The Wall Street Journal: Hunt Family Rushes In Where Big Oil Fears to Tread

Lacking Prime Projects,
Texas Firm Bets on Peru;
A Bad 20 Years for Shell
By BOB DAVIS
December 20, 2007; Page A1

PAMPA MELCHORITA, Peru — Seven decades ago, Texas wildcatter H.L. Hunt used poker winnings to build an oil company. Juggling three wives and 15 children, he headed a legendary family whose soap-opera quality rivaled the one on TV’s “Dallas.”

Now Dallas-based Hunt Oil Co., the family-run company he founded, is playing another high-stakes hand — betting it can make money on projects in Iraq and other spots that big oil companies won’t touch.

HUNT’S BET IN PERU
 
A Hunt Oil Co.-led gas project could start Peru’s long-overdue exploitation of its natural resources, and boost its battered economy. But environmentalists and indigenous groups have inquired: At what cost?

The company’s biggest wager is on Peru. Royal Dutch Shell spent nearly 20 years and $450 million to develop a natural-gas project in the Amazon before pulling out empty-handed in 1998. Hunt took Shell’s place in this volatile country two years later. Amid protests from international environmental groups and local Indian activists, Hunt soon plans to pump gas from Amazon wells and pipe it over 14,000-foot Andean peaks where alpacas graze. The company is building a massive plant overlooking the Pacific Ocean to export liquefied natural gas.

Yesterday, an LNG consortium led by Hunt won approval of a $400 million loan from the Inter-American Development Bank for the project, part of $2 billion in financing it is seeking from export and multilateral agencies. Today it faces its toughest financing hurdle when the U.S. Export-Import Bank decides on another $400 million loan. In 2003, the Ex-Im turned down financing for a companion natural-gas project in Peru, in which Hunt has a minority stake, over environmental concerns.

“The things that have worked out well for us are often the things that on Day One, people said, ‘You must have lost your mind,'” says Ray Hunt, the company’s 64-year-old chief executive officer.

Hunt’s scrappiness, pedigree and political savvy have made the company an outsized presence in an oil world dominated by giants. The company’s $3 billion or so in annual revenue is just a few days work for Shell or Exxon Mobil. Because Hunt doesn’t have the cash or technological prowess to compete with the major oil firms for the largest projects, it must troll for profits in regions marked by dicey politics.
 
Its willingness to explore overseas makes it distinct among U.S. independent oil and gas producers. Most expose themselves to less risk, and lower reward, by limiting their exploration to smaller fields in the U.S. that don’t attract the majors’ attention. “Ray Hunt is known as an original,” says Thomas Wallin, president of Energy Intelligence Group, a New York publishing house.

Mr. Hunt compares his 2,500 employees to a commando outfit. His privately held company can move quickly because it isn’t second-guessed by shareholders or Wall Street analysts. Hunt discovered oil in northern Yemen in the 1980s, for instance, when oil majors shunned the region because it was then claimed by Saudi Arabia.

But such projects are also a gamble. Two years ago, the Yemeni government seized Hunt’s main oil operations. Afterward, Hunt’s global oil production plummeted by 30% in 2006, according to Moody’s Investors Service. Moody’s downgraded the company’s credit rating a notch.

The Yemeni setback makes Hunt’s bet on Peru even more important. The company doesn’t expect much growth in its oil and natural-gas fields in Texas, the Gulf of Mexico and Canada, industry analysts say. In Peru, though, it owns 50% of a $3.8 billion consortium set to start exports of liquefied natural gas in 2010, and it is also searching for oil elsewhere in the country. If Hunt succeeds in Peru, it figures it can expand elsewhere in Latin America.

Hunt’s gambling streak dates to the 1930s, with H.L. Hunt, a storied entrepreneur and bigamist who believed he possessed a “genius gene” that he was determined to pass on to his progeny. Mr. Hunt partly financed his first stakes in oil leases in East Texas with poker winnings, and later made his own oil finds in the Texas plains. Newspapers regularly dubbed him “the world’s richest man.”

Before he died in 1974, he named Ray Hunt, then just 31, as his executor, passing over Ray’s better-known half-brothers, Nelson Bunker Hunt and William Herbert Hunt, who went on to try to corner the world silver market. When the effort fell apart in 1980 and his paper gains vanished, Bunker famously remarked: “A billion dollars isn’t what it used to be.”

Ray Hunt’s modesty and establishment politics contrasted with the family’s eccentricity; Time Magazine dubbed him “The Nice Hunt” in 1977. But he shared the family affinity for risk, and began the company’s international expansion. In 1976, Hunt bought a stake in a North Sea oilfield overlooked by the majors for $50,000, according to a Hunt biography, “Texas Rich.” The stake produced millions of dollars in oil.
 
The company’s stature rose along with the political fortunes of the Bush clan. In 1970, Ray Hunt ran a support group for George H.W. Bush’s unsuccessful Senate run, called “Young Men for Bush,” and he remained an important campaign contributor to him and his son on their routes to the White House. A Hunt vice president, Jeanne Phillips, rescheduled her wedding to host a fund-raiser for Bush senior.

While the company’s Bush connections opened doors in Washington, they sometimes backfired in the Middle East after the invasion of Iraq. This fall, Hunt was one of the first oil companies to sign an exploration deal in the Kurdish region of Iraq. The company’s political connections chafed on two ends: President George W. Bush rebuked Hunt, saying the project could deepen Iraqi political divides. Kurdistan’s oil minister, Ashti Hawrani, says he almost nixed Hunt’s exploration bid because he feared the contract would be seen as a political plum.

“We said, ‘Do we really want to give a contract to that company?'” Mr. Hawrani says. “People can read it the wrong way.” The Kurds signed the deal anyway.

In Yemen, the Bush connection became one rationale to justify the 2005 expropriation of Hunt’s properties, although Hunt figures the Yemenis were motivated by rising oil prices. Hunt is seeking more than $1 billion from Yemen in international arbitration. It is also still smarting over an earlier Yemeni decision to choose Total SA over Hunt to build an LNG project, even though it was Hunt that discovered a big natural-gas field. Hunt is relegated to a 17% stake in Yemen LNG.

“Mr. Hunt told me three times about the difficulties he had with Yemenis,” says Jaime Quijandría, a former Peru mining minister. “He wanted to be a project operator; he didn’t want to just be an investor.”

Hunt got its chance in Peru. In 1983, Shell discovered between 13 trillion and 17 trillion cubic feet of natural gas near the Amazon village of Camisea, enough to vault Peru into big leagues of gas producers.

From the start, international environmental groups opposed Shell, fearing it would despoil one of the most biodiverse parts of the Amazon. Early slip-ups didn’t help. When loggers near a Shell work site brought gifts to Machiguenga tribesmen, they inadvertently spread influenza and killed many of the natives. Shell says the loggers didn’t work for the company.

Peruvian politics were also forbidding. “Shining Path” guerrillas controlled parts of the Andes where pipelines would run, while a nationalist government made what Shell considered onerous financial demands. Shell quit Peru in 1988.

Shell gave Peru another look in the 1990s, after an investor-friendly government took over and the guerrilla movement was shattered. Trying to limit environmental damage, it treated the Amazon as an offshore facility, ferrying rigs by helicopter rather than building roads. But Shell couldn’t reach a deal with the government on pricing and exporting. It pulled out for good nearly a decade ago.

In 2000, Argentina’s Pluspetrol SA proposed to drill for natural gas near Camisea and, along with another Argentine company, build two gas pipelines. Hunt quickly signed up for minority stakes in the Camisea drilling and pipeline projects.

Hunt started a more ambitious project, too, lining up partners and financing to build a pipeline across the Andes to a plant on desert cliffs of the Pacific coast that would chill Camisea gas to minus 259 degrees Fahrenheit. This liquefied natural gas would then be shipped in tankers to North American and Asian markets.

Hunt benefited from a changing political environment. Shell’s exit had stunned the country’s political and business elite who now sought to show they could attract foreign investment.

Mr. Hunt flew regularly to Lima to lobby for changes in the energy law. A prominent Hunt adviser, Pedro Pablo Kuczynski, who had just stepped down as finance minister, helped smooth the way. In 2003, he invited Mr. Hunt to dine in his garden with Peru President Alejandro Toledo, the prime minister and Mr. Quijandría, the mining minister. Afterward, the government began to push through Peru’s Congress a series of what it billed as small technical fixes to laws and regulations. It took two years before locals broadly understood that the changes had effectively recast the country’s energy policy to promote exports. Peruvian newspapers dubbed the changes “the Hunt laws.” A study by a former Harvard economist, funded by the U.S. group Environmental Defense and released last week, argued that Peru would be better off keeping the gas for domestic use, deepening the debate here.

Carlos Herrera Descalzi, a former Peruvian mining minister, accuses the government and Hunt of using “very clever and very dirty” tactics to make the legislative changes. Peruvian government officials say the lawmakers had sufficient notice, and Hunt says the revisions were necessary to attract investment. “I’ll bet you the biggest steak dinner in Dallas,” says Mr. Hunt, that the creation of an LNG market will boost Peru’s gas exploration and benefit local industry.

Hunt’s efforts in Peru have been hobbled by missteps in the Camisea project started by Pluspetrol. Amazon communities complained they hadn’t been fairly compensated for their land. One of the two pipelines sprang five leaks in the first 19 months after operations started in 2004, and the pipeline consortium has spent more than $50 million patching it. Hunt argues that it was minority partner in the Camisea project and wasn’t responsible for the botched operations.

Many activists in Peru still oppose Hunt. Dissatisfied communities, advised by international nongovernmental organizations, can be a potent political force. They successfully pressed the government to cancel a big gold mine in 2003, and have shut down oil exports for weeks at a time.

During a November session at a Lima hotel, Michael Valqui, World Wildlife’s Peru representative, told Hunt executives that they suffered from “original sin” for the company’s stake in the Camisea project. He urged Hunt to lobby the government for additional environmental and economic analyses.

No way, shot back Hunter Hunt, senior vice president and Ray Hunt’s 39-year-old son and heir apparent, who said the company didn’t want to get involved in Peruvian environmental policy. “We understand what we are not,” he said. “We are not the government.”

Hunt is, however, planning to spend about $10 million over four years to help develop isolated Andean communities along the pipeline’s path to impress international lending agencies and build local support.
 
In Minas Corral, a collection of stone huts with thatched roofs only recently wired for electricity, Edgar Zamalloa, a former Peruvian finance ministry official hired by Hunt, conferred with village leaders in November. They’re unhappy about a Camisea pipeline that runs near the village, they told him, because the grass hasn’t grown back fully over the buried pipeline after three years.

“One hundred percent of the community lives off alpaca,” said 39-year-old Fredy Lorenzo Gomez, whose lined face makes him look a decade older. When the group heard that Mr. Zamalloa had come to talk of a new pipeline, requests poured out. Can the grasslands be improved for alpaca grazing? What about more water for animals? First-aid kits for the community?

“We’re very poor, as you can see,” said another villager, Zenon Alccasi, dressed in the brimmed brown hat typical of the region. “We believe the first pipeline didn’t benefit us. We don’t know about the second.”

Mr. Zamalloa listened closely but made no promises. From previous visits, he knew that the source of the sole communal water pipe is contaminated. Hunt plans to install a chlorination unit and improve the water system. While it’s not what the community is asking for, Mr. Zamalloa figures the changes will help the local children and be welcomed.

Hunt has more plans for Peru, which has opened wide swaths of the Amazon for oil-and-gas exploration. The company plans to explore for oil in a part of the Peruvian rain forest abandoned earlier this year by another oil major, ConocoPhillips. Conoco pulled out under pressure from Achuar Indians, who protested at the company’s Houston headquarters wearing traditional robes and headgear and lobbied shareholders with the help of Amazon Watch, a U.S. environmental group. “We aren’t interested in operating counter to the interests of the [local] population,” says a ConocoPhillips spokesman.

Such tactics won’t work with Hunt, Ms. Phillips, the Hunt vice president, told Amazon Watch in a fall teleconference. Hunt has no public shareholders.

Write to Bob Davis at [email protected]

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