Private Empire: ExxonMobil and American Power

by Steve Coll

  ExxonMobil ran an office in Moscow, headed by a former Australian diplomat, Glenn Waller. Rosemarie Forsythe, the former Clinton administration National Security Council analyst, also advised Raymond during ExxonMobil’s talks in Russia after 2001. The corporation, as ever, believed it was better off handling things in Moscow on its own. “Exxon operates independently,” recalled Leonard Coburn, who worked at the Department of Energy on the Bush administration’s Russian oil initiative. “They think they can do better than the [U.S.] government and often they do.” Occasionally, Lee Raymond might turn to Vice President Cheney or another very senior official to give the Russians “a good kick in the pants,” as Coburn put it, about a specific tax or policy stalemate in Moscow. Otherwise, the corporation negotiated in private.8

  ExxonMobil owned one significant oil interest in Russia at the time the Bush administration made its push to deepen cooperation. In the chaotic last months of the Soviet Union, investment bankers retained by elements of the dying regime presided over by Mikhail Gorbachev shopped around all sorts of natural resource deals; Lee Raymond had authorized bids on an exotic project in Russia’s far eastern territory, near Sakhalin Island, just above Japan. The project dated to the 1970s, when Japanese corporations had lent money to the Soviet Union in exchange for exploration rights. But the deal went nowhere until the Soviet Union began to crack up and finally split apart. In the early 1990s, Raymond had called an old hand named Terry Koonce, who was running Exxon’s oil operations in Calgary, Canada, and asked him to go to Moscow to “start to open the way in Russia.”

  “Man, I thought you sent me to Siberia when I went to Calgary,” Koonce said.

  “No, I was just getting you warm.”

  It was not until 1996 that ExxonMobil closed on terms for what became known as the Sakhalin-1 project. It was an undertaking that would test the corporation’s engineering prowess like no other. Hurricane winds swept the Sakhalin region each autumn, and ice packs up to six feet thick built up during the winter. After the spring, melting ice floes threatened to knock down any offshore oil rig in their way. Exxon decided on a plan to drill a seven-mile horizontal well from mainland Russia underneath the ocean waters. It was the only well of its kind in the world. Sakhalin-1 suggested some of the appeal of Western oil technology and engineering skill to Russia. But to make the deal on terms acceptable to Exxon, Russia’s government had had to set aside its nationalism and share oil ownership.

  The Sakhalin-1 deal had been made at the nadir of the Boris Yeltsin era. Post-Communist enthusiasm about democracy and private enterprise had yielded to disillusionment and backlash as bankers and other new Russian oligarchs seized control of former Soviet state property in corrupt transactions. During this period ExxonMobil was one of three Western oil corporations to enter into production-sharing agreements, or P.S.A.s—contracts that allowed for direct oil ownership by the foreign firms and also sought to segregate arbitration rights in the deal from the morass of Russian law.

  Rex Tillerson had followed Koonce as the lead ExxonMobil executive on Russia. He managed the Russia account from a base in Texas, flying over as necessary. Tillerson formed a friendship with the Sakhalin governor and decided to rope in a state-owned Russian oil firm as a project partner, so that ExxonMobil and the Russian government would be “on the same side of the table,” as Tillerson put it later, if disputes over the project arose. ExxonMobil had connections at Rosneft, one of the smaller state-owned oil and gas companies, with about 10 percent of the country’s reserves, a company widely regarded as a bureaucratic mess even by Russia’s standards. Around 1995, Lee Raymond had met with Rosneft executives to talk about a possible acquisition of the firm. The Russian company’s leaders had said they were willing to merge into Exxon, and “begged and pleaded” to be acquired, as an executive involved recalled it, but Raymond declined because even Rosneft’s leaders seemed unsure about what their company legally owned. Rosneft’s participation in the Sakhalin project provided some protection, and the legal and arbitration protections in the P.S.A. helped too, but the deal remained politically vulnerable in Moscow. Delays, arguments, and disputes over environmental issues, pipeline routes, and other subjects stalked Sakhalin-1 from its inception.

  Under pressure, Tillerson applied the Exxon formula: no surrender. “We jacked this all the way to the top,” recalled one of his colleagues. “We brought the issue up with the president [Putin] and we said, ‘Look, we have got the contract signed, we are doing everything we are supposed to do—here are the rules. And these guys don’t want to follow the rules. What are you going to do about it?’”

  Putin offered to write out an executive order saying that Sakhalin-1 could proceed, but Tillerson refused. Putin did not have enough legal authority to satisfy ExxonMobil; Tillerson said he did not want to operate by decree, but by durable laws. Tillerson wanted to have “all the t’s crossed and i’s dotted exactly according to Russian law and regulation, and if we couldn’t get it done, then we were not going to do it,” the former executive remembered. Ultimately, after Putin “blew his stack” at ExxonMobil’s affront, the Russian president agreed.9

  In 2001, India’s largest state-owned oil company bought into the Sakhalin deal in a transaction approved by Putin but which required ExxonMobil’s acquiescence. ExxonMobil took its time reviewing the issue. At a White House meeting with President Bush, India’s prime minister, Manmohan Singh, asked Bush to intervene. “Why don’t you just tell them what to do?” Singh asked.

  “Nobody tells those guys what to do,” Bush answered.

  This was the state of ExxonMobil’s relations with Putin’s regime when the Bush administration launched its ambitious energy diplomacy: Sakhalin had been successfully launched, but there had been a tough struggle over terms. Russia’s negotiating culture of bluff and coercion seemed to suit ExxonMobil. The corporation and the country where it sought to deepen its investments had similar personality traits. ExxonMobil’s executives convinced themselves that their earlier firmness had brought Putin around on Sakhalin. This self-affirming perception would shape Lee Raymond’s attitude in the next round of negotiations, after 2001, when the stakes would be higher.

  In early April 2002, Rex Tillerson arrived at the ExxonMobil terminal at Love Field in Dallas to board a jet to Moscow. Tillerson had turned fifty less than three weeks before. He had risen to the cusp of the top job at ExxonMobil partly on the strength of his work in Russia. The Bush administration’s oil initiative placed ExxonMobil’s business dealings in Russia in a new light. There was now the potential, if all went well, for ExxonMobil to acquire substantial equity oil in Russian fields, enough to make a major contribution to the corporation’s reserve replacement requirements. There was no other place on Earth where the corporation enjoyed such full and explicit partnership with the White House in the pursuit of such large oil holdings—the sort of partnership that ExxonMobil executives often claimed they neither wanted nor needed.

  President Bush had scheduled a visit to Moscow for May 2002 to meet with Putin and follow up on energy diplomacy, among other subjects. The administration hoped at this Moscow summit to announce new agreements between ExxonMobil and Russian oil companies, as well as between Chevron and Russian firms. They would not be large deals, but the announcements would display momentum. Tillerson rehearsed for negotiations with Putin, role-playing with a colleague.10

  On the eve of Bush’s arrival in Moscow, Tillerson announced a $140 million contract with a Russian shipyard to upgrade one of ExxonMobil’s Sakhalin production platforms. Don Evans attended the contract-signing ceremony in May and declared that direct U.S. investment in the Russian oil industry would soon be increasing. A joint statement issued by Putin and Bush called out the “successful advancement of the Sakhalin-1 project” and drew similar attention to a Chevron pipeline agreement. Putin and Bush welcomed the “implementation of more projects in the fuel and energy sector . . . on the basis of Production Sharing Agreements and other frameworks.”11 It was unusual f
or an American president to put his name behind a particular contract genre, but unlike in Iraq, the Bush administration had decided that American foreign policy would embrace and promote the direct ownership of Russian oil by U.S. corporations.

  Ambassador Vershbow cabled to Washington that the ExxonMobil signing ceremony had highlighted “the importance and sanctity” of ExxonMobil’s investments in Russia, as well as the “tangible benefits for the Russian economy of cooperation in energy. U.S. and Russian companies are negotiating a slew of new potential projects that could add more meat to the bones of this framework.”12

  How, realistically, could ExxonMobil acquire direct ownership of Russia’s oil and gas reserves? The sell-off of Soviet assets during the 1990s had given birth to a new generation of private sector Russian businessmen—entrepreneurs, bankers, former security and intelligence officers, former apparatchiks, and opportunists of all stripes. Oil and gas plays were big draws: The dollars involved were enormous, and just a 1 percent “point” as a commission on a deal or as a discount on a contract to sell oil abroad could make a man wealthy very fast. These Russian oilmen were not generally ideologues who shared George W. Bush’s vision of a new order in global oil, in which Russia would participate on free-market contract terms of the sort promoted by the International Monetary Fund. But they did see opportunity in the eagerness of Lee Raymond and his counterpart at BP, John Browne, to own a piece of Russian reserves. By 2002, one of these tycoons, Mikhail Khodorkovsky, was in a mood to deal.

  Khodorkovsky was just thirty-nine years old when he opened discussions with ExxonMobil in 2002. The fortune he controlled was estimated to be about $8 billion. In the fashion of the day, he kept his short hair combed forward in a style suggestive of ancient Rome. He was a handsome man with brown eyes and youthful energy. It required boldness to seize and build a great fortune from the ruins of the Soviet economy; in that respect, Khodorkovsky was like a dozen other Russian billionaires who had emerged from the 1990s. He was more politically ambitious than some of his peers, and as ruthless in business as any of them, but more recently, he had begun to profess a newfound appreciation for shareholder rights and even international market ideals.

  He had grown up in Moscow, served as a Communist youth leader, and had graduated from a technical institute in the mid-1980s, just as Mikhail Gorbachev consolidated power and introduced reforms. He and his college friends worked with computers, symbols of modernization, and they joined one of the experimental cooperatives permitted under Gorbachev’s new economic policy. When Gorbachev allowed private banking for the first time, in 1987, Khodorkovsky and his partners—then in their midtwenties—formed a bank called Menatep. They accumulated rubles as communism collapsed. Radical reformers around Boris Yeltsin issued 150 million vouchers with which Russians could supposedly buy shares in former Soviet assets. Many people dumped the vouchers; Menatep bought them up. By 1995, Yeltsin’s administration was running out of money, in part because bankers like Khodorkovsky were not paying their taxes. Menatep helped to mastermind a “loans for shares” scheme with Yeltsin. In exchange for keeping the Russian government solvent and assuring Yeltsin’s reelection, Khodorkovsky and his partners paid rock-bottom prices for state oil and gas properties. They spent about $300 million for a recently assembled energy corporation called Yukos, whose underlying oil and gas reserves were worth about $5 billion. Khodorkovsky was not only opportunistic, he was ruthless; a few years later, during the Russian currency and banking crisis of 1998, he shifted assets around to protect his fortune, while leaving depositors and investors, including some of the world’s most respected investment banks, with large losses.13

  As Russia’s economy recovered in 1999, Khodorkovsky adopted a new strategy. All of the billionaires who had made their fortunes as he had claimed legitimacy, but they remained vulnerable politically, in part because many Russians justifiably believed they had stolen their wealth. Vladimir Putin spoke about advancing free-market reforms and fashioning a deeper democracy as he assumed the presidency in late 1999, and he accommodated the business oligarchs, as they were known, in exchange for their agreement to keep out of politics. Yet Putin also represented a reviving elite of former K.G.B. officers, military officers, and Soviet-era bureaucrats who might seek to challenge the private sector billionaires for power and the control of state wealth.

  According to Vladimir Milov, who was deputy energy minister early in Putin’s administration, Khodorkovsky’s conflicts with Putin dated to the 1990s’ wild scrambles for state assets. “By the time Putin became president, the relations between his group . . . and the Menatep group really had been tense.” They had struggled over oil privatization deals during the 1990s and had evolved into rival camps influenced by former K.G.B. officers maneuvering for profits and power: “Yukos was the company which was, I believe, the most infiltrated by former K.G.B. officers out of all Russian business structures,” Milov said. That was a difficult matter to quantify, but from the time Putin became president, his own group of former security men “saw an absolutely real challenge from Menatep” rivals.

  Khodorkovsky sought to protect himself after 1999 in part by transforming Yukos from an opaque amalgamation of dubiously acquired property into a transparent multinational corporation that adhered to international accounting standards. His full motivations and intentions were difficult to discern: He was a man in a hurry with a record of questionable business dealings; he seemed ambitious politically; and he increasingly flew to London and Washington and Paris, where he delivered speeches, built networks, and maneuvered for gain. He now positioned himself as the leading practitioner of “normalized” democratic capitalism in Russia. He moved to develop two highly ambitious projects simultaneously: a merger between Yukos and Sibneft, another post-Soviet oil giant, which would create one of Russia’s largest oil companies, and a sale of part of Yukos to a Western oil corporation. That would diversify Khodorkovsky’s political risk by aligning Yukos with the interests of America or Britain or France, depending on whether it was ExxonMobil or BP or Total that invested in Yukos. “He probably rushed too early for this,” recalled Milov. “I think he also realized, because of his personal conflict with Putin, he was maybe running short of time.” A deal involving a Western buyer would also allow Khodorkovsky and his founding Menatep partners to take cash out of the business and legitimately move it abroad.14

  Khodorkovsky needed American and European specialists to help him with this corporate metamorphosis, to spruce up Yukos’s books so that someone like Lee Raymond could audit them and not walk away shaking his head, as he had earlier done over Rosneft. Khodorkovsky recruited experienced executives from the major U.S.- and European-headquartered oil and oil service companies to fashion this financial makeover. He also transformed Yukos technically and operationally by recruiting engineers to raise production and profitability at the company’s major oil fields. From Schlumberger, he hired Michel Soublin, a Frenchman, as an interim chief financial officer. He recruited Joe Mach, also from Schlumberger, to oversee oil production. Mach brought in Stephen Chesebro, who had been chief executive of Tenneco Energy, a U.S.-based, $4 billion company. When it came time to recruit a permanent C.F.O. Chesebro telephoned an old colleague, Bruce Misamore, then forty-nine, who had spent his career as a senior financial executive in the American oil business, including seventeen years at Marathon Oil.

  “Look,” Chesebro told Misamore, “I just got a call from a buddy of mine who is working for a large Russian oil company. They’re looking for an American C.F.O. My wife told me not to call you, but I just thought, ‘Is this something that you might be interested in?’”15

  Misamore had semiretired; he was financially secure and comfortable, busy with his family, but he was relatively young. He decided to look into Yukos; it sounded like an adventure.

  Misamore knew enough about Russia to know that you didn’t want to get yourself in the wrong situation there, lest you end up raked by automatic weapons fire one morning. He read in depth ab
out an earlier dispute that had taken place between Mikhail Khodorkovsky and the American investor Kenneth Dart. From his initial research, he could tell that Khodorkovsky was “somebody who had the bad boy image for a while.” But he could detect as well that the young Russian was sincere about transforming Yukos into a normal corporation, with proper audits, governance structure, and accounting. Khodorkovsky had already hired a former auditor from BP and he had retained the accounting firm PricewaterhouseCoopers to implement generally accepted accounting principles. He had also retained the consulting firm McKinsey & Company and, with its advice, had “totally revamped the structure of the organization,” Misamore recalled.16 Khodorkovsky had also recruited international directors to his board and had a goal to win a listing for Yukos on an international stock exchange. Misamore decided to take a chance; he accepted the position of chief financial officer of Yukos and moved to Moscow in 2001.

  Every Monday afternoon Misamore met with Khodorkovsky in the Russian’s office in the old Soviet-era Menatep bank building on Ulansky Pereulok, fronting Moscow’s Garden Ring. Khodorkovsky usually wore jeans, a turtleneck, and a sport coat. Misamore came to regard the young billionaire as a visionary and a natural leader. He lacked some management skills, perhaps, but he possessed a powerful intuition about Russia’s present and future, Misamore believed.

  In late 2001, just as the Bush-Putin energy negotiations were launched, Khodorkovsky told Misamore that he wanted to explore the sale of some of his and his partners’ shares in Yukos—up to 25 percent—to a foreign oil company. Given the immense amount of oil reserves controlled by Yukos, this would be a great prize in equity oil holdings for whatever corporation bought in. For Yukos, it would diversify ownership and provide opportunities to explore and develop oil reserves outside Russia.