To some, though, it was an opportunity, not an easy one by any means, but a window through which to get things done. After all, people would still need petroleum, and, indeed, they would need more petroleum when economic growth resumed, which would mean higher prices. But the industry would need to be more efficient, managing its costs better, and leveraging skills and technology across a larger span. That pointed in one direction—toward greater scale. And the way to get there was through mergers.
“WERE HE ALIVE TODAY . . .”
Sanderstolen is a rustic mountain resort in central Norway, reached only by a twisting two-lane highway that has to be laboriously plowed during the winter. In the years after discovery of North Sea oil in Norway’s offshore, it became the venue for the Norwegian government and the oil companies operating in the Norwegian sector to get together and thrash out industry issues—talk in the morning, cross-country skiing in the afternoon.
One morning in February 1998, two investment bankers, Joseph Perella and Robert Maguire, offered a view of the industry that caught the attention of the executives gathered there that year. “The roster of the top publicly traded firms in the oil industry is largely the same as it has been since the breakup of the Standard Oil Trust,” they said in their presentation. “Were he alive today, John D. Rockefeller would recognize most of the list. Carnegie, Vanderbilt, and Morgan, on the other hand, would have difficulty with similar lists for their industries.”
The bankers and their colleagues had been talking about something more than “mergers”—about the imminent emergence of what they had started to call the “supermajors.” For a year, Doug Terreson, an analyst at Morgan Stanley, had been laboring over a paper that declared the “Era of the Super-Major” was at hand. “Unparalleled globalization and scale”resulting from mergers—combined with greater efficiency and a much wider book of opportunities—would lead to “superior returns and premier valuations.” In short, larger companies would be more highly valued by shareholders. And, by implication, those companies that were smaller and less highly valued would be at risk.5
Someone would need to go first. But how could mergers be done? Hostile takeovers looked very difficult to do, so companies would have to agree on a price. There was also a formidable obstacle—what is variously called antitrust in the United States and competition policy in Europe. After all, the most famous antitrust case in history was that involving John D. Rockefeller’s Standard Oil Trust that the Supreme Court had decided in 1911.
Beginning in the mid-1860s, Rockefeller had marched out of Cleveland with “our plan,” a concept for transforming the volatile, chaotic, and individualistic new American oil industry into one highly ordered company, operating under his leadership. “Methodical to an extreme,” in the testy words of a former partner, Rockefeller had proceeded with cold-eyed and single-minded determination, a mastery of strategy and organization, and a bookkeeper’s love of numbers. The result was a massive company, the Standard Oil Trust, that controlled up to 90 percent of the U.S. oil industry and dominated the global market. In doing all this, Rockefeller really created the modern oil industry. He also invented the “integrated” oil company in which the oil flowed within the corporate boundaries from the moment it came out of the ground until finally it reached the consumer.
Rockefeller became not only the richest man in America but also one of the most hated, and, indeed, the very embodiment of monopoly in the robber baron age. In 1906 the administration of the trust-buster, President Theodore Roosevelt, launched the momentous case charging the Standard Oil Trust with restraint of trade under the Sherman Antitrust Act. In May 1911, the U.S. Supreme Court upheld lower court decisions and ordered the Standard Oil Trust broken up into thirty-four separate companies.6
Ever since the dissolution of the Standard Oil Trust, virtually every American law student interested in antitrust has studied that case. And, again and again, in the decades since 1911, the industry had been investigated for allegations and suspicions of colluding and restraining trade. Wouldn’t combinations, creating larger companies, only fan the flames of suspicion? But times had changed. The global playing field was much larger. Altogether, the large international oil companies now controlled less than 15 percent of world production; most of it was in the hands of the national oil companies, which had taken control in the 1970s. Some of these government-owned companies, such as Saudi Aramco, were becoming effective and capable competitors in their own rights, backed up by those immense reserves that dwarfed anything held by the traditional international oil companies.
In order to gain efficiency and bring down costs—and with the approval of antitrust authorities—some of the companies had combined, in key markets, their refineries and networks of gasoline stations. But none of these had sought to overturn the established lay of the land, the demarcations of corporate boundaries so clearly set in place by the 1911 Supreme Court decision.
THE MERGER THAT WASN’T
The chief executive of BP, John Browne, was among those who were convinced that something radical needed to be done. Trained first as a physicist at Cambridge University and then subsequently as a petroleum engineer, Browne had considered a career in academic research. But, instead, he had gone to work in BP, where his father had been a middle-level BP executive, for some time based in Iran. His mother was a survivor of the Auschwitz concentration camp, although this was known only to a very few until after her death in 2000.
Browne had entered BP on what was called an “apprentice program.” He quickly proved himself what the British called a high-flier, moving rapidly up in the organization. In 1995 he became chief executive. He was convinced, he said, that “we had to change the game. BP was stuck as a ‘middleweight insular British company.’ It was either up or out.”
During a BP board meeting, Browne laid out the rationale for a merger: BP was not big enough. It if did not take over another company, it was in danger of being taken over. BP needed to become bigger to achieve economies of scale, bring down costs, and take on larger projects and risks. And it needed the clout that came from scale to be taken “seriously” by the national companies. Browne was apprehensive that the board members would conclude that just one year after choosing him as CEO, he had taken leave of his senses. But, somewhat to his surprise, the board gave a contingent go-ahead.
The best fit for BP seemed to be Mobil, the second-largest of the successor companies to the Standard Oil Trust. In the many decades since the breakup, it had turned itself into one of the largest international integrated oil companies in its own right. It was also one of the most visible. Its flying horse insignia was known around the world; it had invented the “advertorial” in the right-hand bottom corner of the New York Times; and it was one of the biggest supporters of PBS, public broadcasting in the United States, most notably, of Masterpiece Theater. Moreover, BP had already established a joint venture with Mobil in European refining and marketing operations that had saved $600 million and had proved that the two companies could work together.
Mobil’s CEO was Lucio Noto. Known throughout the industry as “Lou,” he had wide international experience and his avocations were notably broad, extending from the opera to rebuilding the engines of old sports cars.
Mobil faced big strategic problems. A significant part of its income came from one source—the Arun LNG project on the island of Sumatra, in Indonesia. But, as Noto put it, “Arun was going downhill.” It was in decline and would require new investment, and that meant that there would be a large gap in profitability until new projects came on stream. This threatened Mobil with its shareholders and would make it vulnerable to a hostile takeover.
The company needed time. “To have one really good upstream asset,” Noto said, “you have to have six projects in the frying pan to bring experience, money, and talent to bear.” Moreover, Mobil’s new growth projects were in Nigeria, Kazakhstan, and Qatar, as well as Indonesia, meaning that the company’s future prospects would be susceptible to geopolitical
risks of one kind or another.
Qatar’s vast offshore natural gas field, at the northern end of the Persian Gulf, would be a particular challenge. Because of the field’s immense size, the investment bill would be enormous. “The more we learned about Qatar,” said Noto, “the more we realized that it would be beyond the capacity of a single company.”
“We had to do something,” recalled Noto. “We could survive. But we couldn’t really thrive.”
Mobil was ready to talk to BP. Secrecy was essential. If any news leaked, it would be damaging to the companies involved and could wreak havoc with the stock price. Browne and Noto sketched plans for a two-headed company, with listings on both the New York and London stock exchanges. Finally, after lengthy negotiations and much consideration, Mobil concluded that while BP would be taking over Mobil, there would be no premium to shareholders.
Noto met Browne at the Carlyle Hotel in New York City. His message was very simple: Without a premium, there could be no deal.
“I can’t do it,” Noto said. Browne was stunned. Just to be sure that there was no misunderstanding, Noto handed him a short, carefully drafted “Dear John” letter, which expressed great appreciation for the discussions but made clear, absolutely clear, that they were over.
There was not much else to say as they stood there. But Noto had one other thought. “I don’t know what will happen,” he said.
Browne flew home in silence. What would his own board, which he had worked so hard to convince, think when he broke the news ? Maybe they would conclude that he really had taken leave of his senses .7
THE BREAKOUT: BP AND AMOCO
As soon as he was back in London, Browne called Laurance Fuller, the CEO of Amoco, which was headquartered in Chicago. The former Standard Oil of Indiana, Amoco was one of the largest American-based oil companies. Although its assets were heavily weighted to the United States, it had been one of the pioneering oil companies to go into the Caspian after the collapse of the Soviet Union, and it was now one of the major partners, along with BP, in Azerbaijan.
Fuller and Browne chatted first about the state of their project in Azerbaijan. That was the warm-up. Then Browne popped the question.
“What are your thoughts about the future of Amoco?” Browne asked. “Because it seems to me it’s a good time for a few oil companies to get together.”
Fuller showed no surprise over the phone. Fuller reminded Browne that in the early 1990s, Amoco and BP had discussed combining their petrochemical operations, but BP had broken off the talks.
“What’s new ?” Fuller asked.
“Strategically,” Browne replied, a merger is “something we ought to do.”
“Well, it’s not on my agenda,” Fuller said. “But why don’t we talk?”
“When would be convenient?”
“How about the day after tomorrow ?”
Two days later they met in British Airways’ Concorde lounge at JFK Airport in New York. Amoco had gone through a series of restructurings and major strategy projects to try to find a way forward but without clear success; Fuller, a lawyer who had been CEO for almost a decade, was personally pessimistic about the future of the industry. BP was bigger than Amoco, so it was going to be a 60-40 deal. But the negotiations foundered on structure—whether it would be a two-headed company, with headquarters in both Chicago and London, and whether Fuller would share power with Browne.
In early August 1998, Browne, surrounded by his team, called Fuller from his home on South Eaton Place in London. “This only works if it’s a British company, based in London, and we get one more director on the board,” said Browne. “That’s it.” He asked Fuller to let him know within the next twenty-four hours. Several hours later, Fuller called back. It was a go, he said. He was getting on his plane.
A few days later, August 11, 1998, BP convened a press conference in the largest venue it could find, on short notice, in London—the Honourable Artillery Company, in the city of London—in order to accommodate a huge press corps. It was clear that something very big was about to be announced. London was in the midst of a heat wave, and it was another hot day, blazing hot, and the circuits in the building were overloaded by the temperature and all the television cameras. As Browne stood up to announce the deal, a fuse blew. The whole room went dark. Not an auspicious start for what was, up to that point, the largest industrial merger in history. But the sensational news got out far and wide—a $48 billion merger, a potentially transformative step for the world oil industry. And, although not said publicly, it was what BP needed if it was to become a heavyweight.
The implementation proceeded quickly. The Federal Trade Commission found no major antitrust issues. The businesses of the two companies “rarely overlap,” said the chairman of the FTC, and consumers will continue to “enjoy the benefits of competition.” The BP-Amoco deal closed on the last day of December 1998.8
TOO GOOD TO BE TRUE
John Browne was scheduled to speak in February 1999 at a major industry conference in Houston. Two days before the conference, he called the organizers. He was very apologetic. Something urgent had come up in London and unfortunately he wouldn’t be able to make it. He would send one of his senior colleagues to read his speech in his place.
It was an excuse. The real reason was that Browne was scheduled to be the keynoter on Tuesday, and the keynoter on Wednesday was Michael Bowlin, the president of one of the major U.S. oil companies, ARCO. And Browne could not take the risk of being on the same program with Bowlin, not given what both were then engaged in.
A month earlier, in January 1999, Bowlin had called Browne from Los Angeles, which was ARCO’s hometown. Bowlin had a simple message: “We would like BP to buy ARCO,” he said.
Unlike Browne, Bowlin did appear at the Houston conference. His speech was on the future of natural gas, which was a little ironic: for Bowlin, it seemed, had concluded that oil did not have much future. Bowlin and the ARCO board had lost confidence in the company’s prospects. ARCO’s major asset was its share of the North Slope oil in Alaska, and with oil around $10 a barrel amid the price collapse, management worried that it would not be able to survive.
“It seemed too good to be true,” Browne later observed. ARCO “simply wanted to drop into the lap of BP.” This was a superb opportunity for BP, especially because of the efficiencies that would come through combining ownership and operatorship of their large North Slope oil resources. The North Slope was the largest oil field ever discovered in North America, but its production had fallen from a peak of 2 million barrels per day to a million, and a combined operatorship would save several hundred million dollars a year.9
If ARCO had hung on for another six weeks, it would have seen the beginning of a recovery in its fortune. For, in March 1999, OPEC started to cut back production, which in turn would begin to lift the oil price off the floor. But by then the deal was just about done. The purchase of ARCO for $26.8 billion by BP Amoco (as it was then) was officially announced on April 1, 1999.
“EASY GLUM, EASY GLOW”: EXXON AND MOBIL
The announcement of the BP-Amoco deal the previous August proved to be a historic juncture. The taboo against large-scale mergers had been broken, or so it appeared. Perhaps the greater risk, really, was to not merge.
Lee Raymond, the CEO of Exxon, was at a conference at the Gleneagles golf course in Scotland when the BP-Amoco announcement broke in August 1998. He knew exactly what he should do: get in touch with Lou Noto.
Raised in South Dakota, Raymond had joined Exxon after earning a Ph.D. in chemical engineering in three years from the University of Minnesota. His first jobs were in research. In the mid-1970s, he was drafted to work on a project for the CEO. The oil-exporting countries were nationalizing Exxon’s reserves, and the company needed a strategic direction going forward. Thereafter, Raymond began to play an increasingly key role in reshaping the company. From the mid-1970s onward, the dominant issue for the company had become not only how many barrels of reserves did it have,
although that was still critically important, but how financially efficient it was. And how much more financially efficient could it be, compared with its competitors? Success on those criteria would enable it to deliver steadily growing returns to pension funds and all the other shareholders. “The industry had to exist,” Raymond later explained. “If you were the best of the lot, you’ll always be there.”
Raymond became president of Exxon in 1987 and its chairman and CEO in 1993. During the years that Raymond led the company, Exxon’s investment process became known for its highly disciplined and long-term focus. Indeed, Exxon’s “discipline” became a benchmark against which the rest of the industry was measured. The long-term focus meant that it kept its investment very steady, whether the price was high or low. It did not suddenly increase its spending when prices went up or abruptly cut it when prices fell. This reflected Raymond’s own steadiness. One of his favorite maxims, whether in boom times or a price collapse, was “Easy glum, easy glow.” Don’t get overexcited and hyperactive when prices are shooting up, or overly depressed and catatonic when they’re headed down.
But by the mid-1990s, Raymond was coming to the conclusion that financial efficiency in itself had limits. Something more was needed, and that something was a merger. Mobil was a candidate. And as Lou Noto liked to say, “Business is about making something happen.”
A couple of months after the breakdown of negotiations with BP, Noto had run into Lee Raymond at a conference. After chatting about various challenges facing the industry, Raymond had said, in his own steady, measured way of speaking, “Something will happen.” Not long after, Raymond phoned Noto and said he was coming to Washington and hoped they could have lunch. Sure, Noto replied. Afterward, Noto happened to ask what would be bringing Raymond to Washington.
The Quest: Energy, Security, and the Remaking of the Modern World Page 11