by Tom Bower
That was precisely the problem Montepeque noticed when Total, the French oil major, and Glencore were reporting sales of distillates. Platts reporters believed they were under pressure to publish reports of deals and prices to influence the pricing of a contract due to mature on that day based on the “actual” price in the North Sea. If all their business had been genuine, Montepeque knew, the whole region would grind to a halt with tankers. “It’s suspicious trading,” he concluded. “Each side wants to overwhelm the other to cover themselves.” In December 2007, Platts would bar Total from trading until February 2008 for misconduct.
To prevent these ruses, Montepeque insisted that traders needed prior approval from a Platts reporter before posting their trade on the screen. The result, most complained, was as untransparent as before. There was a gap between the prices on the Platts window and the traders’ actual deals. Small, last-minute trades caused prices to seesaw. At the last moment traders would offer huge amounts of a product like jet fuel in a remote location to distort the market. The system was as imperfect as previously. “The traders,” Littlejohn realized, “are trying to pull the wool over our eyes.” He blamed Montepeque’s “market on close.” Montepeque refused to explain how prices were set in the last minutes of trading if there had been no sale. Platts, the traders suspected, was simply inventing phony bids and offers so as to set a price. “Jorge Montepeque likes opaqueness to enhance his power and Platts’s profits,” Littlejohn complained. He telephoned Montepeque in Singapore and told him, “You’re duping us by bizarre pricing.” Montepeque rejected the criticism. “You’re not the smartest man in the world,” Littlejohn screamed at him. “I’m talking to a wooden post. I’m going to ignore you.” The bankers in New York were similarly scathing. “Montepeque is unbearably self-promoting and self-important. He’s running around with a fire hose but he’s always getting screwed. The traders use him to make their profits. Each time he believes he has prevented manipulation, he is beaten by another ruse.”
The proof was a trader’s squeeze on Brent in 1994. The Brent market had become an impenetrable matrix of contracts developed among the traders through usage. Somehow the benchmark for oil prices worked so long as no one tried too hard to understand the complications, not least the anomaly that the decline of oil production in the North Sea had made Brent even more vulnerable to manipulation. Occasionally even the sharpest traders missed the signs. In 1994 the trader bought about 80 cargoes of Brent oil, although the field could only produce 30 cargoes a month. Leveraging between 15-day Brent and “contracts for difference” (CFDs), the squeeze was undetected as prices rose by $2 a barrel, earning the trader an estimated $30 million.
This was minuscule compared to the potential that Vitol’s directors spotted once the United Nations approved the “food for oil” program in April 1995, allowing Saddam Hussein’s regime to overcome an embargo on Iraqi oil by exchanging it for food. Embargoes were rich sources of profit for traders, especially as Iraq exported oil worth $65 billion under the program. It was claimed that Vitol had made handsome profits striking oil deals with Serbia while UN sanctions were still in place, paying the paramilitary leader Arkan, a Serbian later found guilty of committing countless atrocities during the Balkan wars in the early 1990s, $1 million to act as an intermediary in 1995 to recover a debt. Vitol insisted the oil was delivered only after sanctions were suspended, and the deal was entirely legal. Just as Vitol hoped to escape censure for that trade, the directors did not anticipate any repercussions if their company bought Iraqi oil in breach of UN sanctions. Knowing that the sale of Iraqi crude was assured to those refineries that were calibrated to process it, Vitol’s skill was to negotiate with Iraqi officials the amount of dollars to be deposited as “commission” in return for the oil. Like Oscar Wyatt in New York, Vitol knew that those payments, or “surcharges,” broke UN sanctions, but none of the traders involved expected any legal consequences.
Faced with such ruthlessness, Jorge Montepeque’s mechanisms to control the traders were, in the opinion of Carl Calabro, Littlejohn’s successor, not “failsafe.” Like Littlejohn, Calabro disliked any interference in his efforts to establish the best price for Saudi crude. The Kingdom considered Platts to be unhelpful. Limited markets encouraged “murky assessments,” and prompted Calabro’s question, “Is this price being manufactured?” Russian traders had entered the market, and were offering bribes to Platts reporters and threatening to steer the market. Real trades throughout the day were ignored, while those in the last 30 minutes were, Calabro thought, just bids and offers, not authentic trade. “The traders,” Calabro realized, “were trying to pull the wool over our eyes.” At the end of 1999 he decided to abandon the Platts window and trade on the IPE in London and through Argus, Platts’s smaller British rival, which he described as “the real trade.” Argus’s prices were entirely based on 50 reporters around the US interviewing traders. “Argus was not vulnerable to traders crashing in on the close,” Calabro explained. The British agency allowed traders and regulators to watch prices change in “real time” knowing that the reporters excluded those that had aroused suspicion because of their timing or size. Montepeque telephoned Calabro. “I didn’t get a hosing from Jorge,” Calabro reported, “I got worse, a one-sided lecture.” Calabro replied in kind: “You’re not the smartest man in the world, and the moment anyone thinks he is the smartest man in the world, it’s the road to ruin. Never call me again.”
Jorge Montepeque was bruised. Platts had been rebuffed by Aramco, and other traders were moving to Argus rather than Platts to price American crude oil. Platts was also rejected by BP, the industry’s most aggressive trader. Montepeque’s problems were drowned amid the industry’s crisis as prices collapsed and Saudis’ fears about their vulnerability were resurrected.
Chapter Nine
The Crisis
LEE RAYMOND’S BELIEF in the free market had been vindicated. In August 1996 the accountancy firm Arthur Andersen had predicted that America’s oil and gas industry was in its best shape in 15 years, and was poised for “double-digit” growth. Costs had fallen, spending on exploration had risen by 8 percent, oil prices had risen modestly and the oil majors’ profits were assured. Even OPEC acknowledged defeat as the world’s oil production increased by 2.9 percent but prices appeared fixed at around $20 a barrel. “These prices are here to stay,” announced Rilwanu Lukman, OPEC’s secretary general. During 1996, proven oil reserves increased by 11.4 billion barrels, and an additional 11.6 trillion cubic feet of gas had been found. The surplus of oil, the industry was convinced, could only swell.
Raymond’s self-confidence reflected a disdain of Washington, the US government, Congress and the anti-oil lobby. The fear of oil shortages, rising imports and soaring prices symbolized by Jimmy Carter wearing a cardigan and declaring it was “the moral equivalent of war” to cut consumption had been forgotten. Size rather than the environment was again fashionable. Economy cars had been abandoned, and nearly a fifth of American motorists drove gas-guzzling SUVs, the biggest of which ran at four miles a gallon. Although oil imports were predicted by the US Government Accountability Office to rise to 60 percent by 2015, there was no fear of an oil shock. Smart technology that enabled drills to turn corners in rocks miles beneath the surface could be relied upon to produce more oil, and oil’s contribution to industrial production was diminishing.
Raymond’s sense of certainty enhanced Exxon’s stature. He and Rex Tillerson were guided by their desire to satisfy their shareholders. They appeared to have no fear of failure. Exxon’s reserves, compared to those of their competitors, were enormous. “Lots of molecules” was a familiar Exxon boast. Convinced that Exxon’s balance sheet could withstand any cycle, Tillerson asserted, “We’ll be the last one standing.” The volatility of prices during the 1990s had convinced Raymond that Exxon should continue on its own terms, without departing from its preordained systematic process. Exxon invariably arrived late, not least in deep-sea drilling, and preferred to shun par
tnerships with other oil corporations in the hope of gaining unique access. Its reserves had fallen over the previous 30 years, but the corporation’s haughtiness had not dimmed. It continued to cultivate a mystique of omnipotence, and governments were deterred from interfering in its interests.
Identified at the outset of his career by an internal code as destined for the board of directors, Raymond specialized in negotiating Exxon out of problems: selling a refinery in the Caribbean, or a nuclear plant in Washington State after a dangerously unfit chief executive had been removed; facing down threats from Venezuela to pay more for crude; and directing the cleanup after the Exxon Valdez oil spill. In the spotlight for the first time in Alaska, he had been asked by a lawyer during the preliminaries of a civil trial to assess the Exxon Valdez damages to describe his background. “I hope this doesn’t get too boring,” Raymond replied. “It kind of bores me.” Asked later about his low profile, he explained, “I don’t think much about it. I’ve never had a focus group to decide what my persona is out there.” A good day, he added, was Exxon staying out of the news, and maintaining his own invisibility. His limited public appearances, displaying unusual self-control, aroused bewilderment about whether Lee Raymond was truly from the Exxon mold.
Raymond’s insistence on limiting Exxon’s civil and criminal responsibility, and his management of the Valdez spill and its aftermath, publicly redefined Exxon and Big Oil. Stoutly, he expressed no shame, and appeared to dismiss the emotional and financial distress the disaster caused to Alaskans. According to Exxon’s Strategic Planning System, his priority was ensuring that shareholders’ profits were substantially above the industry’s average, and he combatively rebuffed challenges to that agenda. He embraced a culture that ordained that Exxon’s rules and contractual agreements would be mercilessly enforced upon governments, employees and anyone else entrapped within the corporation’s affairs. Unlike the employees of other companies, Raymond was trained not to “aim all over the sky,” but to “beat opponents to death with lawyers and auditors.” His opponents after March 24, 1989, were 14,000 Alaskans, especially fishermen, whose livelihoods had been destroyed by the oil spill.
In the weeks before the trial in Anchorage in May 1994, Raymond had single-handedly negotiated a settlement with the plaintiffs. At the final meeting, never raising his voice, he had confronted a room full of opposing lawyers and won the day. But the deal collapsed, and the plaintiffs, claiming $20 billion, had to prove Exxon’s negligence before and after the spill. During the pretrial hearings Exxon’s lawyers had successfully limited the corporation’s liability to direct losses. The indirect losses, including the diminished value of fishing permits and the sharp drop in the numbers of salmon in the area — from 38 million to 7.4 million — were excluded from the claimable damages. Those legal distinctions aggravated the jurors, all local people. “This is corporate indifference and arrogance at its worst,” Brian O’Neill, the plaintiffs’ lawyer, told the court. “A company as large as Exxon thinks it is above the law. You need to take a substantial bite out of their butt before they change their behavior.” O’Neill portrayed Exxon as an uncaring oil giant that entrusted its most modern tanker to the command of a known alcoholic, “causing misery to thousands of ordinary folk.” In the courtroom sat Lee Raymond, said O’Neill, whose income had risen in 1990 to $909,000, while Exxon chairman Lawrence Rawl earned $1.38 million, and both were refusing to help innocent victims. Highlighting Exxon’s $111 billion revenue in 1993, O’Neill scoffed, “Exxon thinks its behavior after the incident was exemplary.” Raymond retorted that Exxon had paid $3.5 billion toward the cleanup and compensation, a sufficient amount.
Exxon’s defense was fortified by the rescue operation after the accident. Chuck O’Donnell, the senior executive employed by Alyeska, the owners of the pipeline running from the North Slope to the terminal on the seashore, was responsible for overseeing the response to any emergency. Awoken at 12:30 a.m., he was told that a tanker had run aground. Earlier that night his team had celebrated the completion of clearing a small spill from the Thompson Pass, an Arco tanker, and he was not in the mood to rush back down to the coast. After ordering a subordinate to head for the pipeline terminal, O’Donnell went back to sleep. The subordinate discovered that the equipment to contain oil spills was either missing or had malfunctioned. “I was shocked at the shabbiness of the operation,” admitted a manager. Raymond argued that the damage following the spill was aggravated by Alyeska’s negligence, and presented scientific studies financed by Exxon showing that Prince William Sound had suffered more damage over the past years from diesel spills than from the Exxon Valdez.
Despite his aggressive defense of his company, Raymond’s arguments were rejected. The scientific evidence lacked credibility, and he was criticized for refusing to meet the fishermen, and rebutted by scientific witnesses who confirmed that the fisheries were destroyed, about 400,000 birds had died and the recovery could take 70 years. On June 13, 1994, the jury found Exxon negligent and reckless. The corporation was ordered to pay a further $5 billion in punitive damages. “The verdict,” commented Raymond, announcing an appeal, “is totally unwarranted and unfair… The damages are excessive by any legal or practical measure.” Raymond’s insistence that Exxon should not suffer punitive damages was undermined by the emergence after the trial of his disingenuousness. In his testimony, he had described how in 1991 he had authorized the immediate payment of $70 million to destitute fish processors, ruined by the Exxon Valdez spill: “I said from New York, ‘Forget the release, just pay the money. Get a receipt that you paid the money and some day we’ll sort this out in court.’” He and his lawyers had not, however, revealed the conditions attached to that $70 million compensation: the fish processors had agreed to repay Exxon a share of any punitive damages subsequently awarded by a court. Raymond’s secret arrangement, described by trial judge Russell Holland as “Jekyll and Hyde” tactics and “behaving laudably in public and deplorably in private,” was criticized as “reprehensible,” and “an apparent fraud on the jury.”
Raymond dismissed the censure. He had vowed to contest the $5 billion damages award up to the Supreme Court, on the grounds that damages should be “reasonably predictable.” Eventually, in June 2008, the Supreme Court reduced the damages to just $507.5 million, a year after Exxon made profits of $40.6 billion. The damages could be paid from two days’ earnings. The fisheries remained destroyed. Experience had taught Raymond not to be cowed by any judge or to trust any government, especially after the recent hysteria in Washington about supposed price gouging and monopolies in oil retailing. Every appearance of an oil executive in Congress was exploited to win political points. Occasionally seeking government help was akin to supping with the devil. Raymond’s contribution to the widespread distrust of Big Oil left him unconcerned. By advocating the shareholders’ interests and alienating the public, he had reinforced the corporation’s belief in his trustworthiness, and on April 28, 1993, aged 54, he had been appointed as Larry Rawl’s successor. His conduct confirmed the sanctity of Exxon’s values regardless of external circumstances. “Our culture eats strategy for breakfast,” said one admirer.
“Play by the rules of the book” was the corporation’s doctrine. “It started with JR,” intoned Raymond’s lieutenants, invoking Standard Oil’s founder John D. Rockefeller to those selected to embrace the faith. “JR had integrity. He played by the rules. He never did anything illegal.” New employees were told, “There’ll be no cutting corners, corruption or lying. If you do, you lose your job.” Deifying Rockefeller surprised outsiders, but within Exxon’s secretive fraternity, agreement percolated from the top about the cardinal rules. By example and instruction, Raymond, like all Exxon’s employees, had been nurtured to speak unemotionally, and only about facts. “When meeting outsiders,” new arrivals were told, “either do not speak to them or be cautious and report back.” Those lessons, impressed in youth, remained ingrained.
After Valdez, Exxon transferred its hea
dquarters from New York to Irving, near Dallas. This move out of the spotlight had coincided with Rawl’s and Raymond’s courting of Republican politicians, especially George W. Bush. Ever since Theodore Roosevelt had declared in 1906 that the directors of Standard Oil were “the biggest criminals in the country,” and unleashed the legal process that culminated in the corporation’s enforced self-destruction in 1911, John D. Rockefeller’s successors had downplayed their relationship with politicians and the government. Raymond gave the impression of hating Washington. “Exxon is squeezed too much by government,” he complained, suggesting that politicians never did anything good. “I run the company on the basis of my long-term price assessments. I’m running a global business. Please stay out of my way.” Exxon’s rivals were unpersuaded. Oil titans only stayed out of Washington until they needed help, then they arrived with their hand out. Chris Fay of Shell regarded Exxon as the voice of the US government, while Chevron’s senior directors suspected that Exxon had received government assistance to secure a natural gas concession in Indonesia, an oil lease at Upper Zackin in Abu Dhabi, the rights to Sakhalin 1 in Russia, and much more. Combatively, Raymond occasionally denied ever requesting or receiving government help.
Raymond had been trained to share Exxon’s global outlook, but America was the center of its universe. Standard Oil of New Jersey, Exxon’s original incarnation, had been the jewel of Rockefeller’s empire. The conservatism of Standard Oil’s senior staff, especially the international specialists, had transferred to Exxon. Created within an integrated market — the oil wells, refineries and customers were all adjacent — Exxon inherited more oil than the other Standard companies after the breakup, and Walter Teagle, Exxon’s chairman in the 1930s, had bought more oilfields in the midst of the financial crisis in Venezuela and elsewhere, confirming Exxon as the world’s biggest oil corporation. Accordingly Exxon had the least reason of any of the oil majors to take risks, and could balance losses in one region of the world with profits in another.
