A New York oil trader's international companies received possibly as much as $119 million in revenue in an 18-month period by acting as middlemen in the sale of Nigerian crude oil to Atlantic Richfield Co. (ARCO) during the oil crisis of 1979-80.
The oil trader, Marc Rich, now a co-owner of Twentieth Century-Fox Film Corp. with Denver oilman Marvin Davis, had gained access to a large quantity of Nigerian oil production before 1979 and was able to command premium prices by reselling it. ARCO lost substantial oil supplies in Iran in early 1979 and subsequently acquired much of Rich's Nigerian oil by agreeing to pay his companies large premiums.
The crude oil was pumped from Nigerian wells and loaded into oil tankers bound for ARCO refineries. Officials of the oil company said they were willing to pay the premiums because the only alternative was to pay higher prices elsewhere.
ARCO first paid the premiums under two contracts signed with Marc Rich & Co. in mid-1979. The contracts guaranteed Rich $5-a-barrel and $8-a-barrel markups over the official price of the Nigerian state oil company on 40,000 barrels of oil a day.
New contracts were negotiated in the summer of 1980 for the Nigerian oil. One carried a $3-a-barrel markup over Nigeria's official price. The other, signed directly between ARCO and Nigeria, provided a $2.50-a-barrel consultant fee to Marc Rich & Co.
In some cases, the markup paid by ARCO to Rich's companies under the contracts represented as much as one-third of the price for a 42-gallon barrel of oil. ARCO officials said they did not know what Rich's costs were and what premiums he paid, if any, to obtain the Nigerian oil. His net profits cannot be determined.
The Energy Department began looking into Rich's crude oil trading profits in late 1978, according to L. Kenneth Jones, then a senior enforcement official. Jones and other enforcement officials said price control regulations in effect at the time generally restricted--to their historical levels--the amount of net profit that traders could charge, usually less than $1 a barrel.
On Feb. 5, 1981, the Energy Department issued a subpoena for the records of Rich's oil trading activities from October, 1978, through December, 1980, and some records have been produced, according to Jones and Energy Department status reports. Last fall, the department projected that the investigation would be completed later this year.
Neither Rich nor his Washington attorney, Edward Bennett Williams, would comment.
Since Rich and Davis purchased Twentieth Century-Fox Film in April, 1981, the company has repurchased its publicly traded stock and returned to private status.
As such, the new owners have attracted prominent figures to sit on Fox's board of directors, including former president Gerald R. Ford, former secretary of state Henry A. Kissinger and Williams, who is also Davis' attorney.
In an unrelated matter, The Washington Post reported last October that Rich was under investigation by a federal grand jury in New York for allegedly diverting $23 million in profits from west Texas crude oil transactions to his Swiss firm in an alleged tax avoidance plan.
There were widespread reports at the time of the 1979-80 oil crisis about huge premiums being paid to oil traders who, by good fortune or business connection, positioned themselves to profit from the chaos of the international petroleum markets.
But the story of ARCO's relationship with Marc Rich and Nigeria represents the first documented account of one company's arrangement with a major trader and gives a glimpse of a heady international market normally hidden from public view by competitive secrecy and extremely high stakes.
Rich was able to command the premium prices from ARCO in part because ARCO had been more heavily dependent on Iranian crude oil for its foreign supplies than most other U.S. companies.
When Iran, at the height of its revolution, abruptly canceled contracts to supply ARCO with 125,000 barrels of oil a day, ARCO officials said they were forced to scramble to find new supplies.
According to ARCO attorney Richard C. Morse, the company turned to Marc Rich because the prices he was offering, though high, were still less than the prices on the international spot market, where crude oil is traded at auction.
During most of the 12-month term of the initial contracts, spot market prices for Nigerian oil remained above the price levels ARCO was paying to Rich. But they later fell below the level fixed in the ARCO contracts.
"At the time we signed them [the contracts], they were very attractive deals," Morse said. "Had Atlantic Richfield not entered into its Nigerian oil supply contracts, but instead stayed with the volatile spot market, it probably would have ended up paying more than it did pay."
ARCO decisions, Morse added, "in hindsight, were appropriate . . . . History has confirmed the correctness of Atlantic Richfield's decisions . . . to help keep its refineries full and its customers supplied . . . . Adequate supplies dampened a potentially explosive panic situation . . . ."
The spot market is where various volumes of crude oil are traded on a one-time basis, as opposed to being purchased under long-term contracts.
"Spot" transactions are arranged by professional traders, governments and oil companies over telephone and telex lines for uncommitted tanker-loads or pipeline "batches" around the world. The market is monitored from trading centers such as Rotterdam, New York and Houston.
How Rich had the foresight to lock up substantial supplies of Nigerian oil in late 1978 before the world crisis struck is not known. But a trader in such a position gambles against economic devastation if prices do not advance.
The figures relating to ARCO's contracts with Marc Rich & Co. were provided by ARCO officials during four months of inquiry by The Washington Post. Under the contracts, ARCO received 27 million barrels of Nigerian crude oil from late 1979 to early 1981.
Depending on what, if any, premiums Marc Rich & Co. paid to obtain the Nigerian oil that was resold to ARCO, the contract figures indicate that his maximum revenues were as much as $85 million on the two 1979 contracts and $34 million on the 1980 contracts.
The fact that large premiums added significantly to the overall price of a barrel of oil also supports the claim of some government officials that the skyrocketing prices felt by consumers in the United States and the world were not exclusively the result of price increases by the Organization of Petroleum Exporting Countries (OPEC).
Energy Department price control regulations also allowed U.S. oil companies to increase their profit-taking in the tight market fostered by the Iranian crisis.
From January, 1979, through early 1981, the world price of crude oil raced from about $15 a barrel to more than $40 a barrel. Today, the Saudi Arabian benchmark price is $34 a barrel, but average world prices are closer to $29.
During the period of the contracts, ARCO often paid more for Nigerian crude oil than did any other American company, according to an official familiar with the Energy Department's confidential "Crude Watch" computer survey.
The official, Paul L. Bloom, then special counsel for Energy Department price control enforcement, said in an interview, "The department's monitoring of costs of crude oil lifted for import to the United States through many months in 1979 and 1980 frequently and repeatedly demonstrated that ARCO was paying prices for Nigerian crudes significantly higher than prices paid by any other importers of the same crudes."
ARCO officials said they could not get better prices in Nigeria and that the alternatives elsewhere were more costly.
Marc Rich operates through Marc Rich + Co. International Ltd. in New York, Marc Rich + Co. A.G. in Zug, Switzerland, and other affiliates in London and the Netherlands Antilles. Though not well known publicly, Rich is something of a legend in the oil industry as one of the largest international crude oil traders who broke away from Philipp Brothers in 1974.
Before the Iranian crisis, in November, 1976, and again in September, 1978, Rich's companies in Switzerland and New York obtained crude oil supply contracts from the Nigerian National Petroleum Co. (NNPC), according to Nigerian government documents. Industry newsletters reported that Rich controlled as much as 50,000 barrels a day of Nigerian production. The world price of oil then was about $15 a barrel.
In the fall of 1978, the momentum of the Iranian revolution was spreading to Iran's oil fields. By the end of the year, all production had ceased. "The cutoff was immediate, with ships in transit," said ARCO's Morse.
At the same time, ARCO was notified that other U.S. oil companies were curtailing supplies of Saudi Arabian crude that they had been selling to ARCO. By the end of 1979, ARCO's total loss of supply grew to 200,000 barrels a day out of an 800,000 barrel-a-day requirement, company officials said.
"What we had to do was to go out and buy that crude from somebody, somewhere," said James S. Morrison, president of ARCO Petroleum Products Co., which supervises crude oil purchases. "We had a lot of purchases on the spot market, and we made the decision that if we were to try to buy all of it on the spot market . . . we could . . . cause the spot market to go even higher than it was."
The energy secretary at the time, James R. Schlesinger, was calling on American oil companies to refrain from making purchases in the spot market out of fear that higher prices paid there would put pressure on OPEC countries to accelerate their price increases.
Morrison said ARCO officials decided in mid-1979 to try to obtain contracts for some of the crude oil it was purchasing on a "spot" basis up until that time.
In August, 1979, ARCO turned to Rich, from whom it had been buying Nigerian crude on a "spot" basis for some time. "There were lots of phone-booth operators who claimed to have all kinds of crudes," Morse said. "We knew him well and knew that he was one of the most reliable traders in the sense that if he had some crude, he really had it."
"Two contracts were executed on Aug. 28, 1979, one for 25,000 barrels per day effective Sept. 1, 1979, and the other effective Oct. 1, 1979, for 15,000 barrels per day," Morse said.
According to Morse and Morrison, ARCO paid Rich the official posted price of the Nigerian state oil company plus $5 a barrel on the 25,000 barrel-a-day contract. On the second contract, for 15,000 barrels a day, ARCO paid Rich the official government price plus $8 a barrel.
With the official Nigerian price for its various grades of crude oil then ranging from $22 to $24 a barrel, the $8-a-barrel premium represented one-third of a barrel's official price.
"It's kind of like buying a car," Morse said. "You never know if you've gotten the best deal the guy was willing to give, but you had a sense that . . . if you aren't willing to pay it, you won't get a contract."
ARCO officials said they received a total 9.4 million barrels during the term of the first contract for 25,000 barrels a day, which yielded up to $47.1 million in premium payments to Rich. On the second contract for 15,000 barrels a day, the company said it received 4.8 million barrels of crude, which increased the gross revenues to Rich for the first 12 months to as much as $85 million.
Rich's revenues may have been reduced by premiums he may have been forced to pay the Nigerian state oil company. Nigeria was one of several OPEC countries that attempted to extract from its customers a premium over and above Nigeria's official price during 1979.
Industry newsletters were reporting that some companies were paying a premium of $1.50 a barrel over the official price. Since Rich had signed some supply contracts in Nigeria before the crisis when oil was plentiful, it is not known whether Rich paid any additional premiums to Nigeria.
Petroleum Intelligence Weekly reported in September, 1979, that Nigerian oil officials had "settled for price surcharges of roughly 50 cents a barrel over official prices (trivial in the context of current world prices for 'extra' oil supplies) and in some cases even zero premiums." If Rich were paying a $1.50 a barrel premium, his revenues in the first 12 months would have been reduced from $85 million to about $64 million.
"He [Rich] probably made a fortune," Morrison said. "It's a big margin for a trader, but at the same time . . . he wanted the same kind of arrangement we wanted. We wanted some assurance that we'd have the product in the future and . . . he wants to be sure he has some kind of term sale for it."
By the end of the 12 months, the international petroleum market had cooled significantly. ARCO officials said they then decided to try to establish a long-term supply relationship directly with the Nigerian state oil company to meet ARCO's projections that demand for petroleum products would continue rising and prices would remain high.
"Executives responsible for crude oil supply . . . made numerous, unsuccessful visits to Lagos [the Nigerian capital] attempting to arrange for the supply of crude," Morse said.
In July, 1980, ARCO again turned to Rich. By this time, ARCO's Morse said, spot market prices had dipped below the official Nigerian price of about $37 a barrel. ARCO signed one new contract with Marc Rich & Co. agreeing to pay the official Nigerian selling price plus a $3-a-barrel markup beginning Aug. 1, 1980. This contract generated gross revenues to Rich of up to $17.4 million over its term.
A second contract was signed directly with the Nigerian state oil company, but Marc Rich & Co. received a consulting fee for having helped arrange this contract and for "contract administration services."
Spot market prices recovered briefly that fall and then continued at a steady downward pace through the rest of 1980 and into 1981. On a number of purchases in 1980 and 1981, ARCO paid more for Nigerian crude purchased through Rich than it could have paid for similar crude on the international spot market.
ARCO officials said they had not foreseen the drop in spot market prices. Morse said ARCO was aware of projections in the industry that demand for oil would fall in late 1980. But he said ARCO continued to concentrate on purchases of Nigerian oil because it still wanted to build a long-term supply relationship with Nigeria and because Nigeria's high-grade crudes were well suited to the technical requirements of ARCO's Philadelphia refinery.
"In hindsight, we should have known we were right on the brink of that precipice" of falling prices, said Morrison, noting that after "signing this deal . . . demand started going to the toilet, but that's the benefit of hindsight, and that's what makes horse races, I guess."
On the second of the two contracts--the one made directly with the Nigerian oil company, with assistance from Rich--ARCO drew 8.6 million barrels over nine months. ARCO paid the Nigerians the official selling price for this crude and in the side agreement ARCO agreed to pay Marc Rich & Co. a consulting fee of $2.50 a barrel for Rich's assistance.
This consulting fee amounted to $16.5 million, and ARCO included the fee as part of its crude oil costs that were reported to the Energy Department. According to Morrison, ARCO paid the consulting fee to Rich for using "his good offices to help us be able to make a deal straight with Nigeria."
"When it was discovered that we had been incorporating that fee into the . . . cost of crude, it was my judgment that that was not something that the federal regulations contemplated," Morse added.
He said that, although the fee was inadvertently included in ARCO's costs that could be passed through to consumers, the oil company did not pass it through "because of the market."
By the time Morse and others discovered that the fee had been included in ARCO's crude cost base, President Reagan had abolished price controls on oil. In a May, 1981, letter attached to a monthly filing to the Energy Department, ARCO stated that the fees to Rich had been "backed out," for accounting purposes, of ARCO's crude cost records for the period, Morse said.
Bloom, the Energy Department's special counsel at the time, called ARCO's treatment of the Rich consultant's fee an act of "dubious legality . . . as a legitimate cost under the regulations in my opinion."
Bloom also said that in 1980 he began a separate investigation of ARCO's contract arrangements in Nigeria. This investigation remained incomplete when he left office in early 1981.
Bloom said he called Morse and other ARCO officials to meetings in Washington and questioned them about the details of the contracts. In answering questions, ARCO officials "never disclosed," Bloom said, the consulting fees to Rich or the fact that the payments were being included in the cost of crude oil as calculated under the price control regulations.
"That would have been a tremendous red flag if they [ARCO officials] were paying a broker or fees on what was being reported as direct contract purchases from the Nigerian government," Bloom said.
"My best recollection is that we did disclose that we had entered a services and consulting agreement whereby we paid fees to Marc Rich," replied Morse, "but that they were not included in the cost of crude because . . . I was operating on the assumption that they were not included."
Morse said he only discovered months later that he had been wrong on how ARCO treated the Rich fees. He said the Energy Department was notified about this in the May, 1981, letter, after Bloom had left.
Morrison, when asked why it was in Rich's interest to help ARCO deal directly with the Nigerian government, thus eliminating the need for a middleman, replied, "Well, we paid him for helping and it was either that or he wasn't going to get anything . . . [and] he probably was tumbling to the realization that the Nigerians are going to cut him out anyway."
Another issue faced by ARCO was that Rich was doing business in a country widely known for its persistent corruption problems.
"We explained our understanding of the Foreign Corrupt Practices Act to Mr. Rich and he understood and knows that law and we have a provision in our contract with him that none of the fees were to be used for any unlawful payments," Morse said, adding that Rich had legitimate arrangements for dealing with the Nigerian government.
ARCO maintained the contract relationship until May, 1981. "While it [ARCO] had the option of breaching the 1980 contracts when, in late 1980-early 1981 it appeared they were not advantageous, ARCO elected to terminate as contractually permitted rather than prematurely breach its covenants," Morse said.
ARCO's Morrison said the company's original justification for pursuing a Nigerian connection had fallen by the wayside for two reasons: first, spot market prices were destined to stay below the prices ARCO had contracted for in Nigeria and, second, the worldwide demand for crude had subsided causing ARCO to cut back its refinery operations.
"So you say, 'Now the world looks different to me than it did nine months ago,' and making another call I say, 'Have I made a bad investment and should I cut my losses?' " Morrison said the answer was yes: "The whole rationale underlying the need for that Nigerian contract and a permanent on-going relationship is much diminished."
"You have to keep in mind that the overall framework at the time, political sensitivities and so forth, that the paramount thing in our mind is keep the refineries full and don't be accused of creating a shortage," Morrison added. "And, for Christ's sake, try to buy the crude at the lowest price you can, but get the crude. That was the orders for the crude people." CAPTION: Chart, Oil trader Marc Rich's companies received possibly as much as $119 million by acting as middlemen in the sale of Nigerian oil to the Atlantic Richfield Co. By Gail McCrory -- The Washington Post