Private Empire: ExxonMobil and American Power (56 page)

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

T
he 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 presentations. 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.

On June 25, however, Cutt called again to declare that ExxonMobil had given up. The two sides were “billions of dollars apart,” he said.

For the second time in just over three decades, the largest private oil corporation in the world would withdraw from Venezuela, a country that might hold the world’s largest reserves, or was at least second to Saudi Arabia, where ExxonMobil also had not a single barrel of bookable reserves.
²¹

BP, Chevron, Total, ENI of Italy, Sinopec of China, and Statoil all negotiated compromises during the weeks that followed; they accepted new terms as minority owners, subordinate to the Chavez regime. Only ConocoPhillips joined ExxonMobil in refusal and departed.

The decision marked one of the first tests of Tillerson’s willingness to endure economic losses for the sake of policy and principle. The corporation’s local government affairs team gathered and drove over to the twin P.D.V.S.A. towers in Caracas’s cluster of downtown skyscrapers. As Carlos Rodriguez took notes, Tim Cutt announced to the vice minister of energy that ExxonMobil would be pulling out of the Cerro Negro project and that it intended to file claims against Venezuela in international courts of arbitration to recover damages. It was an uncomfortable meeting that ended quickly.
²²

Cutt and the engineers at Cerro Negro prepared to turn over the pride of ExxonMobil’s Latin American operations to Chavez’s political cadres in April. It was a painful endeavor, not only because the local executives would be walking away from a complex they regarded as state of the art, but also because scores of ExxonMobil’s Venezuelan employees would lose their jobs in a country where unemployment stood at 9 percent.

ExxonMobil’s lawyers and accounting analysts prepared for their legal campaign that summer by doing some mind-boggling math. Hobert E. Plunkett, a University of Alabama graduate who served as an asset enhancement manager at the corporation, later explained to a federal court how he calculated the damage Chavez had caused to ExxonMobil. The Cerro Negro project had twenty-eight years to go under the terms of the 1997 contract. The contract had a clause that laid out the formula under which ExxonMobil’s damages should be figured. This was called the Threshold Cash Flow Formula. It allowed ExxonMobil to estimate how much money it would have made in Venezuela after operating expenses, royalties, and taxes if it had not been forced to relinquish ownership. Plunkett arrived at a round number: somewhat more than $11.9 billion.
²³

ExxonMobil did not immediately share its thinking about its damage claim with Chavez or his aides. Cutt and his Caracas colleagues concentrated on winding down operations as smoothly as possible. When they visited Orinoco after handing control to P.D.V.S.A., they saw the scores of new employees sitting around in blue jeans without apparent responsibilities, and they saw that political propaganda had replaced their ubiquitous safety notices on some of the walls, but they kept their opinions to themselves. In public, on Wall Street, and elsewhere, Rex Tillerson described the breakup dispassionately: “Our situation in Venezuela is a pure and simple contract. The contract was disregarded.”
²⁴

Cutt gathered the local staff at the movie complex near the Caracas office for a sort of farewell party—“ExxonMobil Idol,” a talent show inspired by
American Idol
. The corporation’s senior managers, with Cutt fronting, took the stage in hats, dark glasses, and chains, with their underwear hanging out of their pants, to perform a gangsta rap number. They chanted inside jokes into their microphones, to the roar of laughter and applause from the remaining staff.
²⁵

The show’s theme accurately reflected ExxonMobil’s mood about Hugo Chavez. The corporation’s executives would not think to call the plan they had in mind “revenge”; they forswore emotion about business and legal decisions. When their plan was revealed for the first time in a New York federal courtroom a few months later, ExxonMobil’s lawyers insisted that they had done nothing untoward or vengeful. It was a contract matter, they said, pure and simple.

T
he banking and legal system known as the cash waterfall was designed to control the flow of money generated by the sale of Cerro Negro crude oil. ExxonMobil and P.D.V.S.A. issued $600 million worth of bonds to international investors to finance construction of the massive upgrader complex in the Orinoco basin. Given the long record of political instability in Venezuela, nobody was likely to buy these bonds—at least not at an affordable interest rate—unless there were guarantees about repayment. The lawyers and investment bankers who organized the bond sale therefore constructed a Common Security Agreement to protect bond purchasers. This agreement established the cash waterfall, as it was termed by the participants, at the Bank of New York, headquartered in Manhattan. The waterfall was a web of restricted bank accounts through which revenue from the sale of Cerro Negro oil flowed in a prescribed manner. Receipts from oil sales went first to pay for the operations of the Orinoco project and second to pay interest to bondholders. Only then did leftover funds cascade into accounts for each of the main project partners, ExxonMobil and P.D.V.S.A.
²⁶