by Tom Bower
Amid the turmoil, PDVSA’s fate remained undecided. The corporation needed expertise and finance, and the only sources of these were the foreign oil majors. Although he lacked any evidence, Chávez was convinced that the oil companies, especially ExxonMobil, had collaborated with President Bush in the failed coup against him. But with oil prices at about $30 a barrel, he could not bring about the confiscation of the oil companies’ Venezuelan assets. Instead, he appeared to support an appeal by Ali Rodriguez Araque, the new director of PDVSA, to lure American banks and oil companies to return to Venezuela. In Houston on May 5, Rodriguez Araque described Venezuela to ExxonMobil, Shell, Chevron and ConocoPhillips as open to foreign investors prepared to contribute toward a $43 billion program to increase production to 5.1 million barrels a day. The chairmen of the four oil companies were wary. One day, they noticed, Chávez ridiculed President Bush and threatened to reduce oil supplies to America, and the next he greeted Chevron’s executives in Caracas to discuss granting a lease to produce natural gas and oil in the “Deltana,” a pristine area. His apparent indecision — “blowing hot and cold” was one executive’s description — reflected insecurity and ignorance. Rather than rebuild PDVSA to resemble Brazil’s Petrobras, Chávez wanted it to serve his political agenda, and to punish the oil majors.
The rise of oil prices to $42 a barrel during 2004 encouraged that plan. PDVSA and the country were awash with cash. PDVSA was ordered to employ extra staff, causing inefficiency and even higher prices. Chevron and other foreign companies were told to await news of whether their offers to invest had been accepted. Watching oil prices rise to $53, Chávez became convinced that the free market in oil was being permanently strangled. Unlike textiles and steel, the fate of oil, Chávez believed, could be controlled by the national oil companies causing shortages to increase prices and their revenue. Although PDVSA was unable to guide horizontal drills with seismic sensors through 8,000 feet of rock or sandstone in the search for crude oil, he preferred to humiliate the foreign oil companies rather than use their expertise to enrich his country. Victory in a referendum in August 2004 stiffened his resolve to trounce the oil majors. Before turning the final screw, he had to decide whether to use the 268 billion barrels of bitumen oil in the Orinoco Belt to transform Venezuela.
Ten years earlier, Chevron had pioneered the conversion of the semi-solid sludge in the Orinoco into oil. On the basis of an agreement to pay 1 percent in royalties, the corporation had invested $1 billion in the complex project, and in 2004 began shipping 180,000 barrels a day to the US. At that moment Chávez breached the contract by increasing taxes on the Orinoco oil to 16.6 percent. “It’s absurd they were so low,” said Venezuela’s energy minister, as the government’s annual income notionally rose from $46 million to $766 million. Chevron’s chairman protested. By reducing the corporation’s income, he said, its investment to secure more oil in the Orinoco would decline. Chávez had no sympathy for this argument. The executives of the oil majors, he felt, had consistently refused to treat him with respect. He believed that rising oil prices endowed him with sovereign power.
In January 2005, after ordering a review of Venezuela’s contracts with oil companies, Chávez flew to Beijing. After the four-day trip he announced that sales of Venezuela’s oil would be switched from the US to China. “There have been 100 years of domination by the United States,” he explained. “Now we are free and place this oil at the disposal of the great Chinese fatherland.” China was given access to 15 oilfields, and in return offered credits to build housing for poor Venezuelans. Shipping oil to China, a 45-day trip that added $5 a barrel to the cost, and China’s need to build new refineries for Venezuela’s heavy oil, would previously have been dismissed as fanciful, but increasing prices had transformed the finances.
Posing as “Castro with oil,” Chávez set out to compensate for Fidel’s failure to incite a revolution across Latin America. Offering cheap oil and technical help to Uruguay, Argentina, Brazil and Ecuador, he gathered support among the socialist and nationalist fraternities across the continent to challenge the capitalists. In May 2005 he announced on television that foreign oil companies in Venezuela owed $2 billion in unpaid taxes. Those who failed to pay by January 2006 would be compelled to leave. Simultaneously, he ordered the foreign oil companies to hand over ownership of their operations to the Venezuelan government. Chevron, Shell, ExxonMobil and Conoco risked losing investments worth $8 billion. The roller coaster gathered momentum. In April 2006, as Arjun Murti’s year-old prediction that oil would rise to $100 a barrel was gaining credibility, Chávez seized 32 foreign-owned oilfields, declared his intention to take control of operations in the Orinoco, and forecast that royalties on foreign operators would be hiked from 33.3 percent to 50 percent.
By any reckoning, the oil majors were fighting for survival. If prices hit $100 a barrel, Chávez would be liberated from Big Oil. O’Reilly believed that Chevron could not afford to argue with the president, or to retaliate. In any case, the rising oil prices had made that less necessary. Chevron’s engineers had struck oil in Big Foot and Knotty Head in the Gulf of Mexico. A triumphant partnership with Shell at Perdito, a cutting-edge project in a previously uncharted area using new light steel down to 16,000 feet beneath the sea’s surface, encouraged Chevron’s executives to revel in their superiority over BP: “Our seismic processing is a strong indicator of our success.” In 2006, O’Reilly increased Chevron’s capital expenditure for the following year by 20 percent, from $16 billion to $19.6 billion. After four years of agonizing, a Chevron director sighed, “We’re choking on our success.” In those circumstances, brinkmanship against Chávez was unnecessary. Rolling over would pay dividends in the future. Chevron, O’Reilly agreed, would remain in Venezuela on Chávez’s terms. Shell also capitulated.
By contrast, Rex Tillerson, chairman of ExxonMobil since January 1, 2006, followed the company’s standard procedure. Contracts were sacrosanct, and too much was at stake elsewhere in the world to allow Chávez victory. Those who attempted to avoid their legal obligations were always challenged by ExxonMobil. There was, Tillerson believed, no choice. Chávez needed to be punished, not only for acting illegally but for his foolish contempt for the oil cycle — “What goes up, always comes down.” Tillerson’s announcement provoked Chávez to confiscate ExxonMobil’s assets in Venezuela. In San Ramon, O’Reilly’s executives gloated over ExxonMobil’s fate. Forced out of Venezuela, nearly kicked out of Indonesia and squeezed in Newfoundland and Alaska, their rival was, they agreed, losing the plot.
During the oil industry’s 1995 “Hard Truths” debate about the future choices it faced, one participant noticed that “Raymond’s public persona as a bigoted tyrant had become invisible. He was normal.” Raymond had not anticipated that global warming would be introduced as a major topic. His antagonism to the subject was well known. In 1997 he had urged developing countries to avoid environmental controls and ignore the arguments about climate change, which hindered the development of the oil industry. Renewables, he knew, would only provide 1 percent of the world’s energy over the next 20 years. But during the early debates, Raymond was persuaded to change his mind and recommend the limitation of carbon emissions.
The “Hard Truths” report was published in 2007, two years later than originally planned and a year after Raymond’s retirement. No one leaves the oil industry poor, but his $398 million package guaranteed unusual comfort. If he had been unloved by his employees, Raymond was appreciated by shareholders. Rex Tillerson, his 54-year-old successor, was accused of “living on his inheritance from Raymond, bringing no extra value to Exxon; and he’s just as nasty as Raymond if he doesn’t get his way.” But Tillerson brought a mood change to the company, and a willingness to listen to new ideas following the simultaneous departure of several senior Raymond loyalists.
John Hofmeister seized on the transition to revive his quest to win public understanding for the oil industry. The discussion among the top executives, he decided, should not
take place on Exxon’s turf. The host would be Jim Mulva, in ConocoPhillips’s offices in Houston. Tillerson was persuaded to fly from Dallas, and David O’Reilly from San Ramon, California. Tillerson was noticeably less adversarial than Raymond. Greenhouse emissions, he admitted, were, despite “significant uncertainty,” one factor affecting climate change; and while there was no change to Exxon’s principal purpose to increase oil and natural gas supplies, and not to chase alternatives, he did reluctantly agree to Hofmeister’s proposal to spend $100 million on a “goodwill” program. “But it’s only going to be about oil and gas,” he insisted. “We’re not going to advertise windmills and sunshine.”
Chapter Twenty
The Backlash
GRUBBY BATTLES with the dictators of oil-producing states, and the image of the oil industry, had become less important to John Browne. The detail and even the substance of exploration and production had become of less than passing interest. Only the prospect of a historic event, the ultimate deal, excited him. While maneuvering to delay his retirement three years beyond 2008, he contemplated becoming chairman of the world’s biggest oil corporation by merging BP with Shell. His entourage listened in respectful silence, but his discussions with Peter Sutherland, BP’s chairman, provoked arguments. Sutherland and his fellow directors had tired of Browne’s destructive self-importance preventing a proper debate in the boardroom about his successor. Sclerosis, in their opinion, was contaminating Browne’s achievements. Instead of acknowledging that even great men must accept the inevitability of a final curtain, Browne appeared addicted to the spotlight.
For some critics, Browne’s visit to New York in February 2003 to present BP’s annual results had been a turning point. Securing the sympathy of Wall Street’s oil analysts was important for all chief executives, but Browne treated these events with special significance, and was particularly anxious to glamorize his presentations. His podium was constructed to enhance his stature, and music and flashing lights combined to produce a Hollywood-style show. Browne’s antagonists compared the performance to a circus, reflecting sizzle rather than substance. A question of trust and credibility had arisen.
No one doubted Browne’s achievement. In New York he was able to report that his decision in July 1999 to reduce costs by $4 billion, sell assets worth $10 billion and invest $26 billion by 2002 had been a spectacular success. Between 1995 and 2002, BP’s value had risen from £20 billion to £90 billion. Only a fifth of the company’s capital was based in Britain, and that proportion was declining. Within three years, BP had converted itself into an American company. Nearly 50 percent of the company’s capital and 44 percent of the profits were American. BP’s ascendancy had been masterminded by upstream cadres, the handpicked and glamorous set who explored for and produced oil. In the Gulf of Mexico, BP was the largest acreage-holder, owning a third of all the reserves, and over the next decade Browne had committed to drilling between four and seven wells every year in the Gulf, at a cost of $15 billion. His 5.5 percent growth target had depended on their success and on radically cutting costs. “Pull the trap,” Peter Davies, BP’s chief economist, had advised, implying that large numbers of employees should be dismissed, especially as oil prices could fall to $10 a barrel. Unlike in ExxonMobil and Shell, those involved in BP’s downstream — refineries, chemicals, marketing and gas stations — were regarded as second-class citizens by Browne and his entourage. Peter Backhouse, a downstream expert, and other potential successors to Browne had lost favor by opposing the relentless pursuit of cost-cutting, especially in BP’s refineries.
Expensive, unglamorous and complicated, refineries had failed to earn guaranteed profits for over 10 years. Beleaguered by constantly revised environmental regulations, political opprobrium and the price swings between crude oil and the distillate products, refining was the Cinderella of the oil business. Recruiting engineers was difficult, and the cost of maintaining the metals and valves for a process involving temperatures reaching 540°C was hurtful. “A Shakespearean tragedy” was one description of refining during the era of surplus oil and low prices in the 1990s. Although America’s “addiction to oil” depended upon the ugly, smelly processing plants, President Clinton encouraged Carol Browner, his environmental secretary, to increase controls through the Clean Air Bill and prosecutions for infringing laws to produce cleaner fuels. An additional chastisement was the regulations being drafted by the Environmental Protection Agency to reduce sulphur in diesel, a seemingly innocuous technical adjustment that had unforeseen consequences. Browning’s laws hit the refineries just as the historic protection for selling gasoline and diesel was disintegrating. Supermarkets were undercutting the oil majors with cheaper fuel obtained from independent suppliers. BP and the other majors regarded the erosion of their profits as a hammer blow.
John Browne was particularly antagonistic toward refineries. Dirty and encumbered by old working practices, they offended “Beyond Petroleum.” BP’s engineers, he believed, had become an unnecessary burden. Financially, refineries were also toxic. Beyond America and Europe, the production from new refineries exceeded demand, depressing prices. “Worldwide refining capacity is continuing to grow faster than demand,” Browne believed in 1999. “Our aim is to reduce refining coverage by about one third.” He hoped to save about $1 billion annually. The selling off of BP’s refineries was encouraged by Robert Pitofsky’s flawed one-size-fits-all rules about competition, which stipulated their disposal as a condition of allowing the mergers with Amoco and Arco. The oil industry, the FTC chairman failed to understand, was unique. Splintering ownership of refineries among independent operators removed the industry’s collective intelligence to anticipate bottlenecks.
Browne’s attitude was not welcomed by Doug Ford, the ex-Amoco executive responsible for refineries. After the merger, Ford had arrived in London, and a series of intensive conversations had persuaded Browne that he should be appointed to BP’s main board. Ford had refrained from criticizing Browne’s underestimation of BP’s new acquisition. Amoco’s five refineries, he believed, ranked among the world’s best, and the company’s technology center in Naperville, Illinois, was outstanding. Ford was relieved when, after an interview with Browne, Amoco’s head of refining Al Kozinski replaced BP’s existing expert. But shortly after, Browne ordered the sale of the profitable Alliance refinery in Plaquemines, Louisiana, and the closure of Naperville. At the time, these moves seemed astute. After September 2001, refining profits slumped, recording the greatest losses in 30 years. Neither Ford nor Kozinski protested. They did not foresee that profits would recover in 2003. “What do you know about refining?” Rodney Chase challenged Kozinski, in his customary manner. “You don’t know how to run the business properly.”
Discomfited, Kozinski did not rebut the challenge, and began a tour of BP’s refineries. His visit to Grangemouth in Scotland was revelatory. “Everything’s wrong,” he said. The maintenance was inadequate, not least because the dykes around the storage tanks were full of oil from the previous year. “BP doesn’t have people who understood how to run refineries,” he realized. He was unsurprised by this, as his predecessor had been a trader, not an engineer, a symptom of Browne’s cost-cutting by buying in or outsourcing expertise. “We know how to find and trade crude,” Chase told Kozinski during their next meeting, “but we’re not that good at running refineries.” Browne and Chase had little intention of improving their skills in that vital area. In 2000, after three incidents within two weeks, including a serious fire and the fracture of a high-pressure steam pipe, Grangemouth was temporarily closed. An official investigation revealed breaches of safety regulations linked to reduced maintenance costs.
Ford and Kozinski drew their conclusions about the cultural differences between Amoco and BP. They were unaccustomed to Browne’s confrontational style in formal meetings. His challenges to cut costs, improve performance and increase profits were accompanied by the unspoken threat “You’d better deliver what you’ve promised.” This was alien to th
ose nurtured on Amoco’s bloated regime, characterized by Nick Starritt, a former Mobil executive employed by BP, as “process, bullshit and bureaucracy.” Browne’s brazenness bewildered the Americans. “Refineries,” announced Chase in one meeting, “are an expensive way to play the crack spread.” He meant that BP used the intelligence it gleaned from refining to speculate on Nymex and the OTC market. “This is a clash of big egos,” concluded Kozinski, confused whether targets were aspirations or orders. He and Doug Ford assumed the latter, and clicked their heels in obedience rather than challenging Browne.
One critical item for discussion was Amoco’s refinery at Texas City, one of five refineries owned by BP in America (two Amoco, two Arco and a BP). Rebuilt in 1934 on the site of a 19th-century Rockefeller refinery, Texas City had been repeatedly expanded to become Amoco’s flagship, producing six refined products. In 20 years, America’s most complex and high-cost refinery had only twice earned a profit. Amoco had repeatedly cut budgets since 1992 to increase shareholder returns, and BP wanted more savings. Despite the industry’s excess capacity, the temptation to close the refinery had been resisted because it would have been more expensive to restore the site’s purity to meet environmental regulations than to reduce activity and limit maintenance. Accordingly, rusting pipes pockmarked the unmodernized plant. Browne did not intend to change course. At their first budget meeting in 1999 he ordered Ford to cut the costs of the American refineries. In his discussion with Kozinski, Ford mentioned Texas City, the most complex and inefficient of the refineries, as a target for savings. Kozinski would say that he was not given sufficient money to improve Texas City over the long term, but that in Amoco’s traditional manner, he never compromised safety. In Browne’s opinion, he was simply demanding better competence without taking risks. In 2001 BP spent about $400 million on repairs and new technologies in the American refineries, but limited the costs by not installing the most modern equipment. Browne did not appear to place priority on those details.