The Squeeze: Oil, Money and Greed in the 21st Century

In 1996, Shell’s success turned sour. The company struck a succession 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 neutralised the hazards. The failures coincided with the US government’s announcement of a second auction of leases for deep-water exploration 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 realised that a mile-thick layer of salt beneath the sea bed, below the silt that had poured out of the Mississippi 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 exploitation commercially viable.

Identifying rock formations 70,000 feet below the Gulf’s surface was technically feasible. Ships dragging seismic equipment were regularly criss-crossing the Gulf, firing sound bops to the sea bed 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 information could be stored on an iPod and analysed by computer within two hours. But either way, the results in the Gulf were notoriously inaccurate. As the seismic soundwaves passed through the salt, the ricocheting bops from the rock strata were grossly warped. ‘Recording the sound through salt,’ Rainey realised, ‘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 programmes 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 conclusive 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 indicator 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 travelling half a mile apart. BP had financed the development of software using seismic echoes recorded from cables just 12 metres apart, considerably 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 geologists. ‘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 denationalised 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 programmes based on algorithms to rectify the seismic data. Rainey’s challenge was to recruit better mathematicians than his rivals, especially Amoco, the masters 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 succession 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 themselves. In their quest to find the rocks which 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 success depends on human understanding.’ The team debated whether the white columns spiralling 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 favour. 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 ten-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 towards 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 petrol 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 per cent of the old rates, and bankruptcies ravaged the industry. ‘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 drilling in the Gulf of Mexico, but hiring rigs to drill to a new record 7,625 feet below the sea bed 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 question 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 weaknesses 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 1 January 1999, Rainey and Yeilding sat in a bland, windowless second-floor office, dramatically named the ‘Operations Room’, following the progress of a computer-guided drill gouging 29,000 feet through silt and salt towards 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 programme to steer the bit around perilous flaws, after which it was hoped that oil would gush through the metal casing 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, hoping that fossils 14.7 million years old, indicating the possible presence of oil reserves, would soon appear. In real time, Rainey and Yeilding scrutinised 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 4 July, as the drill’s sensors reported oil. Nine months later, the size of the reservoir 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 neighbouring 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 petrol, 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 birthright. Filling their petrol 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 antagonism towards 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 fractionally reduce America’s dependence on imported oil, which provided 60 per cent 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 honour at a packed dinner in Houston in August 2002, Browne had been hailed as a hero. BP’s dapper chief executive, 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 promised, ‘drilling between four and seven wells every year.’ His enthusiasm was understandable. Oil which 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 handful 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 recognised as marking a small revolution, and formerly abandoned areas were reconsidered. ‘Elephants’ meant big, fast profits. Thunder Horse meant there was 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 sea bed 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. Gushers 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 criss-crossing the sea bed 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 oil men’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 18 July 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 previously 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 sea bed that linked the well to the pipeline. BP’s engineers had not noticed 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 sea bed; 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 cooperated 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 onto Shell’s coat-tails, 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 which 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 which 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 reconsider 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 which had compelled BP to lift equipment off the sea bed 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, neutralise 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 standardised 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 standardisation. While Raymond concealed uncomfortable truths by cultivating a mystique and keeping outsiders at a distance, Browne was constantly selling himself and his improvised 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 nationalisation laws had expelled American oil corporations, damaging Mexico itself. Pemex, the national oil company, mired in intrigue and patronage, had become notorious for its inefficiency, 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 per cent of the country’s production, was declining by 12 to 15 per cent 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 petrol and other refined products imported from America. Natural gas was flared or burnt 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 materialise only after a decade. His exhortations were ignored. Mexico’s political leaders cared even less about their introverted and protectionist neighbour than about their own plight, an attitude which weakened the oil majors and encouraged the ambitions of the Chinese and other consuming nations to make unrealistic offers to Mexico and neighbouring Venezuela, which was even more beleaguered by falling production. For those governments, 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. 220-mph winds 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 was paralysed. 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.