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The Ultimate Corporation

Leslie Philipp/OttOpix
The Strathcona Refinery, owned by Exxon subsidiary Imperial Oil, on the outskirts of Edmonton, Alberta, December 2008

Exxon’s executives, as anecdote after anecdote in Steve Coll’s book makes clear, enjoy easy access to every president. Its confident CEO is “a peer of the White House’s rotating occupants” who can usually count on the administration to see things as he does. In fact, the president is often more pliable than the CEO, who often goes his own way,

aligned…with America, but…not always in sync; he was more akin to the president of France, or the chancellor of Germany…. His was a private empire.

Coll makes clear in his magisterial account that Exxon is mighty almost beyond imagining, producing more profit than any American company in the history of profit, the ultimate corporation in “an era of corporate ascendancy.” This history of its last two decades is therefore a revealing history of our time, a chronicle of the intersection between energy and politics that explains much about our present and more about our (dismal) future.

And one of the key points that comes through in every chapter is that Exxon mostly earned its power the old-fashioned way: not by political influence, but by prowess, hard work, and discipline. Coll opens by describing the 1989 wreck of the Exxon Valdez and the fouling of Prince William Sound, the nadir of the company’s recent history—soon-to-be CEO Lee Raymond described himself as “chagrined…horrified and to an extent devastated.” He and the company responded to the tragedy by fighting every attempt to make it pay punitive damages—but also by embarking on a rigorous effort to change Exxon’s culture, unveiling to “its employees and executives a universal new management regime, the Operations Integrity Management System,” or OIMS, which one executive described as “more vinyl binders than you can possibly imagine,” covering every possible aspect of the company’s systems.

Exxon, far more than its competitors, did things “by the book,” and this was the book; its employees, if they wanted to remain, did not deviate. In fact, writes Coll, “those who stayed did not find OIMS ironic or extreme; they liked the culture of discipline and accountability.” And the results were inarguable: Exxon didn’t just make huge profits because of its huge size; its “return on capital employed” outstripped that of its peers year after year:

Its exceptional ability to complete massive, complex drilling and construction projects on time and under budget meant that, in comparison to industry peers, it remained exceptionally profitable in recessions and boom times alike, when oil prices were high and when prices were low.

Lee Raymond, CEO from 1993 to 2005, was intimidating, “Iron Ass” to his troops. He calculated, writes Coll, that given the size and sprawl of his global empire,

the only way a chief executive could hope to extract disciplined results was to overdo it—that is, unless Raymond used his bully pulpit…to pound hard…the natural drift and compromising tendencies of such a large workforce would produce mediocre results.

And the results were never mediocre. “What you’re hearing today may seem boring,” Raymond once told an audience of Wall Street analysts before announcing yet another quarter of record results. “You’ll just have to live with outstanding, consistent financial and operating performance.”

Of course, if that were the entire story, Coll’s account would be a management textbook. But as the millennium approached and then receded, Exxon faced two great challenges, and the way it handled them makes for fascinating and also depressing reading.

The first big weakness of its business model derived from the fact that more and more countries were taking full ownership of their oil fields. Exxon and its competitors had once legally controlled most of the world’s large oil fields, and these so-called “booked reserves”—whether in the Middle East or Alaska or South America, for example—were what underlay their share values:

The size of these booked reserves allowed shareholders to estimate future profits with relatively high confidence; equity oil [i.e., oil owned by Exxon] was fundamental to Exxon’s stock market valuation, just as the number of shopping malls or office buildings owned by a real estate company would be fundamental to its market value.

But after the oil embargoes by OPEC and others of the 1970s and the Iranian revolution, most Middle Eastern countries became “resource nationalists,” seizing back oil and gas fields. In 1973 Exxon had produced 6.5 million barrels of oil and gas a day from its own fields; by the late 1990s that figure had fallen by two thirds. Exxon could have become a contractor that simply pumped oil for someone else—Halliburton made a lot of money this way—but the profit margins weren’t as high, and Exxon’s business model was based on its having its own fields. The company increasingly relied on its holdings in free-market countries like the US, Norway, and Australia—but those seemed mostly mature or declining. As Coll documents, Exxon did its best to lock up fresh reserves in newly independent Russia—but those negotiations came to naught because Vladimir Putin understood the political value of controlling his oil fields from the Kremlin. (Coll tells the instructive story of oligarch Mikhail Khodorkovsky, who was jailed on bogus charges while he was trying to sell a stake in his Yukos energy company to Western oil giants.)

Soon Venezuela kicked Exxon out too. Because of its vast size the company needed to find almost a billion new barrels a year simply to make up for what it pumped annually; increasingly, “Wall Street analysts and investors focused down on the question of which oil companies were renewing their reserves healthily each year, and which were stalling and even in danger of spiraling smaller.”

Some companies simply cheated—Shell was caught in a terrific scandal in 2004. Exxon wasn’t that blatant, but as Coll documents, it walked a very fine line, telling Wall Street that it had replaced its reserves each year but admitting to the SEC that by its standards its reserves were declining. It managed this by counting in their entirety, for Wall Street, its new fields of Canadian tar sands oil—a source of oil so dirty and expensive to produce that the SEC refused to recognize it as oil. But the need for filthy tar sands oil to replace the sweet Saudi crude with which the company had been built was revelatory—life was getting tougher for Exxon. (And indeed many in the oil industry questioned whether the Saudis themselves weren’t beginning to run into “peak oil” and faced declining production.)

Exxon solved some of its reserve problem by exploring for oil in countries too marginal to control their own production. Places like Chad or Equatorial Guinea were clearly not sophisticated enough to take charge of their own reserves—they were happy to sign contracts with the highest bidder, which in one sense made them ideal for Exxon. But they came with other problems.

For one, they were dangerous. Working in, say, Nigeria, required that you predict not just the price of oil, but the price of ransoming workers routinely kidnapped by rebels or criminal gangs. “The oil majors tracked actual ransom settlements—Shell’s matrix showed that the most recent ransoms were running at about $120,000” in the early years after the millennium, Coll reports. But more and more gangs kept getting involved, using speedboats, for example, to raid offshore platforms. “Once-orderly ransom markets yielded to price uncertainty,” he says—and no CEO likes uncertainty. In Nigeria, the company not only had its own police force, but also “hired and supervised an eight-hundred-man unarmed unit of the ‘supernumerary’ or ‘spy’ police.” Technically they worked for the government, but eventually the members of the force sued Exxon for benefits—they were, they said, in essence corporate employees.

The chaos was everything Exxon didn’t believe in, the opposite of the orderly world envisioned in its vinyl OIMS binders. “Periodically, after kidnappings and speedboat raids of particular virulence, the corporation evaluated whether the…violence had crossed a threshold that might argue for total withdrawal,” Coll writes. But they didn’t leave. “‘Where are they going to go?’ asked an American official who worked with the company’s managers. ‘They don’t want these reserves off their balance sheets…. They need the reserves.’”

With the oil, though, came scrutiny from African and other human rights organizations, which kept asserting that, in essence, Exxon was buttressing some of the planet’s most unsavory rulers. As Dick Cheney once pointed out while running Halliburton, “The good Lord didn’t see fit to put oil and gas only where there are democratically elected regimes…. We go where the business is.” Occasionally Exxon executives would try to argue that their operations made these regimes somewhat more civilized, but a growing body of evidence showed that, in fact, oil production made them even more unstable than they otherwise would have been. Oil wealth flowed mostly to the ruler and his clique. The descriptions here of Equatorial Guinea’s rulers bringing suitcases to the Riggs Bank in Washington are priceless—they were soon the bank’s biggest depositors.

But the very richness of the prize made these governments attractive targets for coups and invasions—thanks to Exxon, there were very lucrative reasons to want to be the prime minister of, say, Chad. In order to ward off the attacks, these despots invested much of the money that didn’t go for mansions and Lamborghinis in armies and weapons, which in turn made life miserable for many of their citizens, especially those who dared to mount democratic opposition. That explains, for instance, how Equatorial Guinea managed to see its rates of enrollment in primary school decline between 1994 and 2009, precisely the years when the country’s nominal per capita wealth soared to $19,000.

Coll’s great example of Exxon’s bland venality concerns its relationship with Chadian strongman Idriss Déby. Exxon made a contract that paid the company a remarkably generous share of the revenues from the oil fields, but Chad was such a mess that to make the deal palatable to the world, “Exxon enlisted the World Bank” in a scheme that would pay most of the royalties into special accounts controlled by the bank that would ensure that some of it was spent on the health and welfare of the country’s poor. This was necessary, because to get at the oil Exxon would need to acquire land, cut down trees, resettle populations—all the sort of things that “were sure to attract local and international scrutiny.” By recruiting the World Bank as a partner, then, “Exxon’s leaders shrewdly insulated themselves from many of the project’s most daunting reputational risks.” As Déby watched the money flow in, however, he got restless, not to mention scared—he figured, correctly, that there were plenty of coups being plotted, and he wanted guns and planes. He wanted, in other words, to break into the World Bank strongbox and use the money for his own ends.

In this story, the unlikely hero (or would-be hero) was Paul Wolfowitz, reviled by American liberals for his role in promulgating the Iraq war. But when George Bush named him president of the World Bank (and before a complicated scandal involving a woman employee ended his tenure) he “seemed eager to demonstrate his commitment to poverty alleviation.” In the case of Chad, this meant threatening to freeze Chad’s bank accounts if Déby didn’t keep his deal with the World Bank. The dictator went into a rage, and told Exxon he’d simply shut down its oil fields if it didn’t get the World Bank off his back. Exxon tried, but Wolfowitz stuck to his guns.

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