by Tom Bower
This flippancy was not merely for public consumption. Ever since the crash in 1998, ExxonMobil had reduced investment to increase its profits. In 2000, after cutting investment by 24 percent, the company’s profits rose in the first quarter by 122 percent, to $12.5 billion. At the same time, Raymond’s skepticism about Russia and the Middle East was balanced by his successful persuasion of George W. Bush and Dick Cheney to invest time in sub-Saharan Africa, in recognition of a new linchpin of US energy. West Africa supplied 14 percent of America’s oil and gas, and ExxonMobil had a stake in about 10 percent of the area’s estimated reserves of 77.4 billion barrels of oil. With ExxonMobil’s encouragement, in July 2003 President Bush visited the continent to reinforce the corporation’s stake, especially in Angola, a safe country for ExxonMobil’s expansion.
The aversion to risk shared by the oil majors after 1998 had not deterred the next-largest 20 oil companies, including BG, Apache, Devon Energy and Anadarko, from exploring for new oil. Unlike the Big Four’s economic experts, who as usual reached a consensus, the chief executives of the next tier of oil companies believed that oil prices would rise. Raymond’s caution benefited Hess, a $50 billion company based in New York and Houston, which anticipated that supplies of oil would not match rising demand. Focused on exploration, Hess recruited experts from Exxon and other majors to find oil under 5,000 feet of salt in the deep waters off Brazil. This commitment was especially risky, as Shell, BP and Total had all drilled dry holes in Brazil’s acreage, and given up. Hess’s interpretation of the seismic data on lease BMS22 in the Santos Basin pinpointed the ideal spot to drill. The problem was financing the $100 million well. The only way the company could raise the money was if an oil major was prepared to take a stake in the license, owned 80 percent by Hess and the remainder by Petrobras.
ExxonMobil agreed to pay 100 percent of the exploration costs in return for 40 percent of the profits. Having “farmed in,” ExxonMobil’s experts in Houston violently disagreed with Grant Gilchrist, Hess’s geologist, about his interpretation of the seismic data. In the normal Exxon manner, their assumption was that only their judgment could be correct. The disparity in size between the two corporations encouraged the ExxonMobil team’s belligerence. While ExxonMobil needed to discover at least 1.4 billion barrels every year to replace production, Hess required 140 million barrels “to stay out of liquidation.” “Our production doesn’t even cover Exxon’s needle,” commented John O’Connor, Hess’s director. Eventually, Exxon’s team were persuaded by Gilchrist’s version. Just as when they had reluctantly bowed to BP’s analysis and found oil in 1997 in the Hoover field, 165 miles south of Galveston in the Gulf of Mexico, Exxon’s bluff about its deepwater expertise was exposed in Brazil. The discovery of a large reservoir in January 2009 was announced as an ExxonMobil success. The reserve was in an area where Petrobras had already discovered Tupi, a field beneath a salt layer with between five and eight billion barrels of oil, and another find with possibly 100 billion barrels. In the short term, ExxonMobil’s need for more oil could usually be met by investing in rivals’ expertise, but over time, the Hess directors knew, Exxon’s survival depended on more “consolidation,” meaning mergers or takeovers. Only the oil giants possessed sufficient money to discover and exploit the billion-barrel offshore elephants that were essential to future supplies.
ExxonMobil’s success at Sakhalin confirmed the reliability of the company’s model. The revised estimate of the reserves in the area had soared to 60.5 billion barrels of oil and 200 trillion cubic feet of natural gas. Alexei Miller, Gazprom’s chairman, was surprised. The fate of that enormous quantity of natural gas, he felt, should be his decision. Either the gas would be used in Russia, or exported through Gazprom’s pipeline to Europe. Both options were rejected by Raymond. ExxonMobil would earn more by selling the gas to China or Japan, and Gazprom was contractually bound to a unanimous agreement with the corporation. Miller’s efforts to take control were stillborn. But Raymond’s intransigence had a cost. ExxonMobil lost the license to develop Sakhalin 3, and the Kremlin decided that development of Shtokman, an elephant oil and natural gas field 340 miles offshore in the Arctic, would not be licensed to an oil major as an “owner,” but only as a contractor. Raymond excluded Exxon from the development. On the “win some lose some” equation, he was unconcerned that rejecting Russia’s terms fettered the growth of energy supplies. Sakhalin had enhanced Exxon’s reputation for operational excellence, and that skill was only available on Exxon’s terms.
Financially, as oil prices began to rise after 1999, there seemed no reason to relax the corporation’s autonomy. Exxon’s size immunized it from negative news. By the fourth quarter of 2004, ExxonMobil’s profits were $8.4 billion, $3.8 million every hour. When he was asked what the company would do with the money, Raymond replied, in a rare moment of humor, “First of all, we’ll sort through it. And secondly, why in the world would we ever tell anybody in advance what we’re going to do with it?” He did not believe such profits would last forever. At around $45 a barrel, oil prices were, he believed, only temporarily high. Looking back to the mid-1990s, he said, “We had a view that the price structure then could not last — that it was fundamentally unstable.” The same thing, he believed, would happen in 2004. To calculate future exploration and production, Shell’s strategists projected an oil price of $50 over the next 30 years. Exxon’s price was $25, tenaciously low. “They’re operating outside the rulebook,” a Shell executive exclaimed. “You need to keep a long-term perspective in this industry,” retorted Raymond. “You have to recognise that pressures come and go. It’s swings and roundabouts.” As a reward for keeping the faith, earning Exxon $36 billion in profits in 2005 while the share price had nearly doubled since 2003, Raymond’s personal annual income was $69.7 million. Recognizing his importance to the industry, Dick Cheney, the US vice president and former chairman of Halliburton, declined invitations to parties in Washington on the night of President Bush’s second inauguration in 2005 and flew to New York for a celebratory dinner with Raymond.
Much united Raymond and Cheney, not least their frustration at Congress’s general ignorance. Although America was the world’s largest energy producer and consumer, Washington’s lawmakers, they both believed, never ceased pursuing contradictory policies toward energy, except when they united to attack the oil industry for profiteering and pollution. Then their outrage was “dressed up as policy.” Both the vice president and the chairman were irritated by the incoherence of those arguing in favor of subsidies for expensive new fuels while refusing permission to open the Arctic National Wildlife Refuge, and endlessly harping on about America’s increasing dependency on imports. The administration’s hope for some resolution of those differences in the Energy Policy Act in July 2005 proved forlorn. Although a proposed windfall tax on oil companies was defeated, and Congress approved a clause to overcome Florida’s refusal to lease its eastern regions for drilling by redrawing the borders of the Gulf of Mexico and assigning an area under Florida’s jurisdiction to Alabama and Louisiana, it forbade the construction of new refineries. This refusal was in part influenced by popular suspicion about Cheney’s relationship with the oil industry. Soon after the 2004 election, senators had demanded that executives from the oil majors come to Congress to explain their contribution to an energy task force chaired by Cheney in 2001 and 2002. Some executives appeared to be concealing their collaboration with Cheney to promote policies favorable to Big Oil. The politicians’ suspicions were, in Raymond’s opinion, self-defeating. America’s capacity to refine oil had fallen by 10 percent since the last new refinery was built in 1976, but demand for oil products had risen by 20 percent. Although existing refineries had been modernized and expanded, the reduced investment threatened shortages and inevitable price rises.
A series of hurricanes in the Gulf of Mexico stoked more suspicions. In 2004 Hurricane Ivan snapped underwater pipelines, and then on August 26, 2005, after two other minor hurricanes, Hurricane Katrina�
��s 220-mph winds hit rigs and eight refineries. Four weeks later, before the devastation was repaired, Hurricane Rita damaged deepwater platforms. A quarter of US oil production and nearly a third of its refining capacity were hit. Fuel prices began rising. In the 27 years since the last energy crisis, an entire generation of Americans had grown up unaware that cheap fuel was not a God-given right. Responding to their clamor, Washington’s politicians accused Big Oil of profiteering, or “price-gouging.” Republican senator Pete Domenici’s summary was crude: “Most Americans think that someone rigs these prices.” “What [Americans] don’t want,” said the president, joining the attack, “and will not accept is manipulation of the market. And neither will I.” There were suspicions about a decline in OPEC’s production, and outrage that at $50 a barrel the price of oil was too high. Saudi Arabia was suspected of manipulating the markets over the previous four years. Recent research had shown that after the collapse of prices in 1998, Middle East oil revenues had fallen in one year by $42 billion, or 29.7 percent, but in 2002, by carefully controlling supplies, the region’s revenue had doubled. Raymond was convinced that speculators added $20 a barrel to the price of oil. Accusations of price manipulation, the oil companies knew, were a convenient cover for the more complex causes of the crisis. Although taxation, unrestricted consumption and the refusal to allow offshore drilling in American waters contributed to the perception of a shortage, the 15 percent increase in China’s demand in 2004 gave substance to the EIA’s projection of global demand increasing by 54 percent between 2001 and 2025. “It’s the end of cheap oil,” announced David O’Reilly, Chevron’s chief executive, “and the beginning of a bidding war between East and West for Middle East oil.”
News stories about high prices, greater demand and the threat of a shortage did not persuade Raymond to increase Exxon’s investment in exploration. Like the chairmen of his rival oil majors, he feared that oil prices would fall, and investment would undermine the corporation’s share price. The politicians were surprised. The oil companies had received huge grants to explore in the Gulf of Mexico, but the billions of dollars had merely been banked as increased profits. In their attempts to understand the industry’s conservatism, the lawmakers seized on an official study produced in 2004 showing that the market concentration following 2,600 mergers in the US petroleum industry since the 1990s had led to “higher wholesale gasoline prices” by about 2 cents a gallon, and over 7 cents a gallon in California. The approval of the Exxon–Mobil merger, Senator Chuck Schumer of New York complained, had been “a great mistake.” The oil majors had hoodwinked Congress during hearings in the late 1990s about the benefits of mergers. At the time, Raymond and other witnesses had dismissed concern about lack of competition. Six years later the politicians regretted being persuaded by Raymond that Exxon without Mobil was not big enough. The mergers were blamed for increasing prices, underinvestment in refineries, record profits and allegations of collusion among retailers. In 2005 Exxon paid $23.2 billion in dividends and share buybacks, but spent only $17.7 billion on exploration and production. Raymond had boasted that his corporation had earned a 31 percent return on capital in 2005, beating BP, with 20 percent, into second place. With those profits, many in Congress suspected the industry was using the loss of a million barrels a day of oil after Hurricane Katrina as an excuse for extra profiteering. Schumer blamed President Bush for being “addicted to oil companies.”
On November 9, 2005, Lee Raymond replied to those accusations at a Senate hearing. With a weary air of “While politicians come and go, ExxonMobil continues in the same course,” he explained some realities: ridiculing the idea of oil companies rigging the market, he pointed out that ExxonMobil produced only 3 percent of the world’s oil; the market had worked perfectly after the summer’s price rises; oil prices had fallen as supplies were restored, especially after Saudi Arabia increased production to compensate for losses from the hurricanes; ExxonMobil invested the same amount in good times and bad, because each project took so long to mature — the proof was Sakhalin’s development, which would take 10 years, but would produce oil for 40 years. Polite and self-assured, Raymond gave the impression of regarding the congressmen as puppets.
His manner failed to allay the suspicions held by some about the extraction of oil from federal land. About 25 percent of all oil and gas produced in America came from publicly owned terrain, earning the government $8.65 billion in royalties in 2005. Just prior to the hearings, reports surfaced about a corrupt relationship between government officials and some oil companies to underpay royalties for oil extracted from federal land. This alleged “outright cheating” was calculated to have lost the government about $10 billion over five years. The oil companies have disputed the allegations, and the case is still to be heard in the Supreme Court, but the public’s simmering distrust of oil was increased.
To counter the suspicion, John Hofmeister, the president of Shell in America, appealed to the chief executives of Chevron and other oil companies to regain public sympathy by launching an “outreach” program. Hofmeister, formerly Shell’s director of human resources in The Hague, had been chosen by Jeroen van der Veer to restore the company’s image, rated as probably the worst among the majors in America. To please Dick Cheney, Condoleezza Rice and several senators, he had advised van der Veer to obey the American embargo and abandon the development of an LNG plant in Iran. “The Americans should be kept in their box,” Malcolm Brinded, the head of exploration and production, had protested. “You’ll get nasty hearings,” warned Hofmeister, and Shell retreated. With his new authority, Hofmeister sought to spread Shell’s influence. The forum for the industry’s discussions, the American Petroleum Institute (API), was dominated by ExxonMobil. “Whatever we do or say will be a waste of money,” Lee Raymond told Hofmeister, and the outreach initiative was stillborn.
Talk about global warming, peak oil and alternative fuels irritated Lee Raymond. Nature, not man, he said, was responsible for climate change. In his view, the costs and regulations of the Kyoto Protocol were “unworkable, unfair and ineffective.” Calling for more research in 2001, he blamed natural sources in part for the greenhouse effect. The benefits of Kyoto’s regulations, he said, “have yet to be proven. Their total impact is undefined, especially because nations are not prepared to act in concert.” John Browne’s polished speeches to the United Nations and elsewhere about the environment appalled Raymond, who welcomed one congressman’s snipe: “We’re addicted to oil, and they’re addicted to profits.” Profit was Raymond’s bedrock. “I don’t make moonshine,” said Rex Tillerson, articulating the reasons behind Raymond’s funding of the Competitive Enterprise Institute, a group dedicated to denying that fossil fuels endangered the environment. Nevertheless, Raymond was prepared to chair a major study organized by the National Petroleum Council about the world’s dependence on oil. Exxon research showed that between 1980 and 2030 an additional two billion people would inhabit the planet, and the demand for energy would increase by 50 to 60 percent. Providing that energy would cost $17 trillion, and 40 percent would be supplied by oil. Among the obstacles to supplies were some oil-producing countries, none more so than Venezuela, which possessed the largest oil reserves outside the Middle East.
Born in a mud hut and an avowed admirer of Fidel Castro, Venezuela’s socialist president Hugo Chávez was elected in December 1998 with 56 percent of the vote, and was committed to redistributing Venezuela’s oil wealth among the working classes. His targets were the “rancid oligarchs” and “squealing pigs” who managed PDVSA, Venezuela’s national oil company. The executives of the badly managed company were accused of purloining the oil profits to fund their expensive lifestyles. Repeatedly, Chávez highlighted their misuse of PDVSA’s luxury villas and private jets at the very time that Venezuela’s oil prices had fallen to $8 a barrel and inflation had topped 800 percent, plunging the country into temporary destitution. For their part, the oil executives accused Chávez of “stealing” the presidency. Success in t
he battle for power depended on the fluctuating oil prices. Chávez’s popularity among the impoverished workers rose as prices hit $30 a barrel in March 2000, but dropped at the end of 2001 when they fell to $15. In an attempt to reverse the trend, Chávez courted popularity by promising to seize control of PDVSA. His first step was a presidential decree raising taxes on foreign oil companies from 16.7 to 30 percent, and ordering the transfer to PDVSA of a 51 percent stake in every venture operated by a foreign company. PDVSA’s managers, including those appointed by Chávez, opposed these proposals. Foreign investment, they feared, would be deterred, and only the oil majors were capable of doubling Venezuela’s production to five million barrels a day. Chávez wanted the opposite. If prices increased, he calculated, production could be cut.
To resolve the impasse, he fired the managers. PDVSA’s engineers staged a mass walkout. Oil and food supplies dwindled, and the country became paralyzed. When protestors were shot, Chávez was accused of killing innocent workers. On April 12 the beleaguered president was under arrest, and believed to have resigned. His overthrow was publicly welcomed by President Bush: 60 percent of Venezuela’s oil was sold to the USA, and the administration was outraged by Chávez’s flirtation with America’s bitterest enemies, especially Castro. “Chávez deserved what was coming to him,” commented Otto Reich, Bush’s Latin America adviser. Two days later Chávez was liberated, and returned to Caracas convinced that Bush had plotted his demise. Unrest erupted again in October 2002. Senior PDVSA executives demanded Chávez’s resignation and abandoned their work, reducing oil production from 2.5 million barrels a day to less than 100,000, just as oil prices were rising. Strikes and the use of inexperienced workers were damaging the oilfields. In the war of attrition, Chávez fired 13,000 PDVSA strikers and routed the middle-class protestors. By March 2003 he had regained control.