Lee Raymond lived and worked within a bubble of privilege. He traveled the world with round-the-clock support from the corporation’s Aviation Services and Global Security departments. If his day began at his 8,642 square-foot, five-bedroom brick-façade home in Dallas, then his longtime chauffeur and bodyguard, a retired New York City police officer, would meet him there and usher him into a dark sedan. Raymond rarely drove himself anywhere. Nor did the indignities of commercial airline travel encroach on him. Citing kidnapping and other security threats, the corporation’s board of directors had decided that its chief executive should not fly on commercial carriers. Raymond had use of Exxon’s corporate planes for both personal and professional travel. Aviation Services managed about nine jets—around the turn of the decade, the inventory included several Gulfstream aircraft, a Bombardier Challenger, and two Bombardier Global Express jets. Lee Raymond’s principal plane—a ten-passenger G-IV, and later an eleven-passenger Global Express, each with sleeping and mess facilities, satellite telephones, a defibrillator, and CPR-trained flight attendants—bore a tail number expressive of his position: N-100-A, or as it was referred to by corporate aviation personnel, “November One Hundred Alpha.”
The crews catered to Raymond’s onboard tastes: a glass of milk with popcorn in it, within arm’s reach of his executive chair. Aviation Services’s approximately two dozen pilots and several dozen additional support staff also tended to his wife, Charlene, who often traveled with the chairman and who favored bowls of wrapped chocolates. “When you take care of her, you take care of me,” Raymond told them.
Lee and Charlene Babette Raymond were inseparable. By the late 1990s, the couple had developed a typical annual migration: a late-January trip to Pebble Beach, California, where Lee sometimes played in the pro-am golf tournament with the likes of P.G.A. professional Ronnie Black; an April sojourn to Augusta, Georgia, to attend the Masters golf tournament, where Lee might catch up with his friend Phil Mickelson or have dinner with Tom Watson; and then Easter at their winter home in Palm City, Florida. Golf was Raymond’s most discernible passion away from the office—he regularly joined in corporate tournaments. When Raymond had business in Asia, he and Charlene sometimes managed to fit in a vacation break in Hawaii on the way out or the way back. In the autumn he often spent Thanksgiving at the Augusta golf club again and might include a stag trip to Exxon’s vast, corporate-owned bird-hunting ranch in southeastern Texas, near the town of Alice. At Christmas the Raymonds typically retreated again to Palm City, Florida.
Throughout the year they made weeks-long international trips on which the Exxon chief might negotiate for or ratify the final terms of new oil production contracts, attend a ribbon cutting at a new refinery, deliver a speech at an industry conference, or chair a board meeting. On a trip to London in 1997, the couple picked up an expensive painting; panicked Aviation Services and Global Security employees, fearing theft, guarded the artwork for nearly two weeks aboard November One Hundred Alpha as the Raymonds hopped on Exxon business from city to city. As their wealth grew, they collected not only art, but real estate. They added a $3.8 million house in the desert near Palm Springs, California, and a $7 million home in Scottsdale, Arizona.
Raymond and Charlene had both grown up in modest circumstances in the American heartland. Both were devout Christians. Raymond’s Plains-bred parents had raised him as a member of the Evangelical United Brethren in Watertown, South Dakota, a denomination that later became part of the United Methodist Church. Charlene came of age in a German Catholic family from Kohler, Wisconsin. They met at the University of Wisconsin and married when Raymond was twenty-three. Raymond converted to Catholicism and thereafter rarely missed a mass; in Saudi Arabia, which banned Christian churches, he attended services inside the U.S. embassy.
Although Charlene had earned a college degree in journalism, when she gave birth to triplet boys, she devoted herself to them and to her husband. Even at home, Raymond worried about discipline. After he rose within Exxon, he tried to control his family’s use of corporate jets—he barred his triplet sons from flying on them, fearing that if he allowed them the privilege, it would encourage lax behavior by other Exxon executives. Charlene could be as demanding as her husband, and she could also be extremely frugal, as if clinging to lessons imparted during the Depression-influenced era of her youth. Deplaning in Berlin or Paris, she might fill a bag with snacks while complaining about the prices charged for breakfast in the luxury hotels where she and her husband stayed.
Aviation Services staff talked among themselves about which ExxonMobil executives with jet privileges were the most arrogant or prone to temper over petty problems. The capacity of some of Exxon’s multimillionaire leaders to become abusively angry over delays caused by bad weather, pilot changes, or mechanical problems never ceased to amaze their more modestly salaried crews.
Lee Raymond could be sharp-tongued, but he was not the worst offender in that regard. He tried to maintain a cordial formality with his travel crews and won respect, if not affection, from some of them. That was about the most that could be said of the reputation Raymond enjoyed among Exxon executives and employees more generally: He was respected. He was also feared.
Some managers who had worked in other corporations, even notably hierarchical and disciplined ones, found striking the atmosphere of terror and deference Raymond generated in the minds of many who worked for him. Although it was possible to locate people who would say that Raymond was not insulting or mean to them personally, even these exceptional people acknowledged that he was often unpleasant to large numbers of others. Some of those who knew Raymond well, and liked him overall, felt he badgered colleagues in part to keep people away from him. If this was his strategy, it worked. He won the nickname “Iron Ass” among some employees. Behind his desk in the God Pod hung a painting of a fierce tiger.
He calculated that in a corporation as large and diverse as Exxon, with tens of thousands of employees scattered in offices, refineries, and oil production compounds worldwide, the only way a chief executive could hope to extract disciplined results was to overdo it—that is, unless Raymond used his bully pulpit at Irving to pound hard and even intimidate his employees, the natural drift and compromising tendencies of such a large workforce would produce mediocre results.
In a small group or a social setting, Raymond could be relaxed and pleasant company. There was a South Dakota–bred reticence about him that could be confused with coldness. His manner masked a streak of sentimentality. He could be fiercely loyal to ExxonMobil colleagues and sometimes wept openly when subordinates faced illnesses or other personal struggles. At a retirement party for his longtime assistant Adrienne Hurtt, Raymond recounted that he had been on a business trip when his mother died, and that Adrienne had called and imparted the news with perfect grace. As he told the story, Raymond broke down and cried before his colleagues.
He worked hard. When in Dallas, he typically left the Irving headquarters around 5:30 p.m. with a bulging, battered-looking, soft Hartmann briefcase and a pair of plastic legal binders full of memos and reports. At home, he and Charlene kept separate bedrooms, in part because Raymond snored, but mainly because he stayed up until about midnight to read and mark up his files. “His life was the company,” said a former member of the board of directors. Beyond Charlene, Raymond’s friendships were mainly drawn from a small clan of retired and serving chief executives of international oil companies. Traveling in Europe, Raymond would take Charlene to dinner with Lodewijk van Wachem, a retired chairman of Royal Dutch Shell, and his wife. Long dinners where the men could trade stories about the global industry were often Raymond’s idea of evening entertainment. As to hobbies, “Golf was about it,” the former director said.
Before larger audiences and workplace groups, Raymond often seemed to go looking for a fight. It seemed the worst thing an Exxon manager could be in Raymond’s eyes was dishonest, but the second-worst thing was to be stupid. He could be withering with senior executives, Wall Street analysts, journalists, and dissident shareholders who asked what he considered to be a dumb question or who disappointed him with the quality of their analyses. “Stupid shits” was one of the direct phrases by which he conveyed his judgments.
Raymond “definitely had a sense of humor,” a subordinate recalled, and he “didn’t bother belittling people below a certain level. You had to be up to where you had significant responsibility before you could get both barrels.” In those cases Raymond did not hold back. He had been a champion debater in high school in South Dakota and he took transparent pride in his ability to knock down an opposing speaker. During his rise, Raymond ran Esso Inter-America, the corporation’s Latin American division. There he reshaped an Aruban refinery losing $10 million a month into a $25-million-a-month profit center. He did not fashion this turnaround timidly. In front of the subsidiary’s senior managers and board of directors he once turned on a subordinate whose comment had underwhelmed him: “And what little birdie flew in the window and whispered that dumb-shit idea in your ear?” Later, when he reigned over all of Exxon, he would preside over company town hall meetings and question sessions. Sensitive employees in the amphitheater cringed when, as inevitably happened, some incautious manager stood to ask Raymond an impertinent question about when one or another employee benefit might be granted. Raymond “would look at the person who asked as if he could will death,” another former manager recalled. Raymond believed he had never belittled a colleague in front of others, but belittlement is an experience usually defined by the victim. Raymond admitted, “I’m not known to suffer fools gladly.”
His physical appearance did nothing to soften the impression he made. He wore square wire-framed glasses and kept his straight, side-parted light brown hair closely cropped. He had large ears. He had grown into a fleshy man and the jowls beneath his chin could billow like a bullfrog’s neck. A childhood cleft palate had left him with a prominent harelip. Exxon employees who found themselves on the receiving end of Raymond’s ridicule sometimes referred to him darkly as “the Lip.” The amateur psychologists among them speculated that it might have required a certain learned toughness and even meanness, an ability to tune out taunts, to grow up in a small midwestern town with such a visible defacement: “I can envision [him] as a child being absolutely persecuted by other kids,” recalled a former employee. Raymond obviously got through it, the in-house analysis went, but after he achieved success, perhaps it was not surprising that “he doesn’t take any prisoners.”
Raymond’s predecessor, Lawrence Rawl, had created an unforgiving climate within Exxon while tearing into the corporation’s bloated cost structure and overseeing a campaign of staff reductions that federal investigators found had contributed to the Exxon Valdez fiasco, but which had also protected the corporation from financial distress. Rawl had also belittled colleagues at meetings, engendering an atmosphere in which his principal deputy, Raymond, seemed to believe as he ascended, one executive said, that he should be “out-Rawling Rawl” in toughness.
Raymond saw himself as an oil and gas purist. He told colleagues that outside its headquarters the corporation should carve in stone the words, “crude oil.” He felt that it was critical that Exxon “not get confused about what we are trying to do around here.” He and Rawl had employed their drill sergeant–inspired ethos to direct a sharp turn in corporate strategy away from an era, during the 1960s and 1970s, when Exxon had tried to adapt itself partially to environmentalism. (Rawl’s predecessor as chairman, Clifton Garvin, a chemical engineer, had gone so far as to install solar panels to heat the swimming pool at his suburban New Jersey home.) Besides cost cutting, they sought to restore Exxon’s focus on its core business.
Some of his colleagues believed Raymond possessed a one-of-a-kind analytical mind and memory, and that his acuity contributed mightily to Exxon’s superior business and Wall Street performance. At a time of wage stagnation and other rising cost pressures on working and middle-class American families, this success enriched many Exxon employees and increasingly set those located in the United States apart as an economically secure class. Exxon managers had jobs for life if they could hack the corporation’s internal systems and were willing to move from place to place. They enjoyed secure defined-benefit pension plans and restricted stock that would make many middle and upper managers millionaires if they stayed long enough and managed their personal finances carefully. Exxon managers tolerated Raymond’s tirades in part because they understood, as the years passed, that he was making them rich. This was not Silicon Valley: The corporation’s scientists and division chiefs did not walk away with fortunes at thirty-five, but if they conformed and performed, they would rise gradually on a tide of oil profits into an economically privileged elite.
Raymond reserved a particular scorn for the Wall Street analysts who published commentary about Exxon’s business strategy. After years of sporadic efforts to engage with stock commentators, the corporation began to stage an annual meeting with analysts. It was an unusual hearts-and-minds campaign because during the question-and-answer session, it was rare for Raymond to respond to any query without first challenging the analyst’s assumptions or intelligence.
“This is going to be a tough meeting; you ought to take two patience pills,” Peter Townsend, the vice president for investor relations and corporate secretary, would warn him before these sessions.
If Raymond began his answer to an analyst’s question with “Frankly” or “To be candid with you,” it was a signal to duck. He started one meeting at the New York Stock Exchange by noting that executives from The Walt Disney Company were also present in the building that morning: “I don’t think Mickey or his friend Goofy are going to join us, but I may have to hold my judgment on that until after the Q&A session.”
Raymond served in effect as the corporation’s chief financial officer, in possession of all of the critical numbers. By the time he became chairman, he had also served for years as a director at J.P. Morgan, the Wall Street investment bank. During the mid-1980s, Exxon’s financial performance looked respectable but undistinguished, in comparison with its oil industry peers. Rawl’s cost cutting and reorganization campaign was intended to force improvements. In 1987, Rawl began to place heavy emphasis on a metric called “return on capital employed” or R.O.C.E. (often spoken of as “row-see”).
This was a performance measure that sought to show how well a particular Exxon business unit—and overall, the corporation—used the cash it borrowed or recycled from earnings to reap returns from new projects. After he took charge, Raymond campaigned on Wall Street to have his particular measure of R.O.C.E. recognized as the premiere number by which oil corporations should be judged. He argued repeatedly to analysts that oil companies were very long-term businesses that consumed a great deal of capital, and that, ultimately, they should be judged not by quarterly profits or share-price fluctuations, but by how well they managed their investments—whether, for example, they regularly destroyed capital by leasing unproductive oil fields, going over budget on huge drilling projects, or by building unprofitable refineries.
The deep cost cutting continued by Raymond raised Exxon’s rates of return on capital. So did the drive Raymond advanced to improve Exxon’s relatively low-profit divisions, particularly gasoline refining. The “downstream” divisions of integrated oil companies like Exxon were generally much less profitable than the “upstream” units that found, pumped, and sold crude oil and gas. (“Downstream” was an industry term that referred to what took place after oil was pumped from the ground: the refining of oil into gasoline or aviation fuel, and retail sales to motorists at thousands of Exxon-branded gasoline stations across the United States.) Exxon had long tolerated low downstream profit margins and even occasional losses because having huge refineries worldwide gave the corporation a built-in market for its own oil sales. In effect, upstream profits subsidized the downstream. By maintaining a focus on R.O.C.E. inside Exxon and preaching about it on Wall Street, and by tying performance on that number to promotions and bonuses for Exxon managers, Raymond hoped to create change.
Exxon’s rates of return on capital rose sharply during the 1990s, declined as oil prices fell late in the decade, and then recovered to a record level of about 20 percent by the decade’s end, superior to any competitor. Raymond was only partly successful in persuading others to embrace his math—although no other major industry adopted his ideas about R.O.C.E.’s centrality as a metric, Exxon’s major oil company rivals did start to report their own R.O.C.E. numbers, to Exxon’s benefit. R.O.C.E. was, in any event, a somewhat arbitrary figure by which to compare oil giants. The measure favored ExxonMobil’s relative strengths as an operator in low-margin downstream and chemical divisions; for investors, all companies highlighted the numbers that made them look best. Certainly R.O.C.E. was a long-standing and valid way to measure a corporation’s ability to maintain profit discipline across many projects over many years. Still, “about two thirds” of an oil company’s R.O.C.E. is typically explained by “commodity prices,” as James J. Mulva, the chief executive officer of ConocoPhillips, once remarked. (His company’s R.O.C.E. scores lagged.) That is, the most sparkling annual R.O.C.E. numbers, in comparison with returns seen in other industries, often reflected factors in the global oil market beyond any one company’s control. That was apparent in ExxonMobil’s own yo-yoing numbers. Yet within the oil industry, R.O.C.E. scores did provide a basis to compare operating and capital efficiency. Raymond understood the distortions caused by swings in oil prices, but he thought the number was as good a way as any available to judge management’s long-term investment discipline. “Our competitors hated it,” Raymond recalled. “The reason they hated it is that it’s a report card, and while everyone can talk about individual projects and how attractive they may appear to be, ultimately, over time, you have to look at, ‘Well, how do all of those individual projects add up?’”
Raymond’s relentless proselytizing about R.O.C.E. was part of a larger pattern of his leadership: He chose his own metrics; he declared that other metrics were wrong; he delivered profits; and he ignored criticism.
That worked well enough when the subject was Exxon’s increasingly strong quarterly profit performance, in comparison to peers. It worked less well when the subject was Exxon’s ability to find enough new oil and gas to replace the hundreds of millions of barrels the corporation pumped and sold every year. As profitable as Raymond was making Exxon by the late 1990s, he struggled increasingly with a challenge that had never shadowed John D. Rockefeller: how to keep the corporation’s oil reserves—the foundation of its business—from shrinking.
The cold war’s end initially promised new bounty for Western oil corporations. Vast reserves did initially open for bidding in the former Soviet Union, Africa, and elsewhere. But it did not take long for the opening to become constricted. Raymond concluded by the late 1990s that while there was plenty of oil in the ground worldwide, the amount that Exxon could access might make it difficult over time to replace the vast quantities the corporation pumped each year—Exxon produced about 585 million barrels of oil and gas liquids in 1997. The reason involved the persistence of “resource nationalism,” or the inclination of governments that owned oil and natural gas to maintain control of their treasure.
The business models of the major international oil companies such as Exxon, Chevron, Royal Dutch Shell, and British Petroleum—and the prices that their shares commanded on Wall Street and on the London exchange—depended in part on the size of the underlying trove of oil and gas the corporations could claim to own. “Booked reserves” or “equity oil” referred to those proven reserves that a corporation controlled legally and could exploit for sale in future years.
In the world’s wealthy free-market political economies—the United States, Norway, the United Kingdom, Canada, Australia—virtually all of the oil available was “equity oil” in the sense that any company that found it and acquired it could own it legally under contract, in a manner akin to property rights. Exxon and its peers could display such equity reserves to shareholders as “proved” or “booked” oil under regulatory and accounting rules enforced in the United States by the Securities and Exchange Commission. The size of these booked reserves allowed shareholders to estimate future profits with relatively high confidence; equity oil was fundamental to Exxon’s stock market valuation, just as the number of shopping malls or office buildings owned by a real estate company would be fundamental to its market value.
Before the 1970s, Exxon, BP, and other large oil companies owned and operated large oil and gas fields in Saudi Arabia, Iraq, Iran, Venezuela, and elsewhere. Rising anticolonialism and nationalism stoked a period of upheaval that caused them to lose major properties. The twin anti-American oil embargoes of the 1970s signaled the arrival of the new era. The embargoes coincided with the rise of a price cartel, the Organization of the Petroleum Exporting Countries (O.P.E.C.), which served the interests of oil-producing governments. In 1979, the Iranian Revolution’s philosophy of Islamic self-determination advanced the spread of anti-Western political attitudes in Middle Eastern capitals. Populist leaders of oil-producing governments competed to prove themselves as resource nationalists—proud owners of their own geological wealth and unwilling to allow foreign corporations to possess a single barrel. Saudia Arabia, Iraq, Iran, Venezuela, Algeria, Libya, and other governments all seized back oil and gas fields from Western corporations, including Exxon. The expropriations decimated Exxon’s holdings and rates of daily oil production. By the late 1990s, Exxon and the other large private oil and gas companies based in the United States and Europe owned less than 20 percent of the world’s oil reserves. In 1973, Exxon had produced just over 6.5 million barrels of oil and gas liquids per day from its worldwide properties. By the late 1990s, that figure had fallen by more than two thirds.
The corporation spent much of this period “struggling with the issue,” Lee Raymond recalled. “We lost our equity position in the Middle East,” where 60 percent of the world’s proved oil reserves were located. The most fundamental question facing the corporation was, “What’s that mean for the company?”
Even the most nationalistic governments might welcome Western companies as technology partners and hire them strictly as contractors to drill, produce, and refine oil and gas, as a homeowner might hire out a contractor to renovate a house. Such fee-for-service contracts could be the basis of a profitable business—Schlumberger and Halliburton were examples of companies that built lucrative franchises in this way. But deals of this kind stopped short of allowing the contractor to own any oil beneath the ground. Exxon’s business had always been premised on owning oil, which required greater risk taking but promised much higher profit than a contractor could hope to earn.
By the 1990s, virtually all of the oil in the Middle East was off-limits to corporate ownership because of resource nationalism. The strategic problem facing Exxon was that apart from new frontiers in offshore ocean waters or above the Arctic Circle, there did not seem to be much new oil or gas to discover in territory controlled by wealthy, free-market countries. Elsewhere, in Africa, Asia, Latin America, and the former Soviet Union, oil geologists advised, there were still major discoveries to be made, but inconveniently, much of this new oil seemed likely to be found in places where governments would be skeptical about allowing Western corporate ownership. Notwithstanding communism’s fall, many politicians in developing countries, responding to popular feeling, still held that it was neither just nor necessary to give away ownership of oil and gas reserves, least of all to Western capitalists like Lee Raymond.
Although Exxon jockeyed for position as the world’s largest privately owned oil company, by the late 1990s it ranked only fourteenth or lower on a worldwide basis if the list included government-owned companies such as Saudi Aramco, Kuwait Petroleum, Gazprom of Russia, Petrobras of Brazil, or Sonangol of Angola. These state-owned giants not only showed large inventories of booked reserves, they also increasingly prowled outside their borders to compete with Exxon to capture next-generation oil reserves in Africa, Asia, and Latin America.
Exxon’s strategy was to emphasize its superior record of project execution, budget management, and cutting-edge technology. Its executives tried to persuade oil-owning governments that Exxon’s efficiencies could deliver an enormous cash windfall over the long life of a project, in comparison with what a less-efficient state-owned company could deliver. Computing power had started to remake oil exploration techniques. Three-dimensional imaging and algorithms that sorted reams of seismic data into patterns transformed the ability of Exxon’s geologists to find oil and gas. Many state-owned oil companies lagged behind. Not all oil-endowed countries had the capacity or the political and economic stability to build and manage a state-owned oil company that was competent in all sectors of the business. These were the openings Exxon tried to seize. Yet Chinese and Russian competitors could make offers to African or Latin American or Central Asian host governments that Exxon couldn’t touch—government-to-government loans, arms transfers, and political favors.
All this placed unprecedented pressure on Raymond and his peers to show Wall Street that they could find or buy new oil and gas reserves to replace what they produced annually. If an oil company failed to replace production for a sustained period, it would be on a path to liquidation. Under U.S. Securities and Exchange Commission–supervised accounting rules, the oil and gas reserves Exxon and its peers reported to shareholders were not carried on corporate balance sheets, but they were reported each year in S.E.C. filings. The reserves were among the most important assets oil companies described to investors because they suggested the scope of a particular company’s potential future profits and its sustainability. The sheer size of a company like Exxon or Shell increasingly made the math of annual reserve replacement daunting—more than a billion barrels had to be found and booked as new equity reserves each year if the company did not want to appear to be shrinking.
The temptation for Wall Street to fudge the numbers was powerful, as events at Shell would soon bear out. Yet the management of annual reserves reporting—having in-house geologists count up “proved” holdings, field by field; reviewing those counts at higher levels of management annually; and applying objective standards that could hold up if the S.E.C. inspected them—was a relatively new priority. During the long history of Standard Oil and its successor companies, down to offspring Exxon, executives had not had to worry much about reserve counting or replacement. There was plenty of oil to drill worldwide, and because Exxon, in particular, had owned stakes in Saudi Aramco and Iraqi and Iranian companies with massive reserves, the issue seemed of little material importance. It was only after the nationalization waves of the 1970s that annual reserve replacement became precarious, and counting methods drew attention from regulators. Gradually, Wall Street analysts and investors focused down on the question of which oil companies were renewing their reserves healthily each year and which were struggling and even in danger of spiraling smaller. Raymond took up the challenge of reserve counting with characteristic aggression and disdain for Washington regulation.
He had cause for concern: Between December 31, 1996, and December 31, 1997, the proved reserves of oil and liquid natural gas that Exxon reported to the S.E.C. fell from 6.34 billion barrels to 6.17 billion barrels, a decline of more than 2 percent. The amount of that decline was the equivalent of 465,000 barrels of oil production per day, annualized, a sizable amount by industry standards. During the same year, the corporation’s reported proved natural gas holdings increased slightly, but not enough to offset the fall in oil reserves. Judging by the rules enforced by the S.E.C., then, Exxon’s total oil and gas reserves shrank during 1997.
The news that Exxon had retracted a bit, at least temporarily, was hardly shocking: All of the major oil and gas companies struggled during the 1990s to replace produced reserves. To the public and Wall Street, however, Lee Raymond made no such admission. On February 5, 1998, Exxon announced in a press release that it had replaced 121 percent of its 1997 production by adding new proved reserves—in other words, its reserves had grown, not shrunk. “This year’s strong performance is the fourth year in a row that we’ve exceeded 100 percent replacement,” Raymond declared.
How could Exxon tell the public and Wall Street one thing and the S.E.C. another? The answer involved a catalog of legalese known as S.E.C. Rule 4-10, the binder of regulations that governed what oil and gas companies could and could not report as “proved reserves.” A purpose of Rule 4-10 was to prevent oil companies from puffing up their reserve numbers to lure share buyers and bolster their stock market prices.
One of the rule’s provisions held that “oil and gas producing activities do not include . . . the extraction of hydrocarbons from shale, tar sands, or coal.” Tar sands refer to bitumen, a thick form of oil that usually has to be dug out of the ground by techniques that resemble mining, after which it is mixed with chemicals to create a liquid suitable for transport by pipeline to an oil refiner. Canada holds some of the world’s largest tar sands reserves. Exxon, through local affiliates, had been buying into these holdings under Raymond’s spur. Raymond believed it was wrong for the S.E.C. to exclude tar sands from proved oil reserve counting—and so he simply ignored the commission’s rules when he issued press releases.
The S.E.C. had enacted the tar sands rule because it wanted investors to know when a company was engaged in mining and when it was engaged in oil production—for one thing, the expense of mining was typically higher than the expense of oil drilling, so the value of tar sands reserves over time might be less than an equivalent amount of purer oil. Raymond thought this was wrong, too: The purpose of S.E.C. regulation was to ensure accurate documentation of resources, not to force companies to dance around in outmoded categories devised by bureaucrats. There was no doubt that Exxon owned the Canadian tar sands resources it claimed—outright fraud was not the issue. In any event, if Exxon’s Canadian tar holdings were included with other oil and gas holdings, the corporation’s total proved reserves had indeed gone up during 1997, not down—and this is what Raymond chose to emphasize to Wall Street and the public.
Did his defiance of the S.E.C. rules matter? Raymond might disagree with the regulations on the books, but the purpose of S.E.C. regulation was to ensure that all investors had accurate information about the companies whose shares they owned. Through fraud-inflated bubbles, Wall Street reminded the world every ten or twenty years why such regulation was vital. Raymond declared publicly each winter in press releases and Wall Street presentations that Exxon enjoyed smooth, year-to-year reserve replacement when, in fact, no such picture existed, according to S.E.C. regulations. And the corporation’s spinning did help to mask a strategic issue at Exxon, the challenge of resource nationalism and reserve replacement, which was of genuine and enduring importance.
On December 31, 1996, Exxon stock traded at $24.50 per share. On February 6, 1998, the day after the corporation issued a press release boasting of “the fourth year in a row that we’ve exceeded 100 percent replacement,” Exxon shares closed at $31.00. Exxon’s profitability was unchallengeable, but it could be questioned whether all of that 10 percent plus annual gain in stock price, which benefited Exxon executives and employees as well as ordinary shareholders, was honestly earned.
Raymond’s defiance of the S.E.C. was not illegal—the corporation’s annual 10-K filings to the commission appeared to be carefully parsed, and they broke out tar sands (or “oil sands”) as a separate reserve figure, in fine print. Rule 4-10 enforced disclosures in official filings to the commission, not in press releases or oral statements to Wall Street analysts.
Exxon’s practice of reserve spinning to the public reflected a broader mind-set of chutzpah toward Washington. The commission staff was by far the weaker party in this particular contest; for many years the S.E.C. did not have a single oil geologist on its payroll to assess the “proved reserve” claims made by the oil corporations it oversaw.
Exxon’s argumentative press releases also signaled how heavily the reserve replacement conundrum weighed on Raymond and his colleagues. The underlying challenge of reserve booking did have far-reaching consequences: It would draw Exxon to far-flung corners of the earth in pursuit of reportable reserves the corporation might previously have ignored on the grounds that they involved too much political and economic risk and dragged the company into dictatorships and other violent settings for which it was not well prepared.
“What is the one item that concerns you most, that disturbs your sleep?” the Wall Street oil industry analyst Fadel Gheit recalled asking Raymond over a meal.
“Reserve replacement,” Raymond had replied.
John Browne ascended to become chief executive of British Petroleum two years after Lee Raymond took over Exxon. As individuals, their personal interests could hardly have been more disparate—Browne, the Soho-inspired gourmet; Raymond, the duck hunter and country club golfer. As business competitors, they faced a common challenge. As Browne put it later, “We believed governments of oil-producing nations would increasingly prefer to work with very big and influential oil companies. They did not think small was beautiful—that was clear when you spoke to them. They wanted to see a big balance sheet, global political clout, and technological prowess, and they wanted to be sure that you would be around for a long time.”
Moreover, the geographical distribution of Exxon and British Petroleum’s oil holdings increasingly isolated those two companies from the regions with the most promising new opportunities. Exxon’s reserves and those of British Petroleum were the most heavily weighted toward the politically safe, economically free but geologically mature oil regions of the West. About 80 percent of Exxon’s reported proved oil reserves lay beneath the United States, Canada, and Europe. British Petroleum had struck out aggressively in the former Soviet Union after communism’s collapse, but about three quarters of its assets remained in Britain and the United States. Chevron had acquired sizable reserves in Kazakhstan and Africa. Mobil owned large holdings in Africa and Asia; the majority of its reserves lay outside of North America and Europe.
In the autumn of 1996, at the Four Seasons hotel in Berlin, John Browne presented a plan to British Petroleum’s board of directors in which he argued that BP should seek a merger with another large international company in order to compete with state-owned oil companies and improve the geographical diversity of its oil holdings. Browne’s first choice was Mobil.
The BP chief regarded his Mobil counterpart, Lou Noto, as a like-minded cosmopolitan. Noto had grown up in Bensonhurst, Brooklyn, as the son of a labor organizer; he was a stocky, lively, charismatic business strategist with a sizable ego. He lived in Manhattan and indulged his fondnesses for cigars, Porsches, and opera. Browne found him to be a “warm, friendly person and ‘bon viveur.’” They smoked cigars together from time to time and talked oil.
The gigantic investments and industrial operations required to produce and refine oil meant that international companies often found it financially prudent to partner on projects, much as syndicates of Wall Street investment banks shared the risks of selling stocks and bonds. This pattern of coinvestment and coexistence meant that global oil executives kept up steady contact with one another—it was a form of continuous diplomatic relations, involving both cooperation and dispute.
BP and Mobil had embarked on a joint venture that would combine their European refining businesses. Browne introduced the idea of a full merger that would create the world’s largest privately owned oil company.
Noto shared Browne’s view of Big Oil’s predicament: “We need to face some facts,” he said later. “The world has changed. The easy things are behind us. The easy oil, the easy cost savings—they’re done.” Noto was “worried.” He “expected the environment to become more volatile, and more competitive, and more difficult geographically and geologically.”
Mobil had inherited a large share of the downstream assets of Standard Oil. The corporation operated adeptly on the commercial side of the oil business—wheeling and dealing, negotiating customer contracts, maneuvering amid price volatility, and the like. It won major new upstream plays in newly independent Kazakhstan after the Soviet Union’s demise. Yet Mobil was highly dependent on the profits generated by a single large natural gas field in Indonesia and offshore properties in Nigeria; both countries were politically unstable and wracked by violence.
Late in 1996 and early in 1997, Noto and Browne held a lengthy series of secret meetings to design a full merger of their corporations; their work climaxed at a long conference in the New York offices of the law firm Davis Polk & Wardwell. Yet as a decision point neared, Noto thought that Mobil might still be better off on its own. On March 28, 1997, he met Browne in Mobil’s corporate jet hangar outside of Washington, D.C., and “made it clear that we could go no further,” as Browne recalled it. Browne felt that he had “wasted a lot of time and effort.” He flew back to London and announced to a colleague, “Well, we’d better think of something else.”
Plummeting oil prices compounded the pressures he faced. The causes of the price fall emanated from Saudi Arabia, the world’s leading oil producer, at about 9 million barrels per day of capacity at the time, and the leading source of American oil imports. After Saddam Hussein’s invasion of Kuwait, Venezuela’s government decided to break from O.P.E.C. policy and produce as much oil as possible. It looked as if Venezuela might be trying to steal some of Saudi Arabia’s American market share. The usurper attempted to almost double its oil production, from 3.2 million barrels a day to 5.5 million a day. For a while, the gambit worked; Venezuela gained more and more of the U.S. import market and replaced Saudi Arabia as America’s number-one outside oil supplier. In 1997, however, Saudi Arabia retaliated by authorizing a surge in its own oil production, a program “explicitly designed to punish Venezuela” and to establish a “deterrent,” as the industry consultant Edward L. Morse would describe it, to dissuade any other oil-rich country that might harbor similar ambitions. The Saudi production surge drove global oil prices to historic lows in 1998. By the end of that year, oil would fall to just ten dollars per barrel; adjusted for inflation, that was the lowest price the world had enjoyed since the 1960s.
Disciplined Exxon could weather such a sudden price collapse. After the cost reduction binge of the 1980s, Raymond had reduced Exxon’s operating expenses an additional $1.3 billion annually in the five years until 1997. Less-efficient companies such as Mobil struggled. Nobody knew how long prices might stay so low. The long-term challenge of resource nationalism compounded the anxiety. All this coaxed Lou Noto back to the possibility of a merger.
In June 1998, he attended a meeting with Lee Raymond organized by the American Petroleum Institute (A.P.I.), the Washington-headquartered oil industry trade group. Raymond raised the possibility of a minor deal to combine Exxon and Mobil refinery operations in Japan.
“Maybe we should talk about that,” the Exxon chief said.
“That and other things,” Noto replied.
Mobil’s top Management Committee met in New York every Tuesday and Thursday. One morning that summer, Noto arrived and said, “Guess who I had dinner with last night? I had dinner with Lee Raymond.”
The news shocked his colleagues. Exxon was more than twice Mobil’s size by revenue. Layoffs would be the one inevitable by-product of such a combination, and the job losses would reach the highest ranks of the Mobil hierarchy. “There was a massive anxiety,” an executive involved recalled. They worried as well about the culture shift if conservative Exxon took charge; by comparison, Mobil had been loosely governed.
That summer, John Browne advanced a fallback plan to merge with Amoco, the offspring of Standard Oil of Indiana, headquartered in Chicago. Browne and Laurance Fuller, Amoco’s chief executive, held a series of private dinners in a back room of Le Pont de la Tour, the London restaurant, where Fuller “could smoke his cigarettes and we could all drink Puligny-Montrachet,” as Browne recalled it. “Remarkably, no one noticed.”
On August 11, 1998, they announced that their companies intended to merge, with Browne to be in charge of the successor corporation. The deal would create the largest corporation in Great Britain and one of the largest private oil companies in the world.
Browne’s announcement galvanized his competitors. “It was as if the industry had been standing by waiting for someone to make the first move; it felt like we had broken a dam,” as he put it. Every North American and European leader of a large oil corporation seemed to conclude simultaneously that his company needed to merge to get bigger. Chevron and Texaco would soon combine, as would Conoco and Phillips, and Total with Petrofina and Elf.
Raymond believed that Exxon was primed for transformational change. As he had taken full control during the mid-1990s, he had concluded that the corporation had a management that could handle a lot more than it was being asked to do. The post-Valdez reformers were in place. They had restructured, streamlined, and reduced costs. They were down to “the fine grind,” as he put it to his colleagues. Now what? How could they convert their emerging efficiency into a strategic leap, something that would have global scale?
Around this time, DuPont and Exxon discussed a swap of DuPont’s Conoco oil division for Exxon’s chemical division, but the idea did not ripen. Raymond’s rationale for any proposed merger was not complicated. He ran a resource company. Replacement of resource stocks was fundamental; an acquisition at the right price was a common way for resource companies to replace reserves and grow. It was a part of Exxon’s own history—Standard Oil of New Jersey had grown by acquiring Humble Oil and Refining and other reserve-rich firms. In this case, a big merger might provide a new source of leverage for Raymond to accelerate the drive for efficiency and accountability, the vanquishing of bureaucracy, that he had started after the Valdez debacle. It would be the “last brick in the wall of remaking Exxon,” he declared.
That summer of 1998, Lee Raymond and Lou Noto intensified discussions about a recombination of the baby Standards they each led. There would be antitrust issues in the United States if they proposed a deal, but their lawyers advised them that if they sold off some retail gas stations and perhaps a few refinery properties, the deal should be approved. From Exxon’s perspective, the fit with Mobil was well tailored, particularly because the ends-of-the-earth map of Mobil’s oil reserves complemented Exxon’s more conservative profile, so heavily weighted in North America and Europe. Mobil’s holdings included substantial assets in West Africa, Venezuela, Kazakhstan, and Abu Dhabi. It also held important natural gas positions in Qatar and Indonesia. By purchasing Mobil, Exxon could scale up to compete with state-owned oil giants and leapfrog onto new geographical frontiers.
Exxon had the currency—its own stock—to make such a gargantuan deal without incurring debt or financial risk. During the 1960s, Exxon had handled its cash flow conventionally, paying out most of its earnings as cash dividends. This practice rewarded small shareholders by providing them reliable income. The corporation had about eight hundred thousand such shareholders by the early 1980s. During inflation-menaced 1982, Exxon’s dividend was a hefty 10 percent. The next year, however, Clifton Garvin embarked on a campaign of share “buybacks” as a substitute for some of the spending on dividends. He was advised by Jack Bennett, a finance wizard and mentor to Raymond who left Exxon during the mid-1970s to work at the Treasury Department and then returned to the corporation’s board. He and Garvin concluded that after 1980 global oil prices looked fundamentally unstable. Given the volatility that seemed likely, it would be cheaper for at least a while for Exxon to buy oil and gas reserves by purchasing its own stock than by investing in long-term projects at a high price point. “We had a tremendous amount of cash and no debt, we were convinced that the price structure was unstable, and thus we had no other option,” Raymond recalled, but to buy back shares. Exxon management had long raised cash dividends to beat inflation, but Garvin, and later Rawl and Raymond, were reluctant to raise the dividend too much higher, to match the 5 and 6 percent payouts offered by Shell and British Petroleum, for fear that in a down cycle for oil prices “you can get yourself in a real squeeze on cash,” Raymond said.
Each year, therefore, the corporation went into the stock market and used some of the cash generated by its operations to buy its own shares. Between 1983 and 1991, Exxon bought a net total of 518 million shares worth $15.5 billion—a whopping 30 percent of the shares then outstanding. As a result, each remaining share owned by an investor controlled a progressively higher percentage of Exxon’s profits and oil reserves: In 1983, a single Exxon share owned 6.7 barrels of oil and gas equivalents, but at the end of 1989 it owned 8.4 barrels.
During the buybacks, Exxon’s dividend yields fell in relative terms, leaving small shareholders with less cash in their pockets. Did this matter? Arguably, dividend payments and buybacks were equivalent—in one case, a shareholder received cash and in the other, the value of shares rose proportionately. One question was who would make better use of ExxonMobil’s cash, its executives or its dispersed shareholders. By the time he took charge of the corporation, Raymond answered emphatically, “We can.”
Arguably, too, share buybacks could be justified only if the price of Exxon shares at the time of purchase was so low that buying them was a better use of cash than looking for new oil reserves. In the decades to come, however, Exxon would make buybacks continuously, in all price environments, joining an American corporate fashion. Academic studies showed that many corporate leaders had a poor record of buying back shares only when prices were low. “The implied returns . . . from buybacks by big companies would have been laughed out of the boardroom if they had been proposed for investment in bricks and mortar or other more conventional projects,” wrote Richard Lambert, a British critic of the practice. Such programs also raised red flags with some corporate governance specialists because of the manipulations they might mask. Corporate managers might deliberately suppress earnings before a buyback campaign by front-loading expenses to temporarily drive down the price of shares they intended to buy. Repurchases might also smooth out publicly reported earnings per share, to sell Wall Street investors on a story of placid growth when the underlying business was more volatile. In Exxon’s case, all of these concerns hovered, but the buybacks at times also seemed a way to dispose of a problem that other companies could only envy: too much cash.
The shares Exxon bought back did not simply vanish; they were parked in the form of “treasury shares” belonging to the corporation. Raymond and his management team chose to use the parked shares to purchase Mobil tax free. If Exxon could not discover on its own great gobs of oil, it would buy what it could not find: This was an extraordinary payoff for two decades of cash flow discipline.
In late November, Raymond flew on an Exxon Gulfstream IV corporate jet to Augusta, Georgia. The corporation maintained a membership at the Augusta National Golf Club, the site of the annual Masters tournament, and the club hosted an annual Thanksgiving party for families. Raymond typically attended and played golf with his three sons, who had grown into better golfers than he was. This time, Raymond ensconced himself in one of the club’s cabins and played as many rounds as possible while reviewing the final deal terms. Late one night a messenger had to find Raymond’s bungalow to hand over documents. Everyone involved in the deal negotiations, including Lou Noto, knew this would not be a merger of equals. There would be a weighted exchange of shares, but as a practical matter Exxon would take over Mobil. Noto volunteered to accept a subordinate position as vice chairman, reporting to Raymond; he would serve in that role for a transition period and then depart, to enjoy his life in New York.
John Browne later asked Noto if he would have preferred to merge with BP or Exxon. “BP, of course, but I couldn’t make it work,” Noto told him, as Browne recalled it. “When you bought Amoco it was inevitable that Exxon would buy us. It was only a matter of time.” BP had merged its way to a size that Exxon had to match if it wanted to compete, and the acquisition of Mobil was the easiest way for Raymond to get there.
On December 1, 1998, Raymond and Noto stood side by side in a J.P. Morgan conference facility in New York to announce their $81 billion deal. There was no mistaking the new company’s hierarchy: Raymond opened the meeting and spoke for twenty straight minutes. He laid out the merger terms, described the prospective business advantages, and announced future plans in bland press-release prose, displaying all the charm of “the proverbial shoe salesman,” as one newspaper reporter covering the announcement put it.
When at last his turn at the microphone arrived, Noto hastened to say that his decision to merge with Exxon was “not a combination based on desperation.”
It was, instead, a requirement of the times. “Competition has changed,” he said. “We’re here because we’re trying to respond to these changes.”
ExxonMobil Corporation—the world’s largest nongovernmental producer of oil and natural gas, and soon to become the largest corporation of any kind headquartered in the United States—formally came into existence on December 1, 1999. During its first year of combined operations, the corporation would earn $228 billion in revenue, more than the gross domestic product—the total of all economic activity—of Norway. If its revenue were counted strictly as gross domestic product, the corporation would rank as the twenty-first-largest nation-state in the world. A United Nations analysis, designed to calculate by more subtle measures the relative economic influence of particular companies and nations, concluded that ExxonMobil ranked forty-fifth on the list of the top one hundred economic entities in the world, including national governments, during its first year. Its net profit alone—$17.7 billion that inaugural year—was greater than the gross domestic product of more than one hundred nation-states, from Latvia to Kenya to Jordan. As Lee Raymond told his colleagues, “If we haven’t gotten to ‘economy of scale,’ we’re never going to find it.” He was optimistic. Oil prices were rising again. “It’s a great time to be ExxonMobil,” he declared.”