for independence. He remained blithely unaware of the potential problems until the country was struck by shortages of fuel. Petrol stations closed in Moscow, and airlines stopped flying. Beyond the major cities, towns were dark, visitors wore overcoats in their hotel rooms and the harvest in Ukraine was jeopardised. Living standards were falling, and there were threats of strikes. Reports from Siberia warned Gorbachev: ‘The situation is very serious. It is creating an explosive atmosphere.’ The rouble’s value began sliding, Russia’s international debt rose, and the country’s oil companies began bartering oil for equipment, or even demanding dollars for domestic sales. Russia’s daily oil production fell during 1989 from 12 million barrels a day to 11 million. ‘The atmosphere is exceedingly tense despite government promises,’ a trade union leader told the Kremlin. Gorbachev’s indecision, complained L.D. Churilov, president of the government oil company Rosneft, was causing the crisis.
As oil production in 1990 declined towards 10 million barrels a day, Gorbachev was urged that only foreign investment and Western technology could rescue Russia’s economy from collapse. There were precedents for similar appeals. Ever since the first gusher of oil had burst through a well in Baku in Azerbaijan in June 1873, Russia had allowed foreign companies to produce oil on its territory when times were bad. After the Bolshevik revolution in 1917, and again after the Allied victory in 1945, foreign oil companies had been lured into Russia, only to be expelled as production and prices improved. In 1990, admitting that Russia’s plight was ‘catastrophic’, Gorbachev appealed to Germany for help. His choice was odd: Germany was almost the only Western country without any expertise in oil production. After his invitation was extended to all Western oil companies, many seized the opportunity as an alternative source of oil following Iraq’s invasion of Kuwait. In contrast to the turbulence in the Middle East, Gorbachev appeared to be offering Western oil companies safe investment opportunities in 12 vast areas, totalling the size of the United States, with more oil and gas than the whole of the Middle East. Only a fraction of the oil under the Siberian plains and the Arctic had been extracted.
Despite the lack of any formal agreements, the oil companies could not resist the opportunity. Loïk Le Floch-Prigent, the chairman of Elf, the corrupt French national oil company, led the way. ‘I’m the boss,’ Le Floch-Prigent insisted, refusing to work with any Russian partner. The French were followed by ENI of Italy, another corporation tinged by corruption whose former chairman, Gabriele Cagliari, would later ‘commit suicide’ in prison, suffocated by a plastic bag. Then came the Anglo-American majors. Exxon and Mobil focused on western Siberia, Chevron sent a team to Kazakhstan, BP and Amoco competed in Azerbaijan, Marathon Oil, a second-division oil corporation based in Houston, snooped around Sakhalin, on the Pacific coast, all jostled by experts representing smaller companies. The Western prospectors had suspected that Russia’s oil industry was, like its military services, ‘Upper Volta with missiles’, an image conjured in the 1970s by a Western intelligence agency, comparing the impoverished West African country with Soviet Russia. None appreciated that the best of Russia’s geologists and engineers were as talented as their Western counterparts; but nor had anyone imagined the chaos of Russia’s oil production. Mediocrity had suffocated the flair.
The detritus was staggering. Thousands of wells had been damaged or abandoned. By 1989, isolated from the West, Russia’s proud oil engineers had been unaware of technological developments in the outside world. Unable to drill beyond 10,000 feet and ignorant about horizontal drilling, the Russians had constantly pumped water into the rocks to maintain the volume of oil, leaving 80 per cent of the wells contaminated. Poor engineering, bad cement, imprecise drills, failing compressors and mechanical breakdowns had caused a gigantic stain to spread across the landscape. During 1989, thousands of corroded pipes in western Siberia had broken, spilling about 51 million barrels of oil onto the ground and into rivers. Most of them remained unrepaired. The catastrophe was reflected in a single report presented to Gorbachev. In 1980, new wells had produced about 2.85 million barrels a day, but a decade later the rate had fallen to 1.28 million. Only Western expertise could reverse Russia’s predicament. The benefits would be mutual. The oil majors needed new sources of crude oil, and Russia offered enormous potential.
A handful of oil executives moved around carefully ‘to smell the coffee and get to know the relevant people’, but they encountered deep-rooted suspicion. Russia’s oil men questioned the motives of those who, after decades of NATO’s embargo preventing Russia’s purchase of Western technology, demanded access on a grand scale on their own terms. ‘Seventy years of mutual misinformation and mistrust must be set aside,’ said Tom Hamilton, newly appointed as president of Pennzoil, a medium-sized American oil corporation. The distrust was partly a legacy of Cold War enmities, particularly doubts about America’s motives after the publication of a CIA prediction in 1977 that poor conditions in Russia’s oilfields would compel the country to import oil by 1985. The forecast was mistaken, but Russia’s plight was, in the Russians’ opinion, linked to a 1985 visit to Washington by Saudi Arabia’s King Fahd. President Reagan had urged the king to increase oil production in order to cripple Russia’s earnings from oil exports, which amounted to about 40 per cent of its foreign income. Oil prices had in fact fallen from $50 a barrel in 1985 to around $25 in 1990, increasing Gorbachev’s panic and the Russian oil men’s suspicions. Veterans who knew their history were aware that in 1917, Western oil men had rushed into Russia hoping to pick up bargains and prevent the Bolsheviks undercutting their cartel by flooding the world with cheap oil.
Andy Hall of Phibro, among the first Western visitors to western Siberia, was undeterred by such misgivings. The region was being promoted by Houston entrepreneurs as an opportunity to acquire oil reserves for pennies a barrel, and Hall was persuaded that although it had been exploited over the previous 50 years, new technology could produce huge windfalls of oil and profits. The uncertainty created by the Gulf War encouraged his confidence, shared by most Western oil men and governments, that Russia would provide a secure supply of oil, free of OPEC’s interference. The lure to invest was made more tempting by Phibro’s trading losses. Hall had overestimated the potential volatility of prices caused by the war and the early stages of the 1991–92 recession, resulting in losses at Phibro’s refineries at St Rose, Louisiana, and in Texas. He had also failed to balance the increasing demand for diesel and the decreasing demand for petrol, which required different crude oils. In the first nine months of 1992, Phibro lost $34 million. Calculating the odds as a trader without the advice of independent specialists, Hall assumed like others that the Kremlin’s invitation was genuine, and that profitable oil from western Siberia would compensate for the refining losses. His company White Nights promised to invest $100 million and to hire the best expertise.
Hall’s investment was exceptional. The oil majors were uninterested in providing Russia with technical advice or investing in old oilfields. Their aim was to find new Russian oilfields and book the reserves. Mobil was focused on Yakutia, 1.25 million square miles of virgin territory, five times the size of Texas, with only a few wells but guarantees of vast reserves. Amoco’s team headed for Novy Port, 1,400 miles north-east of Moscow, on the Yamal peninsula, committed to spending tens of millions searching for oil and gas while surrounded by people surviving among leaking pipes, polluted soil and water, with high levels of cancer and without adequate heating in a region where the temperature fell to –27 Celsius in winter. Texaco, led by Peter Bijur, began prospecting in Sakhalin, an oil- and gas-rich island on Siberia’s Pacific coast. Conoco excitedly signed deals to develop oilfields in the Arctic Circle and at Shtokman, a giant discovery in the Barents Sea. Chevron offered to invest in Kazakhstan. The temptations for local politicians were overwhelming.
In the barren Kazak desert – a harsh, unexplored, landlocked region of nearly 200,000 square miles – the Russians had found large flows of ‘very high quality’ oil in the early 1980s. With proven reserves of 39.6 billion barrels of oil and 105.9 trillion cubic feet of gas – 3.3 per cent and 1.7 per cent of the world’s proven reserves – and huge deposits of minerals, no one doubted that Kazakhstan could become one of the world’s top 10 energy producers. A thousand wells had been drilled, but by 1990, with less than 20 per cent of the oil extracted, most had been abandoned. Russian