BOOKS BIG OIL RIGGING

The energy giants do it their way

THE EARLY FIFTIES were glory years for U.S. oil fields. Especially in Texas. The state produced twice as much oil as Russia and more than all the Middle Eastern countries combined. Texas was the oil king of the universe.

Times change. Now Russia is the world’s number-one producer. We couldn’t function without heavy Middle Eastern imports. And the slump here at home is so great that experts say those people born in the Thirties will probably live to see most of the wells in America come to a wheezing halt as the fields run dry.

As James McGovern points out in “The Oil Game” (Viking, $12.95), the United States has less than 5 percent of the world’s remaining proven reserves of crude oil; few people in the business believe there are great reservoirs still to be discovered. Not at any price. Most oil men would probably agree with Robert Baldwin, president of Gulfs refining and marketing unit: “It doesn’t appear there are great volumes of oil yet to be found in the U.S. If crude oil went to $100 a barrel, we couldn’t arrest the decline rate.”

Americans are not going gentle into that good night. We are falling into the energy void with confusion and loud recriminations; a complete lack of grace. We go with the knowledge that we have been suckered.

By whom? The oil companies, of course. We indulged them, we spoiled them, we left energy matters up to them. And they let us down. Smug, arrogant, often deceitful, Big Oil always had its way in shaping national and international energy decisions. Not long before Adlai Stevenson quit the U.S. Senate in disgust, he accurately summed up the history of Big Oil’s successes: “What has passed for an energy policy in the past was made in the board rooms of the nation’s major oil companies. Our national energy priorities have been based on the premise that ’What is good for Exxon is good for the country.’ ” Through the years, Big Oil usually wrote its own tax code, got the import quotas it wanted, ripped up the environment pretty much at will, merged and remerged with total indifference to antitrust laws. Stevenson was right: “Almost every time there has been a choice between what is best for Big Oil and what is best for the nation, Big Oil has won.”

It has won for a number of reasons, some of which author McGovern – a former public relations official for Shell and Texaco – makes clear and some of which he doesn’t. He reminds us of what everyone must know by now – oil’s influence in Washington is built on money. The industry has approximately 600 lobbyists, who cost somewhere between $10 million and $75 million a year – a more exact figure is impossible to ascertain because lobbying-disclosure laws are so vague. Oil and gas interests gave $1.3 million to 34 U.S. senators up for re-election in 1978; the industry’s generosity in 1980 is still being toted up. Every election, members of congressional tax committees line up for the traditional handout from oil officials.

Congress – probably not so much because it is bought off as because it simply prefers to follow the line of least resistance – has responded to the industry’s generosity by permitting it, in essence, to set up its own bureaucracy within the federal government. Those who presumably are the regulators of the industry often are alumni of the industry. Every time a political gadfly such as former Senator James Abourezk forces the Federal Energy Agency or the Department of Energy to divulge the professional background of its policy-making officials, the public learns that hundreds of them migrated from the warm nest of the oil industry. In 1975, Abourezk had the General Accounting Office check the backgrounds of 11 agencies whose responsibilities included oil industry affairs. The GAO found 201 former oil company employees and affiliates in top-level positions in the federal agencies-not counting the employees in two agencies that refused to answer the GAO’s inquiry.

Tired of being embarrassed by such disclosures, the Department of Energy recently put a ban on the release of such background data; if you go through the publicly available biographies of its top officials on file at the DOE’s press office, you will find hardly a mention of their ever having heard of petroleum before reaching Washington, much less having earned an income from it.

Other antibodies the oil industry has developed against federal regulation include Congress’ refusal to hire enough people to do the job. McGovern mentions that during the 1973-74 embargo (and in subsequent years) the oil industry was accused of overcharging utility companies and consumers by many billions of dollars, and that the Department of Energy finally set up a special counsel’s office in 1977 to try to recover some of the loot. The office was staffed with 200 lawyers and 400 auditors – which, to the layman, may sound like a lot of snoopers. But it was a hopelessly small crew, considering that they had to investigate, as McGovern points out, “not just the major oil companies, but some 200 refiners, 19,000 crude oil producers and 25,000 wholesalers.”

Unfortunately, McGovern does not tell his readers the full story about the government’s willful incompetence in coping with oil company cheating. He might also have mentioned that in 1975 the GAO found that the Federal Energy Agency (FEA), which was supposed to protect the public from price gouging, had only one auditor assigned to each of the six largest refining companies. The agency admitted it had only one-ninth the number of personnel needed to enforce honest pricing. At the same time, Senate investigators found that the audit team assigned to Exxon was allowed only 54 hours to complete work that the team admitted could not properly be done in fewer than 700 hours. The agency eventually uncovered 75 cases of overcharging by major refiners, which totalled $267 million. Two years later the FEA had not collected one penny in penalties from them.

And when penalties have been assessed by federal regulators, they’ve usually “forced” the wrongdoers to spend more money on themselves. As McGovern points out, in 1980, for example, Standard Oil of Indiana, in penance for price violations committed since 1973, agreed to spend $400 million to modernize its refineries and to step up exploration for domestic oil supplies.

By far the most powerful weapon the oil industry has had in frustrating federal regulators and manipulating federal politicians has been its domination of information. In the years when the Federal Power Commission was making at least vague gestures toward setting natural gas rates, the commissioners relied solely on information supplied by the industry as to how many wells were available and how much gas could be counted in reserve. Producers capped hundreds of producible wells and didn’t report their availability, hoping to make the commission more sympathetic to their requests for higher rates. The commissioners, having no independent data, could not prove the industry’s duplicity and seldom even tried to do so.

The government’s ignorance has been as damaging as it has been pitiful. Consider, for instance, the way the government was tricked into accepting the mandatory oil import quota system in 1959. Here’s how it came to pass:

Until World War II, the major oil companies pretty well had overseas oil exploration sewn up. They rationed overseas production in such a way as to prevent price competition. But in the postwar period, they began to lose control of the market when a number of large independents invaded Africa and the Middle East (as well as other overseas areas) and began to make sizable discoveries. They wanted to bring that cheap foreign oil back to the world’s best market: the United States.

They ran into stiff opposition. Both the major international oil companies and the smaller independent companies (which had no foreign holdings and relied solely on domestic production for their livelihood) wanted to control these imports lest they force down prices here at home. To the small independents, it was a life-and-death issue; to the majors, it was simply a matter of maintaining U.S. prices in order to support world prices.

The results were big public relations problems. How does one convincingly argue for a ban on foreign oil if one’s own wells are running dry? Wouldn’t it be much more sensible to import as much foreign oil as possible and save our own reserves for later, when the foreign fields decline? To block those questions, the majors juggled their reserve figures radically upward and began talking as though U.S. oil would last forever. The public optimism of the oil companies – whatever their private awareness of reality may have been – was nicely expressed by Robert G. Dun-lop, former president of Sun Oil Co.: “We are a long way from exhausting our petroleum resources . . . enormous supplies are still available for development.”

So, they said, it would be okay to keep out the foreign oil. We had plenty right here, and even though it did cost a lot more, we should pump it out of sheer patriotism. Right? That’s what the oil companies told us. The oil companies said that a healthy, prosperous domestic industry was good for national security, so why not just pump, pump, pump away! On that upbeat note, the mandatory oil import quota system was fixed into law in 1959. To a large extent the system was the handiwork of Eisenhower’s Treasury Secretary, Robert B. Anderson, who in turn was the protege of some of Texas’ leading oil men. Some cheap foreign oil was allowed into the country, but sharp limitations were enacted. Thus began what cynics would refer to as the “Drain America First” program. M.A. Adelman, the oil scholar at Massachusetts Insitute of Technology (MIT), estimated that the oil import quota system cost U.S. consumers more than $50 billion – the largest subsidy of an industry on record. It certainly depleted U.S. reserves.

And yet today the same fellows who insisted on keeping mandatory quotas in place for 14 years – turning away the Saudi stuff when it was dirt cheap while pumping Texas like crazy – are admitting that their ebullient estimates of the late Fifties were wrong. We are running out of oil.

MOST TEXANS, having contempt for anything done in Washington, will dismiss the federal government’s energy failures as endemic. So what if the bureaucracy is riddled with conflicts of interest; so what if oil money shapes the game and efforts to punish oil company cheaters fall flat; so what if the federal regulators are at the mercy of the industry’s information-keepers and don’t realize when they are getting bad data – what can you expect? That’s just the lackluster way Washington does things, right?

Perhaps. But it is also the way Texas does things – in spades. If you don’t think so, clear your mind with a reading of David F. Prindle’s “Petroleum Politics and the Texas Railroad Commission,” which has just been published by the University of Texas Press ($14.95). Prin-dle, a government professor at UT, has turned out a sparkling account of muddling through (barely) at the TRC. All the mistakes, improprieties, stupidities and conflicts of interest that have marked Washington’s handling of the oil industry are also embedded in the history of “regulating” Texas oil. To be sure, the courts and the Legislature must share the blame, but one can always count on the Railroad Commission for the biggest goofs.

As every Texas schoolboy knows, Spin-dletop blew in on January 10, 1901. As a result of that and other fields, Texas became the world’s top producer by the end of the Twenties. It was also the world’s most prolific waster of petroleum – a title the state would hold without challenge for another generation.

The courts set the stage for this waste by following the “rule of capture,” an archaic notion dating back to the Middle Ages, when judges decreed that if deer migrated from one man’s property to his neighbor’s property, the neighbor was free to kill them. That may have served well enough for settling quarrels over deer in Robin Hood’s time, but it hardly makes sense in determining how 20th-century neighbors sitting over the same pool of oil should share it without engaging in a frenzy of wasteful competitiveness – “pumping contests,” so to speak. The ruling guaranteed that the industry, unless otherwise held in check, would commit suicide by greed and countergreed, “with each individual drilling as many wells as possible and running them wide open.” Many fields quickly lost pressure, wells stopped flowing and boomtowns became ghost towns. A compulsory unitization law would have forced neighbors to develop each field as a whole, pumping rationally and splitting the profits. But Texas still does not have a compulsory unitization law – the only important oil state without one.

In fairness to Texas’ politicians, it must be acknowledged that they were not so dense as to be unaware of what was happening. In 1919 they passed a law prohibiting the waste of natural resources and told the Railroad Commission to enforce it. The commission enunciated Rule 37 – the well-spacing rule – but made no effort to enforce it. The commission’s slumber was not disturbed again until October 3, 1930, when Dad Joiner brought in the celebrated Daisy Bradford well, opening the largest pool of oil that had been found anywhere in the world. But by that time, the Railroad Commission had become a kind of retirement home for has-been politicians. So enthusiastic were they for their duties that they had not a single petroleum geologist on their staff. When Daisy Bradford’s frenzy swept across East Texas, these old boys responded predictably-they did absolutely nothing for seven months; by that time the East Texas fields were hopelessly chaotic.

The commissioners ignored their own Rule 37 because they thought of themselves as populists (they sided with the independent operators over the majors). The spacing rule for the East Texas fields was supposed to be one well per 10 acres, but by the end of the decade so many exceptions had been granted that the average had become one well per four acres. McGovern writes, “There were many examples of from five to 10 wells on one-acre tracts …. Thus, in the most prolific field in the world, wells capable of producing 10,000 barrels a day were restricted to one-fifth of 1 percent of their open-flow potential, while other equally futile wells were constantly being drilled around them.”

The Railroad Commission’s handling- or non-handling – of the waste of natural gas was, in a way, even more deplorable. When oil is found, it is to some extent always found in association with natural gas -“casinghead” gas, as it is called. For many years, this gas was simply burned at the well because producers at first didn’t know what else to do with it and later didn’t want to go to the expense of re-injecting it into the strata from whence it came. “According to many accounts,” writes Prindle, “motorists could drive for hours at night in parts of Texas . . . and never have to turn on their automobile lights, because the casinghead flares illuminated the countryside.” He is not talking about waste that took place in the first two decades of this century, when the industry was in its infancy. He speaks of the kind of waste that so dramatically lighted the skies of the Thirties and Forties.

Trillions of cubic feet of natural gas were flared into oblivion in Texas fields during those decades. There was no excuse for it. A method for re-injecting casing-head gas into its original rock formation was available from the early Thirties; if the commission had required its use, not only would the gas have been saved, but the field pressure would have been preserved to such an extent that the amount of oil taken from the field would have multiplied by four.

Eventually word got back to Washington that in darkest Texas, gas flaring had reached preposterous proportions. But when the Federal Power Commission began making noises about stepping in, the commissioners claimed that they had the problem under control. This, let us say, was a fib. In fact, the commission was covering up the problem by accepting fraudulent figures from the industry as to how much gas it was flaring. The real amount was 10 to 25 times larger than the amount reported.



SO FAR THIS has been an account of disastrous failures, of a commission that was embarrassingly obedient to the industry it was supposed to be regulating. It is pleasant to report, however, that the history of energy regulation in this country, both in Washington and in Texas, has included, along with the hundreds of bunglers, a few real heroes – men who tried to protect the nation’s resources and protect consumers as well, and did a remarkable job against big odds.

In Texas, the best example of such heroism is to be found in the career of William Murray. As a young petroleum engineer he exposed the commission’s fraudulent gas-flaring statistics. He did it first as a private citizen in 1945, heading an investigation committee that found that “many of the most prominent men in Texas were … contributing to a waste of casinghead gas of almost a billion-and-a-half cubic feet a day, or 57 percent of the state’s total production.” Murray was appointed to the commission and, under his influence, flaring was brought to an end in 1949. This must be counted, as Prindle says, “one of the great victories for conservation in the history of the United States,” and it was “imposed against the nearly unanimous opinion of the petroleum industry.”

Commissioners of strong independent judgment will not last forever, however. The industry will not permit it. Murray was a marked man from the very beginning, but his enemies were not able to bring him down until he once again saved the commission’s reputation, in the Slant-Hole Scandal of 1961.

That was the year a horde of small East Texas operators were discovered stealing oil from neighboring reservoirs (most of them owned by major companies) by drilling holes slanted from their own often worthless leases. Nobody knows how much oil was stolen, but Prindle believes it was worth hundreds of millions of dollars and probably amounted to “the greatest outright robbery in history.”

It might have gone on forever; the slant-holes operation was discovered by accident, not by the commission’s diligence (in fact, some members of the commission’s field staff were in cahoots with the thieves). However, once the operation was uncovered, it was Murray who figured out how to pinpoint which wells were crooked.

By the time the investigation was completed, more than 400 slant wells had been found. Scores of East Texas’ leading citizens were found to have made small fortunes by stealing oil. “Kilgore,” as Prindle tells us, “might almost be said to be a community that for nearly 20 years was based on well-organized larceny.”

Criminal charges were filed against more than 160 persons, but only one was convicted and that conviction was overturned by a sympathetic court. The only person seriously hurt was Commissioner Murray. His key role in the investigation had, needless to say, made him many enemies. Old, unproved allegations of conflict of interest were aired once again, and he was hounded from office.

The irony of the accusations against Murray is that all railroad commissioners exist in a veritable cocoon of conflict of interest. They are elected officials; theoretically, the general electorate of Texas could create a commission that would take a hard-nosed view of the oil industry and a sympathetic view of consumers, but this has never happened. It has never happened because, although the oil industry is not exactly capable of buying elections, it is quite capable of tilting elections with so much money that the outcome is virtually guaranteed. In the Sixties and Seventies, industry’s candidate for the commission usually received about 20 times more campaign funds than all his opponents combined.

And then, just to make sure that none of these handpicked chaps will be able to go off on a wild streak of trouble-causing independence, the industry prevails upon the Legislature to cripple the commission with lack of funds and a skeleton staff. At the time of the Slant-Hole Scandal, the commission had only three field inspectors – one-tenth as many as they hired in the Thirties. In the Sixties, when the gas utilities were tricking consumers into signing up for gas the companies didn’t own, the commission’s Gas Utilities Division employed eight people to keep an eye on 205 companies. Impossible. And that’s exactly the way the industry wanted it to be.



WHEN THAT GRAND old rascal Cornelius Vanderbilt exclaimed, “Law! What do I care about the law! Hain’t I got the power?”, he was not venting his personal feeling. He was expressing the industrial creed of America. It has certainly been the creed of the oil industry. It obeyed the law only when it was profitable to do so; otherwise, it relied on power. McGovern’s book and Prindle’s book are stories of periodic outlawry and constant selfishness. The international, national and Texas oil industries have seldom – and usually only by accident – based their actions on what is best for the American people. Considering that until the early Seventies, and for the previous four decades, Texas was the preeminent producer of oil – dishing up 35 to 45 percent of the nation’s total output each year – one might have expected the Railroad Commission to take more than a parochial view of its duties. But the fast buck for Texans – and to hell with the rest of the nation-was its guiding principle, because the commission was, and is, part of the industry it supposedly regulates. If the fast buck required inefficiencies and waste, so be it. The record of the Railroad Commission for 50 years, writes Prindle, has come down to this: “It has favored producers in general over consumers in general and Texas over the non-producing states.”

During that half-century, Texans may have taken smug satisfaction from watching other states squirm. But how will they feel when their wells begin to go dry and the energy spectrum shifts to the shale of Colorado and Utah, and to the coal of Montana and Wyoming, and to the so-called heavy oil of California? The major oil companies that sometimes ganged up with the independents and sometimes letthe independents have free rein at exploiting Texas’ resources will eventuallymove on to play their game elsewhere,with other energy sources. How will Tex-ans enjoy paying the energy ransomdemanded by other states? Even Texansmay eventually come to realize that theexploitation of natural resources nevershould have been dictated by the accidentof state boundaries; they also may come toagree with the smartest thing said in eitherbook, and it was said by an oil man,Thornton Bradshaw of Atlantic Richfield:”The whole energy situation is too important to be left to the oil and energy industries, the same as war is too importantto be left to the generals.” Too bad thatidea didn’t grab us 50 years ago.

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