Excerpt

Prologue

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THE FORBIDDING GEOGRAPHY SURROUNDING THE CASPIAN region of Central Asia and the Caucasus has long isolated it from the rest of the world. Situated between the Black Sea to the west and the Tien Shen mountains to the east, this is a vast land of sprawling deserts and jagged, nine-thousand-foot peaks, a bit more than half the size of the continental United States. In the center is the Caspian Sea, five times the size of the next largest inland body of water, Lake Superior.

Over the centuries, Russian novelists and British adventurers romanticized the region, with its camel fights, cacophony of languages, and magisterial kingdoms, known as khanates. But Russian soldiers seeking conquest sometimes became lost and desperate in its daunting wilderness, terrified of the Turkmen, Bukharan, or Chechen raiders whose knives and slave markets might await them. Because the region was so secluded, its exposure to the outside world was limited mostly to the march of conquering armies, starting with those of Alexander the Great more than 2,300 years ago. By the late-middle nineteenth century, its Armenian, Georgian, Persian, and Turkic-speaking Muslim peoples were under the rule of imperial Russia.

Always, there was oil. Marco Polo, the thirteenth-century Venetian trader, reported camel drivers exporting crude from Baku, the capital of Azerbaijan, to points as distant as Baghdad. It was valued both as an illuminant and a balm, he wrote, because “in all the neighborhood no other oil is burnt.” Petroleum deposits were so vast that oil and gas issued uncoaxed from the earth.

In 1872, Czarist Russia loosened private land ownership rules in Baku, triggering a feverish oil boom there. At the turn of the century, Baku was providing more than half the world’s oil supply, outproducing even Rockefeller’s Standard Oil. Great fortunes were accumulated by the city’s oil barons, who built imposing mansions and remade Baku into a European-style metropolis, resplendent at night under the glow of electric lights.

The 1917 Bolshevik Revolution claimed thousands of lives in Baku, destroyed its tycoons, and brought its golden age to an end. Oil production plummeted, wiping out Russia’s chief source of export dollars. Baku’s decline mirrored the industrial paralysis that gripped all of Russia, a nation chronically unable to produce and innovate. Ever since Peter the Great, the Russians had attempted to compensate for this deficiency by importing foreign expertise. Now, his scorn for the West notwithstanding, Vladimir Lenin did the same.

American industrialists like Averell Harriman and Henry Ford answered the call, as did a scrappy New Yorker named Henry Mason Day, who revitalized the Baku oil industry with his state-of-the-art drilling technology. German, British, and other American companies followed Day into Baku, building new pipelines and refineries. The oil fields boomed. By 1928, production had recovered to its turn-of-the-century peak and Stalin was committing more money to spur further growth. So it went for decades, until Baku’s oil production and the city itself once again slid into a deep decline. The grand old mansions decayed, and the city became a seedy backwater that stank of oil fumes and garbage.

On December 26, 1991, the Soviet Union collapsed, and the Cold War came to an abrupt end. Fifteen new nations emerged from the wreckage, among them a cluster of states in the Caspian region with names so unfamiliar that few outsiders could spell or pronounce them. (Some foreigners dubbed them the “Stans,” since many of their names ended with that syllable.) Although these states were economic failures, together they were said to possess the world’s third-largest reserves of oil and natural gas, behind only the Persian Gulf and Siberia.

Thus began a new Caspian oil boom, one that would dwarf its nineteenth-century predecessor. Oilmen from America, Britain, Italy, France, Japan, China, and elsewhere scrambled to cut billion-dollar deals with the region’s emerging strongmen. For a time, the Caspian was at the center of “the greatest sale in the history of the world,” as writers Daniel Yergin and Joseph Stanislaw described the period. It echoed the era immediately preceding the First World War, when American and European industrial titans struggled for power and raw economic dominance. The excitement that the Caspian triggered in the global halls of commerce called to mind the openings of the Suez and Panama canals. Western nations relished the prospect of becoming less dependent on Persian Gulf energy suppliers, whom Washington and London increasingly mistrusted. The Central Intelligence Agency fielded Caspian agents, and the U.S. Army trained local soldiers to keep pipelines safe from attack. (Even Hollywood got in on the act. Caspian pipeline intrigue provided the backdrop for the 1999 James Bond film The World is Not Enough, and the CIA, Kazakhstan oil fields, and oil industry corruption drove the 2005 political thriller Syriana.)

Oil riches remade the two most important cities of the region—Baku, the Azeri port on the west side of the Caspian, and Almaty, the Kazakh business capital on the east side. New European restaurants and Turkish cafés flourished. Along Baku’s faded promenade, Charlie’s Bar served American-style hamburgers, and well-dressed couples strolled at night past brightly lit cosmetics and clothing shops. Gamblers risked their oil fortunes in Baku’s casinos, and onetime Soviet apparatchiks, flush with bribes, built luxurious homes and imported new Mercedeses. Kazakhstan’s president, Nursultan Nazarbayev, built an entirely new capital that resembled an upscale theme park.

But the sudden display of cosmopolitan wealth masked some ugly realities. The larger population remained mired in poverty; in time, the presidents of Azerbaijan and Kazakhstan would be named in U.S. money-laundering and corruption cases.

Fortune hunters and adventurers of all stripes flocked to the Caspian from throughout the West. Some were outright hustlers, like Viktor Kozeny, a smooth-talking Czech American with a Harvard economics degree who lured to his investment scheme former Senate majority leader George Mitchell and some of Wall Street’s most seasoned financiers. Other pitchmen claimed that they could obtain the rights to the region’s gold mines; before being unmasked, they managed to float stock issues in Toronto and London totaling $150 million. In both the Kozeny and gold mine ruses, all the money was lost.

But the most intriguing players were the middlemen—shrewd American and European dealmakers without whose blessings few foreign companies could gain access to an oil field. Some had flocked to the Soviet Union in the Gorbachev era, eager to participate in the profits they thought could be made from the newly legalized joint ventures between foreign companies and Soviet partners. But before the deals could get off the ground, the Soviet Union began to collapse all around them. Hungry for new opportunities, the boldest of these western entrepreneurs moved on to the former Soviet republics surrounding the Caspian, now independent nations. There they gained the confidence of the region’s autocratic rulers, who asked them to protect the interests of the newly independent republics.

John Deuss, a Dutch oil trader with keen and ruthless instincts, was one such operator. He hobnobbed with Arab sheikhs and flew in a Gulfstream jet, often with beauteous models at his side, to visit his offices around the world. Sometimes, he celebrated important deals by flying his entire staff to Atlantic City for a night of gambling. In 1990, he had sent a team to the Soviet Union to look for promising ventures. That led to friendships with the leaders of Russia and Kazakhstan, relationships that he hoped to parlay into billions. In an especially nervy play, Deuss obtained exclusive rights to build a pipeline that would export oil from Kazakhstan’s biggest field, leaving its operator, Chevron Oil, apoplectic and at his mercy.

But no middleman was more influential or had a more spectacular run than James Henry Giffen, a garrulous and worldly-wise New York lawyer who had become a millionaire by the time he was thirty. Giffen had a long history in the region, starting in the Soviet Union in the late 1960s. In the 1980s, Mikhail Gorbachev lent his personal support to a Giffen consortium of blue-chip American companies anxious to do business in the Soviet Union. The Soviet collapse stripped Giffen of his influence in the Kremlin, but he reemerged in Kazakhstan as the president’s chief oil adviser. It wasn’t long before he helped expel John Deuss. Suddenly, Giffen was the last middleman standing, both envied and feared by other power brokers. For a time, he controlled every major oil deal on the northeastern Caspian. He earned millions from every transaction.

The headlong rush into the region by the world’s biggest oil companies was easy to explain. The industry had fallen on tough times—one U.S. oil chairman said that conditions were the worst he had seen in four decades. British Petroleum, Chevron, and the others were hungry to remake themselves after almost two decades of boom, bust, and contraction, and they saw a golden opportunity in the Caspian. They jostled for advantage, led by such outsize personalities as Chevron’s energetic Dick Matzke, who made friends and enemies with equivalent ease; Mobil’s Lou Noto, who enjoyed the spotlight perhaps even more than the deal; and British Petroleum’s prickly John Browne, so powerful that his decisions forged British foreign policy.

But in the Wild West atmosphere of Baku and Almaty, there were few rules and no guarantees. Oil executives spent weeks simply trying to determine who in the government was in charge. One local “agent” after another whispered that he, and he alone, could procure the desired deal. The oilmen spied on each other, and local KGB agents spied on all of them, using bugs that were quickly detected but just as quickly replaced, ever more ingeniously.

The Caspian’s autocratic rulers, at first dismissed by the oil executives as rubes, turned out to be tough negotiators with few illusions. They had honed their skills in the Soviet era, when the Kremlin shamelessly flattered western businessmen, all the while squeezing them relentlessly for the most advantageous terms. Signed contracts were unilaterally declared open for renegotiation whenever oil companies seemed vulnerable to new demands. Virtually no license or permit—almost every step in a deal demanded one or the other—was awarded without a bribe, politely called a “present.” As the competition for oil rights grew more feverish, the cost of graft soared. Even when these obstacles could be overcome, daunting physical challenges remained. The Caspian’s largest fields, in the north, were among the deepest in the world, encased under layers of salt four miles thick or more and suffused with poisonous hydrogen sulfide. Rare mud volcanoes that spewed cold grime dotted the seabed offshore from Baku. Oil-company engineers found ingenious ways to cope.

But the biggest obstacle of all was Russia, determined to maintain its hold on the petroleum riches of its former colonies. The Kremlin simply muscled its way into some of the early deals, at one point even threatening that any unauthorized oil platform near Baku would be subject to military attack. But Moscow’s most persuasive weapon was its ownership of the Soviet-era pipelines through which all Caspian oil was exported. The oil companies faced the unhappy prospect of forever having to bow to Russia’s terms in order to get their oil to market. In a provocative demonstration of the pain it could impose, Moscow intermittently and without warning blocked Kazakhstan crude from entering its pipelines, causing particular anguish at Chevron.

Western oilmen increasingly worried that their crude might literally end up stranded, and stranded it would be worth nothing. By the late 1990s, the U.S. government and the oil multinationals were moving in lockstep to develop an export pipeline route from Baku to the Mediterranean that would touch not an inch of Russian soil. If they succeeded, Caspian oil and natural gas would flow unhindered to the West. Oil and profit were the irresistible lure, but the struggle in the Caspian was also about geopolitical power and national pride. Now that it had won the Cold War, Washington was determined to establish an American preserve in the region and dismantle the expansionist Russian empire for good. After the breakup of the Soviet Union, Russia was desperate to retain its old imperial influence. The Caspian nations relished the prospect of genuine sovereignty after more than a century of Russian rule. To say the least, these aims were incompatible.

And so “pipeline politics” became a modern-day version of the nineteenth century’s Great Game, in which Britain and Russia had employed cunning and bluff to gain supremacy over the lands of the Caucasus and Central Asia. This book is the story of how, at the dawn of the twenty-first century, the game was played once again across the harsh environs of the Caspian Sea.