Private Empire: ExxonMobil and American Power (80 page)

ExxonMobil’s lead over one competitor, Chevron, had narrowed, however, to the point where, by market and financial performance measurements, the two companies were about tied. By 2010, ExxonMobil’s R.O.C.E. topped Chevron’s largely because Exxon’s huge chemical and downstream operations performed twice as well as Chevron’s did. Certainly Tillerson and his team deserved credit for maintaining the high margins Raymond had delivered in these notoriously difficult businesses. Yet the downstream business looked increasingly uneconomic in the long run because governments in emerging economies were installing new refineries and petrochemical complexes, backed by state subsidies, for reasons other than profit making—to ensure energy security, for example, or in the case of Saudi Arabia, to create better jobs and promote scientific education. This glut of subsidized capacity would challenge ExxonMobil in the long run. Yet in the oil and gas upstream, where the great majority of profits earned by fully integrated oil companies resided, and where the greatest future profit opportunities lay, Chevron had now about caught up with ExxonMobil; Chevron’s upstream R.O.C.E. in 2010 was a robust 23 percent. The average barrel of oil or equivalent amount of gas produced by Chevron was more profitable than a barrel produced by Exxon, according to Chevron’s calculations. Moreover, using other metrics often highlighted by Wall Street analysts—total stockholder return and cash flow per share, for example—Chevron now substantially outperformed ExxonMobil. Chevron’s shareholders did better than ExxonMobil’s during 2010. (The rest of the peer group lagged.) Tillerson and his colleagues might rationalize their slippage by blaming a short-term herd mentality on Wall Street that turned hostile to ExxonMobil’s shares because of the XTO deal, and indeed the corporation’s shares did bounce back after the initial XTO hangover, but the numbers spoke clearly enough of a tightening competition.

Tillerson deserved credit for accomplishments not visible on ExxonMobil’s balance sheet. His Hamlet-like performance on carbon taxation and climate change did him little credit, but he had led a determined drive to reduce the greenhouse gases emitted by the corporation’s own operations and had delivered real improvements. On his watch, ExxonMobil had reduced gas flaring—the wasteful burning of natural gas produced during oil extraction, which contributed to global warming—by more than half. In Nigeria and other countries with weak governments, the corporation had missed announced targets for the elimination of flaring; it blamed the failure of its partner regimes. Still, between the progress it did make and greater energy efficiency, ExxonMobil had reduced its total direct greenhouse gas emissions by eleven million metric tons, a significant achievement.

Tillerson had also taken steps to address ExxonMobil’s fudging about whether the corporation was finding enough oil and gas each year to replace the amount it pumped and sold. Under Raymond and again during Tillerson’s first years, ExxonMobil had declared publicly through press releases and at Wall Street analyst presentations that it had found enough new “proved reserves” of oil and gas to replace each year’s production and sales. But in making this claim, the corporation ignored the accounting methods required by the Securities and Exchange Commission. In some years, ignoring the S.E.C. reporting rules allowed the corporation to sidestep embarrassment. In 2008, using S.E.C. rules, and based on the corporation’s limited public disclosures, ExxonMobil’s reserve replacement would have been below 75 percent, an alarming rate. But instead of accounting forthrightly for this failure, the corporation issued a press release that quoted Tillerson boasting, “ExxonMobil . . . has replaced an average of 110 percent of production over the last ten years.”
²⁷
That was a defensible claim only if one preferred ExxonMobil’s self-regulation to federal rules.

On December 31, 2008, the outgoing Republican-led Securities and Exchange Commission revised its reserve reporting rules to allow the counting of oil sands, shale gas, and other previously banned categories of reserves. The commission also changed other reporting rules that Raymond and Tillerson had found objectionable. The changes, achieved by oil industry lobbying, liberated ExxonMobil from spinning. The corporation ceased double counting: From now on, it would report only numbers authorized by the S.E.C. It did not retract its previous claims to Wall Street and the public, however, noting only that its long reserve replacement “streak” was based on some years when the S.E.C. rules were not used.

The cleaner 2010 reserve replacement numbers looked good on the surface, but were concerning underneath. When the XTO gas properties were incorporated into ExxonMobil’s resource base, the corporation reported that it had replaced an extraordinarily strong 209 percent of the oil and gas it produced that year. Yet XTO’s purchased properties accounted for four fifths of the corporation’s new reserves. Without XTO, according to Barclays, ExxonMobil would have replaced only
45 percent
of its 2010 oil and gas production—a performance so abysmal that if it continued for a prolonged period, ExxonMobil would be on a path to liquidation. By comparison, Conoco’s “organic” or internally generated reserve replacement rate in 2010 was 138 percent. Shell’s was 133 percent.
²⁸
Of course, ExxonMobil had always been better at buying other people’s oil than at finding it. Arguably, from a shareholder’s perspective, it made no difference whether the oil and gas ExxonMobil pumped and sold so profitably each year had been discovered because of geological genius or bought with piles of cash generated by financial and operating acumen. If Tillerson could maintain the financial performance that made the XTO acquisition possible, he might continue to buy what he could not find. But at a minimum, the numbers made clear how important the XTO purchase would be to Tillerson’s legacy on Wall Street and in the oil industry: If the deal underperformed, the corporation would be hard-pressed to maintain its superiority.

Tillerson promised when he took charge to increase ExxonMobil’s annual production of oil and gas to 5 million barrels per day by 2009. The actual number was 3.9 million—more than 20 percent short. Tillerson promised again that ExxonMobil’s production would grow steadily until 2014, but the trailing numbers showed the corporation in a long, flat pattern—its annual production in 2001, after the Mobil merger closed, was 4.3 million barrels per day.
²⁹
Tillerson had not cracked the challenge of reserve replacement that had also daunted Raymond.

Before Tillerson, dissent and hard feeling inside ExxonMobil often traced to Lee Raymond’s blunt manner. Under Tillerson, ExxonMobil might be a kinder, gentler place to work, yet some of the old guard feared a loss of the toughness and discipline they had valued in Raymond. Retired executives of the Raymond era took one another out to dinner in Houston, Dallas, and elsewhere and talked about whether Tillerson had enough of the guts and firmness that Raymond had mustered to drive ExxonMobil’s financial performance.

Tillerson’s remarks to Wall Street analysts increasingly made it clear that he was aware of these dissenters. It required the equivalent of Kremlinology to perceive Tillerson’s public replies to these dissenting factions, but his rejoinders were detectable. At analyst meetings, Tillerson started to use 2006, the year he took the top job, as the basis for reporting about—and boasting about—ExxonMobil’s financial performance. He ignored the Raymond years, and he went so far as to explain how his leadership had extracted profitability from one tough project, the Kearl oil sands play in Canada, because he had made flexible analytical judgments about projected rates of return that would not have been taken “five, six, eight years ago,” when Raymond was in charge.

O
n April 19, 2010, Tillerson arrived at the Hilton Americas-Houston hotel and convention center to receive the Jesse H. and Mary Gibbs Jones Award for contribution to the international life of Houston. It was a typical appointment in an oil industry chief executive’s diary—a short hop on a corporate jet, a prepared speech before a sympathetic audience, a lunch of Cornish game hen and vegetables, and a roundtable talk with students from the University of Houston, Rice University, and the University of St. Thomas.

As the students snapped pictures of him on their cell phones, Tillerson was relaxed, giddy, and self-deprecating about his looks. One student asked if it was true that he and his wife rode motorcycles for fun.

“Pass,” Tillerson said, smiling.

Another asked about solar and wind power.

“ExxonMobil is not really against renewables,” Tillerson replied mirthfully. “We sell a lot of lubricant oil to the windmill operators. . . . The more windmills are built, the more oil we sell.”
³⁰

To the larger audience of about 750 Houstonians seated at banquet tables, Tillerson read out a philosophical defense of capitalist private enterprise and an explanation of ExxonMobil’s mission in the world. Job losses, bank layoffs, and housing foreclosures had swept the American heartland since 2008. Tillerson’s words reflected his Boy Scout optimism and Christian faith.

“The ‘service we render’ and the ongoing investments we make from our earnings are critical,” Tillerson said. “Simply put, delivering energy in a safe, secure and responsible manner improves the lives and opportunities of billions of people the world over. . . .

“When government and industry respect the rightful role of the other—and trust each other to faithfully fulfill their respective roles—progress is possible. . . . Deepening understanding and building trust between the public and private sectors is more important than ever. . . .

“Service . . . responsible . . . respect . . . trust . . . faithfully . . .”

He seemed to wish for ExxonMobil to be considered as a kind of public trust. He used the words “trust” or “mistrust” five times.

“Often the policy changes that are most damaging to entrepreneurs and innovation flow from a fundamental mistrust in the private sector,” Tillerson declared. He concluded, “Leaders in the private and public sector both have a responsibility to challenge the basis and perceptions for the mistrust.”
³¹

He took in applause, shook more hands, and departed the Hilton in the midafternoon.

T
he next morning, April 20, 2010, at 8:52 a.m., on an offshore oil rig called the
Deepwater Horizon
in the Gulf of Mexico, a drilling engineer working for BP, Brian Morel, e-mailed his office in Houston, not far from where Tillerson had delivered his speech about trust between government and business.

“Just wanted to let everyone know the cement job went well,” Morel wrote.

David Sims, a BP drilling operations manager, e-mailed Morel and his colleagues at 10:14 a.m.: “Great job guys!”
³²

Twenty-eight

“It Just Happened”

R
andy Ezell reached over from his bunk and touched a button to illuminate his electronic alarm clock. It read 9:50 p.m. He picked up his ringing telephone.

“We have a situation,” Steve Curtis told him. “The well is blown out. We have mud going to the crown.”

“Do y’all have it shut in?” Ezell asked. Ezell carried the title “senior tool pusher”; he was one of the more experienced hands aboard the rig that night. Curtis was an assistant driller.

“Jason is shutting it in now,” Curtis said. “Randy, we need your help.”

“Steve, I’ll be—I’ll be right there.”

In the darkness, the
Deepwater Horizon
floated on 4,992 feet of seawater in the Gulf of Mexico. It had been commissioned nine years earlier, one of a new generation of seagoing industrial robots designed to drill for oil in unprecedented saltwater depths. It was a towering, brightly lit metallic behemoth—almost 400 feet tall and 250 feet across. The rig had hovered for weeks over a BP-managed prospect called Macondo No. 252. The name referred to a fictional town in the Gabriel García Márquez novel
One Hundred Years of Solitude.
One hundred and twenty-six men and women were aboard the rig that night. Only six worked directly for BP; the rest, like Randy Ezell, worked for BP’s contractors and subcontractors, including two of the largest corporations in the global oil service industry, Switzerland’s Transocean and America’s Halliburton.

Ezell got up and lurched into the hallway. The explosions began: They were “take-your-breath-away explosions, shake-your-body-to-the-core explosions, take-your-vision-away explosions,” one of his coworkers said later. Ezell knew roughly what had happened. Drilling any oil well required managing the risk that trapped oil and gas under extreme pressure in the ground, when punctured by a drill bit, might escape uncontrollably and ignite. Since 2001, the workforce drilling for oil in the waters of the Gulf of Mexico—about 35,000 people altogether—had endured 60 deaths, 1,550 injuries, and 948 fires and explosions.

The blasts bounced Ezell off the bulkhead and left him trapped on the floor beneath debris. He twice tried to raise himself, but could not. The third time adrenaline jolted him. “I told myself, ‘Either you get up or you’re going to lay here and die.’” He raised himself.

Methane shooting through well pipes whooshed eerily in the darkness outside. Fire rolled in waves across the platform. Ezell heard calls for help and stayed behind as more explosions rumbled. He tended an injured coworker and then carried the wounded man to safety. He found coworkers lowering lifeboats and rafts into the water. He joined the exodus with Curtis.

On another part of the platform, Mike Williams, the
Deepwater Horizon
’s
chief electronics technician, stood on the rig’s edge with Andrea Fleytas, twenty-three, one of three women working aboard. They watched as the life rafts and rescue boats pushed away onto water now illuminated by fire and searchlights. The two of them seemed to be marooned.

“It’s okay to be scared,” Williams told her. “I’m scared, too.”

“What are we going to do?” she asked.

Williams said they could either stay on the platform and burn to death or jump more than one hundred feet into the sea and hope for the best.

Williams jumped. He fell “what seemed like forever,” plunged into the water, resurfaced in a pool of greasy fuel, swam free, and found a rescue boat. The boat carried him to a larger vessel, the PSV
Damon B. Bankston
, which had responded to distress calls and pulled up nearby to collect survivors.

On the
Bankston
, Williams discovered Andrea was alive and well. Back on the rig, she had seen a last life raft lowering from the platform and had leaped in.

A roll call confirmed that eleven men were missing and presumed dead. As dawn approached, the
Deepwater Horizon
workers watched from the
Bankston
as the drilling ship burned and listed. It would soon sink to the bottom of the Gulf’s seabed.

BP later investigated the
Deepwater Horizon
accident and issued a report concluding, “A complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation and team interfaces came together to allow the initiation and escalation of the accident. Multiple companies, work teams and circumstances were involved.”

Mike Williams put it this way: “All the things they told us could never happen, happened.”
¹

B
P’s catastrophe soon surpassed the
Exxon Valdez
wreck as the worst oil spill in American history. The
Valdez
had released 257,000 barrels of oil into Prince William Sound. The amount of oil released by the
Deepwater Horizon
’s blown well proved harder to measure, but eventually, the best scientific estimates held that almost 5 million barrels spilled before the well could be plugged. The
Exxon Valdez
had jolted America’s largest oil corporation to remake its safety, operations, and management systems. Over the ensuing two decades, within ExxonMobil, the wreck on Bligh Reef provided a kind of origins myth for internal reform and redemption, one repeated at employee meetings and safety minute rituals, as well as to journalists and shareholder audiences. If ExxonMobil regarded itself now as straighter than straight, the corporation’s narrative went, it was only because it had known firsthand the terrible consequences of failed risk management.

ExxonMobil’s K Street staff often extrapolated the corporation’s relatively strong safety record into an argument to members of Congress and oversight agencies that industry self-regulation can work well, and that ExxonMobil’s self-regulation, in particular, was highly credible and should be relied upon by government and the public.

Twenty-one years and twenty-seven days after the
Exxon Valdez
struck Bligh Reef, the
Deepwater Horizon
blowout exposed what the bipartisan national commission that investigated the disaster would call “such systematic failures in risk management that they place in doubt the safety culture of the entire industry.” Deep-water oil exploration and drilling, in particular, involved “risks for which neither industry nor government has been adequately prepared.”
²

The chain of errors that destroyed the
Deepwater Horizon
also exposed deep failures within BP and its contractors that were obviously not ExxonMobil’s doing or responsibility. Yet as had been the case in Prince William Sound two decades earlier, ExxonMobil and BP were linked in one critical aspect of the risk management system designed to protect America’s ocean ecosystems from oil disasters: response and cleanup.

T
he Mississippi River dumped sand, dead plants, and other precursors of fossil fuels into the Gulf of Mexico over millions of years. Freshwater delta flows sometimes produced pressurized traps of oil and gas offshore, as was the case off the Niger Delta in West Africa. The Gulf of Mexico’s salt domes held fossil fuels, as it turned out, as a result of many of the same ancient geological processes that had endowed onshore Louisiana and East Texas with oil riches. Early American oil geologists did not take long to follow the oil trail from Texas into the Gulf. Prospectors drilled the Gulf’s first offshore well in 1938.
³
The returns proved compelling. Oil exploration in shallow Gulf waters delivered high rates of success—new wells struck oil twice as often as on Texas or Louisiana lands, and the volumes uncovered were often much greater. For a while, the only wells that made technical and economic sense were those that could be drilled in waters shallow enough to support a drilling platform anchored by pilings in the seabed. Profits incentivized innovation. In 1962, Royal Dutch Shell announced that it had invented a floating drilling contraption that would allow oil exploration in waters too deep to support a traditional platform. The deep-water oil era began—and it, too, boomed. Floating platforms spread from the Gulf to the Pacific Ocean and Alaska. Production from the Gulf of Mexico alone soared from 348,000 barrels per day in the year of Shell’s announcement to 915,000 barrels by 1968, almost 10 percent of America’s domestic total.
⁴

On January 28, 1969, Union Oil Platform A-21 blew out in the Santa Barbara Channel. The spill soaked thirty miles of California beaches in oil. It was the early age of color television and dramatic visual news—moon landings, Vietnam jungle firefights, and televised presidential debates. Images of dead seagulls coated in oil and California beach enthusiasts mucking in tar beamed across national newscasts night after night, adding momentum to America’s burgeoning environmental movement. President Richard Nixon’s secretary of the interior, Walter Hickel, imposed a moratorium on all drilling and production in California waters.
⁵

That decision initiated what became an undeclared, ad hoc system for controlling offshore drilling in American waters. If the waters to be leased for risky oil drilling adjoined states with tourism-dependent economies or voters who supported tight environmental regulation, drilling would be banned. But if the waters adjoined states with pro-oil politics, such as Texas and Louisiana, offshore drilling would be permitted and even encouraged. (Alaska, with its gung-ho pro-oil politics and its vast stretches of protected public lands and waterways, was a special political case; some offshore leasing proceeded there, but it was often contested.) Under a federal law enacted in 1953, individual states own and manage resources beneath ocean waters for three nautical miles from the shore, although Florida and Texas own nine nautical miles’ worth, because of old treaty claims.
⁶
The federal government owns and manages the rest of America’s territorial waters, through the Department of the Interior. Even President Ronald Reagan, who was elected with a sweeping mandate to deregulate industry and spur economic growth, could not overcome America’s strangely Balkanized politics of offshore oil drilling. Reagan’s secretary of the interior, James Watt, initiated plans to lease oil in all of America’s oceans, but in the end, aggressive drilling went forward only in the waters off Texas, Louisiana, Mississippi, and Alabama. The eco-minded West Coast states of California, Oregon, and Washington wanted no part. Florida’s tourism and coastal real estate industries could not abide the risks of a Santa Barbara–scale spill, even though the state’s voters sometimes leaned Republican. Thus even Governor Jeb Bush, a scion of oil, would oppose offshore drilling for a time. On the Atlantic coast, Virginia, North Carolina, and New Jersey occasionally flirted with leasing Atlantic Ocean tracts for oil drilling in exchange for royalty revenue, but none of these states ever produced governors and political constituencies strong enough to go ahead.

After the
Deepwater Horizon
blowout, it became commonplace to observe that Big Oil had captured and weakened Washington’s regulation of offshore drilling, by influencing and outfoxing the weak and underfunded unit of the Department of the Interior, the Minerals Management Service, or M.M.S., which oversaw leasing and drilling in federal waters. It was certainly true that the oil industry outmatched M.M.S. regulators and that the industry muscled through an oversight system that relied heavily on self-regulation. But the weak regulatory system was also a consequence of the segregated American politics of offshore drilling.

The most powerful national environmental lobbies—the Natural Resources Defense Council, the Environmental Defense Fund, the Nature Conservancy, and the Sierra Club—did not focus heavily on the technical, regulatory, and risk management issues surrounding the Gulf’s Red State deep-water drilling operations. To the extent that the environmental lobbies worked on offshore oil issues, they focused more on preventing new leasing in Alaska or in the eastern Gulf, off Florida, where the oil industry sought to expand.

Also, as drilling boomed, Interior became the conduit for annual royalties that reached $23 billion in 2008, $17.3 billion of which was funneled to the deficit-burdened United States Treasury.
⁷
This cash flow reinforced congressional complacency. Besides, in most years, shipping accidents accounted for much more oil pollution leaching into ocean waters than offshore drilling or associated pipeline leaks. All this created a pressure-free atmosphere around Interior’s Minerals Management Service. Compared with food safety, toy safety, mountaintop coal mining, climate change, air quality, or water quality, the rigors of deep-water drilling operations and worker safety in the western and central Gulf of Mexico did not attract great scrutiny—as evidenced by the high numbers of deaths and injuries that took place on offshore platforms.

Deep-water drillers “succumbed to a false sense of security,” as the national commission put it. One warning sign was the well-documented unreliability of blowout preventers. These were contraptions meant to function as last-ditch fail-safe devices to smother uncontrolled wells before they could blow. A Norwegian firm, Det Norske Veritas, published a paper that examined fifteen thousand offshore wells operating between 1980 and 2006. It found eleven cases where teams drilling deep-water wells, fearing a blowout, had switched on their preventer devices. In only six cases did the wells come under control—an apparent failure rate of
almost 50 percent
.
⁸
The Department of the Interior commissioned studies by WEST Engineering Services in 2002 and 2004 that looked in detail at the workings of certain types of blowout preventers, including that deployed on the
Deepwater Horizon,
and found that in many cases, the preventers did not work as advertised. The findings illustrated, the authors of one of the Interior-commissioned studies wrote, “the lack of preparedness in the industry” to manage “the last line of defense against a blowout.”
⁹