Dangerous Liaisons
Forbes On The Cover/Top Stories Daniel Fisher, 04.28.03
Iraq isn't the only place where despots have been sitting atop oil reserves. How does a company like ExxonMobil keep its pipelines filled without getting its hands very dirty? Outside the hushed, carpeted offices of Harry Longwell, executive vice president of ExxonMobil Corp., hangs an 8-foot-wide painting of a panoramic view of the Angola coast. Painted in brilliant colors with lighting reminiscent of a Turner seascape, it portrays a fishing village with a line of majestic bluffs rising behind it. "Just around the corner is Luanda," says Longwell, pointing to the headlands in the background. "It's a beautiful country."
Especially if you own the oil rights. ExxonMobil (nyse: XOM - news - people ) controls concessions covering 12 million acres off the coast of Angola that hold an estimated 7.5 billion barrels of crude.
Getting at that oil wasn't pretty--ExxonMobil handed hundreds of millions of dollars to the corrupt regime of President Jose Eduardo dos Santos in the late 1990s, helping to prolong Angola's ruinous civil war--but then the oil business is rarely pretty. "You kinda have to go where the oil is," deadpans Lee Raymond, ExxonMobil's chairman.
Like to Iraq, where French and Russian oil companies maneuvered for oil concessions even after the United Nations slapped sanctions on the regime of Saddam Hussein. There are plenty of Saddamlets around the world with whom ExxonMobil and every other Western oil company openly does business. They have little choice. North America and Europe still supply 70% of Exxon's 4.2 million barrel equivalents a day of oil and gas production, but the reserves there are dwindling. If you are running a big oil company, you either deal with the despots or watch your company liquidate itself.
Angola is just one of several promising but politically unstable--and often violent--regions like Kazakhstan and Equatorial Guinea. Nigeria, run by brutal military dictators for most of its independent years, has huge oil deposits (see box, p. 92).
The financial stakes for an outfit like ExxonMobil are prodigious. It earned $9.5 billion after taxes extracting fossil fuels last year, four times what it netted from refining and chemicals. Without a new supply it would be reduced to earning a slim refining markup on crude it buys from well owners. Which is why ExxonMobil is willing to apply its diplomatic and economic muscle over a long period of time to get into a new oilfield. That means courting pipsqueak countries controlled by bad guys.
The company and its partners spent almost three decades trying to get the billion-barrel Doba field in southern Chad, a $3.5 billion project that includes a 650-mile pipeline through Cameroon to the Atlantic coast. Courting gifts included six restored locomotives, a dozen bridges, 77,000 mosquito nets and a $25 million payment to the government of Chadian President Idriss Deby--who immediately siphoned off $4.5 million to buy arms for a war against northern rebels.
Deby bought the arms despite an ingenious structure that the World Bank set up to guarantee that oil-related revenue would be spent on social needs instead of on weapons and the military. Under that program, the $2 billion in taxes and royalties the project in Chad is expected to throw off over the next 30 years goes into bank accounts monitored by a nine-member panel, chosen by the government, churches and labor unions, that has a mandate to spend at least 80% on social programs and infrastructure.
But human rights groups are skeptical that the scheme will work any better than the porous oil-for-food program in Iraq, under which Saddam Hussein starved his citizens and bought arms with impunity. "In Chad, the Congress is controlled by the president, and the law allows the allocations to be changed after five years," says Ian Gary of Catholic Relief Services, active in Chad. "That, coincidentally, is when the money starts flowing."
Foreign oil companies have also come under heavy criticism in Angola, where Chevron (now ChevronTexaco (nyse: CVX - news - people )) discovered offshore reserves in the late 1960s. Ties between foreign oil companies and the once-Marxist dos Santos regime have grown tighter as the size of discoveries has grown.
Spread the blame widely. TotalFinaElf (nyse: TOT - news - people ), BP (nyse: BP - news - people ) and ExxonMobil handed over $870 million in "signature bonuses" for offshore drilling rights in 1999. Dos Santos immediately spent much of the money on arms to fight rebels led by Jonas Savimbi, according to Global Witness, the London-based human rights group. Global Witness accuses his regime of taking kickbacks from crooked arms merchants and stealing up to $1 billion a year from its poorly documented oil revenues.
Oil companies generally decline to reveal payments to foreign governments, saying it would violate confidentiality clauses in their contracts. The enormous signature bonuses are verified by Scottish consulting firm Wood Mackenzie. A spokesman at the Angolan embassy in Washington, D.C. denies reports of corruption, blaming apparent lapses in financial reporting on "technical problems."
Another flashpoint is Kazakhstan in central Asia, where Western oil companies will invest $37 billion over the next 40 years. American consultant James Giffen was recently indicted by a federal grand jury in New York for funneling $78 million in oil-company payments in 1997 and 1998 through shell companies in the British Virgin Islands to accounts U.S. authorities believe are controlled by Kazakh President Nursultan Nazarbayev and his cronies, in connection with oil concessions. ExxonMobil acknowledges that Mobil, which it bought in 2000, dealt with Giffen. It is cooperating with the feds and says Giffen was an official representative of the Kazakh government at the time. A former senior Mobil executive, J. Bryan Williams, was indicted separately for evading taxes on a $2 million kickback related to Mobil's business in Kazakhstan. (Both Giffen and Williams have pleaded not guilty.)
ExxonMobil also inherited an image problem in Equatorial Guinea, where Mobil obtained concessions in the mid-1990s. The Los Angeles Times earlier this year detailed how oil companies have deposited more than $300 million into government accounts at Riggs Bank in Washington, D.C. that are apparently controlled by Brigadier General (Ret.) Teodoro Obiang Nguema Mbasogo, the country's oppressive ruler. An IMF official familiar with Equatorial Guinea, speaking on condition of anonymity, says the fund is "quite concerned" about the country's use of offshore bank accounts and lack of a published budget. "It's very difficult to say how much money is entering the revenues of the government," the official says.
If dealing with the Nazarbayevs and Mbasogos of the world is a necessary evil in the oil business, ExxonMobil is hardly new to the game. As Standard Oil of New Jersey in the 1920s, the company pioneered oil production in Venezuela's Lake Maracaibo after winning concessions from the brutal regime of General Juan Vicente Gómez. By the eve of World War II Gómez was dead and Esso was getting half its crude from Venezuela. Executives decided to support reformers who increased taxes but stopped short of nationalizing the industry, as Mexico did in 1938.
Raymond is unapologetic about making deals with regimes that lean toward the diabolical. It's the price of securing oil supplies for U.S. consumers, he says. All he can do is ensure that ExxonMobil doesn't violate the Foreign Corrupt Practices Act by directly bribing officials of other governments. (Congress passed that law in 1977 after spectacular revelations--including the fact that Exxon's Italian unit had paid out $50 million to labor unions and political parties in the 1960s and early 1970s.) "Resisting corruption at all levels and in every country is the standard of this outfit, and once people understand that, it's amazing how you don't have to deal with it very much," Raymond says. Noting the reporter's raised eyebrows, he adds, "You do get some projects stolen away, but my reaction is: If that's the way it is, that's the way it is."
A trial now under way in France involving former executives of Elf Aquitaine, the onetime state-owned oil company, might reveal some of the contracts that got away. Prosecutors allege that Elf executives stole hundreds of millions of dollars from slush funds the company used to bribe Third World leaders, both to secure oil supplies and spread French influence.
ExxonMobil can avoid petty corruption mainly because its projects are so huge. In Chad, for example, one of the world's poorest countries, with a per capita income of $203 a year, the government had no choice but to agree to the plan set up by the World Bank to oversee the spending of its oil windfall. (Chad argued the initial $25 million bonus wasn't subject to oversight, but it has agreed to repay the $4.5 million spent on weapons.) Countries with more experience in the oil business will likely resist such stringent controls.
Raymond himself seems to backpedal when asked if he could demand a Chad-like structure in a country like Kazakhstan. "Go talk to Nazarbayev," he snaps.
Still, ExxonMobil and its peers eagerly seek out such oversights, partly because they offer insulation from prosecution under the Corrupt Practices law. They also provide a clearer picture of a country's oil earnings, an important U.S. policy goal. "The more transparency we have, the harder it is to funnel money to terrorist groups and phony charities," says Stuart Eizenstat, a Washington, D.C. lawyer who helped write the 1977 law as a Carter Administration official and now serves on a committee that oversees sales generated by the Baku-Tbilisi-Ceyhan pipeline from the Caspian Sea.
Some countries recognize that conceding oversight can bring them more clout as they obtain loans to invest in oil projects. "If countries are poor and unstable, the private sector looks at them as if they were either prey or places to avoid," says Michel Pommier, World Bank coordinator of the Chad/Cameroon project. By borrowing from international sources and investing directly in the project, he says, Chad was able to double its take to 40% of revenues. "If this were to be done today in Chad, the take would be 60% to 70%," Pommier says.
The more sophisticated the host country, the harder a bargain it drives. Even the poorest nations are hiring politically connected law firms, such as Baker Botts and Akin, Gump, Strauss, Hauer & Feld.
In Angola technocrats negotiating the latest round of big oil contracts have driven the tax rate to close to 80%, according to international contract expert Gordon Barrows of Barrows Co. In a recent project involving Elf and ExxonMobil, Angola succeeded in winning a sort of windfall-profits tax that gives the government all profits above an inflation-adjusted oil price of $20 a barrel, Barrows says. That leaves the foreign oil companies a profit of about 15% after capital and operating costs, Barrows says, compared with 30% in the U.S.
There are compensations. U.S. tax law treats royalty costs as mere deductions, while foreign income taxes count as dollar-for-dollar credits against U.S. income tax. So most countries structure a deal so that their share of the loot looks like a tax, not a royalty.
Negotiating these deals is an all-consuming process. In China, ExxonMobil has spent years negotiating a $3 billion refining joint venture with Sinopec, the state-owned oil company. Before it commits to spending a dime, ExxonMobil executives and lawyers are struggling to negotiate contracts that specify every detail of how the company will be taxed and how it can get its money out. Edward Galante, senior vice president in charge of downstream operations, has been traveling to Beijing almost monthly. "It's a long process of coming to like minds about what will work," he says. "They look at the world through a different prism."
Raymond, a jowly South Dakota native who freely speaks his mind, would never be confused with a diplomat. But he flew to Angola several times during its civil war to meet with dos Santos, and he has close relationships with most world leaders he needs to know, including the Saudi princes and Russian President Vladimir Putin.
Such personal lobbying helped ExxonMobil wring changes in Russian tax law to allow construction of the company's $15 billion Sakhalin Island project off the coast of Siberia. ExxonMobil earlier in the decade had won a key battle against Russian oil companies by obtaining a production-sharing agreement, which gave it more protection against arbitrary tax increases. But the Russian Duma failed to pass the necessary tax laws to accompany the deal until ExxonMobil, with the help of the U.S. government and Putin, applied pressure. ExxonMobil "moved a lot of issues through the administration and the Duma and obviously wouldn't have done so without the involvement of Putin," Raymond says.
What about Iraq? "Contrary to popular belief, we have not had a single conversation with the U.S. government about Iraq," he says. That's probably because Iraq's reserves of 112 billion barrels, second only to Saudi Arabia's, would come with some very hard bargaining. ExxonMobil has, for the same reason, all but abandoned a project to develop vast gas reserves in Saudi Arabia. "Given what we can invest for around the world, it just wasn't competitive," Raymond says.
ExxonMobil plans to spend $100 billion through 2010 on new and existing oil projects. Africa and the Caspian Sea region, it figures, can supply it with about 1.6 million barrels a day of oil in a few years, compared with worldwide liquids production (crude and natural gas condensates) of 2.5 million barrels a day last year. Risky? Raymond has little patience with the question. "People of your ilk were wondering 50 years ago should we invest in Saudi Arabia, 40 years ago in Libya, 25 years ago in Indonesia and Peru," he growls. "If there is a province that is acceptable from an industry point of view, we'll be there."