EDGE II TRADE

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EDGE II- TRADE ENVIRONMENT
Portland State University
Winter 2007
ENRON FAILURE NATIONS CONTROL OVER ENERGY
RESOURCES
VIKRAM DHARANIPATHI
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ENRON

• Enron Corporation was an American energy company
  based in Houston, Texas.
  
• Enron employed around 21,000 people and was one
  of the world's leading electricity, natural gas,
  pulp and paper, and communications companies,
  with claimed revenues of 111 billion in 2000.
• Fortune named Enron "America's Most Innovative
  Company" for 6 consecutive years.
  
• It was formed in 1985 when Houston Natural Gas
  merged with InterNorth.
  
• The rise and fall of Enron is an important,
  complex story. In its early days Enron did the
  right things for the right reason and garnered
  substantial credibility.
• Later successful operations were replaced with
  the illusion of successful operations. In the
  last phases Enron milked its credibility to
  sustain operations through loans
• After several years of international and domestic
  expansion involving complicated deals and
  contracts, Enron was billions of dollars into
  debt.
• All of this debt was concealed from shareholders
  through partnerships with other companies,
  fraudulent accounting, and illegal loans.

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Big names in ENRON scandal

• Kenneth Lay was the CEO and chairman of Enron
  from 1986 until his resignation on January 23,
  2002.

Was a naval officer in the Pentagon before
becoming an aide to a federal government
regulator for the natural gas
Became undersecretary for the Department of the
Interior before he returned to the
business world as an executive at Florida Gas
By the time of the Reagan administration, when
energy was deregulated, Lay
was already an energy
company executive and he took advantage of the
new climate by merging Houston Natural Gas Co.
with Nebraska-based Inter-North to form Enron in
1985 Was mentioned as a possible candidate for Pr
esident Bush's Treasury Secretary along with J.P.
Morgan Co. head Douglas A. Warner
Dumped large amounts of his Enron stock in
September and October of 2001 as its price fell,
while encouraging employees to buy more stock,
telling them the company would rebound and
liquidated more than 300 million in Enron stock
from 1989 to 2001, mostly in stock options.
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• Thomas E. White a former US Army officer served
  as senior executive
  
• for ENRON before being nominated as United
  States Secretary of the Army
  
• by U.S. President George W. Bush.
• White entered the private sector as Vice-Chairman
  of Enron Energy Services (E.E.S.),
  
• a subsidiary of the Enron Corporation
  responsible for providing energy outsource
  
• Solutions.
• He was responsible for the Enron Engineering and
  Construction Company, which
  
• managed an extensive construction portfolio with
  domestic and international projects.
  
• Also served as a member of Enron's Executive
  Committee and was Chairman and
  
• Chief Executive Officer for Enron Operations
  Corporation
  
• As reported in the Washington Post in late
  October 2001, White made numerous
  
• phone calls to Enron executives including Vice
  President Jude Rolfes, CFO Jeff
  
• Skilling and CEO Ken Lay . Shortly after the
  calls were made, White unloaded
  
• 200,000 Enron shares for 12 million

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• Rebecca Mark-Jusbasche joined Enron Corp. in
  1982, became executive
  
• vice president of Enron Power Corp. in 1986,
  chairman and CEO of Enron
  
• Development Corp. in 1991, chairman and CEO of
  Enron International in 1996
  
• and vice chairman of Enron Corp. in 1998.
• She was named to Fortune's "50 Most Powerful
  Women in American Business" in 1998 and 1999 and
  Independent Energy Executive of the Year in
  1994.
• While head of Enron Development and Enron
  International, Mark made several deals
  
• like the 95 million for a 50 share of a
  barge-mounted power plant off Puerto
  
• Plata on the north coast of the Dominican
  Republic and 3 billion Dabhol Power
  
• Plant in India which turned out to be expensive
  failures.
  
• She allegedly bagged nearly 80 million for her
  1.4 million shares

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• Partnerships that allowed Enron to hide debt
• RADR a group of entities secretly funded by
  Enron that purchased electricity-generating
  windmills from Enron, then later sold them back
  with some of the profits going to key Enron
  officials and their families.
• CHEWCO a company formed by executives of Enron
  in order to buy out the shares of California
  Public Employees Retirement System (CalPERS) in
  a joint venture investment partnership known as
  JEDI. Chewco bought out CalPERS interest in order
  to retain JEDIs off-balance-sheet status.
  However, Chewco did not meet the requirements for
  accounting rules and claimed profits that it was
  not entitled to. In addition, when Enron bought
  out Chewcos interest, Chewcos price was driven
  up, reaping huge benefits for the original
  investors (Enron execs).
• SOUTHAMPTON Enron bought the shares of
  National Westminster Bank (NatWest) in a limited
  partnership with Credit Suisse First Boston.
  Enron paid 20 million, but only 1 million went
  to NatWest. The remainder of the money went to
  several executives and their families, as well as
  to three NatWest employees who were in on the
  deal.

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Other significant personalities in the ENRON
scandal

• Former President Bill Clinton helped Ken Lay get
  a 3 billion power plant project in India for
  Enron. Four days before the deal went through,
  Enron gave 100,000 to the Democratic party.
• President George W. Bush lied when he said that
  he first got to know Ken Lay in 1994, and
  
• that Ken Lay was a supporter of his opponent,
  Ann Richards. Lay first started contributing to
  
• GW's career back in 1978, and in fact gave GW
  three times as much money in 1994 as he did
  
• Ann Richards.
• Vice- President Dick Cheney met six times with
  Enron executives while writing up this
  
• nation's energy policy which benefited Enron 17
  ways, and then refused to tell Congress
  
• anything about those meetings. Cheney also met
  with Ken Lay during the California energy
  
• crisis. The day after the meeting, Cheney said
  the Bush administration would not support
  
• price caps on energy in California, a move that
  cost Californians and made Enron billions.
  
• Enron was a large campaign contributor to Texas
  Senator Phil Gramm. In 1992, his wife,
  
• Wendy, was the chair of the federal Commodity
  Futures Trading Commission. She moved to
  
• exempt Enron's energy-swap operation from
  government oversight, then days later resigned
  
• and took a job with Enron on its audit committee

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• Arthur Andersen LLP, based in Chicago, later
  named Andersen, was once
  
• one of the Big Five accounting firms, performing
  auditing, tax, and consulting
  
• services for large corporations.
• In 2002 the firm voluntarily surrendered its
  licenses to practice as Certified Public
  
• Accountants in the U.S. pending the result of
  prosecution by the Department of Justice
  
• over the firm's handling of the auditing of
  Enron
  
• Nancy Temple (Andersen Legal Dept.) and David
  Duncan (Lead Partner for the Enron
  
• account) were cited as the responsible managers
  in this scandal as they had given the
  
• order to shred relevant documents
• Enron paid this accounting firm with a troubled
  past 1 million a week to keep their
  
• books. As soon as the accounting firm found out
  there would be an investigation of
  
• Enron, they destroyed thousands of documents.

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ENRON International

• Enron had billions of dollars in assets all over
  the world, and was quickly approaching a monopoly
  position in the energy industries in many of
  those countries. Just a few examples include
• A power plant in Panama which is the largest
  thermal power plant in Central America
  
• Two power plants in Guatemala, one of which
  supplies 35 of the electric energy used by that
  country
  
• A power plant in Puerto Rico that supplies 20 of
  the island's consumption
  
• 100 of Jamaica's industrial gas business
• A 357-mile natural gas transmission line in
  Colombia
  
• Promigas, Colombia's premier natural gas pipeline
  operator
  
• Natural gas supply systems in Brazil that supply
  over 21 of Brazil's consumption and
  
• A 3,000-kilometer Bolivia-to-Brazil natural gas
  pipeline that is one of the largest gas projects
  ever undertaken in South America.
  

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• ENRON in INDIA
• In 1992, the government of India, under pressure
  from the International Monetary Fund, adopted a
  program of deregulation and privatization,
  including opening up the country's power and
  electricity sector to foreign investment.
• Enron, along with General Electric and Bechtel,
  two other huge multinational corporations,
  quickly signed an agreement with India's
  Maharashtra state government to build the Dabhol
  Power Project.
• If the project had been completed as originally
  envisioned, it would have been the largest
  independent natural gas-based private power
  project in the world.
• According to a 1993 study by the CEA, "The
  minimum amount MSEB were to required to pay for
  the proposed project was 1.3 billion per year,
  or approximately 26 billion over the life of the
  20-year contract. The government would pay out
  over 20 years, over nine times what Enron would
  pay in.
• In 1995, the Indian government's own report on
  the project found that secret or off-the-record
  negotiations occurred special favors and
  concessions were granted to Enron the expected
  rates for electricity were too high significant
  environmental issues existed.
• The report concluded that the project should be
  terminated, and the project was in fact halted.
  But Enron sued for recovery of 600 million it
  had already spent. Then, a few months later, in
  1996, a "renegotiated" project was
  announced-which was hardly any better.

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• AES Corporation AES (NYSE) is a Fortune 1000
  company headquartered in Arlington, Virginia.
  that generates and distributes electrical power.
  
• It was founded on January 28, 1981 by Roger Sant
  from the US Federal Energy Administration and
  Dennis Bakke from the US Office of Management and
  Budget.
• It is one of the world's leading power
  companies, generating and distributing electric
  power to 26 countries and has more than 30,000
  employees and boasts a market capitalization of
  about 14 billion.
• AES allegedly conspired with several other
  electricity companies to cause a shortage of
  power during the California power crisis of 2000,
  thus driving up the price of electricity and
  driving up profits.
• After the fall of the ENRON empire many
  economists believed AES to be the next ENRON. In
  March 2001 Enron's shares in Lagos power plant,
  Nigeria were sold to AES after government accused
  Enron of secrecy and bad faith in contractual
  obligations.

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• In the mid-1990s AES won the 530 million
  Bujagali dam project contract from the Ugandan
  government.
  
• There was no competitive bidding process and the
  agreement between the two parties remained
  secret. It was a considered as a sweetheart deal
  for AES and a bad deal for the Ugandan
  government.
• AES maintained that Bujagali Dam would help pull
  Uganda out of poverty, but in reality it is a
  costly white elephant that would increase the
  nation's debt load, and produce electricity that
  Ugandans could afford.

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• In December 2001, AES Nile Power received final
  approval to begin construction of a 530 million,
  200 megawatt hydroelectric facility.
  
• Supporters of the dam said Only about five
  percent of Uganda's population now receives
  electricity, and the Bujagali project was to
  expand that group to about 15 percent of the
  population and attract industry to one of the
  world's poorest nations.
• The deal started unraveling in June 2002, when
  the Inspection Panel, the World Bank's
  independent investigative unit, found that the
  Bujagali project violated five operational
  policies of the Bank and then Ugandan High Court
  forced the government of to disclose its terms.
• A week later an independent review of the Power
  Purchase Agreement between AES and the Ugandan
  government, conducted by the Prayas Energy Group,
  concluded that dam was fundamentally
  misconceived.
• It was also concluded that The Power Purchase
  Agreement of the project is not in line with
  international standards, and entails massive
  extra cost for Uganda. The World Bank has given
  poor advice to the Ugandan government, and has
  misled the public about the cost of the project.

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• The review determined that the agreement would
  make the Ugandan people pay 20-40 million extra
  per year compared to similar hydroelectric
  projects in other parts of the world.
• IRN, which has been campaigning against the dam
  since 1999, said that the livelihoods of about
  6,800 people would be affected and the project
  would submerge productive agricultural land on
  the river's banks as well as islands sheltering a
  diverse population of animals and plants.
• The project would drown Bujagali Falls, a
  spectacular series of cascading rapids which
  Ugandans consider a national treasure.
  
• In 2003 AES said its is pulling out of the 530
  million, 200 megawatt hydroelectric facility for
  economic reasons and explained that the project
  has experienced construction delays and will
  produce less profit for the company with a
  greater degree of risk than originally forecast.
• The Justice Department alleged that persons
  and/or entities involved with the project have
  made or have agreed to make improper payments in
  violation of the U.S. Foreign Corrupt Practices
  Act.

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NATIONALISATION OF RESOURCES
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VENEZUELA

• As the price of oil and other energy inputs has
  risen, countries have attempted to capture a
  larger share of the profits, often through
  nationalization of energy resources.
• After renationalisation of its natural resources
  by revolutinary President Hugo Chavez Sixteen
  companies - including Chevron and Shell - did
  agree to new terms giving state oil company PDVSA
  at least a 60 percent state stake
• Petróleos de Venezuela, S.A. (PDVSA) is the
  Venezuelan state-owned petroleum company. It has
  activities in exploration, production, refining
  and exporting oil, as well as exploration and
  production of natural gas. PDVSA dominates the
  oil industry of Venezuela, the world's fifth
  largest oil exporter.
• In November 2005, PDVSA and its subsidiary in the
  U.S., Citgo, announced an agreement with
  Massachusetts to provide heating oil to low
  income families in Boston at a discount of 40
  below market price.
• Similar agreements were later set up with other
  states and cities in the US Northeast including
  New York's Bronx, Maine, Rhode Island,
  Pennsylvania, Vermont and Delaware. Under the
  program, Citgo offered a total of around 50
  million gallons of heating oil at below market
  prices, equivalent to a discount of between 60
  and 80 cents a gallon.

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• In Feb 2007 Venezuelan investors were cheered by
  the government's deal to buyout the country's top
  electricity company from U.S.-based AES Corp.,
  lifting hopes that President Hugo Chavez's
  government may fairly compensate other companies
  it nationalizes.

Chavez triggered a sell-off in local stocks
when he announced the nationalization of
Electricidad de Caracas, or EDC, and other
companies as part of his plans to bring key
industries under state control.
The government on signed an agreement with A
ES to purchase its 82-percent stake in
EDC for
US739.3 million (569.3 million), a deal
analysts said appeared to fairly compensate AES
shareholders. Electricidad de Caracas has
been privately owned since its founding in 1885.
U.S.-based AES, bought a majority stake of
Electricidad de Caracas in a hostile takeover in
2000.
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BOLIVIA

• Though rich in mineral and energy resources,
  Bolivia is one of South America's poorest
  countries. Wealthy urban elites, who are mostly
  of Spanish ancestry, have traditionally dominated
  political and economic life, whereas most
  Bolivians are low-income subsistence farmers,
  miners, small traders or artisans.
• The country has the second-largest reserves of
  natural gas in South America. In May 2006
  President Morales delighted his supporters but
  sent shockwaves through the energy world when he
  put the energy industry under state control.
• Foreign energy firms were given six months to
  sell at least 51 of their holding to the state
  and negotiate new contracts or leave the country.
  Bolivia's 48 trillion cubic feet of natural gas
  are the second largest reserves in South America
  after Venezuela's.
• Yacimientos Petrolíferos Fiscales de Bolivia
  (YPFB) a state-owned petrol company of Bolivia
  was originally created in the 1930s. During the
  presidency of Gonzalo Sanchez de Lozada, YPFB was
  privatized along with numerous other state-run
  businesses.
• Since the election of leftist Evo Morales, YPFB
  has been re-founded with the goal of using
  revenues from extraction of petroleum and natural
  gas to generate government funds and support
  social programs. In June, Gazprom revealed that
  it was in discussions to invest 2-3bn in Bolivia.

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UNITED LATIN AMERICA

• In early March, officials from Argentina, Brazil
  and Venezuela met to build perhaps the most
  ambitious energy project in Latin American
  history the Gasoducto del Sur, a 5000 mile
  natural gas pipeline that would stretch from
  Venezuela, through the Amazon rainforest, and
  down to the southern tip of Argentina.
• The objective, according to the countries
  involved, is to ensure regional energy and
  economic security, while providing an outlet for
  Venezuelan natural gas.
• Venezuela would benefit from greatly expanded
  markets for its natural gas. Argentina, a
  longtime gas producer, recently has had to reduce
  exports to meet rapidly increasing domestic
  demand. Brazil already depends on gas imports,
  largely from Bolivia, and is predicted to triple
  its consumption by the end of the decade.
• President Hugo Chavez of Venezuela has labeled
  the proposal a 5,000-mile symbol of diminishing
  U.S. influence in Latin America. Enthusiastic
  support for the project from regional
  heavyweights, including Brazil and Argentina, has
  prompted others to describe the project as the
  first true joint venture of a political coalition
  determined to forge a new South American identity.

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MEXICO OIL INDUSTRY

• Mexico's oil industry is, in large part, a direct
  reflection of the country's economic well-being.
  As those who have been following global oil
  output are aware, production in Mexico has
  started to wane, and just might decline very
  rapidly.
• Since the Mexican federal budget depends very
  heavily on oil revenues, the country may be faced
  with some tough times ahead, leading to increased
  pressures among its citizens to migrate north
  into the U.S.
• While the government of Mexico claims it has over
  100 gigabarrels of oil, as of January, 2006, the
  prestigious Oil and Gas Journal estimated its
  proven reserves at only 12.9 gigabarrels.
• The reason for the discrepancy is that, while the
  oil may exist in theory, in practice, politics
  prevents it from being developed.
  
• The constitution of Mexico gives the state oil
  company, PEMEX, a monopoly over oil production,
  and the Mexican government treats Pemex as a
  major source of revenue, taking 60 of its
  revenues in taxes. As a result, Pemex has
  insufficient capital to develop the resources on
  its own, and cannot take on foreign partners to
  supply money and technology it lacks.

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RUSSIA GAZPROM
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• Traditionally, Saudi Arabia has been regarded as
  the worlds undisputed primary source of oil and
  Russia has had to settle for second place. But in
  recent years Russia has re-nationalized and
  modernized much of its industry and that policy
  now appears to be paying off.
• OPEC statistics show that in the period since
  2002 Russian companies have surpassed the Saudis
  as the worlds biggest oil producers on an
  on-and-off basis. The latest figures, however,
  have been hailed in Russia as evidence that such
  periodic production spikes are no one-offs and
  that Moscow really does have a right to lay claim
  to the number one spot.
• According to OPEC, in June 2006 Russia extracted
  9.236 million barrels of oil, which is 46,000
  barrels more than Saudi Arabia. The statistics
  also showed that Russian production in the first
  half of this year increased to 235.8 million
  tons, a year-on-year improvement of 2.3
  percent.
• There are fears that Russia is becoming too
  addicted to what politicians call the oil
  needle, and is doing too little to develop
  future revenue streams. Money from oil and gas
  accounts for 52.2 percent of all revenues to the
  state treasury and more than 35 percent of
  Russias exports.

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• Gazprom is the largest Russian company and the
  biggest extractor of natural gas in the world.
  With sales of US 31 billion in 2004, it accounts
  for about 93 of Russian natural gas production
  and with reserves of 28,800 km³, it controls 16
  of the world's gas reserves.
• Apart from its gas reserves and the world's
  longest pipeline network with 150,000 km, it also
  controls assets in banking, insurance, media,
  construction and agriculture.
• Gazprom provides 25 of all Russian tax revenues
  (averaging over US 4 billion annually between
  1993-2003) and accounts for 8 of the nations
  gross domestic product.
• In 1997, Gazprom entered the Financial Times
  listing of the worlds top 100 companies by
  market capitalisation. Gazproms operations range
  from exploration through to processing,
  transportation and marketing. It supplies gas to
  virtually every region of Russia and exports to
  more than 25 European countries
• Recently Gazprom announced that quarterly sales
  grew to 19.5 billion (second quarter of 2006),
  while quarterly net income reached 5.2 billion
  (second quarter of 2006)

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• Gazprom was foiled both in its attempt to acquire
  Rosneft, and its earlier attempt to buy the core
  asset of Yukos, when Yukos filed for bankruptcy
  in Houston. Fearing that it would fall foul of US
  law, Gazprom backed away from buying Yukos' main
  asset when the Russian government auctioned it in
  December 2004, leaving the more gung-ho Rosneft
  to buy it.
• Yukos was one of the world's largest non-state
  oil companies, producing 20 of Russian oilabout
  2 of world production. Its assets were acquired
  in controversial circumstances from the Russian
  Government during the privatization process of
  the early 1990s.
• On October 31, 2003, shortly after the arrest of
  the company's CEO, the Russian government froze
  ownership of 44 of the company's shares. The
  reason given was to prevent a group of
  shareholders led by Khodorkovsky from selling a
  large stake of the company to the US oil firm
  Exxon.
• On 15th December 2005, based on a bank deposit of
  4M and its American CEO's Houston home, Yukos
  filed for bankruptcy protection in the United
  States, estimating its assets at 12.3 billion
  and its debts at 30.8 billion, including
  "alleged taxes owed to the Russian government".
• Rosneft is a Russian integrated oil company.
  Although the company is an open joint stock
  company, according to its website, it seems to be
  completely owned by the Russian Federation, as
  represented by the Federal Property Management
  Agency.