Booking Oil Reserves

Booking Oil ReservesIn the final notes to his book Steve Coll states that he submitted more than one hundred pages of memoranda on its contents to ExxonMobil for fact checking purposes. The corporation, he says, “was the only party of the dozens reached during the fact-checking process that declined to participate.” He also submitted sixteen questions concerning controversies and lawsuits. The corporation “declined to reply to all of these questions except one.”

Reading Private Empire it becomes understandable the reluctance of ExxonMobil to cooperate. Although it is extremely well researched and is clearly appreciative of ExxonMobil’s high corporate quality, Private Empire: ExxonMobil and American Power the strong perception is that the author finds his subject somewhat wanting in the softer aspects of management, in the more human components. The picture that emerges from Coll’s book is that of a financially very successful, highly disciplined and organized corporation that considers profits and maintenance of booked petroleum reserves as its fundamental objective. In a world where the list of corporate stakeholders has been expanding to include not only shareholders and employees but also the communities where the corporations operate, ExxonMobil is seen by Coll as a rather aloof even arrogant organization. Chairman Lee Raymond would say to his audiences: “You will just have to live with outstanding, consistent financial and operating performance.” As a result, just after the Exxon Valdez accident the corporation dropped in Fortune’s ranking of the most admired corporations from sixth to one hundred and ten. For some time Exxon and, later, ExxonMobil has been the corporation many love to hate. This is a sign of success, just as it has been the case in the sports world with the New York Yankees.

In parallel, ExxonMobil has also exhibited a highly determined attitude to learn by its mistakes, to improve continuously in its cost-cutting policies and safety record and to make sure that the corporation remains as one of the most successful money-making machines ever built. In many ways the book is as much about Lee Raymond, the president of Exxon and then chairman of ExxonMobil for 19 years, as it is about the corporation itself. Coll describes how a very strong leader can influence an organization so dramatically, even tailoring it to fit his managerial beliefs. Up until the time he took the helm, Exxon leaders had mostly followed corporate policies. Lee Raymond made policy.

When Raymond retired in 2006, ExxonMobil was the number one U.S. corporation in terms of stock market value. It had 2.5 million individual shareholders and enjoyed a significant premium share price over that of main competitors BP and Royal Dutch Shell. Raymond received a retirement package worth almost $400 million. Amazingly successful, Raymond advanced very strong personal opinions on major issues of national or, even, international significance that became ExxonMobil’s policy. Private Empire is essentially a detailed description of the postures taken by Raymond/ExxonMobil regarding several major issues, and, to a lesser degree, about the ExxonMobil relationship with governments and communities in the countries in which it operates.

Some of the major issues analyzed in the book follow.

The reaction of the corporation to the Exxon Valdez accident

What had been a routine trip made at least one hundred times before by Captain Joseph Hazelwood became a nightmare for Exxon the night of March 23, 1989. The distracted captain abandoned the bridge and the ship ran aground, eventually spilling some 240,000 barrels of oil, an environmental catastrophe. Although the captain’s negligence was the dominant factor, the investigation of the National Transportation Safety Board blamed not only Exxon but also the State of Alaska and the Coast Guard for multiple failures playing a role in the accident. The reaction of the organization and Raymond to this accident was, on balance, quite positive. Initially it became very defensive and critical of its critics, believing that “after the accident it had acted blamelessly, while environmentalists did not” but rapidly instituted such a strong safety program that the corporation became a true industry leader in this field. “The corporation’s revitalized safety and risk management drive increasingly took on the trappings of a cult.”

Booking oil reserves as top priority

For Lee Raymond the name of the game was the ability to replace oil reserves. For every barrel produced a barrel found. However, by 1996-1997 the corporation saw a decline of about 2 percent in its proven reserves. Almost half-a-million barrels per day had not been replaced with new oil found in the ground. Lee Raymond decided that he would not report this event in such a manner. He took a different view saying in a press release that “Exxon had replaced 121 percent of its 1997 production…that its reserves had grown, not shrunk.” He included in those reserves the deposits owned by the corporation in the Canadian oil sands, something the Securities and Exchange Commission viewed differently and expressly disallowed in its SEC Rule 4-10. As a result of this press release, Exxon’s shares jumped from $24.50 to $31.00. Raymond’s challenge of SEC’s ruling was not illegal since the fine print in their statements separated oil sand deposits from conventional types of reserves but, according to Coll “it reflected a broader mind-set of chutzpah toward Washington.” The 1998 merger of Exxon and Mobil was, in fact, helped along by the desire of Exxon to buy into the significant overseas proven reserves of Mobil.

ExxonMobil’s posture towards Global Warming

For many years ExxonMobil took the view that human intervention and the use of fossil fuels were not the dominant factor in global warming or, even, that there was any significant global warming taking place. During the 15th World Petroleum Congress held in Beijing in 1997 Lee Raymond gave a speech “advising countries to block the Kyoto agreements since they would result in slower economic growth and lost jobs.” It would take years and new leadership for the corporation to change its view on this issue but not before important clashes took place between the corporation and environmentalist groups such as Greenpeace.

ExxonMobil in Indonesia, Equatorial Guinea, Chad, Russia and Venezuela

The complexities of the corporation’s operations in several countries are described in Private Empire. In Indonesia, first Mobil and, later, ExxonMobil became caught up in the struggle between the Aceh rebels and the military and was criticized for allowing the violations of civilian human rights by the military. The U.S. embassy would absolve the corporation saying: “the companies are unable to control military/police actions,” although, as the book states, “Lee Raymond refused to sign the agreement on Voluntary Principles on Security and Human rights,” which emphasized human rights concerns in violence-prone areas where the oil companies operated.

The attitude of the corporation toward dictators Teodoro Obiang of Equatorial Guinea and Idriss Deby of Chad receives much attention in the book. In the case of Obiang, ExxonMobil was rather co-operative, lobbying in Washington on his behalf and for the opening of a new U.S. embassy in Malabo. In the case of Deby, the corporation made a genuine effort to work with the World Bank to improve the social and economic conditions in the country, until they had to choose between continuing supporting the World Bank program or protecting its oil operation. They chose the latter.

ExxonMobil’s efforts to establish a strong presence in Russia by way of purchasing a majority stake in Yukos failed, due to Putin’s desire for state control of the industry and his mistrust of ExxonMobil’s power. Of all countries where it operated, Russia was the place where ExxonMobil relied most on the support of the U.S. government, including a meeting of Secretary of State Colin Powell with his counterpart, Sergey Lavrov.

In Venezuela ExxonMobil stuck to its principles and stood up to strongman Hugo Chavez. The corporation left the country and called for the arbitration of the World Bank, claiming breach of contract.

A parallel global power

Lee Raymond once answered to an Executive of a different company: “We are not a U.S. company and I don’t make decisions based on what’s good for the U.S.” Private Empire makes it clear that ExxonMobil almost always preferred to go its own way when operating abroad, sometimes even adopting a posture at variance with prevailing U.S. foreign policy. On the domestic political scene the corporation became close to the Bush administration, mainly due to Raymond’s personal friendship with Vice-president Dick Cheney but never to the point of becoming an echo of U.S. policy at home or abroad. The corporation clearly sided with the Republicans during the Obama-McCain presidential contest of 2008, due to the pro-drilling posture of candidate McCain, but seemed to close the gap with the Democrats after the elections.

Coll’s tale ends much as it begins with the bookend ecological disaster some 20 years after the Exxon Valdez incident in the Gulf of Alaska. The explosion of the BP Deepwater Horizon well, however, released nearly 5 million barrels of oil into the Gulf of Mexico. The denouement finds ExxonMobil’s competitor ultimately sinking as slowly as BP’s platform itself.

Private Empire is an invaluable primer on the complexity of the international oil industry and a detailed analysis of ExxonMobil’s strengths and weaknesses and its dominant role in the sector.

Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela (PdVSA), has had a long and distinguished career in the international petroleum industry, including in the USA, Europe, Venezuela and Indonesia. He is an author, public policy expert and contributor to SFPPR News & Analysis.