A Very Incomplete Story

I've watched CBS's "60 Minutes" periodically since I was a teenager. Over the decades they've aired fascinating character studies and uncovered dirt in high and low places. But there's one style of reporting that I'd be surprised if they haven't patented by now, because it's so effective at getting viewers riled at their chosen targets. You know the setup: innocent victims wronged by a Bad Company, camera angles and backdrops carefully chosen to reinforce the reactions they seek to evoke, and the reasonable-sounding correspondent getting evasive-seeming answers from some corporate official. They're very good at this, and I confess I have no more immunity to such manipulation than most viewers, except in the case of the lead segment of last Sunday's program, which I finally caught up with on TiVo. I got mad all right, but this time at "60 Minutes", because the story in question, concerning a lawsuit against Chevron for alleged environmental damage in Ecuador, is one that I know well enough to spot just how skewed the coverage was. In its eagerness to pillory Big Oil, the segment's bias let the real culprit, the national oil company of Ecuador, off the hook.

I want to be very clear about my inherent conflict of interest here, which also provides the basis for my knowledge about the facts of this case. For more than 20 years I was employed by Texaco, Inc., a subsidiary of which was the partner of the Ecuadoran state oil company, Petroecuador, in the Oriente oil fields of Ecuador from 1964 to 1992. I am also a shareholder of Chevron Corporation, which acquired Texaco in 2001--thus inheriting a lawsuit that had already been dismissed by courts in multiple US jurisdictions. I never traveled to Ecuador or worked in the divisions of the company that were directly involved with the producing operations there, but I had colleagues that did. So although I have no first-hand knowledge concerning the evidence put forward by either the plaintiffs or the defendants, I picked up enough information around the water cooler to have a good sense for what was missing from Mr. Pelley's reporting of this story.

The first questions that anyone digging into this story should have been asking concern the history and structure of the agreement governing the oil producing consortium in Ecuador. It started as a 50/50 arrangement between Texaco and a unit of Gulf Oil, one of the other "seven sisters". During the global wave of resource nationalism of the early 1970s, the state oil company of Ecuador acquired first a 25% share of the Consortium and then Gulf's entire remaining share, giving them 62.5% of the operation. (I am sure there were many times that my former employer wished that the government had simply nationalized the whole thing, back then.) This means that while Texaco collected 37.5% of the profits from the Oriente fields, Petroecuador and the government that owned it received not only the bulk of the profits, but also 100% of the royalties and taxes paid throughout the term of the concession. Even in those days, that amounted to many billions of dollars by the time Texaco's interest terminated in 1992, two years after Petroecuador became the operator, not just the majority owner of the field. The company's estimate is that Ecuador received nearly $25 billion over the life of the contract. That's consistent with production of roughly 200,000 barrels per day in that period, at an average price somewhere around $20/barrel. Out of that, Texaco earned about $0.5 billion in total, a figure that wouldn't surprise anyone familiar with oil concession contracts of that era. That equates to less than a penny per gallon of oil produced.

Now, if Texaco were responsible for all the damage alleged in Ecuador, it might not matter so much that it only earned a fraction of what it is being sued for in an Ecuadoran court. However, the allocation of revenue is extremely relevant to attempting to understand who would have benefited from cutting the corners that the plaintiffs claim were cut in the operations there. Cui bono? The answer is glaringly simple, and not just for the period after Texaco ceased acting as operator: Petroecuador--which by all rights should have been sitting in Mr. Pelley's hotseat last Sunday. Petroecuador, a company with a less than sterling reputation for operational excellence, even now. The reason they are not there is that Ecuador refused to waive its sovereign immunity in the case, and thus could not be sued even though it controlled the ongoing operation of the field since 1990, has been the main beneficiary of the region's oil wealth, and bears all responsibility for the poor state of the sanitary and healthcare infrastructure that contributed greatly to whatever ills the indigenous people have experienced. The logic of suing Texaco was inescapable: sue the party you can reach, whatever their share of the responsibility, and go for the deep pockets.

If you've read this far and still have an open mind about the case, then you might be interested in looking at Chevron's side of the story. My purpose here is not to make their case or to suggest that Texaco operated the Ecuadoran fields in the 1960s, '70s and '80s to the standards that prevail today, decades later. But I do feel the need to point out that there is another side to this story that you didn't see last Sunday, and it is not remotely the black and white tale of a big corporation behaving badly that "60 Minutes" portrayed. I am disappointed that CBS allowed itself to be used to paint such a one-sided picture, sullying the reputation of a company I knew inside and out, and of the tens of thousands of fine, responsible people who worked there--not a gang of environmental criminals. I know "60 Minutes" can do better.

Timing Is Everything

Two news items about oil caught my attention this week, and both of them illustrate the pitfalls of poor timing. If the windfall profits tax bill introduced by Senator Casey and seven of his freshman Democratic colleagues had been proposed at the front end of the current industry cycle, it would have at least been chasing a genuine price-spike windfall, rather than the profits from increasingly expensive new projects. And had the report that Iraq's oil reserves may be double their officially-reported 115 billion barrels--with the increment mostly in the Sunni western part of the country--come out a year or two ago, it might have helped Iraq's feuding factions find common ground. Instead, these two items merely contribute to a bleak picture of the future facing the major oil companies.

Because Iraq is still immersed in sectarian and terrorist violence, with no end in sight, it's going to be a long time before any of the country's newly-discovered oil gets to market. For that matter, any increase in production above pre-war levels would require a dramatic realignment of OPEC quotas, or Iraq's departure from the cartel. But if the new oil is anything like the old oil, distributed in a small number of large deposits with straightforward geology and low development and production costs, then Iraq's long-term future potential isn't 4-6 million barrels per day, as many have thought: it's another Saudi Arabia capable of similar volumes to what the Kingdom puts out. That needs to be factored into considerations of Peak Oil timing and the future oil price with which alternative energy projects must compete. It also serves as a reminder of just how much of the world's future energy supplies belongs to state oil companies in the Middle East.

As to a windfall profits tax on oil companies, this is never a good a idea, but at no time worse than when the industry is facing a serious profit squeeze--caught between rising global construction costs and more assertive national oil companies, both upstream and downstream. Our energy companies need to develop enormous quantities of new oil to replace reserves they are consuming, while investing in new refinery capacity to keep product supplies growing; all of that is going to cost hundreds of billions of dollars. Siphoning off a large slice of that money to fund new poverty programs is a good way to derail those projects and keep the prices we pay for petroleum products high indefinitely.

Taxing oil companies makes for great populist sound-bites, but it is directly contrary to any realistic notion of enhancing our energy security, when the state oil companies are getting bigger and more powerful.

Resource Nationalism

Every now and again you run across an article that presents such a topsy-turvy view of reality, so compellingly, that you just have to nod in admiration of its author. Today's New York Times includes such an op-ed, lambasting Iraq's proposed Oil and Gas Law as the tool of evil, resource-grabbing US oil companies, the Seven Sisters (now four.) She paints a picture that would be comfortingly familiar to those who thought that the film "Syriana" (10/12/06) portrayed the real world of oil: a vast conspiracy between big corporations and the US government to invade Iraq and strip its people of their rightful oil wealth. Like all effective propaganda, it is grounded in fact, but its departures from reality speak volumes about the author's transparently anti-globalist and anti-capitalist agenda. The fulfillment of this ideology would leave the Iraqi people even worse off than they already are.

Ms. Juhasz more or less accurately describes the global shift that put most of the world's oil reserves under the control of national oil companies (NOCs), and out of reach of the international oil companies (IOCs), except on a low-margin, service-contract basis. And she is correct that the terms of the Oil and Gas Law, about which the Iraqis have been arguing for the last three years, would avoid re-creating a similar state monopoly within Iraq, thus putting it out of step with its neighbors. Iran, Kuwait and Saudi Arabia all run their oil industries as arms of government, with minimal foreign participation. Factual enough, so far. Where the fantasy begins is in Ms. Juhasz's notion that Iraq is in a position to establish its oil industry along similar lines, without enormous infusions of foreign capital and expertise--and without the incentives necessary to attract them.

It's worth recalling how and why those neighboring national oil companies took control of the foreign oil ventures on their soil. In the 1960s and early 1970s, international oil prices were low and stable, and the international companies that controlled production--paying taxes and royalties to the host nations--were intent on steadily increasing production to keep prices low and demand growing. These countries saw an opportunity to nationalize these holdings, assume direct control, and limit supplies, to their great financial benefit. I'm sure Ms. Juhasz sees the resulting transfer of wealth to OPEC's members as entirely proper. But there are crucial differences between those circumstances and today's Iraq. In the 1970s, the NOCs took over a slate of relatively new assets and were positioned to thrive from day one. In contrast, the Iraqi oil industry lies prostrate, struggling to sustain production from facilities that were maintained with spit and bailing wire during the long sanctions that kept Saddam's ambitions contained, and then further damaged by war and sabotage. Even if the civil war ended tomorrow, Iraq would require years of assistance just to maintain its energy status quo.

Iraq's oil fields hold great promise, and every IOC in the world must salivate at the prospect of being invited in to develop the country's enormous untapped reserves. But today's industry is a far cry from that of the 1960s. None of these companies, which are much more international than they were then, expects to be handed ownership of all this oil, or to run Iraq as an oil-fiefdom. Whether the ultimate contractual terms end up resembling those in fellow OPEC members Nigeria or Angola, or more like those in the UK--hardly an exploited third-world country--they need to be commercial and mutually agreeable. If in the future Iraq doesn't see the benefits it expects, or believes it was taken advantage of in a period of weakness, it would not be surprising for them to renegotiate those terms. Every company looking at Iraq understands that perfectly well, from long experience elsewhere. They have a large incentive to strike deals that will endure, rather than going up in smoke just after the big investments have been made, but before they have paid out.

Whatever the ultimate basis for international participation in the Iraqi industry, all of Ms. Juhasz's concerns are moot until the civil war subsides, a strong government emerges, and the persistent sabotage of energy infrastructure ends. Once that happens, the interests of the Iraqi people will be served best by an energy industry that can attract foreign capital and expand its output, providing employment opportunities and a growing stream of royalties and taxes, rather than being starved and hobbled by an inefficient and corrupt bureaucracy.