by Tom Bower
Based in Chicago, Amoco was North America’s largest private natural gas producer and, as the refining arm of the former Standard Oil, the owner of five refineries across the country. Under Larry Fuller, an undynamic chief executive, the company was floundering. Since 1992 it had drilled 190 wells in four continents at a cost of $9 billion; its reward was a record collection of orphans. Burdened by that failure, the company was selling more oil than it was finding, and stubbornly remained America’s fifth-largest oil company, increasingly seen as a country-club company. Foreign governments were rejecting Amoco’s bids for exploration licenses in favor of Exxon and Shell, who were using the same technology.
Among Amoco’s attractions for BP were its superior operations in the Gulf of Mexico, especially its engineers and 3D computer programs. Other assets complemented BP’s. Amoco’s chemical plants were not identical, and its 9,300 gas stations in the US were located in different areas from BP’s 18,000, diminishing the regulator’s possible objections. The combined company would be the world’s third-largest oil major and North America’s biggest producer, even bigger than Exxon. A deal was also important, stressed Browne, to camouflage the fall in BP’s pretax profits from $8.8 billion in 1997 to $4.8 billion in 1998. In 1999, if the deal was completed, he anticipated dismissing 10,000 staff.
Browne’s directors were impressed by his masterly presentation. Some carped that he appeared like a perpetual star school pupil, regurgitating information in the form required to earn praise, but everyone agreed that the hunt for an acquisition was over. That was particularly true of Peter Sutherland, the company’s chairman since May 1997. The 51-year-old Irishman’s career as a commissioner in the European Union, chairman of the World Trade Organization and latterly chairman of Goldman Sachs International gave him impressive credentials to scrutinize Browne’s performance and character. Circulating around BP were accounts of Browne’s close relationship with his mother Paula, with whom he shared his home in Chelsea. She regularly accompanied him to formal dinners, and had lived with him during his period as a mature student at Stanford University. Wry smiles were exchanged about the anxious plea after the Brownes’ departure from Stanford that a BP employee fly to California and rescue John’s teddy bear, which had been forgotten in his apartment. It was returned to London in a Federal Express carton. On a personal level, Sutherland and Browne had little in common. “There was no natural glue between a jowly Irish Catholic with no background in oil and a partly Jewish atheist gay seeped in the industry,” observed a Browne aide. The chief executive’s manner and dominance swept aside any critical discussions about the bid for Amoco.
Browne’s approach to Larry Fuller in February 1998 was pitched to avoid any repetition of Lou Noto’s painful rejection. In full flow, Browne’s faultless salesmanship as he enthused about the advantages of marriage was irresistible to the marooned oilman, enthralled by a suitor of impeccable merits. “Amoco had for long been the best partner to dance with,” Doug Ford, the company’s vice president responsible for downstream, volunteered. Rival oil companies had considered the prospect. Lou Noto had probed and walked away, while Ken Derr of Chevron, probably the ideal partner, had plotted but not moved by the time Browne approached Fuller. Browne’s offer of shares, not cash, for Amoco was sugared with an enticing comparison. While BP shares had risen by 90 percent over the past five years, reflecting the company’s transformation, Amoco’s share price had fallen. The “merger,” with a 15 percent premium, would be an offer of BP’s shares valuing Amoco at $49.8 billion. BP, Browne explained, would not consider a takeover of Amoco, but a merger of equals into a corporation quoted in New York as “BP-Amoco.” Browne was deliberately vague on the subject of whether Fuller or himself would be the merged corporation’s senior executive. He did not mention that BP’s code name for the offer was “Project Belgium,” a clear reference to a weak and divided country susceptible throughout history to effortless invasions and occupations.
Browne claimed the credit for the possibility of a cashless offer. His endless cost-cutting and focus on efficiency had been rewarded. Assiduously, he had also cultivated his reputation in America as an inspired visionary, single-handedly softening the public’s prejudice against dirty Big Oil. In a carefully researched speech about the environment he gave at Stanford, his old college, in May 1997, he had confessed to a Damascene conversion. He admitted his mistake, shared by the chiefs of Exxon and Shell, in disparaging the link between fossil fuels and climate change. In front of his carefully selected audience, he rejected his past opinion. Acknowledging the existence of global warming, he urged the world to “begin to take precautionary action now” and engage with Greenpeace to discuss the reduction of greenhouse gases. The acknowledgment had won Browne and BP considerable plaudits around America and Europe; but not from Lee Raymond, who was outraged by Browne’s exhortations to his competitors to join BP and reverse global warming. In the same year, at the World Petroleum Congress Raymond caused uproar during a discussion about climate change by proudly describing himself as prepared to “stand up in public and point out some of the scientific uncertainties and damaging economic consequences of the proposals under discussion.” Speaking as chairman of the influential American Petroleum Institute, he sought to halt policies limiting carbon dioxide emissions, because one consequence would be a reduction of oil consumption. Anyone who annoyed Raymond scored points with Larry Fuller, and Browne would do so again.
In the wake of Shell’s imbroglios at Brent Spar and Nigeria, Browne publicly broadened his commitment to the environment to include health and safety, ethics and human rights. His timing astutely anticipated the announcement days later by Chris Fay, Shell’s chairman in Britain, that Shell was converting itself into an energy company focused on promoting sustainable development. Fay’s admission that the increase in Shell’s oil spills from seven tons in 1995 to 111 in 1997 was “completely unacceptable” amounted to a confession that Shell could no longer unconditionally say to society, “Trust us.” Browne elucidated the same ideas in a more sophisticated manner. “BP,” he said, “is becoming a company for all seasons. Behaving ethically and with concern for people and the environment isn’t something new for us… We have to be clear what our standards are, and we have to have a process in place to ensure that those standards are being met, consistently and universally.” Those sentiments beguiled Fuller, and Browne hoped they would have the same effect on any American politicians prejudiced against a foreign takeover.
The merger was announced on March 29, 1998. Over the following months, Rodney Chase, BP’s deputy chief executive, drove through Browne’s true agenda. Tough, chippy and giving the impression of being burdened by complexes, Chase was Browne’s “enforcer,” the type of henchman always useful to authoritarians. The combined new company’s aim, Chase revealed to Fuller, was to save $2 billion annually by more focused exploration, improving procurement and cutting staff. Among the unsuspecting casualties would be Fuller himself. At first he failed to understand Browne’s true intentions, or to grasp the significance of Chase’s disarming smokescreen. “The participants had been unable to pinpoint who first suggested the merger. It just happened.” It was not until July that he perceived his misunderstanding. Browne was not a generous team player, but orchestrated BP’s deeds around himself. He was not interested in a merger of equals, only a takeover. Finally, on August 2, Fuller succumbed to Browne’s pressure and agreed to become BP-Amoco’s deputy chairman, pending his retirement. “A brilliant twist to BP’s advantage,” observed a rival.
On August 11, 1998, Browne watched the stock exchange screen in London register the formal announcement of the “largest ever industrial merger.” BP-Amoco’s shares valued the company at $52.41 billion. The new company was capitalized at $120 billion compared to Exxon’s $163 billion. With combined reserves of 14.8 billion barrels of oil, its oil reserves were second only to Shell’s. BP’s share price immediately soared by 11 percent, and continued rising, apparently endorsing trust in
Browne and the acknowledgment of a new American idol. Thrilled as the new company’s value inched toward $140 billion, Browne, despite his lack of physical stature, was hailed for casting a giant shadow across the global industry.
But after the accolades, the gloom returned. The takeover, Browne knew, would produce hardly an extra drop of oil, or provide any new guarantees for the supply of energy. He hoped to win applause from investors attracted by higher profits, but knew that critics were writing the oil industry’s obituary, cynically quipping, “It’s cheaper to drill on Wall Street than to drill in the mountains and backwoods.” Browne could fend off that prejudice by speaking about “secure reserves for the future” and crucially, to balance the complaint that the oil majors had “stripped themselves down to just making money,” pledging that “supply can always meet demand.” The guarantee sounded authentic. The oil industry was confident about the healthy profits it would reap from the growth of the world’s population by one billion over the next decade — or an extra 250,000 energy consumers every week. Phil Watts of Shell echoed Browne’s mantra, “We can buy our way to the future.”
The Amoco takeover gave Browne a taste for more. One advantage had already manifested itself in Azerbaijan. In 1998, BP produced the first crude oil from the Caspian Sea. To enhance its income, the Azeri government had planned to threaten BP that the contract would be switched to Amoco. The takeover sabotaged that ploy. Size was power, and Browne’s restlessness to please Wall Street became infused into BP’s culture. Some of his old colleagues and the new directors retained from Amoco were disturbed by his preoccupation with finance. Engineers were either retrained or displaced by accountants speaking about “portfolio management” rather than concrete, drills and metal in an attempt to win investors’ confidence. But pleasing Wall Street’s analysts proved counterproductive. Convinced that there was a surplus of oil, they penalized companies that reinvested their profits to find more oil rather than using the cash to reward their shareholders. While Exxon’s balance sheet, supported by high reserves, could withstand any cycle, BP’s fate was still precarious if additional reserves were not found, or if oil prices collapsed.
Anxious to maintain the analysts’ support by spreading optimism, Browne spoke the jargon they understood. “I think the logic at these prices is for a focus on margins rather than volumes,” he told a meeting at the Institute of Petroleum. “It is clear that investors will examine the way in which this industry performs against other sectors and, in particular, the way in which we use capital.” Browne’s macho forecasts of increased performance, profits and production growth displayed his pride in BP’s dramatic transition compared to its rivals. While Shell’s profits fell from $8 billion in 1997 to $5.1 billion in 1998 — the industry’s average fall was 18 percent — BP’s rose 13.6 percent, exceeding the analysts’ expectation of 9 percent. Browne credited his savage cost-cutting, and anticipated that profits would soar from $4.6 billion in 1997 to $6 billion by 2002, even if oil stayed at $14. “We’re beginning to create a new company,” he announced modestly, “but I think we’ve only just begun to understand quite how much it could deliver.” His self-assuredness destabilized BP’s competitors. Mark Moody-Stuart succumbed to Wall Street’s pressure to make an acquisition to avoid Shell becoming a target itself. Shell’s most attractive suitor was Texaco, its partner for refining and marketing in America, but the technical obstacles presented by Shell’s dual ownership remained insuperable. That did not prevent analysts, encouraged by Browne, from seriously speculating about the possibility of BP merging with Shell to become the world’s number one. Browne’s reward was Lee Raymond’s reaction. Sitting imperviously in the catbird seat, Raymond had assumed indifference to BP’s fate, but any challenge to Exxon’s primacy was intolerable. Fortunately for Raymond, Lou Noto finally conceded that Mobil could not survive in a $10-a-barrel environment.
In the months after Noto rejected the merger with BP, Mobil’s fortunes had declined. Although it was a clever marketeer, the company had run out of growth. At a crossroads, with an aging portfolio and aging staff, Mobil was unable to compete with Shell in Turkmenistan or the Gulf of Mexico. Its hopes in Russia had been derailed. Even in Qatar, Mobil’s successful natural gas project was handicapped by the corporation’s limited finances. “He’s so full of himself,” griped one of Noto’s bankers, “that he’s overextended in Qatar and Australia and too aggressive toward Kuwait. He’s got to sell.”
Between 1990 and 1997, Mobil had replaced only 83.6 percent of its reserves. In the fourth quarter of 1996 the company’s net income had fallen by 13 percent. “The world,” Noto admitted, “has changed. The easy things are behind us. The easy oil, the easy cost savings, they’re done.” Over the previous seven years, Mobil had fired 33 percent of its workforce and sold billions of dollars’ worth of assets. By mid-1998 the downturn had become longer and more entrenched than Noto had anticipated. “Now we’re getting down to the muscle and not fat,” he said. Despite following John Browne’s example of cutting costs and generating shareholder value, the reasons for a merger had not changed. “Ours is a great business,” Noto conceded, “so long as you’re number one or two… The status quo just didn’t work.” Mobil, he decided, was too small, and while the oil price was low, the company, according to an assistant, was “sliding south.” Not long before, Noto had damned those who left the company as “traitors.” In the new circumstances, that was forgotten. Without contemplating that Mobil might be more valuable in five years, he became fixated on a single agenda. “Lou’s gone hunting for a marriage,” observed Nick Starritt, a Mobil executive who had recently moved to BP. The prospect of merging with Shell was discussed, but Mark Moody-Stuart’s lack of enthusiasm, reflecting the divided shareholding and the millstone of Shell paying in shares and not cash, excluded that option.
The only suitor was Exxon. Ever since the breakup of Standard Oil, the suspicion had lingered that Mobil and Exxon had forged “a conspiracy or a common understanding” to fix prices. The discovery that after the 1950s the two companies had secretly funneled profits to Saudi Arabia through the American tax system reinforced the conspiracy theorists’ beliefs. Regardless of the past, Exxon, blessed by a high market multiple, was a financial engineer whose shares could be recommended by Mobil’s directors. In June 1998 Noto was speaking on the telephone with Lee Raymond. The FTC had recently allowed a merger between Shell’s and Texaco’s downstream operations in America. The combined company controlled 15 percent of the market, demolishing the previous limit of 7 percent. “I’m really pissed off about this,” Noto told Raymond. “Other industry members are not going to sit around. We can all benefit from consolidation.” Noto allowed the conversation to touch on the idea of a merger. He emphasised his aversion to ceding complete control: any union was to be “a merger of equals.” After all, the two corporations had started from the same tree, and their cultures were similar. Raymond appeared to agree.
During the first weeks of negotiations, Noto consulted his board, while Raymond delayed telling his directors what was happening until the next regular meeting. Naturally, he did not mention his impatience with John Browne’s ambitions. Even in the privacy of the boardroom, he maintained the pretence that Exxon was nonchalant about size and trends, and was only concerned with opportunities and satisfying shareholders. Nevertheless, the advantages of a merger were overwhelming. Ever since Standard Oil had been broken up into 34 parts by a Supreme Court decision in 1911, the two biggest parts, Exxon, about half of the original corporation, and Mobil, the second-largest part with 9 percent of net value, had clashed with the regulators. In 1953 President Eisenhower contended that two former parts of Standard Oil and three other companies were participating in an unlawful conspiracy; and in 1960 Exxon was compelled to divest itself of an oil company in the Far East. If Exxon and Mobil could remerge, the major pillars of John D. Rockefeller’s empire would be restored, albeit without Standard Oil’s power to oppress its competitors. But most of all, having previousl
y ridiculed the notion of an oil company involving itself in extracting natural gas, Exxon would inherit Mobil’s invaluable expertise in Qatar, one of the world’s biggest and most profitable natural gas sources. Combined with Mobil, Exxon would be better placed in the Gulf of Mexico, West Africa and Kazakhstan. The new company would also become a major petrochemical supplier, with 12 percent of America’s refining capacity. But Exxon’s fundamental weaknesses would remain. Like Mobil, its huge reserves were declining, and with oil at $10, profits would suffer until OPEC regained some control over prices.
That was a short-term problem. In the long term, the arguments in favor of a merger were irrefutable. Raymond agreed that Exxon would pay $81.2 billion for Mobil, compared to the company’s market value of $74.9 billion. Valuing Mobil’s oil reserves at $8 a barrel, Exxon was paying a 24 percent premium. Indisputably, the new company would be the world’s biggest, worth $275 billion compared to Shell’s $205 billion. Despite their size, Ron Chernow, the biographer of Rockefeller, observed that the oil majors were “pitiful, helpless giants.” “Giants” was questionable. Even combined, ExxonMobil, with 120,000 employees, possessed only 3.8 percent of the world’s oil production. The merger merely created a bigger minnow. In the final negotiations, Noto acknowledged that talk of a “merger” masked surrender. Mobil’s headquarters in New York would be shut down and incorporated into Exxon’s office in Irving, Texas. Mobil’s creative employees were alarmed. “I’ve served in the army, and I’m not going back,” was a common sentiment among many Mobil employees who feared suffocation in Exxon’s sterile atmosphere. To sugar his pill, Noto was promised $6 million if the deal succeeded. His share options were worth $58 million.