Private Empire: ExxonMobil and American Power
Page 48
Norm Coleman, a Republican senator from Minnesota, traveled to Caracas and met ExxonMobil executive Mark Ward. Coleman noted that the other international oil giants had decided not to protest Chavez’s initial probes on the royalty issue.
“ExxonMobil perhaps has a different perspective on contract sanctity than other companies,” Ward replied. “For ExxonMobil, the sanctity of contracts is paramount.”
The mixed messages sent by different companies—some accommodating, others defiant—created difficulties, Coleman said.
Ward answered that the other companies operating in Venezuela had been “blackmailed” by Chavez. Their oil holdings in the country were in some cases more important to their global reserve reporting than was the case for ExxonMobil.
Such brave talk would soon be tested. Chavez drifted through 2006 and never forced the royalty issue. But as an election scheduled for December of that year approached, he went after the Orinoco deals in full bore. He had committed himself to massive social spending and he lacked financing options. “We’re moving toward a socialist republic of Venezuela, and that requires a deep reform of our national constitution,” he announced. “We’re heading toward socialism, and nothing and no one can prevent it.”8
Lee Raymond and then Rex Tillerson trotted out a standard ExxonMobil script when they spoke about anti-American, anticorporate resource nationalism in Venezuela, Russia, the Middle East, and elsewhere. ExxonMobil’s executives had seen oil nationalization waves come and go over many decades, they asserted, and yet in the long run, most governments would see that their economic interests lay in partnering with private corporations. Before his retirement, Raymond had spoken of the particular problem of Hugo Chavez with a hint of condescension: “I worked in Venezuela a long time ago. . . . I guess my comment would be: ‘Patience.’” Tillerson preferred the language of business realism, but his thrust was the same: Latin American governments enamored of resource nationalism should recognize that it was in their own interest “to find a way to invite and open up to foreign investment, because of the technologies and the know-how that’s needed” to benefit fully from their oil and gas reserves.9
ExxonMobil’s vocal stance about contracts had a pragmatic aspect; it was a form of bargaining by deterrence. The corporation operated in about two hundred countries and it had major oil production operations in several dozen. If it renegotiated contracts in one country, others would surely take notice and might exploit the opening.
By the time of the Hugo Chavez imbroglio, the thinking of ExxonMobil’s senior executives about the sanctity of contracts had evolved beyond business strategy into a philosophy of global governance. The spread of international law regimes and trade treaties had given birth to global business arbitration forums at the World Bank and international chambers of commerce. In its contracts with national oil companies or foreign governments, the corporation inserted elaborate clauses guaranteeing ExxonMobil’s rights to international arbitration before these bodies if the host country tried to alter contract terms, royalty rates, or taxation. Through these provisions, ExxonMobil evaded the conundrums of two hundred different systems of national property rights; it drew all of the host governments with which it contracted into a universal system of arbitration at the World Bank and the international chambers. The corporation’s purpose, said the industry consultant, was to “approximate a global law,” one defined not by national parliaments or the United Nations, but by the binding dispute resolution regime of ExxonMobil’s worldwide contracts. ExxonMobil relied upon this system more than on the United States government. And the corporation’s international competitors took a free ride on ExxonMobil’s hard line—Chevron, BP, Shell, Total, and the rest benefited in general from the education and contract standards campaigns that ExxonMobil mounted with oil-owning governments, but the competitors retained flexibility. They could more easily make contract compromises when it suited them because they did not have such a prominent declaratory policy.10
When Vladimir Putin during 2006 demanded to renegotiate one of ExxonMobil’s remaining contracts in Russia, President George W. Bush telephoned Rex Tillerson to discuss the affront, according to reports of the call that circulated among the corporation’s managers. The Bush administration was by now thoroughly disabused of its romanticism about oil capitalism under Putin; its optimism had ended when Putin arrested Mikhail Khodorkovsky, the president of Yukos, with whom Lee Raymond had negotiated unsuccessfully during 2003. Three years later, Khodorkovsky remained in prison; he made impassioned speeches about democracy while appearing periodically in Russian courtrooms, confined to a cage, and he was emerging as an unlikely symbol of credible dissent. Bush said that his administration stood ready to dive into oil diplomacy to push back against Putin’s attempts at renegotiation. Tillerson thanked the president, but afterward, through its Washington office, the company begged the Bush administration to stay away. The message ExxonMobil’s K Street staff sent to the White House was, in essence, Putin is one of the less offensive heads of state we deal with; we’ll do much better on our own.11
At ExxonMobil’s headquarters, Rosemarie Forsythe, the former National Security Council aide, still managed the political risk department. She reported to Tillerson’s Management Committee, which reviewed dilemmas such as the ones in Russia and Venezuela by reference to color-coded, tab-divided binders Forsythe prepared. These divided the world’s nations into three groups: democracies, authoritarian regimes, and transitional governments. The last were characterized by chronic instability; Venezuela was an emblematic case. More and more of the world’s oil and gas lay in red-shaded transitional countries, as they were marked in the confidential ExxonMobil binders. This made the pursuit of a global, reliable system of contract enforcement all the more imperative, in the Management Committee’s opinion.
It also made political forecasting and project planning excruciatingly difficult. ExxonMobil’s corporate planners had mastered the art of long-term planning for variability in the cost of extracting oil, variability in rates of economic growth, and for the geological surprises that might arise after drilling began. But who could predict the political futures of Venezuela, Nigeria, Indonesia, Russia, Iraq, Iran, or Saudi Arabia over two decades or more? The best that could be hoped for, Rex Tillerson believed, was to “think about a range of outcomes in any given country” and try to position the corporation so that it could adjust to extreme events. In some countries where ExxonMobil invested in long-term projects, the “fundamentals,” as an economist would put it, looked unsustainable—large, young populations; high unemployment; and authoritarian or dysfunctional systems of government that could not meet the needs of the population. The question in these countries was how long it would take before something exploded, and then, when it did, how the upheaval might affect the corporation’s investments.12
The impact of Venezuela’s turmoil, in particular, was not confined to its own borders. Instability in Caracas—as well as in Nigeria, Iraq, and Iran—contributed to steadily rising global oil prices after 2003. Benchmark per-barrel oil prices crossed $40 in 2004; $50 in 2005 and $60 in 2006. The average weekly price of a gallon of unleaded gasoline in the United States topped three dollars for the first time in American history in September 2005; the price fell back some the following winter, but then climbed back to $3 in the summer of 2006. Adjusted for inflation, American gasoline prices reached historic highs after three decades of flat or declining trends.13
Soaring demand for oil from China, India, and other fast-growing emerging economies stoked the price rise. Between 2003 and 2007, China’s oil consumption and net imports grew by about 50 percent. China’s prospective thirst for oil as a transportation fuel, to power the cars of its burgeoning middle classes, created a psychology of scarcity.
Along with soaring demand came less provable claims that the world might be physically running out of oil. Matthew Simmons, a Houston-based oil industry consultant who specialized in financial matters and who was not a professi
onal geologist, published an influential book in the summer of 2005 that argued, on the basis of his review of U.S. geological data about Saudi oil fields, that the kingdom had reached the peak of its capacity to pump oil and would soon enter a long decline.14 Saudi Arabia was not only the world’s largest oil producer; it was also the most important to international markets and prices. The kingdom exported the great majority of its production. Among the world’s major producers, it could most easily raise and lower production volumes to respond to changes in global demand. If Saudi fields were tapped out, as Simmons claimed, the long era of low or relatively stable oil prices enjoyed by the world economy from the 1980s onward would be in jeopardy.
Saudi Arabia insisted that Simmons’s forecasts were wildly off base, but its penchant for secrecy continued to stoke such reports. As oil prices rose, the kingdom launched an investment and construction program to raise its production capacity to 12 million barrels per day from about 10 million. But its project could not easily or quickly undo the psychology of scarcity that Simmons and other end-of-oil commentators generated after 2005. There could be little doubt in any event that Saudi Arabia’s ability to increase or lower global oil prices by adjusting the amount it pumped from day to day would be diminished in the future. The world’s surplus oil production capacity—that is, the amount of oil that could feasibly be pumped each day but was held back for market, economic, or political reasons—peaked in 1985.15 After that, global oil supply and demand moved closer to equilibrium.
Rex Tillerson and ExxonMobil’s Management Committee scoffed at the idea that the world was running out of oil. The corporation prepared PowerPoint slides to document that governments and industry analysts had badly underestimated the amount of oil in the earth throughout the twentieth century. Time and again, forecasters failed to anticipate how technological innovation would free up or “discover” oil previously thought to be unrecoverable, ExxonMobil executives argued in their slide shows. The corporation demonstrated that in 1925, the U.S. Geological Survey estimated the world’s conventional oil reserves to be only 60 billion barrels. By 1950, mainstream estimates had risen to between 750 billion and 1.5 trillion barrels. By 1975, typical estimates were in the range of 2 trillion barrels. By 2000, they had grown to between 2.5 trillion and 3.5 trillion. These swelling numbers did not even account for extra-heavy oil and tar sands oil deposits in places such as Venezuela, Canada, and Russia—perhaps another 4 trillion barrels. Obviously, the actual amount of geological oil had not changed during these decades; all that had changed was the ability of engineers to locate it and pump it profitably. As Tillerson put it: “With new technology, we’re always finding more oil. . . . We will achieve a peak, because it is a finite resource. But that time is well beyond where we are today.” The problem in the global oil markets, Tillerson and his colleagues declared again and again—and the reason Americans so often gasped and sputtered about prices when they pulled into their local stations after 2005—had not to do with geology. It was a result of geopolitics.16
Rising prices did more to hurt the United States than just pinch its drivers’ budgets. Higher prices made oil-exporting governments richer at the expense of importers such as America. BP’s economists estimated that oil-exporting countries enjoyed a $3 trillion windfall between 2004 and 2007. That wealth provided radical and authoritarian governments such as those in Iran and Venezuela with extra muscle and room to maneuver—whether to purchase arms for proxy militias or to forge new compacts with thirsty importers such as China and India, alliances that might constrain American power. For its part, by 2007, the United States had become more dependent on foreign oil imports than ever before. This not only exacerbated its dependency on governments such as Venezuela’s, it also put the country’s prosperity at risk. During the 1980s and 1990s, spending on oil, measured as a percentage of U.S. gross domestic product, hovered under 2 percent; as prices soared after 2003, that spending rose to above 5 percent. History showed a strong correlation between such energy price spikes and the onset of recessions.17
The expropriations threats emanating from Venezuela contributed to those rising prices. Chavez also threatened ExxonMobil’s share price. If the corporation lost its Venezuelan production and its booked oil reserves in that country, the corporation’s publicly reported worldwide oil reserves would shrink. The annual challenge of reserve replacement had not lessened as Tillerson imprinted his leadership on ExxonMobil; if anything, the pressures were rising. Tillerson and other executives might console themselves that expropriations come and go, and that Exxon had left and returned to Venezuela before, yet they would be departing a country proximate to the United States with an oil endowment of enormous size and durability. The numbers from ExxonMobil’s current Venezuelan operations were not large—well under 5 percent of total reserves and production—but with the reserve replacement equation so tight, all losses made a difference, and the shock of being expelled would probably knock down confidence in ExxonMobil shares, which would in turn depress the wealth of executives and employees. The question facing ExxonMobil early in 2007 was whether, for the sake of principle and long-term global strategy, Tillerson and the Management Committee were prepared, nonetheless, to walk.
On January 13, 2007, Hugo Chavez told the Venezuelan congress that he would enforce a law requiring that P.D.V.S.A. seize majority shares and become the sole operator of all oil projects in the Orinoco River basin. If the international companies currently in charge of those projects wished to stay on as minority owners, they could renegotiate terms. Chinese, Russian, Indian, Belarussian, Vietnamese, and Cuban operators would be entering the Orinoco basin, Chavez announced. “He who wants to stay on as our partner, we’ll leave open the possibility to him,” Chavez said. “He who doesn’t want to stay on as a minority partner, hand over the field and good-bye.” He added playfully, switching from Spanish to English, “Good-bye, good luck, and thank you very much.”18
In fact, Chavez was prepared to negotiate. Into the spring of 2007, each of the oil majors found itself in maddening, opaque, shifting talks with Venezuela’s oil technocrats. Fundamentally, they would have to accept a subordinate position to the Chavez regime for the first time and lower rates of return. Within that framework, however, Chavez was ready to deal.
Tillerson and Cutt took a two-track approach: They took all the steps necessary to leave Venezuela by the June deadline Chavez had announced, and simultaneously, they negotiated to stay.
BP was ExxonMobil’s minority, nonoperating partner in the Cerro Negro project. The corporation’s Venezuelan country manager, Joe Perez, admitted privately that “BP’s greatest fear was that Exxon would pull out.” At this point, he also conceded, BP “is basically hiding behind Exxon” and its tough-sounding bargaining position.19
Cutt and Tillerson had four options: Leave Venezuela and invoke their contractual right to international arbitration to recover their investments and lost earnings; sell their share in Cerro Negro to Venezuela; sell their holding to another company; or accept Chavez’s terms and become subordinate to P.D.V.S.A. in a joint venture. ExxonMobil executives told the U.S. embassy that the chances they would capitulate this time were “close to zero.” A sale on terms reasonably close to market price seemed optimal.
Under Venezuelan labor laws, if it planned to shut down by the end of June, ExxonMobil had to take public steps as early as March to prepare to lay off workers. Even if its employees found new jobs under Venezuelan management, their compensation and benefits would shrink. Tim Cutt rented out the movie theater near the ExxonMobil office—located in downtown Caracas in a mixed-use complex of offices and retail stores—for regular all-staff meetings, replete with popcorn, to keep the employees informed. He provided updates on the corporation’s negotiations with the Chavez regime. Carlos Rodriguez, ExxonMobil’s Venezuelan-born, U.S.-educated government affairs director, and Milton Chaves, another Venezuelan who worked on government relations from Houston, sometimes joined or supported Cutt’s presentation
s. From some of the employees, Cutt and his colleagues heard angry, even menacing complaints. Cutt became so anxious about the loyalty of his own workforce that he installed a metal detector at the entrance of the executive suite.
The corporation’s expatriate executives worried, too, that they might be arrested suddenly in Caracas and perhaps made the objects of some theatrical show trial concocted by Chavez. They kept cell phone and emergency numbers for the petroleum attaché at the American embassy, Shawn Flatt. Carlos Rodriguez had regular breakfast meetings with Flatt to keep him up to date, but the corporation was wary about being identified with the American embassy, and so its Caracas managers minimized the embassy liaisons to the most essential matters, such as planning for evacuation if one was required because of violence or threats to American employees.20
In Washington, Tillerson met with Venezuela’s ambassador to the United States, Bernardo Alvarez, on May 16. He told the envoy that ExxonMobil must have a confidentiality agreement with the Chavez regime before it could negotiate in earnest. “We’re looking for a win-win solution,” Tillerson said, but he warned that the corporation “was willing to go to arbitration if it had to do so.”
Cutt confided to the embassy as the final deadline neared that Tillerson and the Management Committee at headquarters had “shown surprising flexibility in attempting to reach a deal” with Chavez. The chances of giving in to Venezuela’s demands were apparently not so close to zero after all. For example, Cutt disclosed, they would “swallow hard” and give up rights to international arbitration if all the other deal terms were satisfactory.