If Koch bought the Corpus Christi plant, Paulson realized, the acquisition would open up an entirely new market for the company: the market for paraxylene and other petrochemicals. And, true to Koch’s philosophy, the market would be new but not entirely foreign. Koch knew the petrochemical business already. It could apply the expertise developed at Pine Bend to manufacturing paraxylene in Texas. On top of all of this, it appeared to Paulson and others that Sun Oil wasn’t aware of the opportunity it was missing in Corpus Christi. Sun was making and selling paraxylene but not at nearly the levels that it could.
In September of 1981 Koch Industries paid $265 million in cash for the refinery, and Paulson immediately started expanding it. He more than doubled its paraxylene output. He bought a used hydrocracking tower from a refinery in Europe and had it shipped to Texas, bragging to Charles Koch that he bought the tower for 40 percent of what it would cost “off the shelf.” Koch Industries became one of the largest paraxylene producers in the United States.
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In 1987, Phil Dubose got the promotion of a lifetime. He went from running Koch’s marine division and barges to overseeing a vast piece of Koch’s pipeline and trucking infrastructure. Dubose’s job title was transportation manager for the southeast division (division 5). He was responsible for all of Koch’s transportation infrastructure in the southeast quadrant of the nation, a territory that stretched from Louisiana in the west to the Florida coast in the east, and all the way up to New York in the north. Inside this region, Dubose was responsible for the trucking operations, pipelines, and the marine tankers in the Gulf of Mexico. Several branch offices reported directly to him, each with its own superintendent. He spent a lot of time traveling to each office and consulting with the local teams.
“I lived in airports—God almighty! To this day, I still get an uncomfortable feeling about airports. I just lived in those things,” Dubose said. “The thing I could never get over was eating by yourself. That was tough.”
The machinery and supply chains that Dubose oversaw were exceedingly complicated. But the economic rules that he lived by remained relatively simple. The rules had not changed for him since he had been an oil gauger roving the backwaters of the bayou on a skiff back in the early 1970s. Dubose knew that his career still hinged on whether he was over or short. When he was an oil gauger, Dubose made sure he was over when he drained small oil tanks. Now he had to make sure he was over on a shipping network that covered many states.
The reasons for this had to do with the nature of the pipeline business. Koch made its money in the transportation business by moving oil, not just by selling it. The actual value of the oil in its pipeline was of secondary importance to Koch Industries. What really mattered was ensuring that the oil was moving. When the oil was moving, Koch was paid to collect it and to deliver it. This means that Koch was som what protected from the volatility in prices that continued to roil markets during the 1980s. During the mideighties, for example, a market crash sent many oil drillers out of business and depressed the economy of oil-rich places like Houston. But this volatility did not matter so much to Dubose. What mattered far more to him was being over. He wanted to make sure that his region was selling more oil than it collected, keeping a “comfortable margin” of overages across operations. Of course, it was impossible for Koch to consistently sell more oil than it collected, which is why oil gaugers used the Koch method to underreport how much oil they took.
Every month, Dubose received a packet of information mailed from Wichita. It was the statistical report compiled by the computer whizzes at headquarters. This was Dubose’s report card, in effect. And the most important number on the report card, the number that he focused on more than any other, was the overage that he reported. Dubose knew that if his region came in over, he would be praised, promoted, and well paid. If his region came up short, then he would be questioned, sidelined, and ultimately fired. “I lived and died by that” monthly report, he said. “They put it on your desk, and you just stared at it for a couple of hours before you even opened the sucker. . . . That’s how you kept your job with Koch. By coming out over. You could not come out short at all.”
Some producers complained to Dubose about the company’s measurement practices—they thought Koch was cheating them by taking more of their oil than it paid for. But the measurement margins in dispute were small, and it was still profitable for oil producers to sell through Koch. Most of the producers were more interested in getting the oil moved quickly and on time, and they didn’t want to quibble over Koch’s gauging techniques. Dubose ensured that his region was over month after month, and, in doing so, he was favored by the managers in Wichita.
Dubose was not some sort of anomaly. Koch’s pipeline and trucking managers across the country, from Florida to Oklahoma to California, took great pains to make certain they were over. Some of these managers, like Dubose, might have thought that they were stealing. Others simply considered the measurement practices to be “aggressive” but fair overall. After all, measuring oil was an imprecise art. Koch executives simply saw themselves as ensuring that the imprecision did not hurt Koch’s bottom line. Dubose had learned this himself as early as 1968: They saw where they could manipulate this because it’s such a gray area. And they took advantage of it. From this point of view, Koch was just playing hardball.
From an outsider’s point of view, things looked quite different. For someone who was new to the oil business, Koch’s conduct might have looked an awful lot like stealing. This point of view was about to come spilling out into the public realm. And it would do so in ways that endangered everything that Charles Koch had built.
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I. Light crude oil has a low viscosity and flows easily at room temperature. Heavy crude is more dense and doesn’t flow as easily.
CHAPTER 7
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The Enemies Circle
(1985–1992)
During the late 1980s, Koch Industries faced two external threats that changed the company’s future. The threats were separate—one came from the US government; the other came from Bill Koch—but Charles Koch and his leadership team saw the threats as intertwined. It seemed to them that Bill Koch was still bitter at being forced out of the company and was using the government as his proxy to attack Charles. In fact, the government was pursuing its own criminal investigation into Charles Koch and Koch Industries, an investigation that arose from the years of aggressive mismeasurement inside Koch’s oil gathering divisions.
The government threat intensified in May of 1989, when the Senate Select Committee on Indian Affairs held a series of daylong public hearings in Washington, DC. The hearings presented the evidence of oil theft collected by the Senate investigator Ken Ballen and FBI special agent James Elroy, who had surveilled Koch employees.
The issue of oil theft was the subject of one hearing, and that hearing focused exclusively on Koch Industries. The reasons for this were simple. Evidence in the case pointed to Koch Industries as the primary culprit in the oil theft. No other company had such dramatically high overage levels, according to data obtained by the committee. Senate investigators believed that Koch had been caught red-handed, and the other companies had not.I The committee asked Charles Koch to testify at the hearing, but he refused. When the Senate released its final report, it stated declaratively: “Koch Oil (‘Koch’), a subsidiary of Koch Industries and the largest purchaser of Indian oil in the country, is the most dramatic example of an oil company stealing by deliberate mismeasurement and fraudulent reporting.”