Oil

by Tom Bower

  Watching Lawrence Rawl, a renowned strong-arm practitioner who used Exxon as a blunt instrument, Raymond had learned the technique of grabbing an inordinate share of the action regardless of sensibilities. Exxon, he knew, was sufficiently big to shun partnerships, but as Rawl and his predecessors had demonstrated, principles could be bent in order to accrue profits. An early partnership with Shell in Cuba had been unsuccessful, but with some political pressure from Washington, Shell had agreed in the late 1950s to admit Exxon as a partner in the spectacularly profitable Gröningen natural gas fields in the North Sea, and later in the Brent and other North Sea oilfields. Raymond had also learned that Big Oil did not need instant results. During that formative decade, he had witnessed both feast and famine. Uncertainty and gyrating prices complicated investment decisions, and oil companies could not turn money off and on. Exxon’s custom was to sit tight, especially after the experience of the exploration and production executives, who had been ordered to spend money in the early 1980s, when high tax rates had encouraged drilling risky wells in the Rockies. “I need you to spend another $50 million,” one exploration and production engineer was told in a telephone call. “Get rid of cash.” Resources seemed to be unlimited. Prices rose and then crashed with the surplus of production, the development of efficient car engines and the shift to natural gas and coal to produce electricity. The ultimate blow was Saudi Arabia’s decision in 1985 to maintain rather than reduce oil production. America’s oil industry had been devastated. Half a million employees were laid off in a wave of hardship, aggravated by deregulated markets and denationalization.

  Rawl and Raymond had understood the need to alter Exxon’s model. Costs were cut and the organizational structure was modified. But the fundamental Exxon way remained sacrosanct. Best practice was imposed from the center. Systematized checks and balances prevented individual initiatives. Raymond inherited a frictionless, problem-free machine, in which every transaction was religiously policed to extract economies of scale by standardization. Like God’s, Exxon’s gospel heralded the corporation’s infallibility: “Accidents are impossible because no man makes mistakes, only a malfunctioning system.” Unlike BP, which would be rejuvenated by haphazardly combining the remnants of a colonial era with three former Standard Oil companies — Sohio, Arco and Amoco — Exxon was purposefully designed by engineers over 100 years, gradually developing the perfect DNA to manage its assets. “The oil business,” Exxon’s staff absorbed, “is putting things down and living with them for a long time.” Everything should work perfectly, without gold-plating. Improvements sprang from constant dissatisfaction and resistance to being first. There was no shame in arriving late and buying entry into the game. Exxon was designed to profit by watching others make mistakes. Smaller rivals, the wildcatters acting on gut feeling and shooting from the hip, would bear the risk of failure. Exxon took pride in being a “fast follower,” carefully calculating if something worked before investing. “It takes me two months to train a specialist to operate in Angola,” a Schlumberger executive proudly told an Exxon specialist. “Gee,” replied the Exxon man. “It just takes me five minutes.” “How so?” asked the puzzled executive. “ ’Cos that’s how long it takes me to walk down the corridor to the Gulf of Mexico man and tell him that he’s now assigned to Angola.” The result was a “one size fits all” standardized Exxon expert, recognized across the globe. Consistent in his approach, he had a clear understanding of his role, the limitations of his responsibility and to whom he was accountable. Empowered by a “Triple A” rated corporation with low tolerance for differences, he was sharply aware of his restricted scope, but could boast on arrival in a new country, “We’ve got the best technology, the deepest pockets, the industry’s best project management, and we will work with the government.” The result produced neither spectacular successes nor crushing failures — just consistently the industry’s highest profits.

  Inflexibility was a mixed virtue. Raymond’s obstinacy in Anchorage and later in Moscow was Exxon’s strength. The intransigent culture — “My way or the highway” — was born from the tortuous decision-making process. Once Exxon’s policy was fixed, its executives became suspicious of anyone who disagreed with it. “They’re wrong,” Raymond would say of those who warned about lead in gasoline or global warming, or, on a lower level, about a rival’s interpretation of seismic data. Disagreement automatically aroused questions about motives. The technological revolution challenged the monopoly of Exxon and the other oil majors. Indoctrinated to believe that Exxon was better than the rest, and that any new idea must be mistaken unless it was invented by Exxon, Raymond begrudgingly acknowledged that Exxon’s research, while the best, did occasionally fail to buy any noticeable advantage. The Standard research labs in New Jersey were closed, and the number of patents assigned to Exxon declined. Outside consultancies could occasionally interpret seismic data better than the oil majors, and operations were frequently subcontracted by Exxon to Schlumberger and Halliburton. Exxon was progressively becoming weaker. Unable to dictate the industry’s agenda, the corporation nevertheless maintained its historic authoritarian pose in order to maintain the influence secured by its founders. The impression of ExxonMobil as a superb machine, engineered to clockwork perfection, was reflected by Lee Raymond’s vainglory and the forbidding exterior of the corporation’s new headquarters.

  Visitors to ExxonMobil’s hilltop mausoleum outside Dallas could have mistakenly interpreted the silent vacuum in the huge entrance hall as symbolic of the giant corporation’s oppressiveness. Within that building, constructed over the Barnet natural gas reserve (America’s largest, but not owned by Exxon), were tiers of seniority, a hierarchy based on status assessed by the “formal weighting” process, blessing the chosen ones with access to the executive dining room. The identically clad male inhabitants — starched white shirt, striped tie, gray suit and shiny black belt — appeared to be the products of a mold, akin to the Stepford wives. Fired by indistinguishable levels of conviction, they were subject to continuous evaluation to select the best and discard the rest. “We put them through a big distillation column,” explained Raymond. “We have a very rigorous process of moving them around. Everyone in the world gets rated every year. It’s a very, very rigorous process. Only the top of the column stays here.” Those few, even though disciplined by Exxon’s monoculture in how to conduct their discussions, incarnated the corporation’s reputation as feared and revered. “Some wonder why they remain as Exxon people,” observed a contractor working in the oilfields alongside those at the top of Raymond’s column. “It’s like they’ve been injected with forgetful drugs.”

  In a raw trade, the smooth self-presentation of Exxon’s star executives was deceptive. Outsiders would carp that they “all sing from the same song sheet,” but Raymond’s closest aide countered, “We don’t meet for Scripture meetings.” In 2000, Enron’s CEO Jeff Skilling, boasting about his company’s supremacy, would compare the oil majors to dinosaurs. “They need to remember,” replied Raymond, “that dinosaurs were around for a long time, and they were as mean as hell.” Big meetings, encounters with strangers and social etiquette were avoided by the custodian of Exxon’s unchangeable customs. The traditional lexicon of marketing — brand recognition, interface and image — barely troubled him. Proudly he presented himself as the personification of Exxon’s parsimony and integrity, the chairman who like the lowliest employee was required to read “Standards of Business Conduct” every year, and to confirm by his signature his agreement to abide by that code. To others, Raymond symbolized Exxon’s regimented “Arrogance Training.”

  Preceded as chairman by colorless, soft-spoken engineers wielding the power of statesmen, Raymond dented the mold. Those lacking his self-confidence were humiliated. “That’s the stupidest idea I’ve ever heard!” he would bark at a subordinate or an opponent. Unglamorous, not least because of a harelip, he rarely concealed his conceit, or nurtured protégés, or made collaboration enjoyable. “Steamrolling
by sheer intelligence” was the comment of a contemporary inducted with Raymond into Exxon’s “forced ranking system,” an innovation introduced during the Second World War.

  The combination of that culture, Exxon’s obduracy toward the environment and the growth of the oil market changed the relationship between the corporation and the government. Unlike the mid-1970s, when the dialogue between the oil majors and the government had been a civilized exchange based upon mutual interest, the mood in the 1990s became sour. “We got bored with each other,” said an Exxon executive, “and less convinced that we needed each other.”

  America’s politicians inflamed the distrust. Bush’s successor Bill Clinton’s National Energy Policy Act, which aimed both to conserve energy and to ban oil exploration in the Arctic National Wildlife Refuge, was criticized by the industry as representing “the destructive power of exaggerated environmentalism.” Although Clinton supposedly checked his popularity every week against the oil prices, his energy bills floated on an oil surplus were blamed by some for crippling the industry. In 1998 he extended Bush’s moratorium on drilling off the US coastline by 10 years. Most Americans were content for oil to be drilled in the Gulf of Mexico and parts of Alaska, but not off California, Massachusetts or Florida. Although Florida might have billions of barrels of oil and trillions of cubic feet of gas offshore, and California had even greater reserves, those two energy-consuming states forbade offshore drilling. The US government’s outlawing of Alaskan oil exports to Japan was supported by the same people in California who demanded that the government place pressure on Russia to increase its exports of crude oil to America. As a relic of an era when America was the world’s biggest oil producer, the country had spawned 18 different gasoline zones, meaning that licenses were required to move gas from one zone to another. California’s unique gasoline requirements rendered oil from Nevada’s refineries inadequate for its purposes, so Nigerian oil was refined with special calibration in Pembroke, South Wales, and shipped to California. The contradictions were unmentioned. “Oil was surplus and there were other more important issues,” admitted an Exxon executive. The surplus neutralized some governments’ interest in developing energy policies. As an extreme example, the British prime minister John Major abolished the Department of Energy. “We don’t need an energy policy,” said Nigel Lawson, a former chancellor of the exchequer, convinced that Britain could rely on market forces, and could change taxation in the North Sea whenever additional revenue was needed.

  The converse was the oil companies’ perennial attempts to avoid regulations and taxation. Around 25 percent of America’s oil and gas was produced from federal land, and since 1988, 18 American oil companies had paid lower royalties for oil drilled on federal lands, saving $5 billion by 1996. “The issue is simple,” said Senator Barbara Boxer. “Big oil companies have knowingly and intentionally cheated the federal government and American taxpayers out of royalty payments for years. We cannot continue to subsidize Big Oil who list profits in the billions each year, at the price of our children’s education.” Most of the companies, including Chevron, BP and Conoco, repaid the government between $30 million and $153 million to end litigation. Only Exxon refused. It had successfully fought similar charges in California in 1992, and as usual expected to out-litigate the government. Exxon was among the oil companies Leo McCarthy, the lieutenant governor of California, had in mind when he commented, “The people of California must be treated respectfully as customers and partners, not as victims and targets for fleecing.” In Alaska, the state government claimed that, to reduce the royalties owed to the state, producers were deliberately undervaluing the oil produced and overvaluing their transportation costs. Exxon did pay $154 million to settle this dispute, much less than BP’s $1.4 billion and Arco’s $280 million, but would refuse to pay a further claim, insisting that it had acted lawfully. Exxon’s rivals were less assured in court battles, and similarly lacked its confidence in their ability to cope with unpredicted price changes.

  In January 1997, fearing losses as oil prices unexpectedly fell, the industry dismissed some engineers, abandoned plans to recruit and train graduates, and canceled orders for new rigs. But in the spring prices stabilized, and fears of disaster evaporated. The oil companies began recruiting, paying bonuses and preparing for expansion. Some even forecast a boom. Over 1,000 oilmen crowded into the Hyatt Regency in New Orleans in early March 1997 to place bids for exploration leases in the Gulf of Mexico. In the electric atmosphere, everyone wanted to play, and the US government pocketed $824 million, 58 percent more than the previous year. Shell was the biggest bidder. Daily rentals for rigs soared to $145,000, compared to $49,000 in 1990. Convinced that oil at $20 signaled good times, OPEC ministers meeting in Jakarta in November 1997 raised production by two million barrels a day.

  But after Christmas, news of crumbling Asian economies crushed the optimists. Brent fell from $20 a barrel to $12.80 in March 1998. The collapse confirmed Lee Raymond’s certainty about oil surpluses and low prices for the foreseeable future. Although the demand for energy had risen by 3.7 percent and prices had fluctuated since 1996, Raymond and his competitors spoke of an “oil glut.” Recently recruited engineers were dismissed, and drilling was terminated, prompting some to question whether the industry had become too smart for its own good. “Is technology too effective?” one expert asked. BP’s horizontal well at Wytch Farm in Dorset had reached 6.28 miles, a world record. “Has seismic 3D run amok?” asked a trade magazine. Underwater exploration and enhanced production in established fields had discredited old truisms about oil shortages. There were new discoveries in the North Sea and off Newfoundland. Amoco had found a vast reservoir 35 miles off Trinidad, and Texaco was about to announce a new discovery 12,400 feet below the seabed off Nigeria. Venezuela’s reserves were variously estimated at between 1.3 and 1.8 trillion barrels. The consensus was that demand would remain low in 2000, and the industry concluded that more oil was available than was required.

  Saudi Arabia had good reason to fear economic mayhem. Ali al-Naimi, the petroleum minister since 1995, was in uncharted territory. The traditional weapons to control prices were failing. Two years earlier, an abrupt $6 price rise after the bombing of a building in Saudi Arabia used to house foreign military personnel had killed 19 American airmen, had rapidly evaporated. Instead of “supply anxiety” sparked by unrest in Saudi Arabia, traders assumed that the world could cope with any glitches, not least because an estimated 800 million barrels of crude oil lay unused in the Gulf’s storage tanks. In that atmosphere, al-Naimi summoned an emergency OPEC meeting in Riyadh in July 1998. To cure its budget deficit, Saudi Arabia needed oil to be priced at $22. OPEC announced that production would be cut by 2.6 million barrels a day. Prices rose to $16, but after some OPEC countries cheated on their quotas and Iraq exported more than was allowed by the United Nations’ quotas, they fell back. With full storage tanks, and with rival countries using technical innovations to increase production, OPEC was vulnerable. Little comfort could be drawn from the prediction of the Energy Information Administration (EIA), the statistics arm of the US Department of Energy, that OPEC would again dominate the world’s supply once the sellers’ market was restored. Despite OPEC’s controlling 63 percent of the trillion barrels of oil already discovered, its old certainties seemed to be evaporating. In a masterly understatement, al-Naimi’s experts reported, “The market is unbalanced.”

  To expel the demons threatening once again to revive the horrors of the late 1980s, the city of Houston hosted a party in September 1998 for 30 oil ministers and 8,000 officials and executives from 82 countries. Everything about the World Energy Congress was on a mammoth scale. Twelve tons of fireworks and the biggest dinner ever served in Texas, however, could not smother the smell of crisis. To survive low prices, some visitors suggested, would require reinventing the whole industry and its technology. By the end of November, the scenario was bleaker. Oil was trading at $11 a barrel, which barely covered the cost of exploration
, drilling and recovery. In December, Brent slid to $8, the lowest level (accounting for inflation) since the 1930s Depression. The oil market’s collapse was swift and devastating, and shares in oil and drilling companies fell by 70 percent. Thousands of workers were dismissed, and only 155 offshore rigs were working, a 60 percent decline in one year. Rig prices in the Gulf of Mexico fell by 70 percent. The remaining 500,000 marginal wells across America were jeopardized. America’s independent producers and one-man strippers, especially in Oklahoma, earned just $18 a day from their two-barrel-a-day wells. The prediction by a banker from J.P. Morgan that oil would “not see $20 in the foreseeable future” galvanized the terrified industry to appeal for help to Congress. But the politicians were helpless. None could understand how oil’s value could halve in two years. By December 1998 there was talk of OPEC’s imminent death.

  The Saudis had survived the collapse of prices in 1996, but the new falls resurrected their vulnerability. OPEC was powerless. Petroleum’s professionals had fallen victim to their own success. In an unusual initiative, al-Naimi sought advice from the oil majors. Seven chief executives were invited by the Saudi ambassador in Washington to his home in McLean, Virginia. How, they were asked, could Saudi Arabia develop its energy resources? Speaking first, Lee Raymond delivered a dry speech, packed with statistics. Oil prices, he predicted with certainty, would remain at $10 for “another decade of hurt.” The cost of production, he said, had fallen from $16 per barrel in the early 1980s to between $6 and $10. At the same time the cost of finding oil had also fallen, from between $14 and $20 per barrel in the 1970s to between $4 and $5. At a price of $10 a barrel, said Raymond, Saudi Arabia would have ample profits, while Exxon would retrench. Raymond’s self-assuredness hung on his conviction that only those with a long-term perspective prospered in the oil industry. Stability was Exxon’s mantra. “A useless, nonsensical meeting,” said one of the invited chairmen. “I’ve just wasted a Saturday on bullshit. They don’t know what they wanted.”