Private Empire: ExxonMobil and American Power
Page 22
These investments in skeptics of the scientific consensus coincided with what at least a few of ExxonMobil’s own managers regarded as a hypocritical drive inside the corporation to explore whether climate change might offer new opportunities for oil exploration and profit. One of ExxonMobil’s most accomplished earth scientists, Peter Vail, had won acclaim for his insights into how changes on the earth’s surface affected ocean levels and other geological shifts. Vail had developed a calculation known as the Vail curve to describe some of these ocean events. In the ExxonMobil upstream division in Houston, scientists in charge of finding new deposits of oil and gas began to explore whether Vail’s scientific insights might give them a leg up in exploration by allowing them to predict how climate change—if it did materialize—might alter surface and ocean trends and lead the corporation to new oil finds. “So don’t believe for a minute that ExxonMobil doesn’t think climate change is real,” said a former manager involved with the internal scientific review. “They were using climate change as a source of insight into exploration.” This work remained unpublicized.
A raiding party of about four dozen arrived at ExxonMobil’s headquarters in Irving, Texas, shortly before eight in the morning on May 27, 2003. The raiders divided themselves into three units. The first group pulled up at the main entrance in two panel trucks marked “ExxonMobil Global Warming Crimes Unit.” They scrambled out, blocked the driveway, and chained themselves to the trucks in front of the gate. A second team wearing business suits and toting briefcases arrived at the maintenance gate at the rear of the one-hundred-acre campus. They cut a lock and drove inside in two rented Jaguars. Two vans pulled up at the delivery gate carrying the third unit of attackers. Most of that group had dressed in tiger costumes, mocking Exxon’s old “Put a tiger in your tank” advertising slogan. They unpacked a ladder and a raft and climbed over the gate, chaining it shut behind them. Some of them dragged their raft to the pond within view of the executive suites and set themselves afloat. Other tigers climbed onto the roof, where they unfolded a banner that declared ExxonMobil’s headquarters to be a global warming crime scene and tossed around a balloon designed as a globe.
The protesters wearing business suits drove their Jaguars across an unpaved road, entered the employee garage, and found their way inside the headquarters building. They fanned out and offered spontaneous lectures and leaflets on climate change to bemused ExxonMobil executives and staff. Two activists in tiger suits also made it inside the headquarters. Some of the oil corporation’s employees thought a terrorist attack might be under way. The Irving Fire Department eventually brought in one of its ladder trucks to remove the tigers on the roof.
It had taken Greenpeace three months and several tens of thousands of dollars to plan the raid. It did so in strict secrecy. The group’s activist coordinator, Maria Ramos, had dispatched a recruiting notice seeking those who might be interested in “challenging the world’s largest company . . . and engaging in guerrilla tactics.” One of the volunteers, Anne Nunn, traveled from Australia, where she had recently completed a raid on a Mobil tanker off the Australian coast. The Irving raid was timed to influence news headlines before ExxonMobil’s 2003 annual shareholder meeting; it succeeded. “If you’re a fringe, radical organization like Greenpeace,” said Tom Cirigliano, of the corporation’s public affairs department, “you need a target, you need an enemy, and you need a villain.”10
Increasingly, inside ExxonMobil, the corporation’s image strategists reflected upon whether they could find some way not to play the role Greenpeace had assigned them. The raid provided additional evidence, if more was required by this time, that Lee Raymond’s visibility on the climate issue had drawn extraordinary attention that was unlikely to dissipate. The attention had reached a point where it was undermining Raymond’s own cause. ExxonMobil’s many allies in Washington who opposed the Kyoto Protocol on economic and fairness grounds—utilities, carmakers, free-market conservatives in academia and journalism—found themselves tarred by the accusation that all of their arguments might be merely a front for the oil industry’s largest corporation.
ExxonMobil executives consoled themselves by saying that the Greenpeace campaign was just part of the price of doing business in the modern oil industry. In the marketplace of nonprofit fund-raising, ExxonMobil’s notoriety offered an attractive opportunity for environmentalists to raise money by promising to hold Big Oil to account, and there was nothing much they could do about that.
The corporation’s executives did not have to passively accept Greenpeace’s assault, however. After the Irving raid, ExxonMobil approached its Greenpeace problem as an aggressive litigator would. The corporation encouraged the Dallas County district attorney to prosecute fully the Greenpeace protesters who had participated in the Irving action. ExxonMobil also sued Greenpeace and thirty-six individuals who had been arrested on its campus. By threatening fines and jail terms, the corporation eventually won a seven-year standstill accord in which Greenpeace agreed not to commit any crimes while campaigning against the corporation. As a result of this settlement, the group’s anti-Exxon campaign migrated from newsmaking direct action and civil disobedience into online publishing.
Investigators from the Internal Revenue Service turned up at the Chinatown office in Washington to conduct an audit. A small nonprofit group called Public Interest Watch had raised questions with the I.R.S. about whether Greenpeace was compliant with federal laws governing groups that received tax-deductible contributions. Greenpeace passed the audit and opened its own investigation of Public Interest Watch.
The group’s tax form, filed about two months after the activists in tiger costumes had scaled the Irving headquarters’ roof, showed that a single donor was responsible for $120,000 of Public Interest Watch’s $124,000 in annual revenue: ExxonMobil Corporation.11
As Raymond battled Greenpeace, the international oil company he most admired after his own, Royal Dutch Shell, stunned stock market investors by revealing that it had overstated its true proven reserves of oil and gas; the company eventually calculated that it had puffed up its holdings by 4.35 billion barrels of oil, an amount equivalent to more than a fifth of ExxonMobil’s total proved reserves worldwide. Three top Shell executives resigned. The scandal made plain that the pressure on the very largest international oil companies to replace reserves in the era of resource nationalism had become so severe that it could induce grotesque distortions.12
Shell’s revelation galvanized regulators at the Securities and Exchange Commission in Washington to look at reserve counting and reporting practices by major American oil corporations. That review in turn brought fresh attention to a practice ExxonMobil had gotten away with for many years: The corporation still claimed each winter in press releases and in Wall Street presentations that it had an unbroken record, dating back to 1993, of replacing, through the discovery and purchase of new reserve additions, at least 100 percent of the oil and natural gas it pumped or otherwise disposed of each year. But the assumptions ExxonMobil used in making these public claims did not conform to S.E.C. regulations—and the commission and its staff had done nothing, under either the Clinton or Bush administration, to force ExxonMobil to modify its public statements.
To protect stock market investors from oil operators that inflated their reserves to boost their share prices, Congress had mandated in the Securities Act of 1933 and the Securities Exchange Act of 1934 that Washington regulators oversee how publicly traded companies reported their numbers. The S.E.C. had later issued detailed regulations, under Rule 4-10, about how a corporation such as Exxon should count its oil and gas holdings and report them in mandatory S.E.C. filings. Among the regulations: To report proved reserves, a company had to show there was a “reasonable certainty” that the reserves would be “recoverable in future years from known reservoirs under existing economic and operating conditions.” That meant, too, a company had to be able to transport the oil to market by sea or pipeline at a profit-making cost. This was obvi
ously an imprecise standard—the reserves being counted were by their nature difficult to measure scientifically, so oil companies retained, by regulatory design, some discretion to decide what was proved and what was not.13
To calculate the economic viability of reserves, companies were required to mark oil prices on the last date of every year. Also, certain forms of oil, such as bitumen or oil sands extracted by techniques that resembled mining, could not be counted. The latter rule remained the main reason ExxonMobil’s public claims about reserve replacement differed from the disclosures it made officially in S.E.C. filings. If ExxonMobil had not disregarded the S.E.C. oil sands rule, it would not have been able to boast of an unblemished record. “This marks the tenth year in a row that we’ve exceeded 100 percent reserves replacement,” Raymond declared in a press release disclosing the corporation’s 2003 results. Yet that was true only by using ExxonMobil math. According to S.E.C. rules, the corporation had replaced reserves fully in only two of the previous four years. And the fudging involved issues that were material to investors: As Raymond put it himself, “Continued high-quality additions to ExxonMobil’s resource base are the foundation of our long-term profitable growth.”14
As Wall Street focused in on reserves and as ExxonMobil implemented O.I.M.S., Raymond tightened and made uniform the corporation’s reserve counting rules. The system’s stated goals included objectivity and rigor: “A well-established, disciplined process driven by senior-level geoscience and engineering professionals . . . culminating in reviews with and approval by senior management. Notably, no employee is compensated based on the level of proved reserves.” Such bonus incentives for managers involved in reserve counting had apparently contributed to Shell’s overstatements; ExxonMobil eschewed them even before the Shell scandal broke.15
By all accounts, Raymond genuinely wanted order and accuracy. In financial management, for example, to complement O.I.M.S., he created the Controls Integrity Management System, or C.I.M.S., a financial audit and risk management system designed to identify and root out managers who cut corners, massaged revenue reporting, or fiddled with expense accounts. Many corporations tolerated split contracts or other gray-area accounting practices designed to smooth out quarterly earnings reported to the public, so that shareholders might see a picture of stability. At ExxonMobil under Raymond, such accounting manipulation could be a firing offense. Raymond would also order employees terminated over tiny expense irregularities.
On oil and gas reserve counting, however, the ExxonMobil system tolerated more flexibility. S.E.C. rules effectively allowed oil companies to manage the timing of announcements of new proved reserves. This helped ExxonMobil control when new proved reserves were revealed publicly, and by doing so aided its effort to portray a steady story of year-by-year reserve replacement for Wall Street. ExxonMobil’s internal rules held, for example, that for reserves to be counted as proved, the corporation’s management must have authorized investment for their development. This meant, as a practical matter, that the Management Committee could adjust the annual timing of proved reserve additions by synchronizing investment decisions. “The key to reserves, among other things, is when you can actually book them,” an executive involved with the process said. “You can’t and you shouldn’t book reserves until you’ve really made an investment to develop the reserves. So consequently, if you’ve figured out a way to manage the system properly, consistent with the continuity of capital budgeting, you can have a pretty smooth reserve identification over time.” As the Wall Street analyst Mark Gilman put it: “If you are conservative about when you book reserves during the development of projects, in effect you create an inventory going forward” that can be declared as new proved reserves as the timing of reserve replacement announcements requires in order to present a smooth picture.16
There would be nothing illegal or even improper about this managed timing if it were linked to a rigorous internal counting system, such as ExxonMobil possessed; if the counting conformed to S.E.C. rules; and if the results were communicated honestly to investors and the public. Characteristically, ExxonMobil’s internal system might have been the most rigorous in the industry, although neither the S.E.C. nor any other regulator had the capacity to confirm that through auditing. Also characteristically, the corporation rejected the precepts of government regulators and communicated in public on its own terms.
Besides the S.E.C. rule that prohibited the counting of oil sands, the other regulation that galled Raymond was the one dictating how a corporation should determine whether proved reserves were economically viable. The S.E.C. held that the viability of reserves should be judged against prices on the last day of the year, December 31. Raymond thought that was dumb: ExxonMobil ran its business by thinking about price ranges and averages, not one arbitrary day’s price. So in public and to Wall Street, he used his own system of average prices to calculate whether reserves should be counted.
After the Shell scandal, the S.E.C. issued new “guidance” to ExxonMobil, saying that it should use the year-end pricing rule, at least in commission filings. Raymond now grudgingly reported the S.E.C. number alongside his own. For the first two years, the consequences of following S.E.C. regulations were highly unfavorable, amounting to a total reduction in ExxonMobil’s proved reserves of oil and gas liquids of 1.27 billion barrels. Even as he noted the S.E.C.-mandated numbers, Raymond went right on issuing press release claims that ignored the rule. With other industry executives, he also initiated a Washington lobbying campaign to have the rules changed.17
In some later years, if ExxonMobil had followed the S.E.C. rules, the corporation’s reserve replacement figures would have been higher than under its own system of counting—it would have looked better. The corporation ignored the advantageous swings in the same way that it ignored the disadvantageous ones. Overall, the two rules ExxonMobil seemed to find most onerous—the oil sand prohibition and the pricing formula—deprived the corporation of the claim that it had smoothly replaced reserves, year after year, since Raymond became chief executive. The picture under S.E.C. rules, instead, although it was not one of disastrous decline, was one of volatility, which implied a degree of change and insecurity in the reserve arena. This in turn happened to reflect a broader truth about the challenges confronting major international oil corporations.
Raymond certainly had a case on the merits: The S.E.C. prohibition of oil sands could be regarded as outdated, and the pricing rule could be dismissed as too arbitrary. Investors might benefit from revisions that better aligned S.E.C. regulation with the rising importance of oil sands. ExxonMobil’s position would have been more defensible, however, if it had communicated to investors and the public more forthrightly, in alignment with S.E.C. regulations, while it petitioned for regulatory change. “Exxon seems incapable of simply stating, ‘We did not replace all of our reserves this year, but we have a heck of a lot of reserves anyway, and we convert them into cash at a more efficient and consistent rate than any of our competitors,’” wrote Steve LeVine, the journalist and analyst who first called attention to the gaps in ExxonMobil’s public reporting. “Nope, it has to say that it’s replaced its reserves for [ten years straight] when, legally speaking, it hasn’t.”18
The dodge reflected on how the need for reserves pushed the corporation toward higher-risk frontiers: Chad, Equatorial Guinea, and deep ocean waters where drilling technology and safety procedures had to be reengineered on the fly. The reserve replacement conundrum pushed the corporation, too, toward unconventional resources like the Canadian oil sands, where innovation and uncertain new drilling techniques would be required to make money at the rate ExxonMobil executives and shareholders expected and where the environmental risks were higher than normal. It also led Lee Raymond to reflect regularly on whether it might be possible to find a new way back into the huge oil zones where abundant crude could make reserve-counting rules irrelevant, as they had been for Exxon and Standard Oil for so much of the twentieth century, when the corpor
ation was awash in equity oil in the Middle East.
Above all, any global oilman thinking big coveted access to Saudi Arabia.
Nine
“Real Men—They Discover Oil”
Lee Raymond had always believed that he could rationalize the $81 billion Exxon paid for Mobil by driving operating costs down enough to justify the combination for shareholders. Assessing the true long-term value of Mobil’s sprawling oil and gas assets was difficult, however—and that would determine the strategic payoff from the merger. The long-term value of Mobil’s holdings would be a function of many factors—not just how much oil and gas actually lay in the ground when all the wells were drilled, but also the evolution of global markets, geopolitics, and the advent of new technologies that might unlock value from reserves previously thought to be worthless. After the merger, Exxon’s geologists, engineers, and marketing specialists tore through Mobil’s business divisions on a quest to understand the assets they had taken on. Gradually, they came to appreciate the astonishing value of one asset they had not comprehended adequately at the time of the merger deal: Qatar’s North field.