explorers risked embarrassment on the frontiers of the industry. Mortified, Shell's engineers had taken a year to rectify their mistakes.
Shell's expensive errors had been concealed from the public. But Thunder Horse appeared to be a warning to Russia and other national oil companies not to rely on BP. The company's explanations were gleefully rebutted by a Chevron vice president: "It's defeatist to say 'Stuff happens.' " That criticism was also rebutted by Rainey. During the 1980s, he recalled, Chevron had suffered multiple drilling failures that had crippled the company. Cooperation in the Gulf with Chevron, Rainey said, had caused arguments. In 2001, BP's explorers had collaborated with Chevron to test-drill the "Poseidon" block. "They're off the structure," Rainey had complained, urging Chevron to recon- sider the test location. Chevron insisted on its expertise, but missed the oil reservoir. Expressing condolences for the failure, BP negotiated to inherit the "barren" field. Rainey's team had precisely calculated the top of the reserve's "hill," hit a billion barrels of oil, and renamed the well Kodiak.
BP's engineers were, however, not protected from the reproaches of a leader of Exxon's exploration team. As the junior partner in Thunder Horse, Exxon was suffering losses caused by BP. Lee Raymond's jocular description of John Browne as a "bandit" found many echoes among Exxon's executives, especially from the technical director who recalled a fault at the BP's Schiehallion oilfield off the Shetland Islands that had compelled BP to lift equipment off the seabed not once, but twice. On two occasions the company's engineers had failed to spot valves installed upside down by the contractors. While Exxon's engineers would at worst have spotted the fault and learned the lesson, BP's management system was not equipped to evaluate the technology, neutralize risks and absorb the lessons.
Exxon, as the industry leader, proudly avoided technical disasters. Since the days of John D. Rockefeller, the nineteenth-century founder of Exxon's forerunner Standard Oil, the corporation had standardized the rigorous management of costs and processes to prevent financial or technical errors. Like God, the system and the company were infallible.
Relying on a culture developed since Standard Oil's creation in 1870, Exxon was built on tested foundations. By comparison, BP in 2004 was a conglomerate including former Standard Oil companies — Sohio, Arco and Amoco — still struggling to replicate Exxon's excellence and standardization. While Raymond concealed uncomfortable truths by cultivating a mystique and keeping outsiders at a distance, Browne was constantly selling himself and his improvized company. Nevertheless, both men could justifiably claim considerable technical achievements to ameliorate oil shortages; yet their skills were spurned by oil- producing countries.
One manifestation of the mistrust of BP, Exxon and the other major oil companies lay across the Gulf, in Mexico. The country, the world's sixth-largest oil producer, owned vast quantities of unexplored oil beneath its coastal waters. To Browne's frustration, Mexico's national constitution forbade the participation of foreign companies in its oil industry, and 1938 nationalization laws had expelled American oil corporations, damaging Mexico itself. Pemex, the national oil company, mired in intrigue and patronage, had become notorious for its ineffi- ciency, and as a slush fund for local politicians. Like so many national oil companies, Pemex was expected to provide employment — there were 27 workers on each of its wells, compared to the industry's average of 10. And those employees, lacking technical skills, relied on services provided by Schlumberger, which posed no challenge to Pemex's sovereignty.
In 2002 Mexico's president Vicente Fox sought to change that situation. The facts were alarming. Mexico's oil production was falling. The reserves in Cantarell, Mexico's biggest field in shallow water, which accounted for 60 percent of the country's production, were declining by 12 to 15 percent every year. In 2002 the government borrowed and spent $50 billion to pump more oil, but it had spent only $5 billion on exploration in four years, none of which was in deep water. Consequently, Mexico's proven reserves — the oil that was technically and economically recoverable — had been reduced within three years from 15.1 billion barrels to 11.8 billion. The country had neither the expertise nor the money to undertake deep-sea drilling, and its plight was compounded by its inability to refine sufficient crude for its domestic consumption. Instead, Pemex exported crude oil to the USA and paid mounting prices for the gasoline and other refined products imported from America. Natural gas was flared, or burned, at Cantarell because Mexico could not afford to collect and pipe it across the Gulf. Within a decade, the country would need to import oil. Fox urged the vested interests to change the 1938 constitution and allow foreign investment, with the condition that any benefits would materialize only after a decade. His exhortations were ignored. Mexico's political leaders cared even less about their introverted and protectionist neighbor than about their own plight, an attitude that weakened the oil majors and encouraged the ambitions of the Chinese and other consuming nations to make unrealistic offers to Mexico and neighboring Venezuela, which was even more beleaguered by falling production. For those govern- ments, local politics and world prices were more important than America's energy needs.
These seemingly disparate events around the Gulf of Mexico became interlocked in the summer of 2005. In August Hurricane Katrina hit the Gulf, passing over Thunder Horse and devastating New Orleans. Winds of 220 mph destroyed old rigs, and struck the Mars rig and 11 refineries. One quarter of all America's oil production and one half of its refining capacity were paralyzed. Overnight, Americans understood the vulnerability of oil and gas production in the Gulf. Four weeks later, Hurricane Rita hit the area, damaging deep-water platforms and compounding the difficulties of repairs. Fifteen years of low fuel prices in America were over.
Although BP's oil traders in Chicago and London rank among the most aggressive, David Rainey was unaware of those who were profiting from these calamities. He had nothing in common with that breed, speculating in the darkness, welcoming the probability of oil shortages.
Copyright Tom Bower 2009
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