Private Empire: ExxonMobil and American Power (55 page)

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.”
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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.
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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.
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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.
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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?

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.”
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L
ee 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.
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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.
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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.
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A
t 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.
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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.
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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 professional 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.
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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.
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After that, global oil supply and demand moved closer to equilibrium.