by Tom Bower
Bruce Botelho, Alaska’s attorney general, had raised the critics’ flag on June 30 during a hearing in the US Senate. BP, he said, was an aggressive cost-cutter. Workers complained about poor pipeline maintenance and feared job losses. “The potential impacts [of the merger],” he said, “on the oil and gas industry in Alaska and thus on the Alaska economy and its citizens are major.” Smaller companies would be discouraged from investing by the merged company’s control of the infrastructure, tanker space, and access to all the seismic data and the pipeline. Even the price of oil supplied to the US West Coast, Botelho continued, would be influenced. At the end of October, Governor Knowles agreed that the enlarged BP would be too dominant, and demanded some divestiture. Browne brushed these negatives aside. Alaska, he assumed, wanted a deal, albeit with slight modifications; as he saw it, the real hurdle was obtaining the FTC’s approval.
For years, Browne had prided himself on being a master of American politics. After living in Cleveland, studying at Stanford and mixing with Washington’s power brokers, he would take no lessons about America’s financial culture. Robert Pitofsky, the FTC’s erudite chairman, he believed, would give his blessing to the merger with minimal conditions, in the same manner as the Amoco deal. The FTC’s criteria were to prevent the elimination of competition in marketing and refining. The Commission had never shown any concern about upstream — production in the oilfields — because prices were set by the world markets. Convinced by his lawyers that Pitofsky could not change these criteria, Browne hoped that the FTC would approve the Arco deal at the beginning of December, although the ExxonMobil merger could delay his timetable. The first warning of problems ahead was Pitofsky’s declaration soon after Exxon’s merger was announced, “There’s now a pronounced trend towards concentration and we have to be concerned about that.” Browne ignored that comment, but could not disregard another observation from the FTC’s director of competition that BP’s merger with Arco would “cement market power and harm competition” for gasoline on the West Coast.
The negotiations with the FTC were entrusted by Browne to Larry Fuller as “BP’s man in Washington,” assisted by John Gore, a BP lobbyist on the Hill, and Byron Grote, another of Browne’s favorites. For weeks the three did little, and reported nothing. Fuller in particular was hapless, but Browne was unconcerned — until Pitofsky delivered a bombshell. The merger, he ruled, would not be approved unless Arco’s Alaskan interests were sold to another oil company. His reason was that the US West Coast, especially California, relied on Alaskan oil, and that competition would be jeopardized by BP’s dominant position in Alaska. Browne’s whole rationale for buying Arco was threatened. He was seen to shudder.
Browne and Bowlin were assured by their lawyers that Pitofsky was legally and factually wrong. He was conjuring an image of the oil market on the West Coast as sealed off from the rest of the world. That was nonsense, the lawyers explained. The oilmen believed that Pitofsky could be persuaded that the West Coast would never be a victim of a squeeze from Alaska, which only supplied 28 percent of its oil, and oil could be imported from anywhere in the world.
Pitofsky’s decision, Browne knew, could be challenged both politically and legally. While an appeal was prepared, he ordered his staff to start lobbying against Pitofsky in Congress and the White House. John Gore returned from London to offer Fuller, Bowlin and Bob Healy, Arco’s experienced lobbyist, “a list of talking points to push on Capitol Hill.” “One idea is that we should urge swift approval,” said Gore, “because 2000 is coming and we must be ready for the Millennium Bug.” Healy roared with laughter. “The FTC could say then wait until after 2000.” Gore was unamused: “We have to do this because that is what John Browne wants.” No one, Byron Grote reminded them all, said “no” to John Browne. “We’re going to spin it in this way,” he ordered. Healy became disenchanted that while Bowlin and Arco’s directors waited impatiently for big payoffs regardless of the company’s fate, the British refused to listen to any American advice. He experienced this obstinacy again during Browne’s next rushed visit. After cruising through the offices of senators and congressmen involved in the oil business, Browne sat in BP’s Washington office expressing his frustration. Although he was greeted as a star, the politicians were unwilling to help. “Don’t they know who I am?” he shouted at Healy. “Why don’t they do what I want?” Healy was nonplussed by his truculence. “I can’t understand why this can’t be done,” Browne continued. “Why is this a problem?” Browne did not grasp, Healy realized, that despite his fame he remained an outsider in America.
Browne decided that there was no alternative to confronting Pitofsky himself. The genial lawyer welcomed the chance of meeting the oil aristocrat and Peter Bevan, his legal adviser. In an unfailingly civilized atmosphere, Browne adopted what one observer called “The olde William the Conqueror view that ‘We know something you guys don’t know because we’re taking over.’” “You’re acting against the law,” he politely admonished Pitofsky, claiming he had misinterpreted the West Coast oil market. Smiling, the regulator replied, “I wrote the laws.” Browne had failed to glance at the bookshelves. Had he done so, he would have noticed that the fourth edition of Cases and Materials on Trade Regulation was edited by Robert Pitofsky. Browne was arguing with the author of America’s standard textbook about monopolies, competition and trusts. In a landmark case, Pitofsky had persuaded the Supreme Court that takeovers should be judged by the trend toward a monopoly in the market. No one had briefed Browne that Pitofsky had been appointed as head of the FTC by Bill Clinton, an admirer, who had used his textbooks to teach the antitrust course at Arkansas’s law college. “Be moderate but aggressive and undo the FTC’s dormancy during the Bush years,” the president had urged Pitofsky during their meeting to confirm the appointment.
John Browne’s crisp and forceful manner did not offend Pitofsky as much as Peter Bevan’s limited understanding of the law. His visitors’ ignorance about the opposition to the takeover on the West Coast was as damaging as their tactless referral to his approval of the Amoco-BP merger. Much, Pitofsky explained, had changed since then. He had welcomed the first merger, which would introduce BP into the market as a strong competitor. “Regulators realize that bigness isn’t necessarily bad,” Philip Verleger had recorded. But in 1998 there had been 14 oil companies. Now there were 12, and with the certainty of more mergers there was a problem, explained Pitofsky, of preserving competition. Browne barely listened. Convinced that nationalistic prejudice was deciding the fate of his cherished deal, he expressed his anger about formal advice given by the FTC’s senior lawyer to Pitofsky: “We should not allow BP to control Alaskan oil,” he had written. “I don’t think the proposed combination of BP and Arco is good for consumers.” Browne challenged his objectivity. “We offer concessions and they change the rules in the middle of the game,” he complained. Unless the FTC gave formal approval, he threatened, the deal would be consummated and the FTC would have to fight BP in court to secure its termination. Irritated that Browne had not noted the views he had previously expressed publicly, Pitofsky regarded Browne as a bit of an opportunist. “That’s why we build courts, Mr. Browne,” he smiled. “If you think we’re wrong, go and try to persuade a judge.” The comparison with Lee Raymond was not flattering. The American had always listened to Pitofsky’s questions and, unlike Browne, gave unambiguous answers.
Browne returned to BP’s office enraged. Looking for culprits, he blamed John Gore for ignoring the FTC and “the political dimension.” Next, he cursed American nationalism and suspicion of foreign oil companies. “They’ve gone too far,” he griped. “They don’t see the world as a single market.” He scorned Bowlin for focusing on his payoff and ignoring Washington. Finally, he took comfort from Bowlin’s quip, “Pitofsky’s looking at shadows,” and flew home.
Searching for a way to turn the tide, Rodney Chase telephoned Healy from London. “John Browne has spoken to Tony Blair,” he reported, “and Blair is fully engaged to talk
to Clinton, who will speak to Pitofsky, and this will be sorted out.” Healy laughed. “Clinton will never call Pitofsky. John Browne needs to get real and stop tearing his hair out.” Turning to John Gore, whom Bowlin and Healy rated as a substandard lobbyist, Healy complained, “The problem is you guys. It’s always ‘We know best.’ You have a bizarre British fantasy about the way this city works.” The news from the White House was predictable. Sandy Berger, the national security adviser, warned that the president would refuse Blair’s request to intervene. “John’s a terrific articulator and a lousy closer,” Rodney Chase eventually admitted to Healy. “I’m always fearful when he does things alone.”
During November, Browne became anxious. Since July oil prices had risen from $20 to $27. Stocks were dwindling and production had fallen to 72.3 million barrels a day as OPEC’s cuts materialized and Iraqi supplies diminished. The price volatility, wrote Joseph Stanislaw, a cofounder with Dan Yergin of the energy consultants CERA, was caused by sharp changes in the world’s economy, new technology and more consumers. New sources of oil and deregulation, Stanislaw foresaw, would increase competition, expand privatization among the oil producers and eventually reduce prices. Tony Hayward, BP’s director of exploration, echoed Stanislaw’s optimism that Russia and the Caspian, like the North Sea and Alaska in the 1980s, would be “the new salvation against OPEC”; and these new supplies would be augmented by previously hostile countries including Algeria, Libya, Kuwait and Iran “reengaging” and welcoming the return of Western majors. Those mistaken assumptions mirrored John Browne’s similar misunderstandings about BP’s position in America.
After contemplating threats about deadlines, over Christmas Browne decided on a showdown. On January 13, 2000, BP announced that the merger would be finalized within 20 days. Pitofsky retorted that the FTC would block the deal in court. On January 30, Browne backed down and offered concessions. His tactics backfired. BP, the FTC’s staff told Pitofsky, had never proved that the merger would boost efficiency, or disproved their conviction that BP’s monopoly would “eliminate the greatest threat to the perpetuation of that power,” that is, competition. Two days later the FTC voted by three to two to block the deal by applying for an injunction in San Francisco. The first hearing was due on March 10. Browne vowed to fight in court. His tactics drew no praise, and his plight deteriorated.
To Browne’s dismay, although Alaska’s politicians had finally approved the takeover subject to conditions, BP’s rivals were encouraging West Coast politicians to question the company’s motives. Lee Raymond was heard commenting about Browne’s ambition to decide the fate of a Californian company and voicing concern about BP being poised to become America’s biggest oil producer. The state attorneys general in California, Washington and Oregon, anticipating elections, were encouraged by local refiners and, some suspected, Exxon’s lobbyists, to file lawsuits in early February 2000 opposing BP’s activities. Half of the West Coast’s refineries, the three argued, were geared to higher-priced Alaskan oil, and BP had been accused for years of squeezing the market by selling Alaskan oil to Japan. BP’s assurances, they claimed, could not be trusted, if only because Browne’s promise to Larry Fuller about a partnership of equals in the Amoco merger had proved to be worthless. These antics infuriated Browne. Emotion, he believed, was overwhelming the facts. The majority of the West Coast’s crude was not imported from Alaska, and BP had no refineries on the West Coast, which would give it the power to control prices. Pitofsky was unpersuaded. If BP’s complaint ever came to court, he told Browne, he would show that BP had exported Alaskan crude at a loss to Asia and to other regions in the US to squeeze refiners on the West Coast.
The prospect of a protracted court battle alarmed Alaska’s Senator Ted Stevens and Governor Knowles. Pitofsky’s “single-handed effort” to scuttle the deal, said Stevens, threatened Alaska with “bankruptcy if this drags on for three or four years.” Alaska’s fate, said Knowles, would be put into “a deep freeze” by “a distant court.” But Knowles was outmatched by the three West Coast state governments. “You have to do what Pitofsky wants,” Bowlin told Browne the following day. “Pitofsky sees it my way and the merger will go through,” Browne stubbornly replied. “Are you sure?” asked Bowlin. Puzzled, Bowlin called Pitofsky. “You do it my way or it won’t go through,” Pitofsky warned him. Bowlin was flummoxed. Despite having spent so much time in America, Browne did not understand the system. The reason, Bowlin assumed, was Browne’s global sense of himself, his belief in his ability to define the problem and find the solution. Bowlin nevertheless remained loyal to Browne, until he read newspaper reports that the delay in the merger was driving Arco toward bankruptcy. “That’s a blatant lie,” stormed Bowlin furiously. “Our credibility is damaged.” Summoning Byron Grote and John Gore to Arco’s office, he told them, “That’s damned untrue and a dumb thing to do. You’re stupid to start something fallacious and I’m going to correct it.” Gore says he cannot recall the episode, while Grote would not comment. Around Washington, in Bowlin’s opinion, the two men had become tagged as arrogant and of “low intelligence.” “They’re no good at mixing and mingling,” decided Bowlin, “and that’s cost good relations with the government. Now it’s gotten worse. Their integrity is in question.” Finding a solution to the stalemate was easy. Without telling Browne, Bowlin called Pitofsky to arrange a meeting. Abandoning any loyalty to Browne, he directed Pitofsky to a clause in the merger agreement that allowed Arco’s Alaskan interests to be sold to another company. “Will this break the deadlock?” he asked. Pitofsky nodded.
Ten months after the agreement was signed, Bowlin told Grote, “Time to offer up Alaska.” In London, Browne recognized that Alaska, which had formerly been seen as the jewel, had become the albatross. Reluctantly he acknowledged that under the agreement, BP was liable to pay billions of dollars in penalty fees if the merger was abandoned. “We’re fucked,” Browne told aides in his London office. “We’ve lost the prize.” Pitofsky had won. There was no choice but to sell half of Arco’s Alaskan production and a share of the pipeline. Soundings had already identified that James Mulva, the president of Phillips, would buy Arco’s turf for about $7 billion. At $3 a barrel, Mulva had snatched a bargain and the resurrection of his sliding career. “It’s one of the most attractive transactions that we’ve seen in a long time,” he commented. Blessed with that windfall, in 2001 he could merge Phillips as an equal with Conoco and become chairman of the world’s sixth-biggest oil company. Mulva’s triumph intensified Browne’s pain.
Shortly after the Alaskan deal with Phillips was announced, ExxonMobil notified Browne that proceedings would be launched to block the sale. Unknown to BP, in 1964 Arco had granted Exxon first refusal if its Alaskan fields were ever sold. ExxonMobil wanted to exploit that lever to assert control over the whole Alaskan operation. Harry Longwell, ExxonMobil’s respected executive vice president, met Bowlin to discuss how Exxon rather than BP could operate the North Slope. “No one has spoken to us about operatorship,” said Longwell. “This is of enormous importance and no one is speaking to us.” Bowlin was unsurprised by the familiar Exxon “mistake-free holistic approach,” but was jolted by Longwell’s hardball demands. “When a Brit farts, the sun shines out of his face,” was a favorite Exxon expression. Longwell’s measured antagonism appeared to confirm the misgivings that the American giant had encouraged opposition to the merger. Old suspicions about Exxon were reawakened. Over 30 years earlier, after oil had first been discovered in Alaska, BP had suspected that Exxon was deliberately delaying production to avoid competition with its other American oilfields, and was encouraging conservationists to protest about the environmental damage that would be caused by a pipeline, mentioning in particular interference with the migration of the caribou. Nothing had been conclusively proved, except that fighting Exxon was a thankless business. Now Exxon was seeking an injunction in a Los Angeles court to block the Arco-Phillips deal. Capitulation was Browne’s only choice. The ownership and operation of Prud
hoe Bay was realigned among BP, Exxon and Phillips. Exxon would become the biggest oil producer, while BP received the largest share of natural gas.*
“We didn’t really need Alaska,” Browne told his board of directors at the next meeting in London. He did his best to gloss over any impression that he had behaved rashly. One member privately recorded, “John is not sulking in a corner. He concealed any impression that he had behaved irrationally.” Others concluded that his explanation resembled the emperor’s new clothes. “Everyone knows it’s a mistake,” one director admitted, “but he was not confronted with dismissal. There was no postmortem.” The giant was certainly diminished. BP was relegated to rank as number three among the oil majors. The value of the deal would be rescued as oil and gas prices rose. Unnoticed by the board was the FTC’s warning that BP’s inheritance of Arco’s pipeline and storage interests in Cushing could excite suspicion about undue influence over worldwide crude prices.
In Los Angeles on April 14, 2000, Mike Bowlin read a news agency report: “FTC Approves BP-Arco Merger.” While the negotiations had been dragging on, oil prices had risen from $10 to nearly $34 in March, but had then gone down to $22. By October they would rocket back to $36. This volatility, Bowlin concluded, proved Arco’s inability to survive. He did not make a final call to Browne before bidding farewell to a few people and handing over his office to Byron Grote. The time for champagne had long passed. He drove home to Pacific Palisades. “Will you put Miracle-Gro on the roses?” his wife asked. With a $27.6 million payoff, Bowlin had no reason to work for the remainder of his life. Most of Arco’s executives had also departed with handsome payoffs. The integration of Arco into BP, they knew, would be ruthless. Eventually, Browne visited Los Angeles to host a reception for the city’s civic leaders. “You should move your headquarters from London to LA,” he was urged by the mayor. “Maybe we could,” he replied. Browne did not reveal that Chicago rather than Los Angeles would be BP’s center of operations in America, although curiously he decided that neither the Windy City nor any of the trophies inherited from Arco and Amoco merited a stopover during his visit.
