by Steve Coll
In the autumn of 1996, at the Four Seasons hotel in Berlin, John Browne presented a plan to British Petroleum’s board of directors in which he argued that BP should seek a merger with another large international company in order to compete with state-owned oil companies and improve the geographical diversity of its oil holdings. Browne’s first choice was Mobil.
The BP chief regarded his Mobil counterpart, Lou Noto, as a like-minded cosmopolitan. Noto had grown up in Bensonhurst, Brooklyn, as the son of a labor organizer; he was a stocky, lively, charismatic business strategist with a sizable ego. He lived in Manhattan and indulged his fondnesses for cigars, Porsches, and opera. Browne found him to be a “warm, friendly person and ‘bon viveur.’” They smoked cigars together from time to time and talked oil.
The gigantic investments and industrial operations required to produce and refine oil meant that international companies often found it financially prudent to partner on projects, much as syndicates of Wall Street investment banks shared the risks of selling stocks and bonds. This pattern of coinvestment and coexistence meant that global oil executives kept up steady contact with one another—it was a form of continuous diplomatic relations, involving both cooperation and dispute.
BP and Mobil had embarked on a joint venture that would combine their European refining businesses. Browne introduced the idea of a full merger that would create the world’s largest privately owned oil company.19
Noto shared Browne’s view of Big Oil’s predicament: “We need to face some facts,” he said later. “The world has changed. The easy things are behind us. The easy oil, the easy cost savings—they’re done.” Noto was “worried.” He “expected the environment to become more volatile, and more competitive, and more difficult geographically and geologically.”20
Mobil had inherited a large share of the downstream assets of Standard Oil. The corporation operated adeptly on the commercial side of the oil business—wheeling and dealing, negotiating customer contracts, maneuvering amid price volatility, and the like. It won major new upstream plays in newly independent Kazakhstan after the Soviet Union’s demise. Yet Mobil was highly dependent on the profits generated by a single large natural gas field in Indonesia and offshore properties in Nigeria; both countries were politically unstable and wracked by violence.
Late in 1996 and early in 1997, Noto and Browne held a lengthy series of secret meetings to design a full merger of their corporations; their work climaxed at a long conference in the New York offices of the law firm Davis Polk & Wardwell. Yet as a decision point neared, Noto thought that Mobil might still be better off on its own. On March 28, 1997, he met Browne in Mobil’s corporate jet hangar outside of Washington, D.C., and “made it clear that we could go no further,” as Browne recalled it. Browne felt that he had “wasted a lot of time and effort.” He flew back to London and announced to a colleague, “Well, we’d better think of something else.”21
Plummeting oil prices compounded the pressures he faced. The causes of the price fall emanated from Saudi Arabia, the world’s leading oil producer, at about 9 million barrels per day of capacity at the time, and the leading source of American oil imports. After Saddam Hussein’s invasion of Kuwait, Venezuela’s government decided to break from O.P.E.C. policy and produce as much oil as possible. It looked as if Venezuela might be trying to steal some of Saudi Arabia’s American market share. The usurper attempted to almost double its oil production, from 3.2 million barrels a day to 5.5 million a day. For a while, the gambit worked; Venezuela gained more and more of the U.S. import market and replaced Saudi Arabia as America’s number-one outside oil supplier. In 1997, however, Saudi Arabia retaliated by authorizing a surge in its own oil production, a program “explicitly designed to punish Venezuela” and to establish a “deterrent,” as the industry consultant Edward L. Morse would describe it, to dissuade any other oil-rich country that might harbor similar ambitions. The Saudi production surge drove global oil prices to historic lows in 1998. By the end of that year, oil would fall to just ten dollars per barrel; adjusted for inflation, that was the lowest price the world had enjoyed since the 1960s.22
Disciplined Exxon could weather such a sudden price collapse. After the cost reduction binge of the 1980s, Raymond had reduced Exxon’s operating expenses an additional $1.3 billion annually in the five years until 1997. Less-efficient companies such as Mobil struggled. Nobody knew how long prices might stay so low. The long-term challenge of resource nationalism compounded the anxiety. All this coaxed Lou Noto back to the possibility of a merger.
In June 1998, he attended a meeting with Lee Raymond organized by the American Petroleum Institute (A.P.I.), the Washington-headquartered oil industry trade group. Raymond raised the possibility of a minor deal to combine Exxon and Mobil refinery operations in Japan.
“Maybe we should talk about that,” the Exxon chief said.
“That and other things,” Noto replied.
Mobil’s top Management Committee met in New York every Tuesday and Thursday. One morning that summer, Noto arrived and said, “Guess who I had dinner with last night? I had dinner with Lee Raymond.”
The news shocked his colleagues. Exxon was more than twice Mobil’s size by revenue. Layoffs would be the one inevitable by-product of such a combination, and the job losses would reach the highest ranks of the Mobil hierarchy. “There was a massive anxiety,” an executive involved recalled. They worried as well about the culture shift if conservative Exxon took charge; by comparison, Mobil had been loosely governed.
That summer, John Browne advanced a fallback plan to merge with Amoco, the offspring of Standard Oil of Indiana, headquartered in Chicago. Browne and Laurance Fuller, Amoco’s chief executive, held a series of private dinners in a back room of Le Pont de la Tour, the London restaurant, where Fuller “could smoke his cigarettes and we could all drink Puligny-Montrachet,” as Browne recalled it. “Remarkably, no one noticed.”
On August 11, 1998, they announced that their companies intended to merge, with Browne to be in charge of the successor corporation. The deal would create the largest corporation in Great Britain and one of the largest private oil companies in the world.
Browne’s announcement galvanized his competitors. “It was as if the industry had been standing by waiting for someone to make the first move; it felt like we had broken a dam,” as he put it.23 Every North American and European leader of a large oil corporation seemed to conclude simultaneously that his company needed to merge to get bigger. Chevron and Texaco would soon combine, as would Conoco and Phillips, and Total with Petrofina and Elf.
Raymond believed that Exxon was primed for transformational change. As he had taken full control during the mid-1990s, he had concluded that the corporation had a management that could handle a lot more than it was being asked to do. The post-Valdez reformers were in place. They had restructured, streamlined, and reduced costs. They were down to “the fine grind,” as he put it to his colleagues. Now what? How could they convert their emerging efficiency into a strategic leap, something that would have global scale?
Around this time, DuPont and Exxon discussed a swap of DuPont’s Conoco oil division for Exxon’s chemical division, but the idea did not ripen. Raymond’s rationale for any proposed merger was not complicated. He ran a resource company. Replacement of resource stocks was fundamental; an acquisition at the right price was a common way for resource companies to replace reserves and grow. It was a part of Exxon’s own history—Standard Oil of New Jersey had grown by acquiring Humble Oil and Refining and other reserve-rich firms. In this case, a big merger might provide a new source of leverage for Raymond to accelerate the drive for efficiency and accountability, the vanquishing of bureaucracy, that he had started after the Valdez debacle. It would be the “last brick in the wall of remaking Exxon,” he declared.24
That summer of 1998, Lee Raymond and Lou Noto intensified discussions about a recombination of the baby Standards they each led. There would be antitrust issues in the United States if
they proposed a deal, but their lawyers advised them that if they sold off some retail gas stations and perhaps a few refinery properties, the deal should be approved. From Exxon’s perspective, the fit with Mobil was well tailored, particularly because the ends-of-the-earth map of Mobil’s oil reserves complemented Exxon’s more conservative profile, so heavily weighted in North America and Europe. Mobil’s holdings included substantial assets in West Africa, Venezuela, Kazakhstan, and Abu Dhabi. It also held important natural gas positions in Qatar and Indonesia. By purchasing Mobil, Exxon could scale up to compete with state-owned oil giants and leapfrog onto new geographical frontiers.
Exxon had the currency—its own stock—to make such a gargantuan deal without incurring debt or financial risk. During the 1960s, Exxon had handled its cash flow conventionally, paying out most of its earnings as cash dividends. This practice rewarded small shareholders by providing them reliable income. The corporation had about eight hundred thousand such shareholders by the early 1980s. During inflation-menaced 1982, Exxon’s dividend was a hefty 10 percent. The next year, however, Clifton Garvin embarked on a campaign of share “buybacks” as a substitute for some of the spending on dividends. He was advised by Jack Bennett, a finance wizard and mentor to Raymond who left Exxon during the mid-1970s to work at the Treasury Department and then returned to the corporation’s board. He and Garvin concluded that after 1980 global oil prices looked fundamentally unstable. Given the volatility that seemed likely, it would be cheaper for at least a while for Exxon to buy oil and gas reserves by purchasing its own stock than by investing in long-term projects at a high price point. “We had a tremendous amount of cash and no debt, we were convinced that the price structure was unstable, and thus we had no other option,” Raymond recalled, but to buy back shares. Exxon management had long raised cash dividends to beat inflation, but Garvin, and later Rawl and Raymond, were reluctant to raise the dividend too much higher, to match the 5 and 6 percent payouts offered by Shell and British Petroleum, for fear that in a down cycle for oil prices “you can get yourself in a real squeeze on cash,” Raymond said.25
Each year, therefore, the corporation went into the stock market and used some of the cash generated by its operations to buy its own shares. Between 1983 and 1991, Exxon bought a net total of 518 million shares worth $15.5 billion—a whopping 30 percent of the shares then outstanding.26 As a result, each remaining share owned by an investor controlled a progressively higher percentage of Exxon’s profits and oil reserves: In 1983, a single Exxon share owned 6.7 barrels of oil and gas equivalents, but at the end of 1989 it owned 8.4 barrels.
During the buybacks, Exxon’s dividend yields fell in relative terms, leaving small shareholders with less cash in their pockets. Did this matter? Arguably, dividend payments and buybacks were equivalent—in one case, a shareholder received cash and in the other, the value of shares rose proportionately. One question was who would make better use of ExxonMobil’s cash, its executives or its dispersed shareholders. By the time he took charge of the corporation, Raymond answered emphatically, “We can.”
Arguably, too, share buybacks could be justified only if the price of Exxon shares at the time of purchase was so low that buying them was a better use of cash than looking for new oil reserves. In the decades to come, however, Exxon would make buybacks continuously, in all price environments, joining an American corporate fashion. Academic studies showed that many corporate leaders had a poor record of buying back shares only when prices were low. “The implied returns . . . from buybacks by big companies would have been laughed out of the boardroom if they had been proposed for investment in bricks and mortar or other more conventional projects,” wrote Richard Lambert, a British critic of the practice.27 Such programs also raised red flags with some corporate governance specialists because of the manipulations they might mask. Corporate managers might deliberately suppress earnings before a buyback campaign by front-loading expenses to temporarily drive down the price of shares they intended to buy. Repurchases might also smooth out publicly reported earnings per share, to sell Wall Street investors on a story of placid growth when the underlying business was more volatile. In Exxon’s case, all of these concerns hovered, but the buybacks at times also seemed a way to dispose of a problem that other companies could only envy: too much cash.
The shares Exxon bought back did not simply vanish; they were parked in the form of “treasury shares” belonging to the corporation. Raymond and his management team chose to use the parked shares to purchase Mobil tax free. If Exxon could not discover on its own great gobs of oil, it would buy what it could not find: This was an extraordinary payoff for two decades of cash flow discipline.
In late November, Raymond flew on an Exxon Gulfstream IV corporate jet to Augusta, Georgia. The corporation maintained a membership at the Augusta National Golf Club, the site of the annual Masters tournament, and the club hosted an annual Thanksgiving party for families. Raymond typically attended and played golf with his three sons, who had grown into better golfers than he was. This time, Raymond ensconced himself in one of the club’s cabins and played as many rounds as possible while reviewing the final deal terms. Late one night a messenger had to find Raymond’s bungalow to hand over documents.28 Everyone involved in the deal negotiations, including Lou Noto, knew this would not be a merger of equals. There would be a weighted exchange of shares, but as a practical matter Exxon would take over Mobil. Noto volunteered to accept a subordinate position as vice chairman, reporting to Raymond; he would serve in that role for a transition period and then depart, to enjoy his life in New York.
John Browne later asked Noto if he would have preferred to merge with BP or Exxon. “BP, of course, but I couldn’t make it work,” Noto told him, as Browne recalled it. “When you bought Amoco it was inevitable that Exxon would buy us. It was only a matter of time.” BP had merged its way to a size that Exxon had to match if it wanted to compete, and the acquisition of Mobil was the easiest way for Raymond to get there.29
On December 1, 1998, Raymond and Noto stood side by side in a J.P. Morgan conference facility in New York to announce their $81 billion deal. There was no mistaking the new company’s hierarchy: Raymond opened the meeting and spoke for twenty straight minutes. He laid out the merger terms, described the prospective business advantages, and announced future plans in bland press-release prose, displaying all the charm of “the proverbial shoe salesman,” as one newspaper reporter covering the announcement put it.
When at last his turn at the microphone arrived, Noto hastened to say that his decision to merge with Exxon was “not a combination based on desperation.”
It was, instead, a requirement of the times. “Competition has changed,” he said. “We’re here because we’re trying to respond to these changes.”30
ExxonMobil Corporation—the world’s largest nongovernmental producer of oil and natural gas, and soon to become the largest corporation of any kind headquartered in the United States—formally came into existence on December 1, 1999. During its first year of combined operations, the corporation would earn $228 billion in revenue, more than the gross domestic product—the total of all economic activity—of Norway. If its revenue were counted strictly as gross domestic product, the corporation would rank as the twenty-first-largest nation-state in the world. A United Nations analysis, designed to calculate by more subtle measures the relative economic influence of particular companies and nations, concluded that ExxonMobil ranked forty-fifth on the list of the top one hundred economic entities in the world, including national governments, during its first year. Its net profit alone—$17.7 billion that inaugural year—was greater than the gross domestic product of more than one hundred nation-states, from Latvia to Kenya to Jordan. As Lee Raymond told his colleagues, “If we haven’t gotten to ‘economy of scale,’ we’re never going to find it.” He was optimistic. Oil prices were rising again. “It’s a great time to be ExxonMobil,” he declared.”31
Three
“Is the
Earth Really Warming?”
On February 8, 2001, nineteen days after George W. Bush’s inauguration as president, ExxonMobil chairman Lee Raymond met with Vice President Dick Cheney in Cheney’s West Wing office at the White House. They knew each other “very well,” as Raymond put it later. Indeed, Raymond had known Cheney for more than two decades, dating back to the period when Cheney was a congressman from Wyoming. They had hunted quail and pheasants together. They were compatible personalities—both reticent, bred on the cold plains of the upper Midwest, and both educated at the University of Wisconsin. They were ardent in their free-market views, inclined to a certain tough bluntness, and not very much worried about what others thought about them, particularly bicoastal media elites and liberal intelligentsia.
During the 1990s, the Cheneys and the Raymonds had lived near one another in the old-line Preston Hollow and Highland Park neighborhoods of Dallas. Cheney served after 1995 as chief executive of Halliburton; his company contracted regularly to provide services to Exxon. (Halliburton did not seek to own and produce oil and gas directly, as ExxonMobil did, but made its money by providing construction and engineering services under contract to oil producers, whether they were government-owned companies or private corporations.) Socially, Raymond’s wife, Charlene, and Cheney’s wife, Lynne, saw each other not only in Dallas, but at retreats and meetings of the American Enterprise Institute for Public Policy Research, a free-market think tank where Raymond served on the board and Lynne served as a senior fellow. When Raymond sat down with Cheney after the latter’s swearing in as vice president, the meeting was best understood as a discussion between like-minded peers and friends who were comparing notes at the cusp of a new project.