Crude World

by Peter Maass

  The representatives of BP, Amoco, Pennzoil, Unocal and lesser outfits squeezed into this squalid box. Because the hotel’s services varied from sporadic to absent, the oilmen imported, on their corporate jets, things like breakfast cereals, printer paper and bottles of Johnnie Walker, so that they could enjoy a shot or four at the end of the day and not wonder whether it had been diluted with antifreeze by the waiters at Ho Bar. Phone lines were assumed to be tapped by the Azeri KGB or rival oilmen who wanted to know who their competitors were talking to and what they were saying. I visited Baku a few years ago and talked to oilmen who recalled the Intourist with an I-was-there horror—a visceral badge worn by survivors of momentous events. “We knew that all our rooms and all of our phones and all of our cars were bugged,” one told me. “We would have a conversation in a car and within twenty-four hours a friend would come up and tell us exactly what we said. We would do silly things, too—we’d say we needed to meet one of the heads of a political party but we couldn’t find him, and we’d just announce it in an empty room.” Because the walls were bugged, the announcement was heard by the hotel’s eavesdroppers. “And twenty minutes later, the manager of the hotel would say, Would you like to meet with so-and-so?”

  Sensitive documents could not be left in the rooms; everything of competitive interest was carried in locked briefcases or protected by guards standing outside the living quarters of executives when they had meetings elsewhere. No one could be trusted, including the ministers and bureaucrats who represented the government of the moment. Until Heydar Aliyev consolidated his hold on power in the mid-1990s, Azerbaijan endured a dismal reign of warfare, petty violence, utter poverty and a succession of leaders who were no better than Mafia chiefs. How do you negotiate in such circumstances? One of the representatives of the government was a shady Slovak businessman who was never seen without a pistol strapped to his waist—and who once pointed the gun at the head of an executive he was negotiating with. Confidential bids leaked out almost the moment they were presented to the government, because there was always a midlevel bureaucrat who augmented his meager salary by showing company X’s offer to company Y. “You make a supposedly confidential proposal and the next thing you know it has been shopped out by someone,” an executive told me. “It’s several Rolaids a day, every day.” Contracts would be signed one day, bottles of champagne would be opened in celebration—and within days the contracts would be declared null and a signing ceremony would be held with another company.

  Like Alain, the executives I spoke with outlined the maddening pressures weighing upon them yet denied any personal unethical activity. Their competitors, they added quickly, were breaking the rules all the time. Apparently all oilmen in Baku were breaking the rules except the ones who were telling me that everyone was breaking the rules. What I knew for sure was that an Apple salesman would fail unless he adapted his sales tactics to the horrible box that awaited him at the doors of the Intourist Hotel.

  The outside of the box looked different, of course.

  On a February evening in 2003 I joined more than a thousand oil executives in a Houston ballroom that was large enough for a jumbo jet or two. The pin-striped diners were served plates of mixed salad, grilled salmon and chocolate mousse by overworked waiters whose service was as gentle as cowboys heaving bales of hay to livestock. This was the gala evening of an annual oil conference at the city’s Westin Galleria Hotel, located in a massive mall that also featured a rink where Olympic skating champion Tara Lipinski trained. Drawn from across the globe, the men and just a few women in the chandeliered cavern constituted an oilpalooza.

  The attraction on this evening was neither food nor skating but a chemical engineer from South Dakota. Since 1963 he had worked for just one company, eventually becoming its chairman and chief executive. He made everyone else in his hard-bitten industry seem gentle. He was gruff even to members of Congress and scoffed at global warming long after scientists proved it. Greenpeace called the company he led America’s “number one environmental criminal.” He was superficially unappealing too, with a misshapen lip, an ample belly and a set of jowls that cartoonists would judge absurd. But in the oil industry you do not need to be pretty or kind to succeed, and this oilman had succeeded beyond anyone’s imagining. Lee Raymond had turned ExxonMobil into the largest and most profitable corporation in America. He was rewarded with an astounding $686 million in compensation during his thirteen-year tenure as chief executive, which breaks down to $145,000 a day, or more than $6,000 for every hour he worked, slept, ate or golfed.

  Raymond fascinated me. Despite his stature and power, he was nearly unknown outside the environmental lobby, which despised him; the financial industry, which swooned over him; and the oil industry, which feared him. (Exxon’s executive suite was known as “the God Pod.”) Think of the tycoons who are part of the contemporary lexicon—Gates, Murdoch, Buffett, Jobs, Branson—and realize that absent from their ranks is the longtime leader of one of the most profitable multinationals of the twentieth century. Raymond was smart enough and secure enough to neither crave nor need publicity, which he knew would invite unfriendly questions. He did what he had to do, meeting financial journalists to announce earnings, but little more. He turned down my requests to interview him.

  I wanted to see him because he was not just in the highest echelon of his industry’s ruling class; he seemed its epitome. Oil firms employ millions of people as ditchdiggers, roughnecks, machinists, geologists, technicians, accountants, lawyers and consultants—a global army presided over by a commanding elite of larger-than-life executives. Like a nation or nationality, the industry has its particular belief system, its financial and political interests, its social layers and pecking orders. In some ways, it has the hallmarks of a political party and a religious movement. Use whatever metaphor you wish—senators, high priests or enforcers—it is impossible to know the oil industry without knowing the men who run it.

  Mousse plates cleared, Raymond lumbered onto the ballroom stage. The crowd offered a round of applause that was akin to a handshake rather than a hug. In this industry, there was no need to feign love; grudging respect would do. Raymond’s lumpy, uneven physique imparted an off-the-rack look to his tailored suit. He made not a single attempt at humor, and he uttered every word with a metronomic drawl. He felt no compulsion to entertain or please.

  His speech was an industrial mission statement. His listeners, who included government ministers, princes and CEOs, were reminded of how vital their work was, how underappreciated they were, how they must labor harder than ever, how the future will be grander than the already blessed present. A video screen enlarged Raymond’s presence to superhuman proportions. It was part Tony Robbins, part Billy Graham, with a whiff of a mumbling Leonid Brezhnev. Invoking a sacred industrial purpose, Raymond recited his version of the inspirational commandments of the oil world:

  “We all have a tremendous opportunity and a responsibility to improve the quality of life the world over. Virtually nothing is made without our energy and our products.”

  “Our industry’s best years lie ahead, surpassing even the greatest achievements of the century gone by.”

  Lee Raymond earned $686 million in his thirteen-year tenure as chief executive of ExxonMobil.

  “We condemn the violation of human rights in any form, and believe our stand on human rights sets a positive example for countries where we operate.”

  “It is almost impossible for someone who is not in the industry to begin to understand the magnitude of the industry and what we do.”

  The audience’s reaction was ritualized, less a genuine wave of applause than an obligatory simulation. I was reminded that in this brutal industry, it was best to save your enthusiasm for crushing a rival rather than congratulating him.

  The court building in Odessa, Texas, is a nearly windowless horror, designed in the 1960s by local architects who followed the Brutalist style popular at the time. If the building could talk, it would say there is no
such thing as too much concrete or too little sunlight. I stepped inside on a summer day, seeking illumination that was neither solar nor fluorescent. I wanted to learn about the oil industry’s tendency to cut corners even in its own backyard.

  Odessa is at the center of the Permian Basin, the great oil reservoir of west Texas. The city, with a population of nearly 100,000, has a love-hate relationship with its roughneck past. The cliché is that if you want to raise kids, do so in nearby Midland, and if you want to raise hell, do it in Odessa. When I visited, the town was less wild than it used to be, focusing more on economic development and high school football than tequila nights that ended in brawls and broken teeth. A museum, dedicated to all things presidential, emphasized the local oilmen who became the forty-first and forty-third presidents, George H. W. Bush and George W. Bush; visitors could pick up complimentary maps pointing them to the Odessa and Midland homes where the Bushes lived. Midland had proudly created its own Petroleum Museum, which claimed in its brochures to be “the nation’s largest museum dedicated to the petroelum industry and its pioneers.” If there was a place Big Oil might call home, where it would behave with conscience, it would be Texas, its petromanger.

  Workers on an offshore oil platform

  At its peak in the 1960s and early 1970s, output in the Permian Basin was 1.8 million barrels a day, pulled from a swath of mesquite plain that measured roughly 250 by 300 miles. Back in those days, west Texas was the Saudi Arabia of oil. At one point, the bonanza reportedly turned Midland’s Rolls-Royce dealership into one of the world’s busiest. But as the Permian Basin passed its prime, the big companies moved on, selling out to smaller firms. By the 1990s, with prices and output tumbling, the office towers in Midland that had once housed Exxon, Mobil, Gulf and Shell were vacant, not a tenant anywhere—tombs touching the sky. Those hard years turned bitter when people concluded that “the majors,” as the big companies were known, had stolen from them.

  It was at the county clerk’s office in the Odessa court building that I learned about the alleged plundering. A lawsuit filed in 2003 accused Exxon, Chevron, Shell and nearly a dozen other firms of a decades-long conspiracy to avoid royalty payments on oil they extracted from public land. In the nineteen-page complaint, the words “fraud,” “fraudulent” and “defraud” appear more than two dozen times. I was accustomed to hearing of predatory corporate behavior in Africa and the Middle East, but this was startling—a major lawsuit against Big Oil in its backyard, and the suit wasn’t the work of Greenpeace. It had been filed by the county government, with similar suits filed by nearly a dozen other municipalities in the Permian Basin. Texans were accusing Big Oil of stealing from Texas. And the accusers weren’t Austin liberals but oil-patch Republicans, as pro-business as possible.

  The alleged fraud was simple. Companies pay about 12 percent in royalties on oil extracted from public land. The royalties are pegged to the price of oil when it is extracted—the “posted price.” The suit accused the firms of selling oil for more than the posted price, thereby avoiding royalties on the price differential. “Defendants knew that their material misrepresentations regarding the market value of oil were false at the time they were made,” the suit said. “The representations were willful and malicious.” This unfriendly language was chosen not by Ralph Nader but by lawyers like Russell Malm, the county attorney for Midland. As a Republican, Malm’s first impulse had not been to sue an oil company, but after looking at the data he’d realized, as he told me when we were chatting in his office, “The oil companies didn’t come out here just to do good for the Permian Basin.”

  It can escape notice that the United States, the world’s largest importer of oil, is also the third-largest producer—some 8 million barrels a day. This provides a window for evaluating the core principles of the firms that dominated the global industry for most of the twentieth century. Overseas, American firms needn’t try hard to get the better of inefficient and corrupt governments, and they don’t suffer the restraint of cultural bonds to the societies where they operate. The practical and ethical barriers to cutting corners are lower overseas. Yet even in America, as the Odessa case and a multitude like it showed, oil companies have a remarkable tendency to do their best to get around the law.

  Businesses cheating in America—this is not news. There is hardly an industry in America that hasn’t been indicted for something. Even the paragon of cool, Apple Computer, was investigated for backdating stock options for its hip CEO, Steve Jobs. But there is a startling pattern in the oil industry; in Texas, Alaska, Louisiana, California and elsewhere there has been an unending stream of indictments, trials and fines for oil companies breaking the law on royalty payments, environmental protection and worker safety. This carnival of sin dates back at least a century, to when the Supreme Court ordered the breakup of John D. Rockefeller’s Standard Oil, which was ruled to be a price-fixing monopoly that used blackmail and bribery to get its way. Industry practices were not greatly improved by that verdict. American oil firms and executives traded with and supported Nazi-era Germany even after World War II began. As Interior Secretary Harold Ickes wrote in his diary at the time, “An honest and scrupulous man in the oil business is so rare as to rank as a museum piece.”

  Cheating continues in America—lawsuits, fines and settlements have not abated in recent years—but the greatest swindles tend to occur overseas, where the dynamic is reminiscent of doping scandals. Sports authorities develop laboratory tests to detect performance-enhancing drugs, and athletes respond by using new drugs that are not detectable by the latest tests. In the oil and gas world, as in track and field, the one-step-ahead-of-the-law violations are intentional rather than accidental, as the case of Jeffrey Tesler showed.

  In 1977, Congress passed the Foreign Corrupt Practices Act, which criminalized bribery of foreign officials. For nearly two decades, the law netted mysteriously few violators; annual prosecutions could be counted on one hand. One of the reasons, aside from indifference on the part of federal prosecutors, was that oil companies had begun to outsource bribery to middlemen or joint-venture partners. On occasion these missing links were discovered, and this happened in a spectacular fashion in 2003, when French regulators looked into an irregular series of payments totalling $132 million by a consortium of international firms that was bidding on a multibillion-dollar natural gas project in Nigeria. The consortium was led by M.W. Kellogg, which was then owned by Halliburton.

  The payments reportedly went to Jeffrey Tesler, an obscure lawyer who worked in an immigrant neighborhood of London and whose clients included sex shops with zoning problems. Why would a global energy consortium funnel money to a barrister whose office, adjacent to a Somali butcher, advertised the availability of a fax machine for fifteen pence a page? In the 1980s Tesler had helped members of Nigeria’s nefarious elite buy homes in Britain. This meant Tesler was connected to Nigerians who could probably influence government contracting decisions. As it turned out, the consortium, which included firms from Italy, France and Japan, had agreed to pay Tesler $60 million if the consortium won the contract. Tesler and a consortium official allegedly agreed to channel $40 million of this fee to General Sani Abacha, the Nigerian military ruler who, after his death, was reportedly found to have stolen more than $3 billion from government revenues. The consortium won the contract and Tesler allegedly received the $60 million payment and substantial additional ones, until the total was $132 million.

  This scheme was not discovered by a compliance officer working for one of the consortium members. Major corporations employ lawyers to ensure that contracts and payments comply with laws like the Foreign Corrupt Practices Act; they are known as compliance officers. Unfortunately, compliance officers in all four companies failed to notice the payments or, noticing it, did not object. French prosecutors heard of the scheme only after filing embezzlement charges in an unrelated case against an employee of a French company in Halliburton’s consortium. The employee, upset that his firm refused to defend him i
n the embezzlement case, took his revenge by telling French authorities about the payments to Tesler—and that is how the scandal began to unravel. In 2009, Halliburton admitted its role in the affair and agreed to pay more than $550 million in fines to the U.S. government. Albert “Jack” Stanley, the Halliburton executive who oversaw the corruption scheme, pleaded guilty to violating the FCPA. Tesler has been indicted and faces trial in the United States. It was one of the largest bribery scandals in American corporate history, and it was uncovered only by chance.

  As I studied the industry’s global rap sheet, I wondered about the reasons for this pattern of law evasion. Why did oil firms transgress legal and moral strictures on such a consistent basis?

  Oil firms describe their work as “producing” oil, but in truth they “produce” nothing, insofar as the meaning of the word is generally understood. With permission from host governments, they extract a valuable liquid from the earth. The process of drawing it from the ground, removing impurities and shipping it to refineries is complicated and daunting, but profits depend first and foremost on getting permission to extract the valuable stuff. It is not the customer who is king and determines a company’s destiny but the president, minister, senator, mayor or real-life royalty who grants extraction licenses. If the computer industry operated this way, Dell and Samsung would bid for the right to pull semiassembled laptops from under the deserts of Arabia or the swamps of Africa. Especially in times of high prices, the dynamic of extracting rather than manufacturing helps explain why oil firms have a record of bribing foreign officials. It is the same in other extractive industries, such as mining for gold. The permission from the host government is what matters, because the product will sell itself, usually with wide profit margins.