Private Empire: ExxonMobil and American Power

by Steve Coll

  Fryszman’s team found their meeting to be a tough grind. They were interrogated about their anonymous clients, particularly about whether there was really enough evidence to withstand scrutiny if the case went forward. The human rights lawyers were impressed by the quality of the government interrogators, but they had no confidence about how the decision would come out. They went out afterward and knocked back shots, trying to keep their spirits up.16

  They soon had reason to be joyous: Clement decided against ExxonMobil and told the Supreme Court that there was not enough at stake in American foreign policy to justify extraordinary action by the high court. Time had changed the Bush administration’s thinking about the balance of American interests in Indonesia: During the long delays in the case, not only had the Aceh war been settled, but Indonesia had evolved toward stable democratic politics and was enjoying rapid economic growth. The country could now afford scrutiny of its past human rights problems; such a trial might even strengthen its democracy.

  Judge Oberdorfer suffered a stroke shortly after Clement’s decision. He prepared to retire. As he recovered from his illness, he composed an opinion ordering the Doe case to trial, one of the last written decisions of his career. He came out on the side of the Does. “Plaintiffs have provided sufficient evidence, at this stage, for their allegations of serious abuse,” the judge concluded.17

  ExxonMobil appealed again. Its lawyers had outlasted Oberdorfer. A new judge might see the issues differently. In Aceh, among the original eleven Does, two more of the plaintiffs died as the appeals went on, leaving widows and estates to pursue their claims.

  Nineteen

  “The Cash Waterfall”

  In Hugo Chavez’s Venezuela, ExxonMobil’s strategy for attracting goodwill in the midst of political contention relied on the powers of art. The corporation staged a salon exhibition in Caracas at regular intervals, with prizes for the best work. It held the event at the National Art Gallery on the Plaza de los Museos. A serene, neoclassical building housed the gallery on grounds that contained a manicured interior courtyard, weeping willows, and a small pond. Tim Cutt, an American who served as the president of ExxonMobil’s Venezuela operations after 2005, presided over the exhibitions with the careful decorum of a museum curator who must please donors and patrons of impossible quirkiness and diversity. The tone Cutt and his colleagues sought to convey at the events was, The art speaks for itself; it brings us all together. In Venezuela’s eroding democracy, however, that wish proved increasingly difficult to fulfill.

  The trouble began as the 2006 presidential election approached. The long struggle between President Hugo Chavez and his opponents intensified. A son of schoolteachers, Chavez had enrolled in a military academy as a young man, played baseball, wrote poems, fought in counterinsurgency campaigns, and rose to the rank of lieutenant colonel. During the 1980s, he became involved in leftist movements seeking to challenge Venezuela’s business and landed elites for power; with his red beret and fiery rhetoric, he emerged as a populist leader. He was jailed for his role in a 1992 coup attempt and later won the presidency by promising to restructure Venezuela’s corrupt, inequitable economy for the benefit of the poor. Once in office, he acted with increasing ruthlessness to consolidate power. Democratic, civic, business, and military forces opposed him.

  Venezuelan artists seized on the annual ExxonMobil exhibition at the National Art Gallery as a forum for dissent: They submitted to the contest only paintings oiled in black, with the map coordinates of Venezuela, from west to east, lightly etched on the dark canvases. ExxonMobil’s Caracas executives decided they had little choice but to mount the stark paintings all around the gallery.

  The artists demanded the microphone at the exhibition’s opening. The corporation’s mortified local public affairs team negotiated an agreement to let them speak briefly; Tim Cutt yielded the floor. The artists explained one after the other that their paintings depicted the future of Venezuela under Hugo Chavez: It would be bleak, they said, in case anyone missed the symbolism of their canvases. They denounced the president and his encroachments on civic freedoms. ExxonMobil’s executives nodded politely.

  This was the sort of awkwardness that had persuaded the corporation’s engineer executives to steer clear of politics in the countries where they worked, and to concentrate as narrowly as possible on those issues that enabled oil and gas production. Now ExxonMobil had opened the door to art-as-politics and there was little the Caracas office could do to reverse course, its local executives believed. If they canceled the next contest, they would signal fear or, worse, that ExxonMobil was somehow choosing sides in Venezuela’s polarized polity. It was not clear whether Chavez or his opposition would prevail across the long arc of years by which ExxonMobil measured geopolitics: As recently as 2002, the president had barely survived an uprising and coup attempt.

  Once the ExxonMobil art wars were launched, the Chavez regime acted decisively: It dispatched its own cadres to the next corporate salon. The Chavez loyalists took the floor and delivered pointed speeches against Yankee imperialism. There was nothing the ExxonMobil executives could or would do to stop them; the National Art Gallery was state owned, and these were Venezuelan government representatives. Cutt and his aides reported the incident to their supervisors at the ExxonMobil upstream division in Houston. Their shared conclusion, said a former executive involved, was that “this is going to be harder and harder to handle.”1

  ExxonMobil had multiple interests in Venezuela: downtream filling stations, some oil production ventures, and supply agreements that directed Venezuelan oil to a large refinery in Chalmette, Louisiana, which ExxonMobil owned jointly with Venezuela’s state-owned oil company. The web of contracts, financing agreements, and supply linkages meant that confrontation with Venezuela’s leader could prove unusually messy and costly. The dependency was mutual: Venezuela’s oil was unusually sour, not suitable for most refineries worldwide, whereas the Chalmette facility was tailor-made to handle it profitably. Moreover, as the U.S. embassy noted succinctly, “Chavez’s priority is regime survival.”2 He needed oil royalties, profits, and taxes—the principal source of revenue for the Venezuelan treasury—to pay for expanded social spending born of his self-styled Bolivarian revolution. After the failed 2002 coup attempt, Chavez signaled in speeches and rambling television interviews that he intended to take greater control of Venezuela’s oil industry, to challenge what he described as the dominance of foreign profiteers. Yet some of ExxonMobil’s executives calculated that the president could not afford to spook international oil corporations precipitously or to trigger even more capital flight from Venezuela than was already taking place in response to the president’s policies.

  As Chavez gathered power and increasingly employed the populist rhetoric of resource nationalism to stir his followers, ExxonMobil responded initially with appeasement. During 2004, Chavez came under intense pressure from the democratic opposition, a wave of resistance that culminated in the scheduling of a referendum in August of that year to determine whether he could continue in office. Part of the charge against him was that he was jeopardizing Venezuela’s economy through his rash, irrational, corrupted populism. Chavez pressured the international oil companies in Venezuela to sign and publicize agreements with his regime on the eve of the election. Televised signing ceremonies would signal confidence in his presidency by bastions of global capitalism. ExxonMobil had been talking with successive Venezuelan governments for nine years about a multibillion-dollar petrochemical investment that would supply plastics to Latin America’s burgeoning economies. It had never been able to close even a preliminary deal. Now Chavez volunteered to sign an initial understanding—if ExxonMobil would agree to a televised signing ceremony three days before the referendum vote, effectively handing Chavez the American corporation’s endorsement.

  The Bush administration sought to contain Chavez and hoped democratic forces would overthrow him peacefully. The referendum was a critical moment. The administration trie
d not to undermine Chavez’s opposition by embracing them openly, but there was no question which side of the vote Bush was on. ExxonMobil’s executives understood perfectly that the administration would prefer them to take no steps that would strengthen Chavez on the eve of a critical vote about his legitimacy and tenure in office. On the other hand, here was a long-sought investment opportunity finally on offer. The corporation capitulated to Chavez. It agreed to a televised signing ceremony just three days before the election.

  Charles Shapiro, Bush’s ambassador in Caracas, asked an ExxonMobil executive why the corporation would accept such a clearly supportive contract signing on the eve of an “event that has convulsed Venezuela’s political life.” The executive replied that ExxonMobil “could not think of any other issues to raise” with Chavez’s government in the contract negotiation, and the Venezuelans had been “pressuring the company [to] sign immediately.” Lee Raymond, then ExxonMobil’s chief executive, telephoned the Bush White House to tell them of his decision. His deputies in Venezuela signaled that Raymond might be willing to meet Chavez personally if the petrochemical talks advanced far enough. Amid fraud allegations, Chavez won the vote.3

  The peace ExxonMobil purchased that summer did not last. Politics, not the maximization of profit, drove Chavez’s thinking about Venezuela’s oil industry. Reasserting Venezuelan control over the country’s oil was for Chavez an irresistible opportunity. As his assaults on the contract terms enjoyed by the international oil majors intensified, ExxonMobil’s executives and lawyers decided that this time, they would not give in. They also decided to maximize Chavez’s pain. They concocted a legal ambush—carried out, in its final act, on a wintry Friday afternoon in the Manhattan offices of a prestigious law firm—to seize by stealth more than $300 million in cash from the fiscally strapped, debt-laden Venezuelan regime. It would be one of the largest asset seizures ever attempted by an American oil corporation. The Bush administration struggled to punish Chavez for his anti-American policies in a way that measurably pinched him. ExxonMobil, when it finally aligned with the administration’s perspective, developed a practical scheme. The corporation’s motivations were pecuniary—the interests of its private empire, not the policies of President Bush, provided the cause. The plan involved a mechanism of modern global finance known to its participants as “the cash waterfall.”

  Exxon had been thrown out of Venezuela once before, in 1975, when the country’s elected government embraced the global trend of oil nationalizations. (Venezuela’s government claimed its intervention was not a full expropriation, but Exxon insisted that it was, and the American government backed Exxon up as the company fought for compensation.) To ease Exxon’s departure, Venezuela cut some unpublicized sidebar deals, an American official and a former Exxon executive said later. The state-run oil giant, Petróleos de Venezuela, known by its acronym, P.D.V.S.A. (pronounced as “peh-de-vay-suh”), allowed Exxon to purchase Venezuelan oil at discounted rates, for refining and onward sale.

  Nationalization had proven to be disastrous for the Venezuelan oil industry the first time around. P.D.V.S.A. had many outstanding engineers and executives educated at international universities, but under political control the state-run company could not acquire the capital and technology required to maintain oil production. Venezuela’s oil output fell by more than half, from 3.7 million barrels per day in the mid-1970s to just 1.8 million barrels per day by the mid-1990s.

  Falling global oil prices also played a role in the industry’s collapse, in part because much of Venezuela’s oil was “extra-heavy,” meaning it was laden with sulfur, acid, salt, and heavy-metal contaminants. (An industrywide system developed by the American Petroleum Institute designated oil as “light,” “medium,” “heavy,” or “extra-heavy,” on a scale that, among other things, compared the density of a particular batch of oil with the density of water; extra-heavy oil was denser than water. The A.P.I. scale used numerical degrees to describe grades of oil, ascending from heaviest to lightest. Extra-heavy oil was less than 10 degrees, whereas light or “sweet” crude, the most suitable for refining, could be as high as 48 degrees. Oil rated higher than 31 was labeled “light.”) Heavy oil required extra production steps to prepare it for sale. Among other problems, the oil did not flow smoothly in its natural form. The costs of these additional processes meant that most heavy and extra-heavy oil could be extracted profitably only when global oil prices were high. P.D.V.S.A. lacked the technologies to produce Venezuela’s reserves economically as prices fluctuated at low levels during the 1980s and 1990s.

  Venezuela reversed its attitude toward outside corporate oil investment as the cold war’s end spurred privatizations worldwide. The country’s oil-dependent economy had long stagnated, and rates of poverty had risen, in line with the grim forecasts of resource curse theorists. To generate more revenue for development, the government opened talks with international oil companies about deals that would allow foreign ownership of Venezuelan crude again, through joint ventures with P.D.V.S.A.

  Some of the deals involved the country’s rich, underdeveloped vein of extra-heavy oil, in the Orinoco River Basin, which lay in Venezuela’s wet coastlands to the east, near Guyana. The Orinoco River snaked thirteen hundred miles to the Caribbean through tropical palms and slash-and-burn agricultural fields. The United States Geological Survey estimated that the basin held between 380 billion and 650 billion barrels of recoverable oil, perhaps double Saudi Arabia’s endowment. This vast reserve lay beneath the river basin’s muddy soil, but the petroleum was unusually viscous and contaminated. American, Canadian, and European oil companies had begun to experiment by the late 1990s with new technologies that could efficiently “upgrade” heavy oil near wellheads and refine it to a lighter blend, suitable for international markets. Mobil was a leader in the field. Its executives opened talks with Venezuela’s oil ministry about an Orinoco heavy-oil project in 1991 and finalized a contract six years later. The deal was known as the Cerro Negro Association Agreement. (There were four such associations created to mine Orinoco’s reserves. Total of France, Statoil of Norway, ConocoPhillips, Chevron, and BP all participated, either as operators or as minority holders.)

  Mobil’s civil engineers cleared a muddy expanse in a valley surrounded by thickly forested mountains and erected an “upgrader,” a modest word to describe a facility that, when completed, would resemble in visual dimension the vast refineries of northern New Jersey. Its pipes, flaring smokestacks, and white oval storage tanks soon formed a gleaming, belching industrial park in the midst of Venezuela’s rural poverty. Construction proceeded during the Exxon merger. After first oil flowed, senior executives from Irving, including Rex Tillerson, proudly flew in by jet and helicopter to inspect the achievement. “Exxon was extremely proud,” recalled a U.S. government official who toured the facility. “This was the new frontier—the first time anything on this scale had been tried. . . . It worked. It was totally new. It had been a big risk.”4

  Hugo Chavez read and espoused the usual Marxist-influenced texts, but he saw himself as a synthesizer of old and new political ideas. Chavez later said he was “gullible” and believed he might be able to construct a mixed capitalist and socialist system.5 The ambiguous remarks he made about business and ideology during his early years in power led some international oil companies to think they might yet be able to hold on to the oil deals they had made during the opening of the 1990s. Gradually, however, Chavez moved more forcefully against his domestic opponents, and as oil prices gyrated and the economy deteriorated, he grew desperate for new sources of revenue.

  The president purged P.D.V.S.A. of engineers and technocrats he regarded as hostile to his regime. He fired about twelve thousand employees—mostly executives and administrative staff—after the company participated in a national strike called to bring him down.6 He replaced the ousted managers with political cadres who tacked Che Guevara posters on their office walls and whose knowledge of oil production and accounting was often limited
or nonexistent. He looted P.D.V.S.A. for revenue—the company handed over about 70 percent of its gross revenue to the Chavez regime in 2006, including about $10 billion for social spending projects. In a year when most global oil companies posted record profits, P.D.V.S.A. lost an estimated $3.7 billion. To stay afloat, Chavez authorized mass borrowing—$4 billion from China, in exchange for special access to Venezuelan oil, and another $6 billion from international bond and financial markets. He cut oil production and supply deals with Syrian, Iranian, Indian, and Indonesian corporations. By the time of the ExxonMobil art wars, Chavez was running P.D.V.S.A. like a political Ponzi scheme: He overpromised to his impoverished Venezuelan followers, then milked the oil industry’s revenue to pay for those promises as best he could.7

  Chavez railed to his followers about the low royalty rates paid to Venezuela by ExxonMobil, Chevron, BP, Total, Statoil, and other international majors during the 1990s, when he had been in opposition. ExxonMobil’s complex at Cerro Negro enjoyed a royalty rate of just 1 percent during the project’s early years of production. That low rate (distinct from the corporate taxes the government collected, which were substantial) had been agreed upon by Venezuela to assure Mobil that it could recoup the investments in the upgrader complex before Venezuela took a larger share of revenue. After nine years, the royalty rate would rise to 16.67 percent, but that event still lay years away.

  Chavez started to pressure the international oil companies over their royalty deal soon after he won his referendum, the victory ExxonMobil had aided. He threatened to unilaterally bring forward the 16.67 percent rate. The companies could not be sure whether or how quickly Chavez would act. The U.S. embassy cabled Washington that ExxonMobil, “presumably looking at potential risks around the world,” had declared privately and repeatedly that it “takes sanctity of contract very seriously.” Yet the corporation had invested $1.5 billion in its Orinoco operations and planned to spend at least $700 million more over the contract’s thirty-five-year life. Would it really pull out of Venezuela a second time, and so early in the project’s tenure, before profits had flowed amply?