Kochland Page 3
The Arizona Republic alleged that oil companies were exploiting this toxic system. Some of the world’s biggest oil drillers operated on the wide belt of federal land and reservations stretching across Oklahoma, Texas, Arizona, and surrounding states. These firms were making a killing amid all the dysfunction and poverty, collecting a steady stream of crude oil and piping it out to US and world markets. Rumors of oil theft had been circulating for years.
In Washington, the Senate Select Committee on Indian Affairs held a private meeting and voted to form a special investigative subcommittee that would look into the allegations. Senator DeConcini was selected to lead the subcommittee. He was joined by Arizona’s other senator, the Republican John McCain, and by Tom Daschle, the Democrat from South Dakota.
What resulted was one of the most far-reaching investigations of its kind. DeConcini and his counterparts decided to investigate major oil companies, the BIA, local Indian schools, and even the tribal authorities themselves. DeConcini knew that he would need a top-notch investigator to run the effort. He would need someone who could manage a large team of lawyers and field agents like Jim Elroy, and someone who could oversee a sprawling and complicated chain of evidence that would be developed.
Luckily for DeConcini, there was a young lawyer who had recently gone on the job market named Ken Ballen. Ballen was on the job market because he had been a lead investigator for the Iran-Contra hearings, a nationally watched investigation of covert US arms sales to Iran. When the investigation wrapped up, Ballen was looking for a new challenge. And he was about to get it.
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In the spring of 1988, Ken Ballen walked down a tree-lined sidewalk near Capitol Hill, on the way to his new job. He walked past a strip of low-slung brick buildings that were built back in Washington, DC’s earliest days, when it was not much more than a sleepy little town that seemed to shut down when the legislature was not in session. Just across from these quaint buildings was the imposing nine-story structure where Ballen was headed, an edifice that evoked the new age of Washington and all of its power. This was the Hart Senate Office Building, where Ballen had just recently started work as the lead investigator for the Senate’s investigation into potential criminal conduct on Indian reservations.
The front of the Hart Building was a grid of rectangular, black windows, bordered by a façade of white marble. This was the face of the Senate bureaucracy. Ballen hustled into the main entrance of the Hart Building along with the usual crowd of Washington workers. While it is nondescript from the outside, the interior of the Hart Building is magnificent. It’s the kind of place that makes a person feel important, even powerful, just by the mere fact of working there every day. Even in the bathrooms, the partitions between urinals are made from slabs of white marble, giving every corner of the space a feeling of quiet authority.
Ballen certainly had considerable authority in his new position. He oversaw a large team of investigators who had recently been given full reign over the ninth floor of the Hart Building, the top story that contained a warren of cubicles and offices. He was just thirty-three years old in 1988 and not too long out of law school. But even at that young age, he had already played a major role in one of the biggest investigations in the US Senate. That’s how he caught the eye of Senator DeConcini. Ballen took the job when DeConcini offered it because he believed that the new subcommittee was dedicated to uncovering the truth and, just as importantly, because the Senate would be willing to give him the resources he needed. Ballen wasn’t disappointed on this front. As he entered the Hart Building and took an elevator to the ninth floor, he walked into an entire suite of offices that were now dedicated to his effort.
Early in the investigation, Ballen knew that he needed a lead investigator in the field, and the Senate turned to the FBI to find one. The request was sent to Oliver “Buck” Revell, who, at that time, was the FBI’s associate deputy director in charge of all investigative operations. When Revell got the request, he only had one agent in mind: Jim Elroy. Revell had worked with Elroy back when the two of them were based in Oklahoma, and he thought Elroy would be the perfect agent to head a complex and difficult investigation. “I think Jim’s the best investigator I ever ran into at the FBI. And I ran into thousands,” Revell said many years later.
Elroy agreed to take the assignment, and soon he and Ballen were talking back and forth about Elroy’s plans to lead the fieldwork out in Indian Country. One of the first items of business was dealing with the oil companies.
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In the beginning, Ballen decided that his primary target would be the biggest oil companies—the majors, as they were called—such as Exxon and Mobil. The Arizona Republic articles insinuated that these firms were the prime offenders of oil theft. Ballen approached the companies with the same prosecutorial zeal he’d applied to witnesses of the Iran-Contra affair. He sent them a series of subpoenas demanding that they hand over documents that would otherwise be confidential and closely held; documents that showed exactly how the firms bought and sold the oil that was drilled on Indian reservations.
With his subpoenas, Ballen was able to breach the wall of corporate secrecy that reporters at the Arizona Republic could never penetrate. He used the full authority of the federal government to compel them to turn over the records that would show, in black and white, what they were doing.
Not surprisingly, the phone calls started coming in soon after. And the callers were not happy. Ballen began to get inquiries from the top lawyers for the oil companies; the highly paid Washington insiders who represented Exxon, Mobil, or Phillips. The attorneys told Ballen that the subpoenas were onerous and complying with them would require untold hours of labor and expense. Why was he casting such a wide net? What was he looking for? Ballen didn’t back off, and eventually the boxes of documents started arriving at the Hart Senate Office Building. Ballen’s team began digging through them and compiling numbers.
Ballen’s team did not find what it expected. The picture that developed, in fact, was downright shocking. It was also deflating. The companies, it turned out, were not stealing at all. Their own records proved it.
The large oil purchaser Kerr-McGee, for example, was actually taking away less oil than it paid for in the state of Oklahoma for the years 1986, 1987, and 1988. The company was short every year, to use the industry term. During that same period, Conoco was also short for one year, and the other two years, it was long, or over, by only a tiny margin. Conoco took 351 extra barrels in 1986 and 375 barrels in 1988. The overage was tiny, negligible. The same pattern held for Sun Oil.
It appeared that the Arizona Republic had gotten its facts wrong. But as his team was compiling the records, Ballen kept getting phone calls from top oil company lawyers. And they told him there was more to the story than he was seeing. They informed him, in confidence, what was really going on, and their admissions would never be made public over the ensuing years.
“Everyone operating on Indian territory told us one thing and one thing only: ‘We’re not stealing oil, but we’ll tell you who is: Koch Industries,’ ” Ballen recalled. “And they all told me that Koch was taking one to three percent. And I said, ‘Why don’t you do something about it?’ And first of all, they said, ‘It’s just more trouble than it’s worth to fight with them.’ ”
The oil companies also pointed out another compelling reason: Koch Industries had too much market power to be trifled with. It was risky to make the company mad. The oil wells in question were hardly the best wells. They were scattered across the countryside and were hardly gushers. The wells barely broke even for the producers, and Koch Oil was the only firm willing to take the oil and ship it, and the producers like Exxon and Mobil didn’t want to aggravate Koch Oil more than they had to.
And the oil companies said something else. If Ballen’s team was willing to look into the matter, he could count on the oil majors for help. This was a highly unlikely alliance. Oil companies held a unique role in the American economy in 1988 a
nd that role made them politically toxic. They were both a villain and an indispensable part of life. Everybody depended on the oil companies, but nobody seemed to like them. This wasn’t a new thing—one of the first major US oil companies was also one of America’s most hated firms. The Standard Oil Company was operated by John D. Rockefeller, the most famous of the robber barons of the late 1800s. Rockefeller amassed a fortune by cleverly using a network of secret “trusts,” or shell companies, to build an unrivaled monopoly in the oil business. Rockefeller controlled supplies, put competitors out of business, and cut secret sweetheart deals with railroads. His business became the poster child for the “antitrust” movement, which was aimed squarely at breaking up the kind of opaque and powerful business enterprises that he’d spent his life creating. The government eventually split Standard Oil into multiple competing firms.
But all the bad blood over Rockefeller seemed to have dissipated by the 1960s. At that time, the United States was the nation of the oil gusher. America was the biggest oil producer and seemed to have a limitless supply of the geological treasure. Oil was the primary energy source of America’s industrial economy, and it became the raw material of its economic growth. Dark crude oil was an embodiment of America’s special place in the world and its unrivaled economic supremacy. During this era, the United States developed a deep dependency on its oil companies. The well-being of the economy itself and the price of oil became intertwined. Ten of the eleven recessions after World War II were preceded by a spike in oil prices. This dependence, predictably, created deep resentments. Public sentiment turned against the oil industry decisively in the 1970s, but this time it wasn’t necessarily the fault of a robber baron like Rockefeller.
This time the villain was the public demand itself, coupled with an unprecedented exercise of power by oil-producing nations in the Persian Gulf. Demand for oil in the United States had quietly surpassed the level of available supplies, leaving the nation reliant on imports to make up the difference. In 1973, a cartel called the Organization of Petroleum Exporting Countries, or OPEC, imposed an embargo that unleashed unprecedented chaos in oil markets. By the time the whole mess had settled in 1974, oil prices had risen from $3 a barrel to $12 a barrel.
Oil prices would fall again during the 1980s, but the psychological wound never healed. Americans knew that their economy was now held hostage by oil. The stability of the 1950s and 1960s was gone. Oil prices could spike overnight, a concept that no one had ever really thought of before. The concept of oil price spikes would soon become embedded in Americans’ vocabulary, and with it a new way of seeing oil companies. These firms were now seen as predatory. The well-being of oil companies and the American people were at odds by 1988. Oil companies embodied the opposite ideal of the old maxim, which claimed that “what was good for our country was good for General Motors, and vice versa.” Instead, what was good for oil companies came at the expense of everyone else.
Most people suspected that the oil companies were screwing them in one way or another, so it only made sense that oil companies would be the central target of Ken Ballen’s investigation. This was a message that was delivered to Ballen in no uncertain terms by Senator Daniel Inouye of Hawaii, who was chairman of the Senate Indian Affairs Committee and a friend of Senator DeConcini’s. As chairman of the committee, Inouye had authority over the special investigative team that DeConcini had put together. Inouye therefore had some measure of authority over Ballen, and he made it clear to Ballen that the investigation was meant to uncover wrongdoing on behalf of the oil majors like Exxon or Mobil. Instead, Ballen found himself working with the oil majors in order to entrap Koch Industries, which no one had ever heard of. It was a politically risky move, in Ballen’s eyes, but that’s where the evidence in the case was leading him.
Ballen’s case grew stronger after he took a trip to Boston. He’d received a tip that there was a whistle-blower in Boston who might be able to shed light on Koch Oil’s alleged theft. The whistle-blower was in a good position to know about it. His name was William “Bill” Koch, and he was brothers with Koch Industries’ CEO.
Ballen learned that Koch Industries was a family-controlled company, founded in 1940 by a man named Fred Koch in Wichita, Kansas. Fred Koch had four sons. Three of the sons worked for the family company until 1967, when Fred Koch died. At that point, all hell broke loose. The second-oldest son, Charles, was left in charge of the firm. In that role, he oversaw his younger twin brothers, David and Bill. It became clear that Bill didn’t want to take orders from his older brother Charles, and so Bill left the company in 1983. Then he sued David and Charles, claiming that they had ripped him off by underpaying him for his share of the family business.
What interested Ballen was what Bill did next. Bill launched a private investigation into the very behavior that Ballen had stumbled upon: Koch Oil’s alleged theft of oil from remote wells. After arriving in Boston, Ballen met with Bill Koch for two hours in a conference room. He listened carefully while Bill Koch laid out detailed allegations that matched what the oil majors were already saying: Koch Oil practiced widespread theft, Bill Koch confirmed. He should know, because it was happening while he worked there.
The story was convincing, but it also made Ballen uneasy. Bill Koch’s testimony was tainted by the fact that he was suing his brothers. For that reason, he would not make a great witness at a public hearing, or in a courtroom.
Ballen went back to Washington and met with his team. He told them that there was only one path to follow: they would subpoena Koch Oil just as they had subpoenaed the other oil companies. And they wouldn’t proceed unless the company’s documents compelled them to.
Then Koch’s documents began to arrive. The parcels of internal company papers were hauled up to the ninth floor and opened by Ballen’s team, who began to tabulate them.
* * *
Ballen’s team narrowed its subpoenas to examine oil sales in the state of Oklahoma. This made it easier for the companies to comply with the request and made it easier for Ballen’s investigators to sift through the documents once they arrived. The financial results from Koch’s records were stark. They were so stark it seemed unbelievable. The numbers were checked, and checked again. And even then, they told the same story: In 1988, Koch Oil had taken 142,000 barrels of oil without paying for them and cleared pure profit on each of those barrels when it sold them. In 1986 and 1987, the other years that Ballen’s team investigated, Koch was over by 240,680 and 239,206 barrels, respectively. The second-highest overage of any other company in those years was the Phillips Petroleum Company’s overage of 2,181 barrels in 1987, still just 0.009 percent of Koch’s overage that year.
The set of numbers was the only clear thing that the Senate team could determine about Koch. As investigators dug further into the company, they discovered an organization that seemed built to obscure its very existence. There was a reason that no one had heard of Koch Oil, even though the company operated huge pipeline networks and two major oil refineries (one in Corpus Christi, Texas, and the other just outside of Minneapolis, Minnesota).
To begin with, Koch made the rare decision to remain privately owned rather than selling shares of the company on the stock market. Most firms go public after they reach a certain size because doing so gives them access to an almost limitless amount of money they can use to expand and fund their operations. The downside of this decision is that when a company goes public, it is required to disclose a lot of information to the public, so that investors know what they are buying. Publicly traded firms need to publish the salaries of their CEOs, the value of their debt, the amount of money they make or lose every quarter, and any risks that might be in store for investors who bought their stock. Koch had apparently decided that getting money from Wall Street wasn’t worth the headache of making such information public.
Even more confusingly, the firm was an intricate web of interlocking subsidiaries and divisions. Its pipeline unit, for example, had done business under different
names over the years, such as Matador, without using the name of its parent company. Without the kind of public filings that most companies released to public investors, it was difficult for Ballen’s investigators to even puzzle out exactly what Koch owned and where. And Koch clearly made no effort to build its brand. The company didn’t even put a sign on some of the buildings where it operated, let alone invest in advertising to build a good reputation with customers. Koch clearly preferred being a dark box.
Koch was a difficult target to go after, but Ballen was convinced that the evidence was persuasive enough to warrant the effort. Ballen worked with FBI agent Jim Elroy to draw up a plan to build the case against Koch Oil. They came up with an audacious idea: Elroy and a team of experienced oil workers would arrive at oil tanks before Koch Oil employees were scheduled to get there, and Elroy’s team would measure how much oil was in the tanks. Then they would lay in wait until the Koch Oil man arrived and drained the tank. The Koch Oil employee would leave a document behind, called a run ticket, that stated how much oil Koch had carted off. If the firm was really taking as much oil as it appeared to be, the run tickets should show a smaller amount of oil than Elroy and his team had measured. That’s how Elroy ended up surrounded by cattle, secretly photographing the Koch Oil gaugers.