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The Azeri oil deal

An excerpt from the new book:

The Oil and The Glory:
The Pursuit of Empire and Fortune
on the Caspian Sea

by Steve LeVine
Published by Random House
Reprinted with Permission

Introduction

The Oil and The Glory by Steve LeVine The excerpt below follows the final negotiations for development of Azerbaijan's massive offshore oil fields. After 3 years and 6 changes of government, a deal is finally struck between private and state-owned oil companies as diplomats from Russia and the United States spar in the background.

Overnight, $230 million in cash put up by the oil companies disappears into private bank accounts, apparently benefiting Azeri leader Heydar Aliyev and his associates. It's just one of the stunning, billion-dollar deals documented in this book.

"This is the new way wars are fought," says journalist LeVine, who covered the region for a string of global media companies including The Wall Street Journal, The New York Times, The Washington Post, and Newsweek. Serving 11 years in the Caspian, LeVine was flown home on a stretcher when a Chechen rocket grenade shattered his leg.

More information about the book, The Oil and The Glory, and author Steve LeVine follows the excerpt. Enjoy!


In May 1994, a new round of negotiations opened for development rights to Azerbaijan's oil fields off the coast of the Caspian city, Baku. The first round of talks was held in Istanbul. Azeri leader Heydar Aliyev sent the person he trusted most -- his only son, Ilham -- to be his eyes and ears at the talks. Ilham's presence would allow the Azeri president to keep abreast of every turn without having to rely entirely on the reports of his negotiators or resort to something clumsy, like listening devices. Amoco's Tom Doss recognized this when he and the thirty-three-year-old Ilham climbed into a car during a break in talks. After Ilham ended a longish cell phone conversation, Doss inquired, "Who was that?" "Heydar," the son replied simply.

The Azeris were represented by the old oil guard. Key members were Valekh Aleskerow, Azerbaijan's vainglorious and brilliant principal negotiator; Natik Aliyev (no relation to the country's president), the emotional president of Azerbaijan's state oil company, Socar; and Khoshbakht Yusufzade, the elderly state oil geologist whose well-timed humor often calmed flaring tempers.

The oil industry team was led by Tom Doss, the plain-talking Amoco petroleum engineer, and BP's Eddie Whitehead, who, while having the sharpest mind among the oilmen, nonetheless saw negotiation as "90 percent theater." Whitehead scripted routines for himself and Doss to follow; he would deliver a piece of bad news, and Doss would then step in to explain why it was so. The theory was that, since the Azeris "were all technical people, I'd be more believable," Doss said. Whitehead had even studied acting in order to dramatize such performances; Doss knew when Whitehead was shifting to acting mode "because he'd drop both hands on top of the table, one over the other, look up," and then deliver his punch line.

Aleskerov, an instinctive actor himself, could match Whitehead move for move. (Heydar Aliyev, too, was talented in this respect, having played Hamlet, among other roles, in high school and college.) Aleskerov had a young financial team behind him, trained largely by Pennzoil. Their presence, plus his ability to run many of his economic models independently and his intimate knowledge of past negotiations, made him a formidable opponent. With a beautiful wife, a tastefully furnished Baku apartment, impeccably tailored suits, and a muscular physique, Aleskerov was the very image of elegance. That was before he began negotiating, however, when he would preen, shout, curse, and pound tables to get his way.

The task before everyone was to draft a foundation agreement, a list of principles generally establishing the guidelines for oil field development and the division of profits. Given the number of times these issues had been hashed over in the past, the assignment might have seemed simple. but what followed was a three-week "knock-down, drag-out" fight, as Doss remembered it. The two sides worked out of separate war rooms in the Istanbul Hilton. The oilmen operated so-called white noise generators in their quarters to defeat attempts at surveillance, but the Azeri team at times still seemed to know what they were planning. The only certain way to foil eavesdropping was to go outside for a walk, which Doss and Whitehead did regularly when plotting bargaining tactics. "You don't want the other side to know the whole damn strategy before the meeting started," said Doss.

The oilmen imported their own team of economists, whose workday commenced when the negotiators finished, toiling through the night to produce a flurry of charts and recommendations. They were backed up by an Amoco technical unit in Houston that stood by to generate whatever supporting data was needed. For example, when the oilmen wanted to know how a proposed bonus would affect the deal, they would drop the question off in the war room and get the answer in the morning.

One day, as Doss was using a flip chart to argue a point, the Socar president called him "a liar" and moved closer to elaborate. The American, a wiry, well-built golfer who usually kept his emotions to himself, poked the Azeri in the chest and indignantly responded, "How long have I know you? This is the truth." Calm was quickly restored; as Doss by now knew, it "was just theater."

Serious differences quickly emerged. The Azeris sought a larger share of profits than the oil companies were offering and a higher pipeline tariff as well. The oilmen balked at both demands and argued that development expenses should be paid down before profits were distributed. There was also the matter of the fields themselves. At first, only two were offered up by the Azeris; the third, Guneshli, had been taken off the table in the abortive Manafov round of negotiations. The oilmen successfully argued for restoration of at least a portion of Guneshli -- a pristine deep-water section -- by offering a bigger payoff.

When the Istanbul talks ended, the money issues were still not entirely resolved. The negotiators elected to plug in ballpark figures for the time being. But everyone agreed that progress had been made -- at last, "both sides understood each other," said Doss. They could proceed to final negotiations.

The two sides moved on to Houston in July, and interpreters labored to present a draft agreement in three languages, Russian, Azeri, and English. As the exhausting talks dragged on, the chain-smoking Socar president, Natik Aliyev, appeared to be ill. He was perspiring heavily, and his eyes were sunken. Oil company negotiators "were worried he would have a heart attack and die, and we'd be back to square one, and who would that be with?" recalled Doss. So they issued an ultimatum: No more talks until he saw a doctor. Back came the report that Natik had some partially blocked arteries; he would have to restrain his eating habits and his smoking. Two other Azeri negotiators were also chain smokers; to encourage their ailing colleague, they agreed to put away their cigarettes. Their pledge lasted just three days, but by that time, Natik's condition seemed to have stabilized. Everyone went back to work.

The intensity of the talks simply reflected the high stakes. "It was a process of life or death," observed Yusufzade, the Azeri geologist. "They do not want to spend more. We do not want to get less." Most evenings all dined together, often at a Greek restaurant where the food was reminiscent of the native fare of Azerbaijan. After the meal, the Azeris would "push the tables away and dance, and make us dance with them," said Doss. Personal friendships developed between the Americans and their guests; to the sentimental Yusufzade, Amoco's Doss "was like my son." But then both sides would retire, to prepare for more hard bargaining the next day.

A stir arose when members of the Amoco delegation demanded that the Azeris guarantee the fields against Russian encroachment. They wanted "a signed release from Russia that the Russians surrender any claim to the reserves," recalled Bill White, the U.S. deputy energy secretary. It was an extraordinary proposal, and Amoco's own partners "looked at them like they had their heads on crooked," said one participant. The Azeris were insulted. President Aliyev himself was "the main guarantee," said Aleskerov, their lead negotiator. That rang true -- without a leader of his astuteness, Azerbaijan could not hope to stand up to Moscow.

The Amoco demand so upset the Azeris that Ilham Aliyev immediately flew to Washington, where he urged Bill White to rein in the renegade company. The American official gently informed the surprised Azeri that Washington lacked the absolute power over private companies wielded by his father back in Azerbaijan. But White did follow up with Amoco. He judged the company's demand to be reasonable from a business point of view but politically unrealistic. The demand was withdrawn, and the oil companies took comfort in the age-old belief that possession was nine-tenths of the law along with a contract clause in which the Azeris simply asserted sovereignty over the oil fields.

"I Never Promised You a Rose Garden"

Two months into the Houston talks, frustration began to mount. Aleskerov now "made it known that he wanted to revisit the economics" -- meaning open up the thorny money issue that had been settled with much difficulty in Istanbul. But as the oilmen thought about it, irritation set in. They had compromised enough, said Doss; they were "fed up with the Azeris," and wanted "to end this thing." Oil company lawyers drafted a finished contract that incorporated already settled language plus their desired version of provisions still in dispute. Doss sprung the document on the Azeris.

"This is our final offer," he said. "We want you to show this to President Aliyev and see if he accepts." Doss then slid four airline tickets to Baku across the table and invited Aleskerov and his comrades to use them for a quick trip home and a presidential consultation.

The Azeri negotiator was furious: "That's not the way it is going to be."

Doss stood firm, and declared that if Aliyev didn't agree, "we aren't sure we want to continue negotiating."

The disgruntled Azeris turned to Khoi Tran, the trusted analyst for Pennzoil, and asked him to look at what Doss had presented. Tran spent a day and a half poring over the numbers and pronounced the deal equitable. Still unsatisfied, they appealed to Pennzoil's Dave Henderson, saying that they "felt in a corner, that BP and Amoco were being unreasonable." Henderson rebuffed their feeler for a deal with Pennzoil alone, one that would have left the other companies out in the cold, and told them, "This is as good as it gets." The Azeris still didn't give up. From Istanbul, Socar's top executive telephoned Doss, who said he "wouldn't change anything."

As the negotiations sputtered, the U.S. government prepared to step in and nudge matters to a conclusion. The determined Heydar Aliyev was about to attain what he had wanted all along: an unmistakable signal to Moscow that America was extending its political support to Azerbaijan in exchange "for leaning to the West," as a Washington lobbyist phrased it. The signal sought by the Azeri president was a White House Rose Garden meeting with President Bill Clinton.

Rosemarie Forsythe, the Caspian authority on the National Security Council, swung into action. She had been in constant contact with the oil companies during the roller-coaster negotiations, waiting for the right time to offer what she called "the goody," meaning that Clinton meeting that Aliyev so prized. Washington was just as anxious as the oilmen to wrap up the contract -- not just to lend a hand to the oil companies but also to secure a U.S. presence on the Caspian. America was on the verge of a dramatic new initiative in Central Asia; the geopolitical game there was about to get rougher.

Forsythe called Hafiz Pashayev, Azerbaijan's ambassador to Washington: "We are going to go ahead with a meeting if [Aliyev] signs the deal," she said. It would not be in the Rose Garden -- privately, the administration knew that such a meeting would inflame Armenian sensibilities -- but during the annual meeting of the United Nations General Assembly in New York. That was good enough, came back the reply.

The contract ceremony would be five days hence. Once he made a decision, Aliyev was not a dawdler.

The Contract of the Century

At first, the frazzled oil company negotiators did not believe what they were hearing. Discreet inquiries were made to some of Aliyev's subordinates, asking if the Azeri leadership really was ready to conclude a deal. "They mean to sign the document we sent them, right?" inquired Amoco's Doss. "Yes," the reply came back. The list of signatories to the final agreement would be long. Over the months, the oil consortium had grown substantially, as Aliyev kept taking slices from Azerbaijan's share and distributing them to other countries, in keeping with his strategy of building a diplomatic shield. In all, ten companies representing six countries, including neighboring Turkey, would sign the deal.

The final mystery of the Baku negotiations hinted at high-level profiteering of some sort. The consortium of western oil companies was obliged to pay the Azeris a $300 million signing bonus. After receiving credit for the $70 million advance payment the oil companies had previously deposited, feared lost in the turmoil as Aliyev rose to power, the oilmen deposited the remainder in a designated Azerbaijan government bank account abroad. Almost instantly, the money was dispersed to four separate private accounts elsewhere -- "offshore accounts in countries with lax banking laws," in the words of Dave Henderson of Pennzoil. The oilmen were never able to identify the beneficiaries of the four accounts. But logic dictated that they were persons in some way connected to the Azeri government.

On September 20, 1994, Heydar Aliyev sat behind a long table inside Baku's Gulistan Palace for the signing of what a banner proclaimed the CONTRACT OF THE CENTURY. Before him were four leather-bound versions of the document -- in English, in Russian, and two Azeri renditions in Cyrillic and Latin script. Flanking him were oil company executives and government officials from the United States, Britain, and Russia. They sipped celebratory champagne against a backdrop of flags representing the participating countries, an international front line against anyone who might challenge Azerbaijan's independence.

A Russian deputy energy minister initialed the document as a witness, and the Azeri government interpreted his action as a signal that Moscow "recognized this contract and that this oil field is Azeribaijan's," said Aleskerow, the chief negotiator. Just how wrong he was became clear before the signatories had even left the palace: Declaring that Moscow abhorred "unilateral actions" that "contradict international law," the Russian Foreign Ministry said that the Kremlin did not recognize the deal.

Six days later, Aliyev and Clinton sat in two large armchairs at New York's Waldorf-Astoria. The Azeri president reported on the cease-fire he had reached with Armenia in July and outlined his hopes for an enduring peace between the two countries. Then Aliyev requested a favor -- that Clinton persuade Russia's Boris Yeltsin to acquiesce to the oil deal and be flexible on the issue of pipelines. Russia cannot "dictate this question," Aliyev declared. Clinton promised to try.


About the Author

Steve LeVine
Steve LeVine is an energy correspondent with The Wall Street Journal. He was a foreign correspondent for 18 years, posted in the former Soviet Union, Pakistan, and the Philippines, where, in addition to The Wall Street Journal, he wrote for The New York Times, The Washington Post, and Newsweek. He is currently working on his next book, an examination of the poisoning death of Russian spy Alexander Litvinenko. He lives in Dallas, Texas.


About the Book

The Oil and the Glory by Steve LeVine The Oil and the Glory:
The Pursuit of Empire and Fortune
on the Caspian Sea

by Steve LeVine
Published by Random House
(ISBN 0375506144, 496 pages, 16 pages of photos, hard cover, $27.95)
Available through this site or directly from the publisher:
http://www.randomhouse.com

When the Soviet Union crumbled, oil in the Caspian region -- a remote, rather barbaric, highly romanticized region -- was accessible to the west for the first time in history. The race was on, as Big Oil and all manner of adventurers, dealmakers, and political operatives traveled to one of the most corrupt and dangerous neighborhoods on earth to embark on a new Great Game with massive geopolitical and strategic implications. Fortune hunters sought fortunes, oil companies built an unprecedented, dystopian oil city on the surface of the Caspian Sea, and the American government pushed for the longest pipeline ever built -- one that would lead to a major geopolitical victory over Russia and Iran.

The Wall Street Journal's Steve LeVine takes us from the pipeline builders and oil extractors battling the elements in a primitive land, to the boardrooms of Chevron and BP, to meetings between corrupt officials and U.S. dealmakers on the make, providing a window into the high-stakes, transcontinental maneuvering that occurs when Big Oil, geopolitics, and massive corruption overlap.

Praise for The Oil and the Glory:

"The deft political portrait of this strategic, volatile area makes the book essential reading, but it's LeVine's fine writing that makes it a pleasure."
-- Portfolio Magazine

"A complex story rendered comprehensible, with much drama and intrigue."
-- Kirkus Reviews


Excerpted from The Oil and the Glory by Steve LeVine. Copyright ©2007 by Steve LeVine.

Excerpted by permission of Random House, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

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