“We Target Oil Companies”
Frank Sprow, the ExxonMobil vice president in charge of safety and environmental issues at the corporation after 2000, was a trim, athletic man who stood about six feet one inch tall. He had worked at Exxon since the 1960s; as he reached the corporation’s executive ranks, he wrote and oversaw its rigorous post-Valdez safety rules. He was also, in his private life, a thrill seeker.
In off-hours and on weekends and vacation days, Sprow sometimes went hang gliding. He tried extreme skiing. He raced motorcycles. He raced midget sports cars at Soldier Field in Chicago. He flew stunt helicopters and went parachuting. One of his friends owned a stunt plane, a mini Messerschmitt, and on the weekends the two of them occasionally went for a ride—they would fly straight up, cut the engine, and dive. To manage his hobbies while carrying out his professional role as the chief enforcer of ExxonMobil safety codes so pervasive that they encouraged employees to confess paper cuts, Sprow mainly chose to keep his off-campus activities to himself.
At one stage he developed a particular passion for bicycle racing. He competed in Europe and the United States. Racing proved hazardous, however; he was hospitalized a number of times after accidents. One day Sprow was lying in a Princeton, New Jersey, hospital bed, nursing a broken collarbone, when the telephone rang. An ExxonMobil colleague who was visiting him, and who was aware of his friend’s private passions, answered the call. It was Lee Raymond. Sprow shuddered a little and took the receiver.
“You’re probably thinking that I’m calling to ask how you’re doing and to wish you a speedy recovery,” Raymond said. “The reason I’m calling you is to tell you that this is your last injury as an employee of Exxon. Do you understand that?”
“Yes, I understand,” Sprow managed. Raymond hung up.
Sprow gave up bike racing and entered triathalons; he managed to avoid additional injuries, at least of the type that led to missed workdays and unfavorable safety statistics. He did not slow down much, however. He typically started his days by running ten or twelve miles. After the Mobil merger, despite a general awareness of Sprow’s hobbies, Raymond appointed him to run Safety, Health, and Environment for the worldwide corporation.
Sprow had shown that he could deliver measurable improvements in ExxonMobil’s safety and operational performance. Alongside Raymond, he proselytized the belief that zero accidents and defects was achievable, and that a fanatical devotion to safety in complex operational units such as refineries could lead to greater profits because the discipline required to achieve exceptional safety goals would also lead to greater discipline in cost controls and operations.
Sprow had studied chemical engineering and physics at the Massachusetts Institute of Technology, and he earned a doctoral degree in chemical engineering at the University of California at Berkeley. His advanced knowledge of chemistry gave him special credibility with Raymond, a fellow doctoral degree holder in the field. So, too, did Sprow’s ability, in a succession of management assignments, to break through Exxon’s habitual, bureaucratic resistance to change. Even so, along with many other managers, he occasionally suffered Raymond’s withering scorn. “He’s a pretty brusque guy,” Sprow conceded. “That’s probably an understatement. I have been cursed at by him a few times, and perhaps demeaned. . . . There were a few times when I came home and told my lovely wife, ‘This is probably going to end soon.’”
After taking charge of worldwide safety and environmental matters at ExxonMobil, Sprow became interested in dangerous game hunting—a hobby at least a little more in keeping with the masculine corporate culture. Sprow sought more challenging landscapes than ExxonMobil’s sprawling Texas hunting ranch; he traveled to Africa periodically to shoot lions and rhinos. This bolstered his resolve when facing down Raymond.
Sprow served as one of Raymond’s key lieutenants on climate change matters. Ken Cohen and his public affairs shop, in tandem with the K Street office in Washington, oversaw contributions to free-market advocates who published, spoke out, and filed lawsuits to challenge policies designed to reduce greenhouse gas emissions or assess the long-term impact of global warming. On the ExxonMobil organization chart, however, climate policy fell within Safety, Health, and Environment because it was, like oil spills or air pollution, an environmental issue that required worldwide corporate edicts and continuous management attention. Sprow was among those, like Raymond, who believed that “some of the environmental groups, with relatively little science behind it, at least in the early days,” had “rallied way over to the side that we just need to flat move away from fossil fuels.” He agreed with Raymond that poorer governments should be very cautious about the economic damage they might do to their struggling populations if they moved to tax or limit carbon-based energy sources too quickly or severely.
By 2002, however, it had become apparent to Sprow and other senior executives that ExxonMobil had, at a minimum, a communications problem surrounding its climate policy advocacy. The corporation was being vilified, and it seemed, at the same time, to be undertaking no constructive activities to address or even acknowledge the risks climate change might pose. Early in 2002, the Bush administration had developed a strategy for fending off critics of its own: The administration pledged to invest in scientific research, while resisting any legislation or treaty that would tax or limit carbon-based energy. Around the same time, Sprow pitched Raymond on a similar positioning for ExxonMobil.
“Okay, we cannot prove that climate change is being driven by man-made activities,” Sprow said. Also, even if the burning of coal and gasoline was warming the planet, there were no “cost-effective steps” that would ease the problem, at least not “steps that are available now.” Thus far, he was in lockstep with Raymond’s views.
The science of climate change might contain significant uncertainties, he continued. Yet the uncertainties also cut in the other direction: It was at least possible that global warming was indeed under way and that it could create large disruptions in the future. Sprow put a question to Raymond: “Is it not the case that the risk of climate change is high enough that responsible efforts . . . to mitigate risk would be worthwhile?”
Raymond did not denounce him as an idiot, which was a start. The two of them, other senior ExxonMobil executives, and members of the corporation’s board of directors who oversaw environmental and public policy “talked about that a long time.” They decided during 2002 that ExxonMobil should invest in research that might bring breakthrough clean energy technologies forward, without altering the corporation’s opposition to greenhouse gas regulation—a policy evolution that exactly mirrored the Bush administration’s approach.
ExxonMobil wanted “partners with a faultless reputation” whose work on alternative energy technology could burnish the corporation’s reputation in the field, Sprow recalled. Although he remained skeptical of what he regarded as General Electric’s favor mongering in Washington, Raymond reached out to Jeffrey Immelt, G.E.’s chief executive and the successor to Jack Welch, to explore a joint venture: Perhaps ExxonMobil could benefit from some of G.E.’s carefully honed image making. ExxonMobil, G.E., Toyota, and Schlumberger eventually agreed, late in 2002, to provide $225 million in funding to a new Global Climate and Energy Project, housed at Stanford University; ExxonMobil’s contribution would be $100 million. The project would conduct basic research, overseen by independent scientists, into alternative energy technologies promising enough to address the huge demand for energy worldwide, while at the same time offering pathways to reduce greenhouse gas emissions.
ExxonMobil had also funded computerized climate modeling work at the Massachusetts Institute of Technology. The Stanford project would provide the corporation with something new and credible to point to in response to accusations that it put its profits before the public welfare. The Stanford investment soon became a familiar element of ExxonMobil PowerPoint slides and media talking points, but it would prove to be a limited basis for enhancing the corporation’s reputation on the issue. For one thing, Lee Raymond had not abandoned his fundamental doubts about whether the planet was warming at all. Nor was he prepared to yield the issue to environmentalists. Like his friend Dick Cheney, Raymond believed that the best way to defeat or at least contain an enemy was to remain clear-eyed and unsentimental about the enemy’s intentions.
Greenpeace’s penchant for direct action, guerrilla theater, and civil disobedience had attracted more than two million members since its founding in the counterculture coffeehouses of Vancouver during the Vietnam era. Greenpeace now ran its global campaigns from Amsterdam and maintained offices in more than three dozen countries; its portfolio of issues had expanded to protecting whales and warning of the dangers of climate change.
The 2000 election had forced a reevaluation of Greenpeace’s strategy in the United States. With Al Gore out and George W. Bush in the White House, “Climate [was] suddenly on shaky ground,” recalled Kert Davies, the organization’s Washington-based research director, who had arrived that year from a group called Ozone Action. The question for Greenpeace was how to best launch a worldwide campaign targeting Bush. “The first instinct was, ‘He’s Big Oil,’ so we target oil companies.” Greenpeace began with a generalized campaign highlighting “oil addiction” and distributing posters of Bush holding a gas nozzle like a weapon. That campaign soon evolved into one that explicitly targeted “Exxon as a proxy for Bush . . . a proxy for corporate power over government in the United States.”
Davies played a prominent role in shaping the new campaign. He knew the art of media advocacy; he could remember the “killer quotes” he had placed with particular reporters from major newspapers to advance his messaging. He was a tall, thin man who biked to work at Greenpeace’s office, a warren of desks made from recycled materials, in the Chinatown section of Washington, D.C. Davies had grown up in central Philadelphia, a child of “campers and hippies.” His father was an architect, and his mother was a computer programmer and elections judge. In the midst of the Reagan administration, he studied environmental issues at Hampshire College, whose reputation for crunchiness was the subject of a recurring skit on Saturday Night Live. After graduation, he backpacked around the world and earned a master’s degree in environmental studies at the University of Montana before taking up green campaigning as a formal profession.
He had substantial experience by the time the ExxonMobil challenge fell to him. His thinking was forged as well by Greenpeace’s rigorous internal culture. The organization engaged in ruthless internal reviews and self-criticism in regard to the effectiveness of its advocacy; Davies repeatedly had to defend his choices before colleagues in meetings and in conference calls, some of whom were no less direct than Lee Raymond in their cross-examinations of his decision making. He proved persuasive: ExxonMobil seemed the best target for Greenpeace’s climate work during the first Bush term, because “it was the biggest and the ugliest and . . . had said the worst things about climate.” Lee Raymond, in particular, seemed a gift.
Davies’s strategy was to “pillory this company,” document its “wrong behavior” on climate, and “force other companies to run away from that model.” In July 2001, Greenpeace released “A Decade of Dirty Tricks: ExxonMobil’s Attempts to Stop the World [from] Tackling Climate Change”; an unflattering photograph of Lee Raymond, jowly and thick-lipped, stared out from the report’s cover. The next year, in “Denial and Deception: A Chronicle of ExxonMobil’s Efforts to Corrupt the Debate on Global Warming,” Greenpeace documented the corporation’s funding for proxy groups that raised doubts about climate science. In an introductory note, the executive director of Greenpeace described ExxonMobil as “now standing in the path of history.” In its environmentalist opponents, he continued, the corporation faced a force akin to “the movement led by Gandhi to free the Indian people, the U.S. civil rights movement, and Solidarity’s defeat of Polish communism. The goliath ExxonMobil may provide the perfect catalyst for much needed reform of corporate power. . . . Rave on.”
Greenpeace did not fantasize that it could change ExxonMobil or curtail its profit making; the campaign Davies oversaw did not rely on calls for formal boycotts against ExxonMobil products. “Those objectives would be too hard to reach,” Davies said. Instead, the idea was to show the world—and other multinational corporations—“what it means to be wrong on climate change” and to drive other chief executives away from Lee Raymond’s position. The real targets of the campaign, Davies said, were the “BPs and the Fords and the Coca-Colas” that were iconic in their markets and led by executives less determined than Raymond to challenge climate science and the Kyoto Protocol.
ExxonMobil’s corporate culture prescribed “very careful action,” as Davies put it. This meant that Irving executives would be slow to react to Greenpeace’s provocations and accusations, and when they did react, their responses would often be so heavy-handed that they would only reinforce the Greenpeace message. “They basically held their ground,” Davies said. “They didn’t give an inch on the policy. They didn’t try to moderate their voice at all.”
Greenpeace and allied researchers filed Freedom of Information Act requests seeking documents about early corporate contacts between major oil companies and the Bush administration. Davies already knew that ExxonMobil funded small think tanks and science policy groups in Washington that issued reports and statements arguing that climate change was unproven and of no public concern. The documents produced to Greenpeace under the F.O.I.A. request turned up additional briefing memos and PowerPoints prepared for the White House by ExxonMobil lobbyist Randy Randol and the corporation’s astrophysicist Brian P. Flannery. “Gaps and uncertainty in observations and scientific understanding of critical climate processes limit current ability to predict the rate and consequences of future climate change,” Flannery wrote in a March 2002 memo. An accompanying PowerPoint urged the administration to “avoid near-term caps on CO2 emissions” and “expand nuclear energy.”
The Bush White House did not require ExxonMobil’s bullet points to adopt these recommendations; a majority of the president’s cabinet and the Republican leadership in Congress already shared many, if not all, of Lee Raymond’s views. Davies and his Greenpeace colleagues believed, however, that the documents they discovered established some degree of cause and effect: that ExxonMobil and other politically influential fossil fuel companies had, in effect, through their campaign contributions, purchased the Bush administration’s climate policies, and then reinforced this achievement by sowing public doubts about climate science through the systematic funding of proxy groups.
ExxonMobil had, in fact, self-consciously invested in the dissemination of doubt about climate change. Under Lee Raymond, ExxonMobil had persistently funded a public policy campaign in Washington and elsewhere that was transparently designed to raise public skepticism about the science that identified fossil fuels as a cause of global warming. ExxonMobil ran some aspects of its campaign clandestinely; that is, it did not initially disclose the full scope and purpose of contributions it made. ExxonMobil’s opponents were guilty of lumping together the corporation’s support for small, havoc-making groups focused heavily on climate issues with ExxonMobil’s support for legitimate, well-established conservative and free-market research institutes such as the Cato Institute for Public Policy Research, the American Enterprise Institute, and the Heritage Foundation.
What distinguished the corporation’s activity during the late 1990s and the first Bush term was the way it crossed into disinformation. Even within ExxonMobil’s K Street office, a haven of lifelong employees devoted to the corporation’s viewpoints and principles, an uneasy recognition gathered among some of the corporation’s lobbyists that some of the climate policy hackers in the ExxonMobil network were out of control and might do shareholders real damage, in ways comparable to the fate of tobacco companies. The more it went on, and the more Greenpeace and other activist groups exposed ExxonMobil’s more clandestine investments, the more it became clear that the corporation was taking on risk. If ExxonMobil were ever judged in a courtroom to be cooking science to appease Raymond’s personal beliefs about warming issues, it could be devastating. The corporation was not alone in its support of fringe activists on climate, but it persisted longer than many other business groups and individual Fortune 500 corporations. The available record suggests that ExxonMobil was more aggressive than all but a handful of peer companies during this period, despite the fact that the corporation, because it produced no coal, did not belong to the energy industry’s most vulnerable sector if restrictions on carbon fuels were enacted.
Raymond regarded the groups he supported as entirely legitimate participants in mainstream scientific debate. The credibility of this claim seemed increasingly doubtful, however. Science published a review of 928 peer-reviewed papers on climate science written during the late 1990s and the first Bush term; none of the papers, the survey’s author found, “disagreed with the consensus position” about the probable man-made causes and dangerous trajectory of climate change—an assessment Raymond and his allies rejected. ExxonMobil funded a few institutions that supported the consensus position on climate science, but the corporation’s allies in climate science advocacy were more aligned with James Inhofe, the United States senator from Oklahoma, who asked on the floor of the Senate, in 2003, “With all of the hysteria, all of the fear, all of the phony science, could it be that man-made global warming is the greatest hoax ever perpetrated on the American people? It sure sounds like it.”
These investments in skeptics of the scientific consensus coincided with what at least a few of ExxonMobil’s own managers regarded as a hypocritical drive inside the corporation to explore whether climate change might offer new opportunities for oil exploration and profit. One of ExxonMobil’s most accomplished earth scientists, Peter Vail, had won acclaim for his insights into how changes on the earth’s surface affected ocean levels and other geological shifts. Vail had developed a calculation known as the Vail curve to describe some of these ocean events. In the ExxonMobil upstream division in Houston, scientists in charge of finding new deposits of oil and gas began to explore whether Vail’s scientific insights might give them a leg up in exploration by allowing them to predict how climate change—if it did materialize—might alter surface and ocean trends and lead the corporation to new oil finds. “So don’t believe for a minute that ExxonMobil doesn’t think climate change is real,” said a former manager involved with the internal scientific review. “They were using climate change as a source of insight into exploration.” This work remained unpublicized.
A raiding party of about four dozen arrived at ExxonMobil’s headquarters in Irving, Texas, shortly before eight in the morning on May 27, 2003. The raiders divided themselves into three units. The first group pulled up at the main entrance in two panel trucks marked “ExxonMobil Global Warming Crimes Unit.” They scrambled out, blocked the driveway, and chained themselves to the trucks in front of the gate. A second team wearing business suits and toting briefcases arrived at the maintenance gate at the rear of the one-hundred-acre campus. They cut a lock and drove inside in two rented Jaguars. Two vans pulled up at the delivery gate carrying the third unit of attackers. Most of that group had dressed in tiger costumes, mocking Exxon’s old “Put a tiger in your tank” advertising slogan. They unpacked a ladder and a raft and climbed over the gate, chaining it shut behind them. Some of them dragged their raft to the pond within view of the executive suites and set themselves afloat. Other tigers climbed onto the roof, where they unfolded a banner that declared ExxonMobil’s headquarters to be a global warming crime scene and tossed around a balloon designed as a globe.
The protesters wearing business suits drove their Jaguars across an unpaved road, entered the employee garage, and found their way inside the headquarters building. They fanned out and offered spontaneous lectures and leaflets on climate change to bemused ExxonMobil executives and staff. Two activists in tiger suits also made it inside the headquarters. Some of the oil corporation’s employees thought a terrorist attack might be under way. The Irving Fire Department eventually brought in one of its ladder trucks to remove the tigers on the roof.
It had taken Greenpeace three months and several tens of thousands of dollars to plan the raid. It did so in strict secrecy. The group’s activist coordinator, Maria Ramos, had dispatched a recruiting notice seeking those who might be interested in “challenging the world’s largest company . . . and engaging in guerrilla tactics.” One of the volunteers, Anne Nunn, traveled from Australia, where she had recently completed a raid on a Mobil tanker off the Australian coast. The Irving raid was timed to influence news headlines before ExxonMobil’s 2003 annual shareholder meeting; it succeeded. “If you’re a fringe, radical organization like Greenpeace,” said Tom Cirigliano, of the corporation’s public affairs department, “you need a target, you need an enemy, and you need a villain.”
Increasingly, inside ExxonMobil, the corporation’s image strategists reflected upon whether they could find some way not to play the role Greenpeace had assigned them. The raid provided additional evidence, if more was required by this time, that Lee Raymond’s visibility on the climate issue had drawn extraordinary attention that was unlikely to dissipate. The attention had reached a point where it was undermining Raymond’s own cause. ExxonMobil’s many allies in Washington who opposed the Kyoto Protocol on economic and fairness grounds—utilities, carmakers, free-market conservatives in academia and journalism—found themselves tarred by the accusation that all of their arguments might be merely a front for the oil industry’s largest corporation.
ExxonMobil executives consoled themselves by saying that the Greenpeace campaign was just part of the price of doing business in the modern oil industry. In the marketplace of nonprofit fund-raising, ExxonMobil’s notoriety offered an attractive opportunity for environmentalists to raise money by promising to hold Big Oil to account, and there was nothing much they could do about that.
The corporation’s executives did not have to passively accept Greenpeace’s assault, however. After the Irving raid, ExxonMobil approached its Greenpeace problem as an aggressive litigator would. The corporation encouraged the Dallas County district attorney to prosecute fully the Greenpeace protesters who had participated in the Irving action. ExxonMobil also sued Greenpeace and thirty-six individuals who had been arrested on its campus. By threatening fines and jail terms, the corporation eventually won a seven-year standstill accord in which Greenpeace agreed not to commit any crimes while campaigning against the corporation. As a result of this settlement, the group’s anti-Exxon campaign migrated from newsmaking direct action and civil disobedience into online publishing.
Investigators from the Internal Revenue Service turned up at the Chinatown office in Washington to conduct an audit. A small nonprofit group called Public Interest Watch had raised questions with the I.R.S. about whether Greenpeace was compliant with federal laws governing groups that received tax-deductible contributions. Greenpeace passed the audit and opened its own investigation of Public Interest Watch.
The group’s tax form, filed about two months after the activists in tiger costumes had scaled the Irving headquarters’ roof, showed that a single donor was responsible for $120,000 of Public Interest Watch’s $124,000 in annual revenue: ExxonMobil Corporation.
As Raymond battled Greenpeace, the international oil company he most admired after his own, Royal Dutch Shell, stunned stock market investors by revealing that it had overstated its true proven reserves of oil and gas; the company eventually calculated that it had puffed up its holdings by 4.35 billion barrels of oil, an amount equivalent to more than a fifth of ExxonMobil’s total proved reserves worldwide. Three top Shell executives resigned. The scandal made plain that the pressure on the very largest international oil companies to replace reserves in the era of resource nationalism had become so severe that it could induce grotesque distortions.
Shell’s revelation galvanized regulators at the Securities and Exchange Commission in Washington to look at reserve counting and reporting practices by major American oil corporations. That review in turn brought fresh attention to a practice ExxonMobil had gotten away with for many years: The corporation still claimed each winter in press releases and in Wall Street presentations that it had an unbroken record, dating back to 1993, of replacing, through the discovery and purchase of new reserve additions, at least 100 percent of the oil and natural gas it pumped or otherwise disposed of each year. But the assumptions ExxonMobil used in making these public claims did not conform to S.E.C. regulations—and the commission and its staff had done nothing, under either the Clinton or Bush administration, to force ExxonMobil to modify its public statements.
To protect stock market investors from oil operators that inflated their reserves to boost their share prices, Congress had mandated in the Securities Act of 1933 and the Securities Exchange Act of 1934 that Washington regulators oversee how publicly traded companies reported their numbers. The S.E.C. had later issued detailed regulations, under Rule 4-10, about how a corporation such as Exxon should count its oil and gas holdings and report them in mandatory S.E.C. filings. Among the regulations: To report proved reserves, a company had to show there was a “reasonable certainty” that the reserves would be “recoverable in future years from known reservoirs under existing economic and operating conditions.” That meant, too, a company had to be able to transport the oil to market by sea or pipeline at a profit-making cost. This was obviously an imprecise standard—the reserves being counted were by their nature difficult to measure scientifically, so oil companies retained, by regulatory design, some discretion to decide what was proved and what was not.
To calculate the economic viability of reserves, companies were required to mark oil prices on the last date of every year. Also, certain forms of oil, such as bitumen or oil sands extracted by techniques that resembled mining, could not be counted. The latter rule remained the main reason ExxonMobil’s public claims about reserve replacement differed from the disclosures it made officially in S.E.C. filings. If ExxonMobil had not disregarded the S.E.C. oil sands rule, it would not have been able to boast of an unblemished record. “This marks the tenth year in a row that we’ve exceeded 100 percent reserves replacement,” Raymond declared in a press release disclosing the corporation’s 2003 results. Yet that was true only by using ExxonMobil math. According to S.E.C. rules, the corporation had replaced reserves fully in only two of the previous four years. And the fudging involved issues that were material to investors: As Raymond put it himself, “Continued high-quality additions to ExxonMobil’s resource base are the foundation of our long-term profitable growth.”
As Wall Street focused in on reserves and as ExxonMobil implemented O.I.M.S., Raymond tightened and made uniform the corporation’s reserve counting rules. The system’s stated goals included objectivity and rigor: “A well-established, disciplined process driven by senior-level geoscience and engineering professionals . . . culminating in reviews with and approval by senior management. Notably, no employee is compensated based on the level of proved reserves.” Such bonus incentives for managers involved in reserve counting had apparently contributed to Shell’s overstatements; ExxonMobil eschewed them even before the Shell scandal broke.
By all accounts, Raymond genuinely wanted order and accuracy. In financial management, for example, to complement O.I.M.S., he created the Controls Integrity Management System, or C.I.M.S., a financial audit and risk management system designed to identify and root out managers who cut corners, massaged revenue reporting, or fiddled with expense accounts. Many corporations tolerated split contracts or other gray-area accounting practices designed to smooth out quarterly earnings reported to the public, so that shareholders might see a picture of stability. At ExxonMobil under Raymond, such accounting manipulation could be a firing offense. Raymond would also order employees terminated over tiny expense irregularities.
On oil and gas reserve counting, however, the ExxonMobil system tolerated more flexibility. S.E.C. rules effectively allowed oil companies to manage the timing of announcements of new proved reserves. This helped ExxonMobil control when new proved reserves were revealed publicly, and by doing so aided its effort to portray a steady story of year-by-year reserve replacement for Wall Street. ExxonMobil’s internal rules held, for example, that for reserves to be counted as proved, the corporation’s management must have authorized investment for their development. This meant, as a practical matter, that the Management Committee could adjust the annual timing of proved reserve additions by synchronizing investment decisions. “The key to reserves, among other things, is when you can actually book them,” an executive involved with the process said. “You can’t and you shouldn’t book reserves until you’ve really made an investment to develop the reserves. So consequently, if you’ve figured out a way to manage the system properly, consistent with the continuity of capital budgeting, you can have a pretty smooth reserve identification over time.” As the Wall Street analyst Mark Gilman put it: “If you are conservative about when you book reserves during the development of projects, in effect you create an inventory going forward” that can be declared as new proved reserves as the timing of reserve replacement announcements requires in order to present a smooth picture.
There would be nothing illegal or even improper about this managed timing if it were linked to a rigorous internal counting system, such as ExxonMobil possessed; if the counting conformed to S.E.C. rules; and if the results were communicated honestly to investors and the public. Characteristically, ExxonMobil’s internal system might have been the most rigorous in the industry, although neither the S.E.C. nor any other regulator had the capacity to confirm that through auditing. Also characteristically, the corporation rejected the precepts of government regulators and communicated in public on its own terms.
Besides the S.E.C. rule that prohibited the counting of oil sands, the other regulation that galled Raymond was the one dictating how a corporation should determine whether proved reserves were economically viable. The S.E.C. held that the viability of reserves should be judged against prices on the last day of the year, December 31. Raymond thought that was dumb: ExxonMobil ran its business by thinking about price ranges and averages, not one arbitrary day’s price. So in public and to Wall Street, he used his own system of average prices to calculate whether reserves should be counted.
After the Shell scandal, the S.E.C. issued new “guidance” to ExxonMobil, saying that it should use the year-end pricing rule, at least in commission filings. Raymond now grudgingly reported the S.E.C. number alongside his own. For the first two years, the consequences of following S.E.C. regulations were highly unfavorable, amounting to a total reduction in ExxonMobil’s proved reserves of oil and gas liquids of 1.27 billion barrels. Even as he noted the S.E.C.-mandated numbers, Raymond went right on issuing press release claims that ignored the rule. With other industry executives, he also initiated a Washington lobbying campaign to have the rules changed.
In some later years, if ExxonMobil had followed the S.E.C. rules, the corporation’s reserve replacement figures would have been higher than under its own system of counting—it would have looked better. The corporation ignored the advantageous swings in the same way that it ignored the disadvantageous ones. Overall, the two rules ExxonMobil seemed to find most onerous—the oil sand prohibition and the pricing formula—deprived the corporation of the claim that it had smoothly replaced reserves, year after year, since Raymond became chief executive. The picture under S.E.C. rules, instead, although it was not one of disastrous decline, was one of volatility, which implied a degree of change and insecurity in the reserve arena. This in turn happened to reflect a broader truth about the challenges confronting major international oil corporations.
Raymond certainly had a case on the merits: The S.E.C. prohibition of oil sands could be regarded as outdated, and the pricing rule could be dismissed as too arbitrary. Investors might benefit from revisions that better aligned S.E.C. regulation with the rising importance of oil sands. ExxonMobil’s position would have been more defensible, however, if it had communicated to investors and the public more forthrightly, in alignment with S.E.C. regulations, while it petitioned for regulatory change. “Exxon seems incapable of simply stating, ‘We did not replace all of our reserves this year, but we have a heck of a lot of reserves anyway, and we convert them into cash at a more efficient and consistent rate than any of our competitors,’” wrote Steve LeVine, the journalist and analyst who first called attention to the gaps in ExxonMobil’s public reporting. “Nope, it has to say that it’s replaced its reserves for [ten years straight] when, legally speaking, it hasn’t.”
The dodge reflected on how the need for reserves pushed the corporation toward higher-risk frontiers: Chad, Equatorial Guinea, and deep ocean waters where drilling technology and safety procedures had to be reengineered on the fly. The reserve replacement conundrum pushed the corporation, too, toward unconventional resources like the Canadian oil sands, where innovation and uncertain new drilling techniques would be required to make money at the rate ExxonMobil executives and shareholders expected and where the environmental risks were higher than normal. It also led Lee Raymond to reflect regularly on whether it might be possible to find a new way back into the huge oil zones where abundant crude could make reserve-counting rules irrelevant, as they had been for Exxon and Standard Oil for so much of the twentieth century, when the corporation was awash in equity oil in the Middle East.
Above all, any global oilman thinking big coveted access to Saudi Arabia.