by Tom Bower
The momentum was strengthening Andy Hall’s credibility. Arjun Murti, an analyst at Goldman Sachs in New York, had examined the latest data, which showed that energy demand in 2004 had outpaced the 10-year trend. Consumption had grown by 4.3 percent, the highest increase since 1984. Over the previous three years, Chinese imports of some refined products had risen by 65 percent. Murti was convinced that this was the prelude to a “super spike.” The moment was propitious to make a headline. “In a few years,” Murti announced on March 30, 2005, “oil will hit $105.” Outrage and skepticism rippled across the industry. Few believed that Murti’s bombshell was based on facts. Executives of the oil majors “would not bet” on Murti because the economy “would not take it.” Some suspected that Murti’s bolt from the blue was a ploy to help Goldman Sachs’s traders. In 2004, Goldman Sachs and Morgan Stanley had together earned an estimated $2.6 billion by trading energy commodities. The suspicion of self-interest was rebutted by Hank Paulson, the bank’s chief executive, who was obliged to defend Murti’s honesty until, toward the end of the year, his analysis had gained respectability. Even Guy Caruso was revising his opinion. The oil peakists’ criticism of his excessive optimism, he realized, was partially justified. His forecast of higher production by the national companies was wrong, and his confidence in extra production had been dented by the “difficult political environment.” “Peak oil is not the issue,” he nevertheless insisted. “It’s about investment. But I now realize that there isn’t a silver bullet.” Even if the oil majors were given access to exploit the difficult reserves to produce additional oil, there was no evidence of their willingness to invest an additional $1 trillion every year to produce the extra 40 million barrels a day that Caruso anticipated. In his opinion, the majors were willing their own decline. By buying back shares rather than investing in exploration they appeared to be perpetuating a downward spiral.
But reports from the Gulf of Mexico suggested the opposite. BP had found a new elephant on August 31, 2006, at Kaskida, and Chevron reported that a strike in Jack 2 suggested a field containing “billions of barrels of producible oil and gas.” New technology was opening up new fields on the Abyssal Plain, beneath 10,000 feet of water and at the edge of the salt line, where explorers would drill 32,000 feet, or more than six miles, into the rock to find whether the oil had been trapped. Whatever was discovered would benefit from new subsea hubs, which increased every well’s productive life by two years. Recovery, which used to be 25 percent, had risen to 35 percent, and would certainly one day reach 60 percent, and possibly 80 percent. Farther south, Petrobras was on the verge of confirming the discovery of a field at Tupi, 175 miles off the coast of Brazil. Trapped under a mile of salt, the oil was in a field 500 miles long and 125 miles wide, encouraging the geologists to anticipate that Brazil’s oil wealth could equal Venezuela’s, or even Saudi Arabia’s. To extract that oil would require endless inventions. First, because the salt was like “plastic,” and collapsed once contacted by a drill; and second, because the oil was acidic, metallic and under low pressure. Brazil would have to develop equipment to pump the oil from the reservoir, but if 200 billion barrels of extractable oil were discovered offshore, the oil peakists would need to revise their forecast of doom.
Chapter Eighteen
The Struggle
RESOLVING THE CONTRADICTIONS of peak oil depended on the chairmen of the oil majors. Although they owned just 6 percent of the world’s reserves, the executives, including David O’Reilly, the 60-year-old chairman of Chevron, set the tone about whether to invest or to retrench across the globe. Competing against Exxon, Shell, BP and Total, O’Reilly faced the challenge of preventing Chevron from tipping into the second division. In the maelstrom of American and European politicians seeking security of energy supplies, Chevron became a litmus test of whether smaller oil companies were doomed. Hidden away at the company’s headquarters in San Ramon, a nondescript backwater near San Francisco, O’Reilly and his predecessors had plotted during the lean years to restore Chevron’s fortunes. Ranking fifth among the oil majors, Chevron had struggled for the past 25 years to assert its credibility and survive. Decline was inevitable if it excluded itself from the annual $1 trillion cost of finding new oil. Bankruptcy or bonanza was the perpetual risk. While O’Reilly emphasized operational excellence, he could not deploy the financial weight of Lee Raymond or Jeroen van der Veer, and he lacked John Browne’s vision and commercial cunning. His inheritance, however, was blessed by a stroke of luck.
An unexpected bonus from Chevron’s merger with Gulf in 1984 was the offshore oilfields in Angola. Chevron’s geologists had not appreciated the work of Hollis Hedberg, Gulf’s geologist. Sailing up and down Angola’s coast, he had selected what he regarded as the ideal acreage. “He had the vision of finding the equivalent of the Gulf of Mexico off Africa,” said an admiring Chevron executive, delighted that in the decade after the merger Chevron had exchanged its ranking with Texaco. In 1985, Texaco was bigger than Chevron, but by 1999, profiting from the Angolan discoveries and pumping 240,000 barrels a day in Kazakhstan, 10 times more than in 1993, Chevron was double Texaco’s size, and ranked as America’s third-largest oil company. In order for the company to grow still further, Ken Derr had wanted to buy either Amoco or Arco. Thwarted by Browne in both cases, the only remaining possibility was a merger with Texaco, an option he regarded with distaste. Texaco had a reputation as the meanest and the most disliked of the Seven Sisters. “If I were dying in a Texaco filling station,” said a Shell man, “I’d ask to be dragged across the road.” Derr would have echoed that sentiment. During Chevron’s collaboration with Texaco in the Gulf of Mexico, Brazil and West Africa, he had observed how under Peter Bijur the company had become faded, defensive and steeped in a military culture. “We send two people to meetings,” critics carped in San Ramon, “and they send ten.”
There appeared, however, to be no alternative after Bijur suggested a merger. Shell had refused to bid for Chevron, and Total was on the verge of buying Elf, France’s biggest oil company. While America was immersed in the Monica Lewinsky affair, France had become preoccupied by its own scandal. A group of Elf executives had stolen at least $259 million from the company over a four-year period; Loïk Le Floch-Prigent, Elf’s former president, had been arrested for fraud and was subsequently imprisoned; and an attractive female employee had confessed that she had offered money and sexual favors to Roland Dumas, France’s foreign minister. To clean up the mess, Total added Fina to its purchases, becoming the world’s fourth-largest oil company. Chevron’s survival, Derr decided, depended on a merger with Texaco. Together, they would be the biggest operator off Angola and in the Caspian, and the second largest in Nigeria. But as a sign of his aversion to Bijur, Derr’s offer in May 1999 was low — just $37.5 billion — and he rejected Bijur’s request to remain as a senior executive. “It was a lowball, cheap proposal,” snapped a Texaco executive. Relations between the two chairmen disintegrated, and in early June their discussions were abandoned. “What I was interested in doing was an opportunity for a marriage, as opposed to selling the company,” commented Bijur after the breakdown. Three months later, Derr retired in favor of David O’Reilly. During that period, Texaco’s share price fell by 9.6 percent, while its rival’s value rose. Bijur’s self-respect was the only obstacle to resuscitating the merger. That was resolved over a round of golf. O’Reilly agreed that Bijur could remain as a token vice chairman, but the purchase price would be reduced to $35.1 billion. In October 2000, the deal was approved. Chevron’s executives, surveying their new empire, worth about $100 billion, with 8.6 billion barrels of oil reserves and the equivalent of 2.8 billion in gas reserves, were comforted by the restoration of “critical mass.” Under O’Reilly’s regime, financial management was improved and the focus on engineering was resurrected. The obliteration of Texaco’s culture was merciless. “Quicker homogenizing” was the headline of the amalgamation philosophy. “You can’t run two cultures,” O’Reilly’s executives d
eclared. “Those unwilling to make sacrifices will have to leave.”
In the race to survive, O’Reilly knew that markets would not judge his performance by the provision of cheap oil or by satisfying a social agenda. The management of money was as important as geology, technology and politics, with a corporation’s executives required to mitigate risks and manage uncertainties. The long-term incentive to search for more oil was always tempered by the short-term cost. Securing guaranteed supplies depended on fostering the corporation’s political and financial interests. Ever since the mergers in the late 1990s and the unexpected price collapse, the oil majors had focused on big projects to meet shareholders’ demands for profits. The importance of earnings did not change as prices rose after 1999 and the majors increased their investment. Between 1999 and 2003, the eight biggest oil companies spent $242 billion in their attempts to find and develop oil and gas reserves, and had replaced 134 percent of their production at a price of $5.18 a barrel.
Despite that success, their influence had declined. In 2004, the five oil majors controlled just 15 percent of oil and gas production. Limited access to oil reserves was only part of the reason. More important was the majors’ retreat from risk. To justify high investment to shareholders, David O’Reilly, like his rival chief executives, needed to satisfy their quarterly scrutiny of profits, which undermined the incentive to take risks. Within the oil majors’ magic circle, conservative decisions based on short-term concerns about prices restricted developing oilfields’ potential. Even proven elephant oilfields required at least four years to develop, and if progress or production faltered, lower profits jeopardized further investment. Ken Derr had balanced Chevron’s fate in the Gulf of Mexico and Kazakhstan; the corporation was not in the league to speculate in Kashagan. Kashagan’s estimated reserves had fallen from “jaw-dropping” initial figures of 25 to 100 billion barrels to between 38 and 60 billion barrels, and had then been further reduced by some experts to 13 billion, while the cost of exploration — $29 billion and rising — was beyond Chevron’s resources. Confronted on one side by the national oil companies’ sovereignty over their oil reserves, and on the other by the oil majors’ financial muscle, Chevron and the second-division companies had good reason to fear decline.
To resist the squeeze, Chevron’s executives bolstered their courage by expressing disdain of the bigger companies. BP and Shell were dismissed as “in decline” and “unwilling to take risks any more.” The playing field, Chevron’s executives said, had “leveled.” Shell was mocked for possessing insufficient “acreage” and having “lost out.” ExxonMobil’s employees were disparaged for their willful ignorance of local customs. “Exxon don’t have people in the country looking at the whites of the locals’ eyes and knowing what’s happening,” was the opinion expressed by one senior executive. “They turn up for meetings in Kazakhstan in blazers and white shirts.” Referring to the Gulf of Mexico, another believed that “Exxon is out of deep water. It’s not a serious player in the Gulf.” Irritated that “Exxon doesn’t play well with the other children,” one Chevron executive concluded, “The Exxon model will break.”
These negative attitudes were born of frustration. Natural growth had become too difficult, especially in America. Uncertainty about US taxes and regulations had earlier persuaded Ken Derr to expand in foreign countries, but breaking out of the straitjacket was a gamble. The usual options, Derr and O’Reilly understood, were either to lead the pack or to invest with the rest. “There’s always someone willing to pay more than us,” O’Reilly said. The smaller oil companies, the Chevron executives reckoned, could rarely negotiate straightforward access to oilfields in Africa or Asia without agreeing to special financial arrangements. Despite America’s statutory obligations requiring corporations to behave scrupulously, there were occasions when ignoring those virtues was critical to prosperity. The alternative to operating on the edge was an uncertain fate, possibly following Amoco and Arco into the abyss. Salvation depended on taking shortcuts.
The integration of Gulf in the late 1980s had temporarily paralyzed Chevron, and had also infected the corporation with an unexpected ethos. Gulf’s executives had succeeded in Angola and Nigeria by paying handsome bribes to local politicians and officials. Chevron’s executives did not reject Gulf’s culture outright. Instead, the senior directors, while adhering to their wholesome scripture, acknowledged the need to adopt Gulf’s methods in the Third World. In West Africa, Chevron was suspected of collaborating with Shell to bribe James Ibori, the governor of the Nigerian Delta state. Both corporations had hired houseboats from the governor, and in return deposited $2.3 million into the account of MER Engineering at Barclays bank in London. Global Witness, an organization dedicated to exposing corruption, accused Chevron of paying “signature bonuses” to politicians in return for securing leases to offshore oilfields. In 2002, at the end of the 27-year civil war in Angola that had cost half a million lives, Chevron, in partnership with ExxonMobil, developed four blocks, each producing around 100,000 barrels a day, and in 2007 it would sign a $5 billion natural gas deal, leading a partnership with Total, BP and ENI. The companies put money into the hands of the dictators with little care for the consequences, except for the shareholders. Other companies, including Elf, had paid corrupt politicians in Congo Brazzaville, Equatorial Guinea and Angola, in cash or by payment to a president’s bank account in Washington, DC, but Chevron’s stance was unusual. The corporation’s senior executives indulged in questionable transactions while publicly extolling probity. “Our responsibility is to make the system as transparent as possible, but it’s their oil and money,” said one senior executive. Nigerian politicians, the most corrupt among all oil producers, were resistant to such transparency. “I can’t make them more transparent than the government wants,” one of Chevron’s senior executives admitted. “We push the ‘transparency,’ but only up to a point and only in private.” They did not push too hard. Knowing that China’s, India’s and Norway’s state oil companies unhesitatingly paid bribes, and anxious to expand Chevron’s oil acreage, the company continued operations in the delta long after BP and Shell had withdrawn because of the region’s perils.
Uncontrolled violence in Nigeria had cut production by 25 percent, or 600,000 barrels a day. Despite the technical problems and political complications, Chevron planned to produce 250,000 barrels a day in the Agbami field, although the estimated costs had risen from $3 billion to about $5 billion. Reality would interfere with the timetable. Sucked into the struggle between the delta’s tribes, Chevron was accused of providing helicopters for Nigerian troops to liberate 200 Chevron workers held by local criminals, and of ending the occupation of the Parabe offshore oil rig by hiring armed toughs. Protestors claimed that the soldiers ferried to the area by Chevron had ransacked their villages and tortured the inhabitants. Summoning the army, according to Chevron, was the only solution. In December 2008 the company was cleared of all charges of human rights violations in connection with the incident.
That was not the company’s defense when it was accused of flouting UN sanctions by paying illegal surcharges through middlemen to profit from the Iraqi “oil for food” program. Over 2,000 companies paid an estimated $1.8 billion in bribes between 1996 and 2003 to Saddam Hussein’s agents in exchange for oil. Chevron, in common with Glencore, Vitol and many Russian and Swiss traders, profited from that illegal trade. Vitol would plead guilty in November 2007 to grand larceny, pay a fine of $17.4 million and promise to abandon the cowboy era and legitimize itself because, with crude so expensive, it, like Glencore, needed banks to finance its trade; Oscar Wyatt of Coastal would be fined $11 million and sentenced to one year and a day’s imprisonment; Chevron paid $30 million to settle corruption charges. Trafigura was also swept into the opprobrium. In August 2006, a tanker chartered by the trader had unloaded cargo at Abidjan, in Ivory Coast, and later dumped toxic waste into the ocean. There were claims that many people had died from the polluted water, and the company would pay
a $200 million settlement to Ivory Coast. In September 2008, Trafigura agreed to pay $30 million in compensation to the victims.
In San Ramon and at Chevron’s office in Houston, the former headquarters of Enron, these infractions were brusquely pushed aside. John Browne’s “Beyond Petroleum” campaign was a template for Chevron’s self-promotion as a socially conscious corporation. Inconsistency was not an issue. The oil majors, O’Reilly and vice chairman Peter Robertson believed, needed to reinvent themselves with new “value propositions,” because their rivals were always willing to pay more. In public, employees were urged to “look at ourselves as invited guests” and “behave properly.” Oil had always been about big politics, but Chevron’s new leaders, publicly espousing Californian values, believed they were inventing a new craft by speaking about “making sense of local politics,” especially in sub-Saharan Africa and Kazakhstan. “We don’t buy people the fish,” staff were told by Peter Robertson, “but we show them how to fish. We have responsibilities where we operate towards employees, communities and the environment. We offer project management for schools, water and services.” Chevron’s image-makers invented a “vision statement” about “people, partnership and performance,” and pledged “to make the world a better place.” Funds were provided to fight malaria and AIDS, but overcoming the reluctance of engineers to work in Africa undermined the Californian virtues. Despite their “sensitivity training,” they arrived at the oilfields on private planes and lived in isolated communities, often offshore, protected by security men. Unsurprisingly, the oil engineers appeared “flash” to local Africans.
