Crude World (19 page)
The alleged fraud was simple. Companies pay about 12 percent in royalties on oil extracted from public land. The royalties are pegged to the price of oil when it is extracted—the “posted price.” The suit accused the firms of selling oil for more than the posted price, thereby avoiding royalties on the price differential. “Defendants knew that their material misrepresentations regarding the market value of oil were false at the time they were made,” the suit said. “The representations were willful and malicious.” This unfriendly language was chosen not by Ralph Nader but by lawyers like Russell Malm, the county attorney for Midland. As a Republican, Malm’s first impulse had not been to sue an oil company, but after looking at the data he’d realized, as he told me when we were chatting in his office, “The oil companies didn’t come out here just to do good for the Permian Basin.”
It can escape notice that the United States, the world’s largest importer of oil, is also the third-largest producer—some 8 million barrels a day. This provides a window for evaluating the core principles of the firms that dominated the global industry for most of the twentieth century. Overseas, American firms needn’t try hard to get the better of inefficient and corrupt governments, and they don’t suffer the restraint of cultural bonds to the societies where they operate. The practical and ethical barriers to cutting corners are lower overseas. Yet even in America, as the Odessa case and a multitude like it showed, oil companies have a remarkable tendency to do their best to get around the law.
Businesses cheating in America—this is not news. There is hardly an industry in America that hasn’t been indicted for something. Even the
paragon of cool, Apple Computer, was investigated for backdating stock options for its hip CEO, Steve Jobs. But there is a startling pattern in the oil industry; in Texas, Alaska, Louisiana, California and elsewhere there has been an unending stream of indictments, trials and fines for oil companies breaking the law on royalty payments, environmental protection and worker safety. This carnival of sin dates back at least a century, to when the Supreme Court ordered the breakup of John D. Rockefeller’s Standard Oil, which was ruled to be a price-fixing monopoly that used blackmail and bribery to get its way. Industry practices were not greatly improved by that verdict. American oil firms and executives traded with and supported Nazi-era Germany even after World War II began. As Interior Secretary Harold Ickes wrote in his diary at the time, “An honest and scrupulous man in the oil business is so rare as to rank as a museum piece.”
Cheating continues in America—lawsuits, fines and settlements have not abated in recent years—but the greatest swindles tend to occur overseas, where the dynamic is reminiscent of doping scandals. Sports authorities develop laboratory tests to detect performance-enhancing drugs, and athletes respond by using new drugs that are not detectable by the latest tests. In the oil and gas world, as in track and field, the one-step-ahead-of-the-law violations are intentional rather than accidental, as the case of Jeffrey Tesler showed.
In 1977, Congress passed the Foreign Corrupt Practices Act, which criminalized bribery of foreign officials. For nearly two decades, the law netted mysteriously few violators; annual prosecutions could be counted on one hand. One of the reasons, aside from indifference on the part of federal prosecutors, was that oil companies had begun to outsource bribery to middlemen or joint-venture partners. On occasion these missing links were discovered, and this happened in a spectacular fashion in 2003, when French regulators looked into an irregular series of payments totalling $132 million by a consortium of international firms that was bidding on a multibillion-dollar natural gas project in Nigeria. The consortium was led by M.W. Kellogg, which was then owned by Halliburton.
The payments reportedly went to Jeffrey Tesler, an obscure lawyer
who worked in an immigrant neighborhood of London and whose clients included sex shops with zoning problems. Why would a global energy consortium funnel money to a barrister whose office, adjacent to a Somali butcher, advertised the availability of a fax machine for fifteen pence a page? In the 1980s Tesler had helped members of Nigeria’s nefarious elite buy homes in Britain. This meant Tesler was connected to Nigerians who could probably influence government contracting decisions. As it turned out, the consortium, which included firms from Italy, France and Japan, had agreed to pay Tesler $60 million if the consortium won the contract. Tesler and a consortium official allegedly agreed to channel $40 million of this fee to General Sani Abacha, the Nigerian military ruler who, after his death, was reportedly found to have stolen more than $3 billion from government revenues. The consortium won the contract and Tesler allegedly received the $60 million payment and substantial additional ones, until the total was $132 million.
This scheme was not discovered by a compliance officer working for one of the consortium members. Major corporations employ lawyers to ensure that contracts and payments comply with laws like the Foreign Corrupt Practices Act; they are known as compliance officers. Unfortunately, compliance officers in all four companies failed to notice the payments or, noticing it, did not object. French prosecutors heard of the scheme only after filing embezzlement charges in an unrelated case against an employee of a French company in Halliburton’s consortium. The employee, upset that his firm refused to defend him in the embezzlement case, took his revenge by telling French authorities about the payments to Tesler—and that is how the scandal began to unravel. In 2009, Halliburton admitted its role in the affair and agreed to pay more than $550 million in fines to the U.S. government. Albert “Jack” Stanley, the Halliburton executive who oversaw the corruption scheme, pleaded guilty to violating the FCPA. Tesler has been indicted and faces trial in the United States. It was one of the largest bribery scandals in American corporate history, and it was uncovered only by chance.
As I studied the industry’s global rap sheet, I wondered about the reasons for this pattern of law evasion. Why did oil firms transgress legal and moral strictures on such a consistent basis?
Oil firms describe their work as “producing” oil, but in truth they “produce” nothing, insofar as the meaning of the word is generally understood. With permission from host governments, they extract a valuable liquid from the earth. The process of drawing it from the ground, removing impurities and shipping it to refineries is complicated and daunting, but profits depend first and foremost on getting permission to extract the valuable stuff. It is not the customer who is king and determines a company’s destiny but the president, minister, senator, mayor or real-life royalty who grants extraction licenses. If the computer industry operated this way, Dell and Samsung would bid for the right to pull semiassembled laptops from under the deserts of Arabia or the swamps of Africa. Especially in times of high prices, the dynamic of extracting rather than manufacturing helps explain why oil firms have a record of bribing foreign officials. It is the same in other extractive industries, such as mining for gold. The permission from the host government is what matters, because the product will sell itself, usually with wide profit margins.
If the world’s resources were all located in Norway and Canada, where the national governments are strongly resistant to bribery, corporate corruption would not be a severe problem because there would be few takers for under-the-table offerings. Firms would have to win contracts in open competitions and pay fair royalty rates and operate their concessions in a responsible way, because well-funded regulators would strictly enforce laws that had not been watered down by lobbyists. But Norway and Canada are outliers; most of the world’s oil and gas resides in countries with bribery-prone systems, and even the United States fits into that category, as illustrated by the conviction in 2007 of two Alaska legislators who accepted unlawful gifts from an oil executive. In countries like Nigeria and Iraq, closed-door negotiations for extraction licenses and legislative votes on royalty rates turn into
matchmaking opportunities for bribe givers and bribe takers. Nordic ministers might not think of accepting money, but a Caspian dictator would be inclined to demand and take it in an instant.
Unlike Intel, which is not masochistic enough to build a factory in Equatorial Guinea or Kazakhstan, Exxon must do business in such places. Geology determined where oil is located and where, therefore, Exxon must operate. When other industries operate in morally dubious countries, corners tend to get cut, too. Microsoft bent to the demands of China’s government by banning the use of words like “democracy” and “human rights” on its search engine and blogging service. Yahoo knelt further, helping Chinese authorities identify a democracy-promoting reporter who used its e-mail service; the reporter was jailed for ten years. The difference is that extractive industries do most of their business in compromise-inducing countries, in a sector with structural incentives for corruption, and they have vast footprints that alter political, economic and environmental destinies. Microsoft’s compromises might be distasteful, but they do not contribute overtly to violence and poverty.
The problem is not that extractive industries have lower principles than other industries. The problem is that they must have better principles. Unfortunately, having a soul is a luxury the law and shareholders do not encourage.
If Lee Raymond, the legendarily coldhearted chief executive of ExxonMobil, had arrived at work one morning in an altruistic stupor and ordered that half of the company’s profits be devoted to social-welfare programs in the Niger Delta or decided that the company’s lobbyists should support higher royalty rates in Texas, his board of directors would have responded by issuing a statement explaining that Raymond was taking a leave of absence to spend more time with his family. A truthful statement from the board would admit that the lunatic had to be terminated. The board would have had little choice, thanks to rulings that began with a 1919 judgment on a dispute between Henry Ford and the Dodge brothers, Horace and John.
Ford, who owned the majority of shares in Ford Motor Company,
decided to suspend special dividend payments so that more funds would be available for capital investment as well as price reductions. He also wanted to prevent the Dodge brothers, who were minority shareholders, from amassing enough capital to move forward with their plan to set up a rival auto firm. The Dodges filed a lawsuit demanding the dividends. In testimony, Ford made a surprising argument—that his company’s goal was “to do as much good as we can, everywhere, for everybody concerned … and incidentally to make money.” The Michigan Supreme Court would have none of it, ruling that a corporation’s mission “is organized and carried on primarily for the profit of its shareholders.” Ford was ordered to pay.
The
Dodge v. Ford Motor Co
. ethos goes back a ways. In the 1700s, Lord Edward Thurlow famously lamented that under the laws of his day, “Corporations have neither bodies to be punished nor souls to be condemned.” A modern-day justification for conscience-free companies is nearly paradoxical: that they do good by not trying to do good. Milton Friedman championed this notion in a famous article entitled “The Social Responsibility of Business Is to Increase Its Profits,” which argued that companies interested only in profits do the greatest amount of good by creating jobs and returning dividends to their mom-and-pop shareholders. Friedman and other conservatives did not oppose all forms of corporate generosity, and nor does the law, because companies can enhance their image and thus their sales by funding summer camps and literacy programs. But generosity that offers no payback—this is discouraged, legally and ideologically. Altruism is fine so long as it isn’t true altruism.
I witnessed the consequences when I met a Chevron executive at the company’s headquarters in Lagos. I had to make my way through dozens of protesters who had traveled several hundred miles from their fishing village to throw onto the floors of Chevron’s reception area some of the oil that had contaminated their waters. I was escorted around the protest to the executive’s office, where I asked whether Chevron might do more to help the villagers and promote general welfare. I noted that a few days earlier the firm had announced quarterly earnings of $3.2 billion. “It is not the role of an oil company to provide
the basic fundamentals that are required for communities to thrive,” the executive replied. “It is not our mission as a corporation. It is not our identity as a corporation.” Regarding the protesters who were blocking the reception area and singing a song with the refrain “We have suffered enough in the hands of Chevron / And we cannot continue to suffer like this,” he said the company would look into their grievance.
One day, I got a behind-the-scenes look at a board of directors meeting that was a sort of corporate vaudeville.
I was in Moscow working on a profile of Vagit Alekperov, the president and a multibillionaire shareholder of Lukoil, a Russian company that has oil reserves equal to Exxon’s. The boardroom at Lukoil’s headquarters had wood-paneled walls and parquet floors that had been polished to an opulent shine. The board members, all but one of whom were men, sat around an oblong conference table with enough space for several dozen people. It was dotted with bottles of Evian and porcelain coffee cups replenished by waiters who slipped into the room like silent ships. The two foreigners on the board, Richard Matzke, a former Chevron executive, and Mark Mobius, a financier, were emblems of Alekperov’s effort to globalize Lukoil and list its shares in London and New York. I had been invited to watch a model board meeting.
As the meeting began, there was a malfunction with the headsets providing an English translation of the proceedings. When the problem was fixed after a few minutes, the Lukoil executive who was running the meeting said, “I think our [American] colleagues missed very little.” That was true. And they missed very little in the PowerPoint slides projected onto a screen without translation of the Russian captions. Vague spending plans were outlined by several executives, a few investments were described and one or two expansion opportunities were mentioned. It was as numbing and unrevealing as an annual report without the glossy photos.