Bush/Cheney et al, tie our futures to the Saddams of the world.
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Dangerous Liaisons
Thursday April 24, 5:35 pm ET
By Daniel Fisher
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 almost-3-meter-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) controls
concessions covering 4.8 million hectares 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. 33).
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 1,050-kilometer 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)) 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), BP (NYSE:BP - News)
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."
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