Book: Private Empire: ExxonMobil and American Power

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“The Cash Waterfall”


In Hugo Chavez’s Venezuela, ExxonMobil’s strategy for attracting goodwill in the midst of political contention relied on the powers of art. The corporation staged a salon exhibition in Caracas at regular intervals, with prizes for the best work. It held the event at the National Art Gallery on the Plaza de los Museos. A serene, neoclassical building housed the gallery on grounds that contained a manicured interior courtyard, weeping willows, and a small pond. Tim Cutt, an American who served as the president of ExxonMobil’s Venezuela operations after 2005, presided over the exhibitions with the careful decorum of a museum curator who must please donors and patrons of impossible quirkiness and diversity. The tone Cutt and his colleagues sought to convey at the events was, The art speaks for itself; it brings us all together. In Venezuela’s eroding democracy, however, that wish proved increasingly difficult to fulfill.

The trouble began as the 2006 presidential election approached. The long struggle between President Hugo Chavez and his opponents intensified. A son of schoolteachers, Chavez had enrolled in a military academy as a young man, played baseball, wrote poems, fought in counterinsurgency campaigns, and rose to the rank of lieutenant colonel. During the 1980s, he became involved in leftist movements seeking to challenge Venezuela’s business and landed elites for power; with his red beret and fiery rhetoric, he emerged as a populist leader. He was jailed for his role in a 1992 coup attempt and later won the presidency by promising to restructure Venezuela’s corrupt, inequitable economy for the benefit of the poor. Once in office, he acted with increasing ruthlessness to consolidate power. Democratic, civic, business, and military forces opposed him.

Venezuelan artists seized on the annual ExxonMobil exhibition at the National Art Gallery as a forum for dissent: They submitted to the contest only paintings oiled in black, with the map coordinates of Venezuela, from west to east, lightly etched on the dark canvases. ExxonMobil’s Caracas executives decided they had little choice but to mount the stark paintings all around the gallery.

The artists demanded the microphone at the exhibition’s opening. The corporation’s mortified local public affairs team negotiated an agreement to let them speak briefly; Tim Cutt yielded the floor. The artists explained one after the other that their paintings depicted the future of Venezuela under Hugo Chavez: It would be bleak, they said, in case anyone missed the symbolism of their canvases. They denounced the president and his encroachments on civic freedoms. ExxonMobil’s executives nodded politely.

This was the sort of awkwardness that had persuaded the corporation’s engineer executives to steer clear of politics in the countries where they worked, and to concentrate as narrowly as possible on those issues that enabled oil and gas production. Now ExxonMobil had opened the door to art-as-politics and there was little the Caracas office could do to reverse course, its local executives believed. If they canceled the next contest, they would signal fear or, worse, that ExxonMobil was somehow choosing sides in Venezuela’s polarized polity. It was not clear whether Chavez or his opposition would prevail across the long arc of years by which ExxonMobil measured geopolitics: As recently as 2002, the president had barely survived an uprising and coup attempt.

Once the ExxonMobil art wars were launched, the Chavez regime acted decisively: It dispatched its own cadres to the next corporate salon. The Chavez loyalists took the floor and delivered pointed speeches against Yankee imperialism. There was nothing the ExxonMobil executives could or would do to stop them; the National Art Gallery was state owned, and these were Venezuelan government representatives. Cutt and his aides reported the incident to their supervisors at the ExxonMobil upstream division in Houston. Their shared conclusion, said a former executive involved, was that “this is going to be harder and harder to handle.”

ExxonMobil had multiple interests in Venezuela: downtream filling stations, some oil production ventures, and supply agreements that directed Venezuelan oil to a large refinery in Chalmette, Louisiana, which ExxonMobil owned jointly with Venezuela’s state-owned oil company. The web of contracts, financing agreements, and supply linkages meant that confrontation with Venezuela’s leader could prove unusually messy and costly. The dependency was mutual: Venezuela’s oil was unusually sour, not suitable for most refineries worldwide, whereas the Chalmette facility was tailor-made to handle it profitably. Moreover, as the U.S. embassy noted succinctly, “Chavez’s priority is regime survival.” He needed oil royalties, profits, and taxes—the principal source of revenue for the Venezuelan treasury—to pay for expanded social spending born of his self-styled Bolivarian revolution. After the failed 2002 coup attempt, Chavez signaled in speeches and rambling television interviews that he intended to take greater control of Venezuela’s oil industry, to challenge what he described as the dominance of foreign profiteers. Yet some of ExxonMobil’s executives calculated that the president could not afford to spook international oil corporations precipitously or to trigger even more capital flight from Venezuela than was already taking place in response to the president’s policies.

As Chavez gathered power and increasingly employed the populist rhetoric of resource nationalism to stir his followers, ExxonMobil responded initially with appeasement. During 2004, Chavez came under intense pressure from the democratic opposition, a wave of resistance that culminated in the scheduling of a referendum in August of that year to determine whether he could continue in office. Part of the charge against him was that he was jeopardizing Venezuela’s economy through his rash, irrational, corrupted populism. Chavez pressured the international oil companies in Venezuela to sign and publicize agreements with his regime on the eve of the election. Televised signing ceremonies would signal confidence in his presidency by bastions of global capitalism. ExxonMobil had been talking with successive Venezuelan governments for nine years about a multibillion-dollar petrochemical investment that would supply plastics to Latin America’s burgeoning economies. It had never been able to close even a preliminary deal. Now Chavez volunteered to sign an initial understanding—if ExxonMobil would agree to a televised signing ceremony three days before the referendum vote, effectively handing Chavez the American corporation’s endorsement.

The Bush administration sought to contain Chavez and hoped democratic forces would overthrow him peacefully. The referendum was a critical moment. The administration tried not to undermine Chavez’s opposition by embracing them openly, but there was no question which side of the vote Bush was on. ExxonMobil’s executives understood perfectly that the administration would prefer them to take no steps that would strengthen Chavez on the eve of a critical vote about his legitimacy and tenure in office. On the other hand, here was a long-sought investment opportunity finally on offer. The corporation capitulated to Chavez. It agreed to a televised signing ceremony just three days before the election.

Charles Shapiro, Bush’s ambassador in Caracas, asked an ExxonMobil executive why the corporation would accept such a clearly supportive contract signing on the eve of an “event that has convulsed Venezuela’s political life.” The executive replied that ExxonMobil “could not think of any other issues to raise” with Chavez’s government in the contract negotiation, and the Venezuelans had been “pressuring the company [to] sign immediately.” Lee Raymond, then ExxonMobil’s chief executive, telephoned the Bush White House to tell them of his decision. His deputies in Venezuela signaled that Raymond might be willing to meet Chavez personally if the petrochemical talks advanced far enough. Amid fraud allegations, Chavez won the vote.

The peace ExxonMobil purchased that summer did not last. Politics, not the maximization of profit, drove Chavez’s thinking about Venezuela’s oil industry. Reasserting Venezuelan control over the country’s oil was for Chavez an irresistible opportunity. As his assaults on the contract terms enjoyed by the international oil majors intensified, ExxonMobil’s executives and lawyers decided that this time, they would not give in. They also decided to maximize Chavez’s pain. They concocted a legal ambush—carried out, in its final act, on a wintry Friday afternoon in the Manhattan offices of a prestigious law firm—to seize by stealth more than $300 million in cash from the fiscally strapped, debt-laden Venezuelan regime. It would be one of the largest asset seizures ever attempted by an American oil corporation. The Bush administration struggled to punish Chavez for his anti-American policies in a way that measurably pinched him. ExxonMobil, when it finally aligned with the administration’s perspective, developed a practical scheme. The corporation’s motivations were pecuniary—the interests of its private empire, not the policies of President Bush, provided the cause. The plan involved a mechanism of modern global finance known to its participants as “the cash waterfall.”

Exxon had been thrown out of Venezuela once before, in 1975, when the country’s elected government embraced the global trend of oil nationalizations. (Venezuela’s government claimed its intervention was not a full expropriation, but Exxon insisted that it was, and the American government backed Exxon up as the company fought for compensation.) To ease Exxon’s departure, Venezuela cut some unpublicized sidebar deals, an American official and a former Exxon executive said later. The state-run oil giant, Petróleos de Venezuela, known by its acronym, P.D.V.S.A. (pronounced as “peh-de-vay-suh”), allowed Exxon to purchase Venezuelan oil at discounted rates, for refining and onward sale.

Nationalization had proven to be disastrous for the Venezuelan oil industry the first time around. P.D.V.S.A. had many outstanding engineers and executives educated at international universities, but under political control the state-run company could not acquire the capital and technology required to maintain oil production. Venezuela’s oil output fell by more than half, from 3.7 million barrels per day in the mid-1970s to just 1.8 million barrels per day by the mid-1990s.

Falling global oil prices also played a role in the industry’s collapse, in part because much of Venezuela’s oil was “extra-heavy,” meaning it was laden with sulfur, acid, salt, and heavy-metal contaminants. (An industrywide system developed by the American Petroleum Institute designated oil as “light,” “medium,” “heavy,” or “extra-heavy,” on a scale that, among other things, compared the density of a particular batch of oil with the density of water; extra-heavy oil was denser than water. The A.P.I. scale used numerical degrees to describe grades of oil, ascending from heaviest to lightest. Extra-heavy oil was less than 10 degrees, whereas light or “sweet” crude, the most suitable for refining, could be as high as 48 degrees. Oil rated higher than 31 was labeled “light.”) Heavy oil required extra production steps to prepare it for sale. Among other problems, the oil did not flow smoothly in its natural form. The costs of these additional processes meant that most heavy and extra-heavy oil could be extracted profitably only when global oil prices were high. P.D.V.S.A. lacked the technologies to produce Venezuela’s reserves economically as prices fluctuated at low levels during the 1980s and 1990s.

Venezuela reversed its attitude toward outside corporate oil investment as the cold war’s end spurred privatizations worldwide. The country’s oil-dependent economy had long stagnated, and rates of poverty had risen, in line with the grim forecasts of resource curse theorists. To generate more revenue for development, the government opened talks with international oil companies about deals that would allow foreign ownership of Venezuelan crude again, through joint ventures with P.D.V.S.A.

Some of the deals involved the country’s rich, underdeveloped vein of extra-heavy oil, in the Orinoco River Basin, which lay in Venezuela’s wet coastlands to the east, near Guyana. The Orinoco River snaked thirteen hundred miles to the Caribbean through tropical palms and slash-and-burn agricultural fields. The United States Geological Survey estimated that the basin held between 380 billion and 650 billion barrels of recoverable oil, perhaps double Saudi Arabia’s endowment. This vast reserve lay beneath the river basin’s muddy soil, but the petroleum was unusually viscous and contaminated. American, Canadian, and European oil companies had begun to experiment by the late 1990s with new technologies that could efficiently “upgrade” heavy oil near wellheads and refine it to a lighter blend, suitable for international markets. Mobil was a leader in the field. Its executives opened talks with Venezuela’s oil ministry about an Orinoco heavy-oil project in 1991 and finalized a contract six years later. The deal was known as the Cerro Negro Association Agreement. (There were four such associations created to mine Orinoco’s reserves. Total of France, Statoil of Norway, ConocoPhillips, Chevron, and BP all participated, either as operators or as minority holders.)

Mobil’s civil engineers cleared a muddy expanse in a valley surrounded by thickly forested mountains and erected an “upgrader,” a modest word to describe a facility that, when completed, would resemble in visual dimension the vast refineries of northern New Jersey. Its pipes, flaring smokestacks, and white oval storage tanks soon formed a gleaming, belching industrial park in the midst of Venezuela’s rural poverty. Construction proceeded during the Exxon merger. After first oil flowed, senior executives from Irving, including Rex Tillerson, proudly flew in by jet and helicopter to inspect the achievement. “Exxon was extremely proud,” recalled a U.S. government official who toured the facility. “This was the new frontier—the first time anything on this scale had been tried. . . . It worked. It was totally new. It had been a big risk.”

Hugo Chavez read and espoused the usual Marxist-influenced texts, but he saw himself as a synthesizer of old and new political ideas. Chavez later said he was “gullible” and believed he might be able to construct a mixed capitalist and socialist system. The ambiguous remarks he made about business and ideology during his early years in power led some international oil companies to think they might yet be able to hold on to the oil deals they had made during the opening of the 1990s. Gradually, however, Chavez moved more forcefully against his domestic opponents, and as oil prices gyrated and the economy deteriorated, he grew desperate for new sources of revenue.

The president purged P.D.V.S.A. of engineers and technocrats he regarded as hostile to his regime. He fired about twelve thousand employees—mostly executives and administrative staff—after the company participated in a national strike called to bring him down. He replaced the ousted managers with political cadres who tacked Che Guevara posters on their office walls and whose knowledge of oil production and accounting was often limited or nonexistent. He looted P.D.V.S.A. for revenue—the company handed over about 70 percent of its gross revenue to the Chavez regime in 2006, including about $10 billion for social spending projects. In a year when most global oil companies posted record profits, P.D.V.S.A. lost an estimated $3.7 billion. To stay afloat, Chavez authorized mass borrowing—$4 billion from China, in exchange for special access to Venezuelan oil, and another $6 billion from international bond and financial markets. He cut oil production and supply deals with Syrian, Iranian, Indian, and Indonesian corporations. By the time of the ExxonMobil art wars, Chavez was running P.D.V.S.A. like a political Ponzi scheme: He overpromised to his impoverished Venezuelan followers, then milked the oil industry’s revenue to pay for those promises as best he could.

Chavez railed to his followers about the low royalty rates paid to Venezuela by ExxonMobil, Chevron, BP, Total, Statoil, and other international majors during the 1990s, when he had been in opposition. ExxonMobil’s complex at Cerro Negro enjoyed a royalty rate of just 1 percent during the project’s early years of production. That low rate (distinct from the corporate taxes the government collected, which were substantial) had been agreed upon by Venezuela to assure Mobil that it could recoup the investments in the upgrader complex before Venezuela took a larger share of revenue. After nine years, the royalty rate would rise to 16.67 percent, but that event still lay years away.

Chavez started to pressure the international oil companies over their royalty deal soon after he won his referendum, the victory ExxonMobil had aided. He threatened to unilaterally bring forward the 16.67 percent rate. The companies could not be sure whether or how quickly Chavez would act. The U.S. embassy cabled Washington that ExxonMobil, “presumably looking at potential risks around the world,” had declared privately and repeatedly that it “takes sanctity of contract very seriously.” Yet the corporation had invested $1.5 billion in its Orinoco operations and planned to spend at least $700 million more over the contract’s thirty-five-year life. Would it really pull out of Venezuela a second time, and so early in the project’s tenure, before profits had flowed amply?

Norm Coleman, a Republican senator from Minnesota, traveled to Caracas and met ExxonMobil executive Mark Ward. Coleman noted that the other international oil giants had decided not to protest Chavez’s initial probes on the royalty issue.

“ExxonMobil perhaps has a different perspective on contract sanctity than other companies,” Ward replied. “For ExxonMobil, the sanctity of contracts is paramount.”

The mixed messages sent by different companies—some accommodating, others defiant—created difficulties, Coleman said.

Ward answered that the other companies operating in Venezuela had been “blackmailed” by Chavez. Their oil holdings in the country were in some cases more important to their global reserve reporting than was the case for ExxonMobil.

Such brave talk would soon be tested. Chavez drifted through 2006 and never forced the royalty issue. But as an election scheduled for December of that year approached, he went after the Orinoco deals in full bore. He had committed himself to massive social spending and he lacked financing options. “We’re moving toward a socialist republic of Venezuela, and that requires a deep reform of our national constitution,” he announced. “We’re heading toward socialism, and nothing and no one can prevent it.”

Lee Raymond and then Rex Tillerson trotted out a standard ExxonMobil script when they spoke about anti-American, anticorporate resource nationalism in Venezuela, Russia, the Middle East, and elsewhere. ExxonMobil’s executives had seen oil nationalization waves come and go over many decades, they asserted, and yet in the long run, most governments would see that their economic interests lay in partnering with private corporations. Before his retirement, Raymond had spoken of the particular problem of Hugo Chavez with a hint of condescension: “I worked in Venezuela a long time ago. . . . I guess my comment would be: ‘Patience.’” Tillerson preferred the language of business realism, but his thrust was the same: Latin American governments enamored of resource nationalism should recognize that it was in their own interest “to find a way to invite and open up to foreign investment, because of the technologies and the know-how that’s needed” to benefit fully from their oil and gas reserves.

ExxonMobil’s vocal stance about contracts had a pragmatic aspect; it was a form of bargaining by deterrence. The corporation operated in about two hundred countries and it had major oil production operations in several dozen. If it renegotiated contracts in one country, others would surely take notice and might exploit the opening.

By the time of the Hugo Chavez imbroglio, the thinking of ExxonMobil’s senior executives about the sanctity of contracts had evolved beyond business strategy into a philosophy of global governance. The spread of international law regimes and trade treaties had given birth to global business arbitration forums at the World Bank and international chambers of commerce. In its contracts with national oil companies or foreign governments, the corporation inserted elaborate clauses guaranteeing ExxonMobil’s rights to international arbitration before these bodies if the host country tried to alter contract terms, royalty rates, or taxation. Through these provisions, ExxonMobil evaded the conundrums of two hundred different systems of national property rights; it drew all of the host governments with which it contracted into a universal system of arbitration at the World Bank and the international chambers. The corporation’s purpose, said the industry consultant, was to “approximate a global law,” one defined not by national parliaments or the United Nations, but by the binding dispute resolution regime of ExxonMobil’s worldwide contracts. ExxonMobil relied upon this system more than on the United States government. And the corporation’s international competitors took a free ride on ExxonMobil’s hard line—Chevron, BP, Shell, Total, and the rest benefited in general from the education and contract standards campaigns that ExxonMobil mounted with oil-owning governments, but the competitors retained flexibility. They could more easily make contract compromises when it suited them because they did not have such a prominent declaratory policy.

When Vladimir Putin during 2006 demanded to renegotiate one of ExxonMobil’s remaining contracts in Russia, President George W. Bush telephoned Rex Tillerson to discuss the affront, according to reports of the call that circulated among the corporation’s managers. The Bush administration was by now thoroughly disabused of its romanticism about oil capitalism under Putin; its optimism had ended when Putin arrested Mikhail Khodorkovsky, the president of Yukos, with whom Lee Raymond had negotiated unsuccessfully during 2003. Three years later, Khodorkovsky remained in prison; he made impassioned speeches about democracy while appearing periodically in Russian courtrooms, confined to a cage, and he was emerging as an unlikely symbol of credible dissent. Bush said that his administration stood ready to dive into oil diplomacy to push back against Putin’s attempts at renegotiation. Tillerson thanked the president, but afterward, through its Washington office, the company begged the Bush administration to stay away. The message ExxonMobil’s K Street staff sent to the White House was, in essence, Putin is one of the less offensive heads of state we deal with; we’ll do much better on our own.

At ExxonMobil’s headquarters, Rosemarie Forsythe, the former National Security Council aide, still managed the political risk department. She reported to Tillerson’s Management Committee, which reviewed dilemmas such as the ones in Russia and Venezuela by reference to color-coded, tab-divided binders Forsythe prepared. These divided the world’s nations into three groups: democracies, authoritarian regimes, and transitional governments. The last were characterized by chronic instability; Venezuela was an emblematic case. More and more of the world’s oil and gas lay in red-shaded transitional countries, as they were marked in the confidential ExxonMobil binders. This made the pursuit of a global, reliable system of contract enforcement all the more imperative, in the Management Committee’s opinion.

It also made political forecasting and project planning excruciatingly difficult. ExxonMobil’s corporate planners had mastered the art of long-term planning for variability in the cost of extracting oil, variability in rates of economic growth, and for the geological surprises that might arise after drilling began. But who could predict the political futures of Venezuela, Nigeria, Indonesia, Russia, Iraq, Iran, or Saudi Arabia over two decades or more? The best that could be hoped for, Rex Tillerson believed, was to “think about a range of outcomes in any given country” and try to position the corporation so that it could adjust to extreme events. In some countries where ExxonMobil invested in long-term projects, the “fundamentals,” as an economist would put it, looked unsustainable—large, young populations; high unemployment; and authoritarian or dysfunctional systems of government that could not meet the needs of the population. The question in these countries was how long it would take before something exploded, and then, when it did, how the upheaval might affect the corporation’s investments.

The impact of Venezuela’s turmoil, in particular, was not confined to its own borders. Instability in Caracas—as well as in Nigeria, Iraq, and Iran—contributed to steadily rising global oil prices after 2003. Benchmark per-barrel oil prices crossed $40 in 2004; $50 in 2005 and $60 in 2006. The average weekly price of a gallon of unleaded gasoline in the United States topped three dollars for the first time in American history in September 2005; the price fell back some the following winter, but then climbed back to $3 in the summer of 2006. Adjusted for inflation, American gasoline prices reached historic highs after three decades of flat or declining trends.

Soaring demand for oil from China, India, and other fast-growing emerging economies stoked the price rise. Between 2003 and 2007, China’s oil consumption and net imports grew by about 50 percent. China’s prospective thirst for oil as a transportation fuel, to power the cars of its burgeoning middle classes, created a psychology of scarcity.

Along with soaring demand came less provable claims that the world might be physically running out of oil. Matthew Simmons, a Houston-based oil industry consultant who specialized in financial matters and who was not a professional geologist, published an influential book in the summer of 2005 that argued, on the basis of his review of U.S. geological data about Saudi oil fields, that the kingdom had reached the peak of its capacity to pump oil and would soon enter a long decline. Saudi Arabia was not only the world’s largest oil producer; it was also the most important to international markets and prices. The kingdom exported the great majority of its production. Among the world’s major producers, it could most easily raise and lower production volumes to respond to changes in global demand. If Saudi fields were tapped out, as Simmons claimed, the long era of low or relatively stable oil prices enjoyed by the world economy from the 1980s onward would be in jeopardy.

Saudi Arabia insisted that Simmons’s forecasts were wildly off base, but its penchant for secrecy continued to stoke such reports. As oil prices rose, the kingdom launched an investment and construction program to raise its production capacity to 12 million barrels per day from about 10 million. But its project could not easily or quickly undo the psychology of scarcity that Simmons and other end-of-oil commentators generated after 2005. There could be little doubt in any event that Saudi Arabia’s ability to increase or lower global oil prices by adjusting the amount it pumped from day to day would be diminished in the future. The world’s surplus oil production capacity—that is, the amount of oil that could feasibly be pumped each day but was held back for market, economic, or political reasons—peaked in 1985. After that, global oil supply and demand moved closer to equilibrium.

Rex Tillerson and ExxonMobil’s Management Committee scoffed at the idea that the world was running out of oil. The corporation prepared PowerPoint slides to document that governments and industry analysts had badly underestimated the amount of oil in the earth throughout the twentieth century. Time and again, forecasters failed to anticipate how technological innovation would free up or “discover” oil previously thought to be unrecoverable, ExxonMobil executives argued in their slide shows. The corporation demonstrated that in 1925, the U.S. Geological Survey estimated the world’s conventional oil reserves to be only 60 billion barrels. By 1950, mainstream estimates had risen to between 750 billion and 1.5 trillion barrels. By 1975, typical estimates were in the range of 2 trillion barrels. By 2000, they had grown to between 2.5 trillion and 3.5 trillion. These swelling numbers did not even account for extra-heavy oil and tar sands oil deposits in places such as Venezuela, Canada, and Russia—perhaps another 4 trillion barrels. Obviously, the actual amount of geological oil had not changed during these decades; all that had changed was the ability of engineers to locate it and pump it profitably. As Tillerson put it: “With new technology, we’re always finding more oil. . . . We will achieve a peak, because it is a finite resource. But that time is well beyond where we are today.” The problem in the global oil markets, Tillerson and his colleagues declared again and again—and the reason Americans so often gasped and sputtered about prices when they pulled into their local stations after 2005—had not to do with geology. It was a result of geopolitics.

Rising prices did more to hurt the United States than just pinch its drivers’ budgets. Higher prices made oil-exporting governments richer at the expense of importers such as America. BP’s economists estimated that oil-exporting countries enjoyed a $3 trillion windfall between 2004 and 2007. That wealth provided radical and authoritarian governments such as those in Iran and Venezuela with extra muscle and room to maneuver—whether to purchase arms for proxy militias or to forge new compacts with thirsty importers such as China and India, alliances that might constrain American power. For its part, by 2007, the United States had become more dependent on foreign oil imports than ever before. This not only exacerbated its dependency on governments such as Venezuela’s, it also put the country’s prosperity at risk. During the 1980s and 1990s, spending on oil, measured as a percentage of U.S. gross domestic product, hovered under 2 percent; as prices soared after 2003, that spending rose to above 5 percent. History showed a strong correlation between such energy price spikes and the onset of recessions.

The expropriations threats emanating from Venezuela contributed to those rising prices. Chavez also threatened ExxonMobil’s share price. If the corporation lost its Venezuelan production and its booked oil reserves in that country, the corporation’s publicly reported worldwide oil reserves would shrink. The annual challenge of reserve replacement had not lessened as Tillerson imprinted his leadership on ExxonMobil; if anything, the pressures were rising. Tillerson and other executives might console themselves that expropriations come and go, and that Exxon had left and returned to Venezuela before, yet they would be departing a country proximate to the United States with an oil endowment of enormous size and durability. The numbers from ExxonMobil’s current Venezuelan operations were not large—well under 5 percent of total reserves and production—but with the reserve replacement equation so tight, all losses made a difference, and the shock of being expelled would probably knock down confidence in ExxonMobil shares, which would in turn depress the wealth of executives and employees. The question facing ExxonMobil early in 2007 was whether, for the sake of principle and long-term global strategy, Tillerson and the Management Committee were prepared, nonetheless, to walk.

On January 13, 2007, Hugo Chavez told the Venezuelan congress that he would enforce a law requiring that P.D.V.S.A. seize majority shares and become the sole operator of all oil projects in the Orinoco River basin. If the international companies currently in charge of those projects wished to stay on as minority owners, they could renegotiate terms. Chinese, Russian, Indian, Belarussian, Vietnamese, and Cuban operators would be entering the Orinoco basin, Chavez announced. “He who wants to stay on as our partner, we’ll leave open the possibility to him,” Chavez said. “He who doesn’t want to stay on as a minority partner, hand over the field and good-bye.” He added playfully, switching from Spanish to English, “Good-bye, good luck, and thank you very much.”

In fact, Chavez was prepared to negotiate. Into the spring of 2007, each of the oil majors found itself in maddening, opaque, shifting talks with Venezuela’s oil technocrats. Fundamentally, they would have to accept a subordinate position to the Chavez regime for the first time and lower rates of return. Within that framework, however, Chavez was ready to deal.

Tillerson and Cutt took a two-track approach: They took all the steps necessary to leave Venezuela by the June deadline Chavez had announced, and simultaneously, they negotiated to stay.

BP was ExxonMobil’s minority, nonoperating partner in the Cerro Negro project. The corporation’s Venezuelan country manager, Joe Perez, admitted privately that “BP’s greatest fear was that Exxon would pull out.” At this point, he also conceded, BP “is basically hiding behind Exxon” and its tough-sounding bargaining position.

Cutt and Tillerson had four options: Leave Venezuela and invoke their contractual right to international arbitration to recover their investments and lost earnings; sell their share in Cerro Negro to Venezuela; sell their holding to another company; or accept Chavez’s terms and become subordinate to P.D.V.S.A. in a joint venture. ExxonMobil executives told the U.S. embassy that the chances they would capitulate this time were “close to zero.” A sale on terms reasonably close to market price seemed optimal.

Under Venezuelan labor laws, if it planned to shut down by the end of June, ExxonMobil had to take public steps as early as March to prepare to lay off workers. Even if its employees found new jobs under Venezuelan management, their compensation and benefits would shrink. Tim Cutt rented out the movie theater near the ExxonMobil office—located in downtown Caracas in a mixed-use complex of offices and retail stores—for regular all-staff meetings, replete with popcorn, to keep the employees informed. He provided updates on the corporation’s negotiations with the Chavez regime. Carlos Rodriguez, ExxonMobil’s Venezuelan-born, U.S.-educated government affairs director, and Milton Chaves, another Venezuelan who worked on government relations from Houston, sometimes joined or supported Cutt’s presentations. From some of the employees, Cutt and his colleagues heard angry, even menacing complaints. Cutt became so anxious about the loyalty of his own workforce that he installed a metal detector at the entrance of the executive suite.

The corporation’s expatriate executives worried, too, that they might be arrested suddenly in Caracas and perhaps made the objects of some theatrical show trial concocted by Chavez. They kept cell phone and emergency numbers for the petroleum attaché at the American embassy, Shawn Flatt. Carlos Rodriguez had regular breakfast meetings with Flatt to keep him up to date, but the corporation was wary about being identified with the American embassy, and so its Caracas managers minimized the embassy liaisons to the most essential matters, such as planning for evacuation if one was required because of violence or threats to American employees.

In Washington, Tillerson met with Venezuela’s ambassador to the United States, Bernardo Alvarez, on May 16. He told the envoy that ExxonMobil must have a confidentiality agreement with the Chavez regime before it could negotiate in earnest. “We’re looking for a win-win solution,” Tillerson said, but he warned that the corporation “was willing to go to arbitration if it had to do so.”

Cutt confided to the embassy as the final deadline neared that Tillerson and the Management Committee at headquarters had “shown surprising flexibility in attempting to reach a deal” with Chavez. The chances of giving in to Venezuela’s demands were apparently not so close to zero after all. For example, Cutt disclosed, they would “swallow hard” and give up rights to international arbitration if all the other deal terms were satisfactory.

On June 25, however, Cutt called again to declare that ExxonMobil had given up. The two sides were “billions of dollars apart,” he said.

For the second time in just over three decades, the largest private oil corporation in the world would withdraw from Venezuela, a country that might hold the world’s largest reserves, or was at least second to Saudi Arabia, where ExxonMobil also had not a single barrel of bookable reserves.

BP, Chevron, Total, ENI of Italy, Sinopec of China, and Statoil all negotiated compromises during the weeks that followed; they accepted new terms as minority owners, subordinate to the Chavez regime. Only ConocoPhillips joined ExxonMobil in refusal and departed.

The decision marked one of the first tests of Tillerson’s willingness to endure economic losses for the sake of policy and principle. The corporation’s local government affairs team gathered and drove over to the twin P.D.V.S.A. towers in Caracas’s cluster of downtown skyscrapers. As Carlos Rodriguez took notes, Tim Cutt announced to the vice minister of energy that ExxonMobil would be pulling out of the Cerro Negro project and that it intended to file claims against Venezuela in international courts of arbitration to recover damages. It was an uncomfortable meeting that ended quickly.

Cutt and the engineers at Cerro Negro prepared to turn over the pride of ExxonMobil’s Latin American operations to Chavez’s political cadres in April. It was a painful endeavor, not only because the local executives would be walking away from a complex they regarded as state of the art, but also because scores of ExxonMobil’s Venezuelan employees would lose their jobs in a country where unemployment stood at 9 percent.

ExxonMobil’s lawyers and accounting analysts prepared for their legal campaign that summer by doing some mind-boggling math. Hobert E. Plunkett, a University of Alabama graduate who served as an asset enhancement manager at the corporation, later explained to a federal court how he calculated the damage Chavez had caused to ExxonMobil. The Cerro Negro project had twenty-eight years to go under the terms of the 1997 contract. The contract had a clause that laid out the formula under which ExxonMobil’s damages should be figured. This was called the Threshold Cash Flow Formula. It allowed ExxonMobil to estimate how much money it would have made in Venezuela after operating expenses, royalties, and taxes if it had not been forced to relinquish ownership. Plunkett arrived at a round number: somewhat more than $11.9 billion.

ExxonMobil did not immediately share its thinking about its damage claim with Chavez or his aides. Cutt and his Caracas colleagues concentrated on winding down operations as smoothly as possible. When they visited Orinoco after handing control to P.D.V.S.A., they saw the scores of new employees sitting around in blue jeans without apparent responsibilities, and they saw that political propaganda had replaced their ubiquitous safety notices on some of the walls, but they kept their opinions to themselves. In public, on Wall Street, and elsewhere, Rex Tillerson described the breakup dispassionately: “Our situation in Venezuela is a pure and simple contract. The contract was disregarded.”

Cutt gathered the local staff at the movie complex near the Caracas office for a sort of farewell party—“ExxonMobil Idol,” a talent show inspired by American Idol. The corporation’s senior managers, with Cutt fronting, took the stage in hats, dark glasses, and chains, with their underwear hanging out of their pants, to perform a gangsta rap number. They chanted inside jokes into their microphones, to the roar of laughter and applause from the remaining staff.

The show’s theme accurately reflected ExxonMobil’s mood about Hugo Chavez. The corporation’s executives would not think to call the plan they had in mind “revenge”; they forswore emotion about business and legal decisions. When their plan was revealed for the first time in a New York federal courtroom a few months later, ExxonMobil’s lawyers insisted that they had done nothing untoward or vengeful. It was a contract matter, they said, pure and simple.

The banking and legal system known as the cash waterfall was designed to control the flow of money generated by the sale of Cerro Negro crude oil. ExxonMobil and P.D.V.S.A. issued $600 million worth of bonds to international investors to finance construction of the massive upgrader complex in the Orinoco basin. Given the long record of political instability in Venezuela, nobody was likely to buy these bonds—at least not at an affordable interest rate—unless there were guarantees about repayment. The lawyers and investment bankers who organized the bond sale therefore constructed a Common Security Agreement to protect bond purchasers. This agreement established the cash waterfall, as it was termed by the participants, at the Bank of New York, headquartered in Manhattan. The waterfall was a web of restricted bank accounts through which revenue from the sale of Cerro Negro oil flowed in a prescribed manner. Receipts from oil sales went first to pay for the operations of the Orinoco project and second to pay interest to bondholders. Only then did leftover funds cascade into accounts for each of the main project partners, ExxonMobil and P.D.V.S.A.

The Bank of New York’s role was to ensure that all of these legal obligations were met before either ExxonMobil or P.D.V.S.A. took out the money that reached the bottom of the cash waterfall. The agreement included collateral and other guarantees to assure bondholders that the Bank of New York could enforce the system’s rules.

The cash waterfall had flowed smoothly for almost a decade. Oil came out of the ground in the Orinoco basin; the upgrader lightened the oil and removed its contaminants; the oil flowed through pipelines to ships at a Caribbean port; and the ships delivered regular loads to Chalmette, Louisiana, for final refining into commercial products. When Chalmette confirmed receipt of a particular shipment, it released its payment to the Bank of New York, which in turn sent the money flowing down the waterfall accounts. The bank routed some cash back to Cerro Negro to cover operating expenses, it set some money aside to make monthly interest payments to the bondholders, and then it released the remainder—many tens of millions of dollars annually—to ExxonMobil and P.D.V.S.A.

There were still $538 million worth of bonds outstanding under the cash waterfall agreement in the spring of 2007, when Hugo Chavez abrogated the Orinoco oil agreements. Some of the bonds were due in 2009, others in 2020, and still others in 2028. The bondholders—investment banks, pension funds, mutual funds, hedge funds—became nervous when ExxonMobil signaled publicly that it might pull out of Venezuela. If the corporation no longer operated Cerro Negro, the cash waterfall system might not work so well, and at a minimum, the prices of project bonds would fall because of investor anxiety about the future. On April 27, 2007, Cerro Negro bondholders declared that because of the prospective actions of Hugo Chavez’s government, Venezuela and ExxonMobil had legally defaulted on their joint obligations as issuers of the bonds. Under the cash waterfall system, the bondholders had the right to seize collateral if this default declaration was confirmed.

ExxonMobil had already handed over control of Cerro Negro to the Chavez government, but the corporation contacted the Chavez regime and offered to work closely with it on the bond problem. ExxonMobil was still on the hook for 50 percent of the bond issue; hundreds of millions of dollars were at stake.

J. R. Massey, ExxonMobil’s vice president for operations in Canada, South America, and the United States, flew down to Caracas. Massey was a Texas A&I graduate who had worked at ExxonMobil for thirty-six years. He told his Venezuelan counterparts, as a lawyer for the Chavez regime recalled it, that “regardless of the differences which remained between the ExxonMobil companies and Venezuela” over the nationalization, “there was no reason not to cooperate in good faith to restructure the financing.”

On June 1, ExxonMobil and P.D.V.S.A. jointly retained the Wall Street investment bank of Lazard to advise them on how to make their nervous bondholders happy. Lazard concluded that the best way to clean up the mess would be for the government of Venezuela to buy back all the outstanding bonds through a cash tender offer and then borrow money on its own by other means. Chavez’s aides at P.D.V.S.A. eventually accepted this advice. The Venezuelans even agreed to pay for ExxonMobil’s share of the bonds.

Lazard initiated the complex tender process by which the Cerro Negro bondholders would first be given a chance to decide whether to accept the repurchase offer. If enough did so, they would later surrender their bonds and receive cash payments from the Chavez government. All of the parties retained high-end law firms in New York and Washington to handle the paperwork.

The offer succeeded and the full bond repurchase was scheduled to “close” on December 28, 2007, in a meeting similar to the document-signing sessions familiar to the sellers and buyers of residential property. Curtis, Mallet-Prevost, Colt & Mosle, Venezuela’s New York law firm, agreed to host the closing in a conference room at its flagship office, an angular glass-walled skyscraper at 101 Park Avenue. For the lawyers and bankers involved, the year-end closing date meant they would have a disrupted holiday season, but a remunerative one, once their deal fees were distributed.

ExxonMobil and Venezuela were anxious for the deal to close, too. The cash waterfall had been stopped up through most of 2007. Money continued to flow into the Bank of New York accounts from oil sales, but until the disputes with debt holders were fully resolved, it could not go out. As the year wound on, more and more cash had accumulated in each of the stopped-up accounts of ExxonMobil and P.D.V.S.A. By December, ExxonMobil’s account held $242 million and Venezuela’s contained about $300 million. One purpose of the closing meeting at the Curtis law firm was to confirm that all the legal obligations to bondholders had at last been met so that these huge sums could be released, to be booked as corporate revenue before the year ended.

ExxonMobil’s lawyers and finance specialists knew all about the $300 million building up in Venezuela’s cash waterfall account because “one of the principal and fundamental economic objectives” of the bond repurchase, as a lawyer for Venezuela later put it, was to make sure that ExxonMobil got its own money out of the stopped-up accounts.

On December 28, Venezuela’s lawyers at Curtis assumed that everything was in order—both sides would be rewarded with a cash windfall when the paperwork was formally completed that afternoon.

All along, as the bond repurchase neared completion, ExxonMobil had been working secretly with a corporate repo man: Steven K. Davidson, a litigator at Steptoe & Johnson, a global law firm founded in Washington, D.C. Davidson was a practitioner in arbitration and corporate asset seizures who worked from Steptoe’s Washington office on Connecticut Avenue. By 2007, he had become one of the world’s leading specialists in the art of seizing and liquidating assets on behalf of large, aggrieved companies. For Motorola, which had fallen into a dispute with a Turkish company over a $2 billion loan, Davidson had seized a yacht in Israel; private jets in Bermuda, France, and the United States; real estate in Britain, Germany, and the United States; and bank accounts in Switzerland and New York. There was a streak of ruthlessness in his work that made him a natural for ExxonMobil.

Over Christmas, Steptoe lawyers secretly prepared court documents to freeze the $300 million in Venezuela’s Bank of New York cash waterfall account. They argued in the documents that the money was needed as security against future arbitration awards that might pay off ExxonMobil’s outstanding claims against the Chavez regime.

On Thursday, December 27, the day before the closing, Steptoe lawyers contacted the federal court clerk in the Southern District of New York in Manhattan and asked for a hearing before the “emergency” judge on call. They drew Judge P. Kevin Castel. In Castel’s courtroom on Pearl Street, the Steptoe attorneys handed up a prepackaged filing of affidavits, draft orders to seize the Venezuelan funds—and also a request that Castel place the entire matter under seal immediately, keeping it secret so that neither P.D.V.S.A. nor its lawyers at Curtis would know, as they signed the bond closing documents the following day, what ExxonMobil had in mind.

“In view of the urgency of the matter and the precise timing required,” Steven Davidson wrote, he also requested that Castel designate two young female lawyers at Steptoe to serve the asset seizure papers so as to “avoid the delays that may occur if the U.S. Marshal is directed to serve the order.”

J. R. Massey told Judge Castel that P.D.V.S.A.’s “sole asset in the United States is its share of the Project Accounts in New York, sometimes referred to as the ‘cash waterfall’ (approximately $300 million).” (P.D.V.S.A. also owned CITGO gas stations and refineries in the United States indirectly, through a subsidiary, but ExxonMobil did not seek to move against these assets.) It was “highly unlikely,” Massey continued, that ExxonMobil could force Hugo Chavez’s government to make payments on any future arbitration claim “unless the cash waterfall is restrained.”

Castel signed off on all of ExxonMobil’s requests and also agreed to keep his ruling secret. The next day, lawyers and executives from ExxonMobil joined the oblivious lawyers for P.D.V.S.A., Bank of New York, Lazard, and the bondholders in a Curtis conference room above Park Avenue. Robert Minyard, the treasurer of ExxonMobil’s upstream division, attended with ExxonMobil’s bond deal lawyers from the Los Angeles firm of Latham & Watkins. The oil corporation’s delegation gave no hint that anything was out of the ordinary.

A large bond closing is an excruciatingly detailed event, carefully sequenced and choreographed on blinking computer screens, all watched over by nervous lawyers. Hundreds of millions of dollars previously deposited by Venezuela to pay for the bonds went out by wire that morning to each bondholder who had agreed to sell; when the sellers received their money, they sent back electronic confirmation messages. In the late morning and early afternoon, the confirmations blinked through one after another. Signatures were affixed, photocopies exchanged.

At about 2:10 p.m., Minyard took physical possession of the certificates of the repurchased bond shares and left the building. The Bank of New York’s representative announced to those remaining in the conference room that it had received enough confirmations from bond sellers to declare the closing officially done. “I am prepared to release the collateral.”

That meant the money in the cash waterfall accounts could flow again. Bank of New York immediately initiated a wire transfer sending the $242 million lying in ExxonMobil’s stopped-up account to the corporation, free and clear. ExxonMobil’s lawyers soon confirmed that the wire had gone through. They had their money.

For Venezuela’s account, the Bank of New York had a special Federal Reserve number to wire out the $300 million to the Chavez government. Before the bank’s representative could push the final button, however, a new electronic message arrived—an “Order of Attachment” signed by Judge Castel, freezing the Venezuelan funds in place. “The amount to be secured by this Order is Three Hundred Million Dollars,” the order declared. The bank’s lawyers told Venezuela’s lawyers that there was nothing they could do; the court had spoken, and the money would stay put.

Arbitration law pays well, but is not rich with emotional reward. For the Steptoe attorneys the late-December Friday-afternoon seizure of $300 million belonging to Hugo Chavez’s government was like hitting a walk-off home run in the bottom of the ninth before a full house at Yankee Stadium. It was the sort of thing the lawyers involved would put on their résumés for years to come, as evidence of their litigating prowess.

They would have to celebrate in quiet, however. ExxonMobil did not call public attention to what it had done, it did not offer any cowboy-toned declarations, and it did not permit its outside attorneys to do so, either. The corporation’s executives did not see profit in crowing about Hugo Chavez. Dictators came and went; nationalizations came and went. They had their $300 million—the money was now frozen, awaiting final rulings in the arbitrations to come.

ExxonMobil “has come to this Court . . . with unclean hands,” Joseph Pizzurro, the lead attorney for Venezuela at Curtis, wrote in an impassioned filing to a federal judge a few weeks afterward.

In its undisclosed appearance before Judge Castel, the corporation had told the judge that it needed a freezing order in secret because it did not wish to interfere with the orderly closing of the bond repurchase, but “it never told the Court why it did not want that transfer to be interfered with.” The reason, Pizzurro continued, “was simple”: ExxonMobil wanted to make sure its $242 million—money provided to it by the government of Venezuela, after months of cooperative negotiations—was moved out of the cash waterfall accounts before it acted to seize its partner’s money. ExxonMobil’s lawyers, as part of their cooperation with the Venezuela side over the bond deal, had even signed an agreement late in 2007 affirming that there was “no provision of law . . . order [or] injunction” that would “prohibit, conflict with or in any way prevent” the funds in the cash waterfall accounts from being released once the bond repurchase was completed.

“Obviously, if P.D.V.S.A. . . . had known that [ExxonMobil] was going to breach its obligations and representations,” Venezuela would never have gone through with the bond deal. ExxonMobil “knew this full well, which was the reason its litigation counsel sought to keep the court file under seal.” The whole charade, Pizzurro wrote, was little more than “a scheme calculated to conceal its misrepresentations, not only from P.D.V.S.A. . . . but from this Court.”

Steven Davidson, for ExxonMobil, said he couldn’t understand why counsel for Venezuela seemed so upset. “They call it ‘unclean hands,’” Davidson told Judge Deborah Batts, who had inherited the case from Castel, at a hearing on February 13. “They say that we did something that’s somehow inappropriate with respect to the transaction that closed at the end of the year,” Davidson said. “Now, Your Honor, we would, as a matter of fact and law—we would say that’s simply incorrect. . . . There was nothing inappropriate done whatsoever with respect to that closing.”

Pizzurro was the managing partner at Curtis, whose reputation with its client in Caracas had obviously been damaged by the December 28 fiasco. He had been schooled in Boston. He had a thick head of white hair and a boxer’s pugnacious face, with a flattened nose. He struggled to persuade Batts that Hugo Chavez had been wronged. “It was sort of a chicken-and-egg situation,” Pizzurro tried to explain when Batts called on him. The ambush beside the cash waterfall had been a complicated affair, he noted: “We wouldn’t get the money until we paid them off, but once we paid them off, we could get the money. . . . Mobil was cooperating at all times. Indeed, they went and hired with us Lazard, to come up with and help with a restructuring of the financing, to create a solution” to ensure ExxonMobil got its own $242 million.

By sneaking into court on December 27 to obtain orders under seal, Pizzurro went on, ExxonMobil had acted in bad faith. “To pretend that that wasn’t part of the plan and the scheme, to pretend that . . . it had nothing to do with why they needed to get this under seal, and to pretend that that has nothing to do with a breach . . . is simply not credible.”

If Judge Batts was concerned about the ethics of ExxonMobil’s executives or lawyers in this case, however, she gave no indication. Under the law, she said when Pizzurro had finished, a freeze order of this type was appropriate. All that was required, legally, to maintain the freeze on the account was “a probability or possibility” that Chavez’s government might not make good if it eventually lost out to ExxonMobil, Judge Batts said. Therefore, “I’m confirming the attachment. The matter is adjourned.” If Hugo Chavez wanted his money back, he would have to seek it in the court of ExxonMobil’s choosing.

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