The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (51 page)

The basic technology of drilling, he tells me, hasn’t changed since Colonel Drake first drilled for oil in Pennsylvania back in 1858: rock samples are flushed out by a white drilling fluid poured through the exploration drill. ‘We look for the stain of oil in the drill cuttings,’ Normann says. Fortunes ride on specks of viscous brown in the milky white fluid. The ‘we’ here is actually the Great Wall Drilling Company, owned by the Chinese government, which shipped over two of its biggest rigs and a few dozen drillers and geologists. Normann has no qualms about employing a company owned by a state that doesn’t hide its hunger for hydrocarbon. US officials in Baghdad are rather relieved that it is a Norwegian oil company, albeit using Chinese drills, that is poised to become the first exporter of the new oil.

While pipeline politics keeps his pumps idle, the black-gold buccaneer back in Tawke has not been twiddling his thumbs. Normann has piped drinking water to the local village, and imported hospital equipment from Norway. ‘Hearts and minds,’ he declares. But he’s also come up with an ingenious way to get his crude oil to local markets. Four tankers line up on top of one of his oil wells and are simultaneously filled with 200 barrels of warm crude oil spurting directly from three kilometres below ground. It must be the world’s biggest fuel stop.

Iraq’s potential wealth is staggering. Crude is even easier to extract in the south of the country, where the fields are so-called super-giants. Hawrami calculates that, with concerted investment, the nation’s oil earnings could increase fivefold, to $200–$300 billion per year, creating ‘five new Dubais’ in Iraq’s major cities and ‘more money than the nation could ever spend’. Under Saddam, says Hawrami, Iraq’s oil was a curse, used to buy weapons to kill the Kurdish people. Iraq, he says, should be planning its own sovereign wealth fund, to deal with the problem of having too much money.

Iraq could have chosen a more centralised state-run oil industry, keeping prices high by only slowly releasing its oil bounty onto world markets. Officially the plan is to rejoin OPEC’s system of quotas for oil production, designed to keep the price high. However, Iraq’s allegiance to the OPEC cartel could be somewhat compromised by the existence of a privatised, fragmented, competitive and market-driven industry in the north of the country.

For Iraq as a whole, one might argue that it would have been better to leave the oil in the ground. The country has been a victim of a particularly vicious form of the ‘oil curse’ – that frequently observed phenomenon whereby the existence of extensive hydrocarbon resources in a country serves to underpin bad, often dictatorial, governance. Even Sheikh Yamani, the Saudi politician, fears it for his own country. Yamani was Saudi oil minister from 1962 to 1986, and as such became the public face of the 1970s oil embargo (‘Yamani or your life’) by which the Arab oil producers hiked up prices and restricted supplies in retaliation for the perceived support by the West of Israel. When I asked him in 2001 whether oil had proved to be a blessing or a curse for oil-producing countries, the Sheikh smiled enigmatically: ‘I am worried about the future. If you get money so easily, you relax and you lose your muscles.’

He believes that the oil age will end not for lack of oil, but because technology will replace the need for oil. So in the very long term the oil prices would fall with declining demand. ‘The Stone Age did not come to an end because we had a lack of stones, and the oil age will not come to an end because we have a lack of oil,’ he said. Yet the oil price has more than trebled since this prediction of underlying falls in crude oil prices, at the behest and to the benefit of a number of badly run non-democratic governments.

Memories of Saddam’s chemical assault on the Kurds have not faded in the north of Iraq, and the Kurdistan regional government is leaving nothing to chance. Kurdish Peshmerga paramilitaries patrol what is effectively an international border between Iraqi Kurdistan and the rest of Iraq. And that border marks an economic boundary as well as an ethnic one. The Kurdish regional government have encouraged US property tycoons to construct massive gated property developments such as ‘the American Village’. This lies to the north of Erbil, on the arid rocky road to the oil fields, and comprises a development of 400 homes featuring green lawns, picket fences, a shopping centre and an artificial lake.

I met with one of the developers, Jim Covert, who proudly points out to me some of the key features of this showpiece of Americana: ‘a typical American garage, with automatic door. We measured it to fit the biggest cars available on the market, so your Hummer will fit in here,’ he tells me. Dozens of houses were sold off plan, before they had even been built, for as much as half a million dollars each. The money is here, even if the banking system is not. Some of the six-figure dollar deposits were paid in bags of cash. ‘This is like the Wild West,’ Covert tells me enthusiastically. ‘Now is the time to get in here to get established and make money because there’s so much money coming from oil.’

Iraqi Kurdistan alone could have more oil than Nigeria. Saddam Hussein’s ban on oil development in the region has left a legacy of exploration opportunities for DNO and for seventeen other small oil companies from Canada, Turkey, Iraq, the USA and a number of Asian countries. But Kurdistan’s reserves are dwarfed by untapped reserves in the Shia south of Iraq, and strong potential reserves in the unexplored desert in the west of the country.

By 2008, Iraq’s main oil artery from the north of the country to the Turkish border was again gushing with black gold. Half a million barrels of oil a day now flows from the Kirkuk field to the Turkish port of Ceyhan. At times they pump through 1.6 million barrels in four hours. That’s the time they have before hot crude oil pumped from underneath the massive Kirkuk field starts to warm up the earth above the pipeline route, alerting insurgents that the oil is flowing. Further south, the Ministry of Oil has built a 10-metre wall around the pipeline to protect it from attacks. The measures seem to be working. A relatively uninterrupted flow of crude through this pipeline has boosted Iraq’s oil exports back up to pre-Saddam levels.

By 2011, the Kurdish government’s gambit – inviting new exploration under better terms than those offered by the central government – was starting to pay huge dividends. Tensions with the central government in Baghdad flared up, but Baghdad repeatedly backed down. Major oil firms such as ExxonMobil were now favouring new developments in the Kurdish areas, at the expense of their deals struck in Baghdad. The General was at last able to connect his small gutter pipeline to the main export pipeline, and was starting to be repaid for his investment. But by December 2012, that route out was cut off over a dispute between the KRG and Baghdad. The Kurds announced a deal with Turkey for their own separate export pipeline, bypassing Baghdad’s pipeline at Fishkhabour. This would give Iraqi Kurdistan de facto oil independence from the rest of Iraq.

In theory, these developments could help break OPEC in our lifetime, lowering global oil prices and thereby helping Western economies by raising living standards. But the disagreement over Kurdistan’s right to invite prospectors to drill for oil is part of a wider argument about the stability of Iraq. There is a violent dispute within Iraq about the status of the oil-rich city of Kirkuk. This city lies at the heart of an ethnically mixed area (Arabs, Kurds, Turkmen and Assyrians all live here), and the dispute concerns the question whether Kirkuk should become part of Iraqi Kurdistan. By 2013 BP was eyeing deals with Baghdad over dilapidated giant oil fields in Kirkuk – a sensitive issue with the Kurds. Turkey watches on, doing deals with the Kurdish administration, whilst nervous of the impact of KRG assertiveness on its own Kurdish minority, which for many years has been agitating, sometimes violently, for independence. In 2013, Turkey signed a peace deal with its own Kurds, opening up the possibility of Kurdish oil pouring into Turkey.

Security in Iraqi Kurdistan depends on that militarily policed internal border with the rest of Iraq. Syrian Kurds are rising up against their leaders. Iraqi Kurdistan may be the Wild West of the Middle East. But that does not mean it’s going to end up like California.

Pipelines remain a fault line. Iraq’s oil curse is yet to turn into a blessing.

Three thousand kilometres to the north, in southern Moscow, there is a thirty-five-storey building shaped like a giant phallus – or, officially, a ‘large pencil’. Within this angular Russian precursor of London’s Gherkin, there is what appears to be a war room. The room is dominated by a 6-metre plasma screen displaying a map of western Europe, as if plotting a re-run of old Soviet invasion plans. Rendsburg, Tilburg, Aachen, Fos-sur-Mer and other apparently random small towns are marked in Cyrillic characters. They are connected by a series of luminous green lines. But these are not planned attack paths. They are pipelines – not for oil, but for gas. This is just the start of the ambitions of Russia’s hydrocarbon giant Gazprom, one of a new breed of state-owned energy giants that are trying to reshape the energy map of the world.

Gazprom is the direct descendant of the old Soviet Ministry of Gas, which turned itself into a state corporation in 1989, retaining its assets and later being part-privatised (under Yeltsin) and then being brought back under Russian state control as part of Putin’s drive against the oligarchs. Gazprom may be a ‘new breed of energy giant’, but its institutional roots are buried deep in Russia’s Communist past.

‘This is where the life of Gazprom is centralised and managed,’ says Anatoly Paramonov, who runs this control room of the Central Operations and Dispatch Department, the ‘heart’ of Gazprom. ‘Here we set out what the gas supply should be, where it should go, and to which customers.’

Of particular concern are weather forecasts. Every Friday, the meteorological outlook up to 3,000 kilometres away will determine how much gas he will allow to flow from pipelines in Siberia. Over the seven days it takes gas to flow to Germany, or the nine days it could take to get to Great Britain, small fortunes can be made and lost. Russia’s Unified Gas Supply System is controlled from this room twenty-four hours a day. Paramonov takes out a small remote control and the screen fills with a map of the UK, with small towns such as Moffat, Peterborough, Carlisle and Bacton marked in Cyrillic script.

At the time I visited, in June 2006, Gazprom was already the largest single provider of Europe’s fuel for central heating and power, and it was doing little to quell suggestions that it wanted to buy Britain’s entire gas distribution network, part of an ambitious strategy to connect the world’s biggest gas supplier directly into the homes of western Europe, ‘from drill to grill’. The plan was exciting the world’s markets, leading the majority state-owned Russian company to trade on the Russian stock exchange at a value of $300 billion, making it the third biggest company in the world. As Alexander Medvedev, the official in charge of Gazprom’s expansion strategy, told me at the time: ‘If we are being realistic in the long term, then we should dream not about $300 billion but about a one trillion market capitalisation. It will not be a fairy tale, it’s a real target which could be probably given to the company in the next three to five years.’ ‘The biggest company in the world?’ I ask. ‘Yes,’ he replies, with a villainous smile.

Back at HQ, Anatoly Paramonov spots a cold snap in the Rhineland or the West Midlands, and from his war room instructs the chief dispatcher to flick some computer switches to send gas molecules flowing west from Siberia. Deals are thrashed out with executives from gas-hungry energy consumers in a glass pyramid at the top of the building. Gazprom remains the largest single provider of Europe’s fuel for central heating and power. A straightforward trading relationship is the theory. The practice has been a little more complicated. A clue to this complexity is in the marble sculpture of a tsar-like figure wrapped in a giant gas flame that welcomes visitors to Gazprom HQ. The bigger clues lie further east.

It’s midnight in the sleepy Siberian backwater of Novi Urengoy, a town carved out of nothing by the Soviet Union’s gas ministry, now Gazprom. Novi Urengoy is home to 100,000 people, packed into row after row of concrete Soviet-era apartment blocks. Red-faced gasworkers stumble drunkenly through the midnight daylight groaning like zombies in a horror film. It’s not surprising the workers enjoy a drink or two during the all-too brief summer, when for two months the sky never goes dark. We are only a few dozen kilometres south of the Arctic Circle, and the rest of the year, apart from the shortest of springs and autumns, is one long winter, in which for many months the sun barely peeps above the horizon, and temperatures drop as low as −55 degrees Celsius. In the indigenous Nenets language, Urengoy means ‘godforsaken rotten place’ – and that was before the construction of those grim apartment blocks. As a wind-up, our hosts have only supplied us with one-way plane tickets. Despite the unremitting bleakness of the place, thousands of workers come to live here, attracted by relatively high wages. Novi Urengoy came into being four decades ago when seismologists accidentally stumbled upon huge gas reserves in the area. A pioneering team, living in tiny cabins, braved the harsh Siberian winter to build the pipeline network that would carry Urengoy’s treasure across the Soviet Union. The reindeer-herding Siberian tribes long ago abandoned the area, leaving it to the hunters of hydrocarbon.

Here, in Russia’s sub-polar regions, the winter snows melt away briefly each year to reveal a relentless expanse of tundra. Dotted around this Arctic desert are drills sucking gas from the Urengoy field, which lies beneath a thick layer of permafrost nearly 2 kilometres deep. It’s the second biggest gas field in the world, the largest field in one country – 10 trillion cubic metres of gas, enough to meet all of Britain’s needs for an entire century.

Twice in the past decade, in 2006 and 2009, spats between Russia and Ukraine over the price of natural gas have led Russia to turn off the tap, which has also affected gas supplies to other European countries. ‘Energy security is a complicated matter and it’s a two-way street,’ says Alexander Medvedev. ‘We are as dependent upon our customers as they are on us,’ he says. I ask him if Gazprom is threatening western Europe. ‘We are not threatening anyone, we are simply saying that to call for the role of Russian gas to be artificially diminished is a very dangerous thing.’ That sounded threatening enough to me.