Private Empire: ExxonMobil and American Power

by Steve Coll

  Raymond would eventually quip in private that the North field alone was probably valuable enough to justify the full Mobil merger price, and that everything else that came with the company—all its oil and gas fields in Africa, Asia, and the former Soviet Union—were a bonus. That was an exaggeration, intended in jest, and yet “it would be fair to say that we did not totally appreciate what the scale of it might be,” Raymond recalled.1

  Qatar protruded into the Persian Gulf from the desert landmass of Saudi Arabia; on maps, it looked like a small spruce tree. It was a featureless, flat, barren, sandy, humid kingdom without oases or other natural greenery. At the turn of the twentieth century, Qatar’s native population of impoverished fishermen, pearl divers, and Bedouin Arab herdsmen numbered perhaps five or ten thousand. Even by comparison with the other sparse, isolated emirates of the Arabian peninsula—Saudi Arabia, Kuwait, Bahrain, Oman, and the United Arab Emirates—Qatar had been a backwater. A single family, the Al-Thanis, had ruled the peninsula since 1825. Japan discovered a method for synthesizing pearls during the 1930s, which caused a crash in the global pearl market, leaving Qatar even more isolated and poor. Around the same time, the emirate’s Persian Gulf neighbors discovered and pumped oil, but Qatar lagged. It had been endowed with more natural gas than oil and it lacked the leadership and skills to exploit either profitably. The Al-Thanis feuded among themselves; in 1995, one of the king’s sons, Hamid Bin Khalifa Al-Thani, overthrew his father bloodlessly. As late as 1990, the emirate remained a ramshackle, underdeveloped place, whereas in oil-engorged Saudi Arabia booming revenue after the 1970s paid for California-style freeways, industrial ports, airports, skyscrapers, ornate princely palaces, and shopping malls.

  Geologists knew that Qatar’s North field held natural gas—lots and lots of gas. It held so much gas that it was not easy to estimate the full amount accurately—800 trillion square feet eventually became a common estimate, the equivalent of more than 130 billion barrels of oil. By comparison, Mobil’s highly lucrative gas field in Aceh, Indonesia, held only about 17 trillion square feet, equivalent to just under 3 billion barrels of oil. For all practical purposes, the size of the North field was infinite; it would last for generations, probably beyond the point when fossil fuels would be a dominant source of energy supply for the world economy. After the Mobil merger, Lee Raymond organized a natural gas task force. The paradox its members confronted was that while the North field’s abundance was assured, little had been done to develop it profitably. Why had other corporations failed, and what might ExxonMobil do differently?

  The natural gas industry differed from the oil business in that, during the postwar period, the main challenge had not typically been the search for new fields. The problem instead was to profitably exploit the largest natural gas reserves that were known to exist but were geographically “stranded,” that is, physically disconnected from commercial markets. Pressure and heat formed and trapped natural gas beneath the ground by processes similar to those that formed oil. Much of the world’s gas was mixed up with, or “associated” with, oil deposits. Qatar’s North field was a mother lode of “nonassociated” or freestanding natural gas. There were a handful of proven, concentrated areas of large nonassociated gas reserves in the world: in Qatar, Iran, and Russia. The latter two could use some of their gas domestically, and Russia exported gas to Eastern Europe, where it was a critical source of heat and electricity. Qatar’s gas, on the other hand, was sitting thousands of miles from any customers that might burn it. It would be prohibitively expensive and politically impractical to connect Qatari gas by pipeline to large population centers in Europe or Asia.

  As an energy source, gas had many attractions. It could heat homes, cook food, power turbines to produce electricity, fuel automobiles if the cars were configured properly, and be used to make chemicals and other industrial products. Gas also emitted considerably fewer greenhouse gases than oil or coal when burned. Qatar’s case illustrated one of gas’s major liabilities, however: Its form made it difficult to transport. Oil was a remarkably easy fuel to move around. It sloshed easily into storage tanks; it streamed cooperatively down pipelines; it poured smoothly into supertanker holding bins; it poured out again into refinery pipelines; it flowed out the other side of a refinery as gasoline; and it spilled into tanker trucks for delivery to retail stations. Gravity was oil’s friend. The natural tendency of gas, on the other hand, was to dissipate into the air; gravity was its enemy. Engineers could design systems to transport gas by pipeline easily enough, but for many decades that had been the only practical way to move it from a field where the gas was pumped out of the ground to facilities where it was burned. This meant gas-fired electricity plants, for example, had to be located within economical piping distance of a gas source, whereas an oil-fired plant could use oil from halfway around the world.

  For Qatar, rich in gas but bereft of oil, in the first decades after the Second World War, all this had amounted to an equation that kept the emirate locked in poverty. The only semimodernizing economies within easy pipe distance—Saudi Arabia, Iran, and Iraq—had plenty of their own gas. Qatar also lacked even the basics of a manufacturing economy of its own, such as freshwater and a skilled workforce.

  It had been known since the early twentieth century that, as a matter of chemistry, natural gas could be converted into a liquid and then, after transport, be reconverted into a gas for burning. This process might solve the problem of a stranded-gas holder like Qatar: Its gas could be turned into liquid, loaded into oceangoing tankers, shipped to populated markets, and then reconverted into gas for commercial use. The technology to accomplish this conversion and reconversion at a large scale was unwieldy, however. Britain and Algeria signed the first major commercial liquefied natural gas contract in 1961. A huge refrigeration plant in Algeria cooled that country’s stranded gas into a liquid; ships carried the liquid gas to Britain; and a reconversion plant turned it back into a fuel for electricity. Indonesia soon moved into the L.N.G. industry with energy-starved Japan as a customer; Mobil became the operating partner in Aceh. For years the profitability of Mobil’s L.N.G. business in Aceh was an exceptional success, however. It relied, effectively, on Japan and South Korea, which were industrializing very rapidly but had few hydrocarbons of their own; they were willing to pay high prices for secure L.N.G. supplies. The technology Mobil employed to fill these contracts was very costly, and it seemed that it would be some time before those methods would be economical enough to deploy worldwide.

  Exxon had a troubled history in the L.N.G. business before the Mobil merger. The corporation had built, relatively early on, an L.N.G. plant in Libya and a reconversion terminal at La Spezia, Italy. The Libyan plant proved to be balky and trouble-prone. In the early 1970s, Exxon’s Italian subsidiary became embroiled in scandal when the unit’s president, Vincenzo Cazzaniga, was accused of setting up a web of hidden bank accounts to funnel almost $50 million of Exxon’s revenue to Italian political parties—including a small amount to the country’s Communist Party—to win tax and other favors. Exxon eventually entered into a consent decree with the Securities and Exchange Commission over the matter; the affair soured the corporation’s executives on their Italian subsidiary, and their L.N.G. investments languished.2

  Mobil had stumbled into its gas partnership with Qatar during the 1990s. A substantial number of the oil industry’s big success stories were the product of luck, not brains. Oil executives had flown in and out of Qatar for years, but none of them could think of how to commercialize the North field. Royal Dutch Shell led the global L.N.G. business by the 1990s. Mobil was a second-tier but significant player, because of Aceh. Shell negotiated access to the North field but pulled out in a dispute over financial terms. British Petroleum and the French giant Total moved in afterward and negotiated to build an initial pair of L.N.G. “trains,” the industry term used to describe the giant refrigeration complexes that converted gas into liquid form for sea transport. The consortium struggled with some
of the technical challenges; British Petroleum pulled out. “They had it on a golden plate, but they rejected it,” Abdullah Bin Hamad Al-Attiyah, Qatar’s energy minister, remembered. The Qataris realized there was hardly anyone else in the global oil industry but Mobil who could do the work they wanted. “They came immediately,” recalled Al-Attiyah.3 Lou Noto slipped into the Total deal as a partner, but he also won the exclusive right to build future Qatari gas trains. He structured a long-term sales contract for Qatari gas with South Korea as the customer and handed off the whole project to Lee Raymond at the time of the merger.

  The North field challenge played to Exxon’s strengths: budget- and performance-conscious management of gargantuan engineering projects, combined with profit-maximizing financial planning. In Mobil’s L.N.G. group Exxon also acquired technical expertise it otherwise lacked. After 2000, ExxonMobil committed to multibillion-dollar investments to develop huge new L.N.G. gas trains from the North field as an exclusive 25 percent partner with Qatar Petroleum. Its engineers found that the emirate’s natural gas was of unusually malleable quality—relatively easy to liquefy or to process to separate out other industrial products. This made it cheap to produce. The projects Raymond authorized in Qatar were designed to be profitable if the natural gas they produced sold at just three dollars per thousand cubic feet. Within a few years, prices soared as high as fifteen dollars. ExxonMobil’s direct gas sales from Qatar took place under long-term contracts, so the corporation did not reap all of the benefit of this windfall on spot markets, but its gas-derived profits soared nonetheless. Also, the corporation’s share of profits from auxiliary products manufactured in Qatar, referred to as gas liquids, would soon exceed $1 billion annually. Only ExxonMobil, Raymond boasted to Wall Street analysts, had figured out how to unlock the value of Qatar’s bounty.

  Gas figured increasingly in the search by ExxonMobil to replace the oil and gas reserves it pumped and sold each year. The sheer scale of ExxonMobil’s reserve replacement challenge—its need to find and book oil and gas in equivalent or greater amounts to that which it pumped out and sold—now meant that the corporation “had to find a Conoco every year,” as Raymond put it.4 (In 2001, ConocoPhillips had worldwide revenues of almost $40 billion.) The scale problem was genuine, but it also sounded more and more like an excuse—nobody had forced Exxon and Mobil to merge, and Raymond had advertised the combination as full of strategic advantage. In any event, ExxonMobil’s total portfolio was shifting away from oil toward gas. In 2002, the corporation pumped slightly less oil than it did in 2001; in the first half of 2003, oil production fell slightly again. For Wall Street, ExxonMobil counted oil and gas reserves as a single number, as “oil equivalent barrels.” Analysts converted gas reserves to equivalent barrels of oil with formulas accounting for energy content and price. Yet the truth was that gas was less profitable than oil, equivalent barrel by equivalent barrel. Oil prices averaged about 30 percent more than natural gas on an energy equivalent basis after 1995, and the United States Energy Information Agency projected that this gap would widen into the future. Gas production could be more costly. Customer markets were less flexible, less interconnected. Yet because of resource nationalism and the depletion of accessible supplies in the United States, oil was harder and harder for ExxonMobil to own. The slow migration of ExxonMobil’s reserves from oil to gas did not show up clearly in the numbers the corporation reported to Wall Street—and certainly not in the numbers it emphasized in public and investor presentations—but over time, the higher proportion of gas investments could threaten the corporation’s impressive record of profitability.

  Raymond lobbied in Washington to ensure that the United States had enough big import terminals to handle liquefied natural gas ships. Forecasts by the Bush administration’s analysts at the nonpartisan Energy Information Agency suggested that the United States had only about twenty years’ worth of natural gas supply left under its soil, government analysts then believed. America would soon need to import gas just as it already imported oil. In the United States, in 2003, gas supplied about a quarter of the country’s energy supply, to generate electricity, heat water and homes, and fuel industrial processes.5 ExxonMobil supported a National Petroleum Council study in 2003 that made recommendations to the Bush administration to expand the industry.6

  Raymond had developed a friendship with Federal Reserve chairman Alan Greenspan. The men had gotten to know each other while serving together briefly on the J.P. Morgan board of directors, and then stayed in touch. Raymond impressed his analysis about natural gas on the Federal Reserve chairman: The American economy needed planning to build the facilities to import and reconvert liquefied natural gas in the future. ExxonMobil’s economic forecasters in corporate planning reported to the Management Committee that they expected the global L.N.G. market to double by 2010. ExxonMobil was busy investing in that market worldwide. The global sales force in the corporation’s gas marketing division finalized a contract to ship two billion cubic feet of liquefied gas from Qatar into the United Kingdom, for example. Raymond educated Greenspan about the coming shape of the emerging global L.N.G. market. Without telling Raymond in advance that he intended to go public, Greenspan testified before Congress, highlighting America’s coming gas deficit as a strategic issue for the American economy. Preparing for an L.N.G. world would require construction of large import terminals that carried environmental and safety risks, but the thrust of Greenspan’s testimony was that America’s gas deficits would demand such risk taking. Greenspan’s friendship with Raymond was not well known, but one analyst aware of the relationship remembered reading Greenspan’s unusual testimony about natural gas markets and thinking, “He’s giving Raymond’s testimony!”

  As it turned out, the natural gas market in the United States was one of the few industry subjects that Lee Raymond had misjudged. “Gas production has peaked in North America,” he declared at an industry conference in 2003. America’s only large, unexploited deposits of gas were in Alaska, stranded from commercial markets in the Lower 48 for lack of a pipeline. Even if a pipeline were built, Raymond continued, he expected total American gas production to decline, “unless there’s some huge find that nobody has any idea where it would be.”7 In fact, such a find, of sorts, was coming by the decade’s end, and it would transform ExxonMobil’s strategy within the United States. Lee Raymond just did not see it coming. Hardly anyone else did, either.

  Abdullah Bin Abdul-Aziz, the crown prince of Saudi Arabia, was in his mid-seventies at the time of the ExxonMobil merger. He moved among manicured, well-watered palace complexes the size of some college campuses. There was one palace in Riyadh, the Saudi capital, and another in Jeddah, and another in the desert where Abdullah bred Arabian horses. The prince kept an unusual schedule. He slept in two four-hour shifts, one between 9 p.m. and 1 a.m. and a second between 8 a.m. and noon. In the hours between he swam for exercise and did office work. He was a goateed, barrel-chested man with a serious and penetrating gaze.8

  He had much to contemplate. His older half brother, King Fahd, had been incapacitated by a stroke in 1995. The Saudi royal family was too decorous and divided to remove Fahd from power formally, despite his incapacitation, so Abdullah ran the country as de facto king, but he was constrained by shifting family and ministerial factions. Abdullah felt that his kingdom needed to modernize its economy and its education system. Saudi Arabia imported too much of its skilled labor from Asia and Europe while employing its native sons in do-nothing government bureaucracies and religious institutions. The state oil company, Saudi Aramco, which had been owned in part by Exxon and Mobil before nationalization during the 1970s, was so bloated that it employed about three quarters as many people to operate within the kingdom as ExxonMobil did to operate worldwide. The Saudi regime needed to create jobs for its restless population of young men, but even with the inefficiencies that resulted, Saudi Aramco was a rare bright spot in the Saudi economy in that many of its homegrown employees and engineers were professiona
ls who could work to international standards. In many other bureaucracies in the kingdom, too many Saudis lacked the skills and leadership to compete in the global economy. If the royal family did not do something to change this before its oil was depleted, then a common fatalistic aphorism among the Saudi elite—We started on camels; we acquired jets; we will return to camels—might well be borne out.

  By 1998, seeing what Qatar had undertaken with its massive gas-fed industrial complexes, Abdullah decided to leapfrog beyond Saudi Arabia’s dependence on oil sales into a more sustainable, job-creating future. The key to his thinking was natural gas.

  That year, in the autumn, while on his first state visit to America as regent, Abdullah invited the chief executives of the seven largest American and European oil companies to the McLean, Virginia, mansion of the cigar-chomping Saudi ambassador to Washington, Prince Bandar Bin Sultan. Lee Raymond and Lou Noto attended. It was awkward for them because at the time they were in the advanced stages of merger discussions known only to them and a few dozen others involved in the talks. They agreed to act as if nothing unusual was going on.

  It was extraordinary for all of the executives of the largest oil corporations to gather in one place with the head of state of an oil-rich country. In an Arabian-style diwan setting of cushioned chairs and couches, overlooking the Potomac River, the meeting began stiffly; it suggested the formal, tensely competitive atmosphere of a meeting of the heads of competitive crime families trying to divide up casino building rights. Abdullah invited the oil chiefs to speak about how they might work with Saudi Arabia’s natural gas resources if they were invited back to the kingdom as investors for the first time in more than two decades. This was an enormous opportunity for all of the executives present—Abdullah’s gas initiative could not make up for the economic pain of oil nationalization, but it offered a rare chance to reenter the kingdom with a big play, and who knew where that might lead.