Crude World

  If the world’s resources were all located in Norway and Canada, where the national governments are strongly resistant to bribery, corporate corruption would not be a severe problem because there would be few takers for under-the-table offerings. Firms would have to win contracts in open competitions and pay fair royalty rates and operate their concessions in a responsible way, because well-funded regulators would strictly enforce laws that had not been watered down by lobbyists. But Norway and Canada are outliers; most of the world’s oil and gas resides in countries with bribery-prone systems, and even the United States fits into that category, as illustrated by the conviction in 2007 of two Alaska legislators who accepted unlawful gifts from an oil executive. In countries like Nigeria and Iraq, closed-door negotiations for extraction licenses and legislative votes on royalty rates turn into matchmaking opportunities for bribe givers and bribe takers. Nordic ministers might not think of accepting money, but a Caspian dictator would be inclined to demand and take it in an instant.

  Unlike Intel, which is not masochistic enough to build a factory in Equatorial Guinea or Kazakhstan, Exxon must do business in such places. Geology determined where oil is located and where, therefore, Exxon must operate. When other industries operate in morally dubious countries, corners tend to get cut, too. Microsoft bent to the demands of China’s government by banning the use of words like “democracy” and “human rights” on its search engine and blogging service. Yahoo knelt further, helping Chinese authorities identify a democracy-promoting reporter who used its e-mail service; the reporter was jailed for ten years. The difference is that extractive industries do most of their business in compromise-inducing countries, in a sector with structural incentives for corruption, and they have vast footprints that alter political, economic and environmental destinies. Microsoft’s compromises might be distasteful, but they do not contribute overtly to violence and poverty.

  The problem is not that extractive industries have lower principles than other industries. The problem is that they must have better principles. Unfortunately, having a soul is a luxury the law and shareholders do not encourage.

  If Lee Raymond, the legendarily coldhearted chief executive of ExxonMobil, had arrived at work one morning in an altruistic stupor and ordered that half of the company’s profits be devoted to social-welfare programs in the Niger Delta or decided that the company’s lobbyists should support higher royalty rates in Texas, his board of directors would have responded by issuing a statement explaining that Raymond was taking a leave of absence to spend more time with his family. A truthful statement from the board would admit that the lunatic had to be terminated. The board would have had little choice, thanks to rulings that began with a 1919 judgment on a dispute between Henry Ford and the Dodge brothers, Horace and John.

  Ford, who owned the majority of shares in Ford Motor Company, decided to suspend special dividend payments so that more funds would be available for capital investment as well as price reductions. He also wanted to prevent the Dodge brothers, who were minority shareholders, from amassing enough capital to move forward with their plan to set up a rival auto firm. The Dodges filed a lawsuit demanding the dividends. In testimony, Ford made a surprising argument—that his company’s goal was “to do as much good as we can, everywhere, for everybody concerned … and incidentally to make money.” The Michigan Supreme Court would have none of it, ruling that a corporation’s mission “is organized and carried on primarily for the profit of its shareholders.” Ford was ordered to pay.

  The Dodge v. Ford Motor Co. ethos goes back a ways. In the 1700s, Lord Edward Thurlow famously lamented that under the laws of his day, “Corporations have neither bodies to be punished nor souls to be condemned.” A modern-day justification for conscience-free companies is nearly paradoxical: that they do good by not trying to do good. Milton Friedman championed this notion in a famous article entitled “The Social Responsibility of Business Is to Increase Its Profits,” which argued that companies interested only in profits do the greatest amount of good by creating jobs and returning dividends to their mom-and-pop shareholders. Friedman and other conservatives did not oppose all forms of corporate generosity, and nor does the law, because companies can enhance their image and thus their sales by funding summer camps and literacy programs. But generosity that offers no payback—this is discouraged, legally and ideologically. Altruism is fine so long as it isn’t true altruism.

  I witnessed the consequences when I met a Chevron executive at the company’s headquarters in Lagos. I had to make my way through dozens of protesters who had traveled several hundred miles from their fishing village to throw onto the floors of Chevron’s reception area some of the oil that had contaminated their waters. I was escorted around the protest to the executive’s office, where I asked whether Chevron might do more to help the villagers and promote general welfare. I noted that a few days earlier the firm had announced quarterly earnings of $3.2 billion. “It is not the role of an oil company to provide the basic fundamentals that are required for communities to thrive,” the executive replied. “It is not our mission as a corporation. It is not our identity as a corporation.” Regarding the protesters who were blocking the reception area and singing a song with the refrain “We have suffered enough in the hands of Chevron / And we cannot continue to suffer like this,” he said the company would look into their grievance.

  One day, I got a behind-the-scenes look at a board of directors meeting that was a sort of corporate vaudeville.

  I was in Moscow working on a profile of Vagit Alekperov, the president and a multibillionaire shareholder of Lukoil, a Russian company that has oil reserves equal to Exxon’s. The boardroom at Lukoil’s headquarters had wood-paneled walls and parquet floors that had been polished to an opulent shine. The board members, all but one of whom were men, sat around an oblong conference table with enough space for several dozen people. It was dotted with bottles of Evian and porcelain coffee cups replenished by waiters who slipped into the room like silent ships. The two foreigners on the board, Richard Matzke, a former Chevron executive, and Mark Mobius, a financier, were emblems of Alekperov’s effort to globalize Lukoil and list its shares in London and New York. I had been invited to watch a model board meeting.

  As the meeting began, there was a malfunction with the headsets providing an English translation of the proceedings. When the problem was fixed after a few minutes, the Lukoil executive who was running the meeting said, “I think our [American] colleagues missed very little.” That was true. And they missed very little in the PowerPoint slides projected onto a screen without translation of the Russian captions. Vague spending plans were outlined by several executives, a few investments were described and one or two expansion opportunities were mentioned. It was as numbing and unrevealing as an annual report without the glossy photos.

  Alekperov, at the front of the room, spent much of his time reading a company brochure. When he wasn’t doing that, he fiddled with a fountain pen; he spoke only once. After a perfunctory vote to approve everything that had been outlined by the management, the meeting was wrapped up with final words from Valery Grayfer, chairman of the board but far lesser in wealth and status than Alekperov. “I thank you all, dear colleagues,” the gray-haired Grayfer said meekly. “Our work is finished today.” The meeting had lasted for less than an hour.

  Shows of this sort are common at board meetings. Particularly in the oil world, CEOs have for the past century been especially strong-willed, accustomed to running things with minimal oversight or interference from their boards (the members of which the CEOs usually handpick). So long as company executives are sustaining or expanding profits, boards will give a nod to almost anything that comes up in their meetings, including exorbitant compensation packages. (Exxon’s board did not blink as Lee Raymond walked away with that $686 million in his CEO years.) Spirited arguments about oil pollution, human rights violations or corruption in the countries where contracts are signed will perhaps be made by dissident share
holders who grab a microphone at an annual shareholders’ meeting, but that’s usually it. Board meetings are intended to ratify the status quo, not disturb it.

  A look at board membership helps reveal why. In 1991 Condoleezza Rice joined the Chevron board. She had worked as a Russian expert on the National Security Council under President George H. W. Bush and at the time of her Chevron appointment was a professor at Stanford University. Just thirty-six years old, she had almost no experience in the financial world. But she had political connections. Shortly after joining the board, Rice traveled to Kazakhstan to help Chevron win a slice of the multibillion-dollar contracts being negotiated there. Chevron, in addition to paying Rice $60,000 a year for her part-time efforts and awarding her several hundred thousand dollars in stock, even named a supertanker after her (though the S.S. Condoleezza Rice was quietly renamed when its namesake became President George W. Bush’s national security adviser).

  Today, Chevron’s board, like the boards of its rivals, consists of a friendly group of establishmentarians from the business, political, military and academic sectors. And they are drawn from both sides of the mainstream political spectrum. Until President-elect Barack Obama named him as national security adviser, retired General James L. Jones was on Chevron’s board. Like Rice, Jones severed his corporate ties to serve in the White House. That doesn’t imply a severing of sympathies or interests. Supportive of business as usual when they were on the board, neither Rice nor Jones showed a significant change of heart when they returned to government service. For a corporation, the only thing better than having a former White House official on its board is having a future official on it.

  The board meeting I attended was a private vaudeville. The public vaudeville occurs at times of high gasoline prices, when Americans join Nigerians and Angolans in beseeching oil companies to sacrifice profits for the public good.

  The script sounds serious. Inundated with pleas for relief at the gas pump, the companies respond that they are investing in exploration and doing everything they can to bring cheaper gasoline to the marketplace. A refrain is heard from the boardrooms in Houston and Dallas: We are your friend. As prices soared to ever-higher levels in recent years, industry advertisements in the New York Times and other newspapers offered reassurances that, as an Exxon ad put it, “Today’s energy industry earnings are important for meeting tomorrow’s energy needs.” In 2006 Exxon spent $19.9 billion exploring for oil and updating its refining systems—an impressive number that was relentlessly promoted. The same year, without any mention in its self-lauding publicity, Exxon dispensed more than $35 billion on dividends and stock buy-backs. The bulk of its windfall went into the hands of the company’s owners.

  This is completely normal in the business world. Apple, enjoying record earnings from its iPods, did not respond by giving away the wonderful little machines. It continued to sell them for as much as the hungry market would bear. Nobody expected that Steve Jobs would forgo his profits or invest them in socially useful projects. But when oil firms began to clock quarterly profits in the billions and then tens of billions, the public and politicians clamored for these companies to behave like nonprofits. The oil companies, preferring PR to honesty, did their best to portray themselves as public-minded.

  The truth lay elsewhere. The chartered purpose of American oil companies is not to supply consumers with cheap gas but to make as much money as they can by selling their product at the highest possible price. It is reasonable to ask them to obey the law, but it’s a different thing to ask them to have a soul and care about our pain. On occasion a CEO might admit the truth, but that’s only because he wandered from the script. This happened on a morning in 2006 when Rex Tillerson, who succeeded Lee Raymond as Exxon’s chief executive, was interviewed on the Today show. Softball questions were the norm on this show, and Tillerson certainly intended to polish Exxon’s image, but the host, Matt Lauer, threw a curveball.

  “Would ExxonMobil be willing to lower profits over the summer to help out in this time of need and crisis?” Lauer asked.

  “We work for the shareholder,” Tillerson said. “And the investors who own our stock are over two million Americans. A lot of pension plans, a lot of teacher retirement plans, and our job is to go out and make the most money for those people so their pensions are secure, so that they see the benefits of our work.”

  Lauer wasn’t satisfied.

  “That’s a no?” he asked.

  “We’re in the business to make money,” Tillerson replied.

  If the industry’s critics were hoping for a paradigm-changing chief executive, John Browne seemed to answer their dreams. A gregarious physicist who loved cigars, art and opera, Browne became chief executive of British Petroleum in 1995 and started a revolution. Everything Big Oil had done wrong for the past century, BP would do right, he vowed. As Exxon continued to fund pseudoscientific groups that claimed global warming was a hoax, Browne promised to cut BP’s carbon emissions and spoke in favor of the Kyoto Protocol, which most oil companies vehemently opposed due to the expected onset of carbon caps and taxes. The American Petroleum Institute, a lobbying arm of the industry, sourly complained to Browne that he had “left the church.”

  He was making a new one, launching a $200 million rebranding campaign in which British Petroleum’s name was shortened to “BP” and its logo became a green-and-yellow sun—a happy friend of the earth. The firm ran TV commercials that extolled its solar and biofuels programs and often used the slogan “Beyond petroleum.” Of course, BP continued to depend on fossil-fuel revenues, so its ads acknowledged the step-by-step nature of corporate change with the catch-phrase “It’s a start.” In essence, BP asked the public to trust its sincerity when it promised to be as green and conscientious and forward-looking as possible.

  Skeptics were naturally concerned that BP was engaged not in revolution but in greenwashing—using climate-friendly PR to make the public forget climate-unfriendly realities. For instance, while the company announced that it was best friends with Mother Nature, it supported efforts to allow drilling in Alaska’s Arctic National Wildlife Refuge. Greenpeace mockingly gave Browne an award for “Best Impression of an Environmentalist,” but many environmentalists quietly hoped that he meant what he was saying.

  It didn’t take long for them to get an answer.

  In 2005, a BP refinery in Texas suffered a massive explosion that killed fifteen workers and injured hundreds. Investigations revealed that BP had cut the refinery’s capital budget by 25 percent. Broken or outdated equipment had not been replaced, while worker training and safety had been ignored. Months before the explosion, the refinery had commissioned an independent report that had warned, prophetically, of “a series of catastrophic events.” The report’s authors wrote, “We have never seen a site where the notion ‘I could die today’ was so real.” Even though BP earned a record $22.3 billion profit in 2004, the refinery ran on a catastrophe-beckoning budget. A BP official admitted that the disaster had been caused by “incompetence, high tolerance of non-compliance, inadequate maintenance and investments.” BP set aside $1.6 billion to settle lawsuits related to the explosion. In the twenty-first century, a Dickensian tale of greed and callousness had unfolded at a facility owned by a firm proclaiming itself the most conscientious its industry had known.

  This was not the end. A year later, a BP pipeline dumped more than 200,000 gallons onto the North Slope region of Alaska’s coast—the largest spill ever on the slope. BP, ordered by regulators to inspect the entire pipeline, found that corrosion had reduced the pipeline’s steel in some places to the thickness of a beer can’s shell. The pipeline was closed for urgent repairs. Follow-up investigations found that the company had cut costs by forgoing maintenance and updates. As one newspaper wryly noted, “For a company that claims to have moved ‘beyond petroleum,’ BP has managed to spill an awful lot of it onto the tundra in Alaska.”

  BP was turning into an example of iniquity rather than virtue. A few months after th
e spill, BP traders were indicted for fixing propane prices. The indictment quoted a BP trader as saying, in a recorded call, “What we stand to gain is not just that we’d make money out of it, but we would know from thereafter that we can control the market at will.” The indictment said that a dry run had even been conducted by the traders and that the scheme, which raised home heating prices in the winter, had “the knowledge, advice and consent of senior management.”

  It became possible to suggest that BP stood for Beyond Parody, except that the firm’s self-impalement was not yet finished.

  Lord Browne’s sexual orientation—gay—though not a secret, had not been discussed publicly. In 2002 he began a relationship with Jeff Chevalier, a Canadian student. When the relationship ended, Chevalier asked for $600,000 to soothe the hurt. Browne refused, Chevalier went to a tabloid and Browne sought an injunction. Browne lost the case and, problematically, lied in his testimony, claiming that he’d met Chevalier while exercising in a park, rather than through suitedandbooted.com, a gay escort Web site on which Chevalier’s services were advertised. As the presses rolled, Browne resigned. Booted, indeed.

  Browne was a torn oilman. He probably would have liked to make BP clean, green and safe, but he needed to satisfy the market, too. “Corporations have to be responsive to price signals,” he once said. “We are not public service.” This was the sort of remark Wall Street likes to hear. Yet his cost cutting was a key factor in the explosion and spill. In the end, Browne could not make BP a friend of the earth and a friend of the market.