There is a moment on that sunny day in the fall of 1995 when the partners begin to sense that the prospects for their new oil company have no limit. As they walk the grounds of Beverly Hills High School, of all places, they survey, analyze, do the math, and begin to get excited. See Mr. Vision, Tim Marquez, then 36, fit, square-jawed and intense, with his Rockefeller-size oil-baron dreams walking the site but already looking past it: This is just the start, baby. See Mr. Reality right beside him, Rod Eson, then 44, silver-haired, stout, and quietly assured, with his oil veteran's pragmatism and a taste for stability: Yeah, but let's make sure we get this right.
A wise wedding of daring and diligence, the partners are inspecting the walled-off less-than-an-acre parcel where 16 oil wells are pumping 24-7 less than 100 meters from where the high school football team practices for Friday's game. Eson checks the pumps and drills and dismisses them as inefficient and out of date. We can pull up more oil at less cost, he'll observe, without all the big-company overhead. Marquez will crunch the data with the help of a geophysicist, peer through his desktop computer and into a 3-D simulation of the geologic faults and folds looking for untapped sweet spots, and he'll find them.
Some type of oil well has been operating on the Beverly Hills site since the turn of the century. In fact, all across Los Angeles, big and small producers are still trying--in parking lots, under shopping malls and high schools, in neighborhoods rich and poor--to suck the vestiges of what was once one of the largest reservoirs in the nation. This facility was built in 1978 and is owned by Wainoco, a Houston oil company traded on the New York Stock Exchange (and now part of Frontier Oil). But litigation, environmental regulation, and falling prices are turning urban drill sites like this one into a liability for companies like Wainoco.
Three years after founding Venoco Inc. in 1992 on nothing but will and hope, Marquez and Eson decide to buy the mineral rights to the Beverly Hills site for pennies on the dollar. They gamble that a nimble, low-overhead organization can use fresh technology to squeeze oil out of places the big boys are too inefficient to tap.
"These properties are everywhere," says Eson.
"We'll be the biggest independent oil company in California," says Marquez.
It will take them 10 years to build the prototypical entrepreneurial success story--and one year to destroy it.
A New Kind of Oil Company
It used to be there really were only two options in the oil business. One was to work the old wildcatters' game, crisscrossing the Southwest for one big score. But that route has always been a sucker's bet; drilling a well can cost upward of $20 million, and the odds of striking sweetness are maybe one in 10. For the less daring, there was always work in the supply chain of the so-called Seven Sisters, the "majors" such as Exxon or Shell. But the bureaucracies of those vertically integrated goliaths stole all that was fun--and most lucrative--about the oil industry.
Marquez had worked in the business as a roustabout--"a flunky," he says--since he was a teenager paying his way through the Harvard of geosciences, the Colorado School of Mines. Eson was a mechanical engineer who'd run his own service company, hooking up big companies with new technologies that helped them get more oil out of their wells. Brought together by a mutual friend, the two men believed there was an emerging third option: the independent.
Independents--the industry term for companies that have more capital and know-how than the typical wildcatter--can grow either by exploring and finding reserves or by buying a company that already has them. Drilling is risky, because finding oil is only half the job. The real challenge is finding the money to pump the oil. But Venoco wouldn't explore or drill new holes, the men decided; the company's competitive advantage would come from buying properties that had not been fully tapped. "The best place to find oil and gas is where [you already know] there is oil and gas," says Eson, stating an industry maxim that became the company's founding principle.
Oil wells never really run dry. A big company will drain maybe 40% of a field. Pulling out the rest of the oil, which requires an outlay of incrementally more cash per barrel, often proves uneconomical for big companies with big overheads. In the late '80s and early '90s, however, huge technology gains were enabling the independents to get in the game. "The industry was undergoing as many technological advances as it had undergone in the previous 100 years combined," says Marquez. In short, what once required a Cray supercomputer could now be done on a $5,000 desktop.
Oddly enough, the decline in real prices for oil--which had begun with a crash in 1986--also helped the independents, because it made pulling out those back-end barrels even less attractive to the majors. It was yet another factor compelling the majors to concentrate their efforts overseas, where frontier lands afforded the possibility of a major discovery. As the majors fled, the domestic oil fields could be had cheap--especially in the decidedly anti-oil environment of California. The independents boosted their share of domestic oil production from 45% in the mid-1980s to well over 60% by 1995, when Marquez and Eson first looked at the Beverly Hills High site.
The risks were formidable: The Golden State is a minefield of litigious residents and environmental red tape. It may be as tough to drill there as it is in the harsh climate of Antarctica; inclement weather has nothing on inclement Angelenos protective of their property values. But Marquez and Eson, who would start referring to Venoco as "a new kind of oil company," were sure they could do this right. They even based the company in Santa Barbara, which took a certain audacity--Santa Barbara being the site of a disastrous 1969 offshore oil spill that virtually gave birth to the modern environmental movement. And yet, Santa Barbara would come to love Venoco, eventually honoring it as its 2001 business of the year.
Marquez and Eson were eager to be at the forefront of an old industry's new wave, even if they were eager for different reasons. Marquez was the self-styled "visionary," which is to say he was obsessive and unfailingly bold in his plans. His anointment as CEO was a given. He worked relentlessly and still found time to wake early to run and swim and train for marathons. He was intense and charismatic and hated to lose. Eson, by contrast, bore a measured exterior. He was the "engineer," known for being reasoned and unemotional.
From the get-go, Marquez said his goal was to be producing 5,000 barrels a day within five years--an ambitious goal for a company with no money in an industry where many smaller independents were happy to produce just a few hundred barrels a day. There was a bit of the wildcatter to Marquez. Which was okay. The partners' contrasting personalities were what drew them together in the first place: "Tim had the big vision, he knew where he wanted the company to be in 10 years," says Eson. "But you won't fulfill that vision if you can't take care of today, which is what I tend to focus on."
It took them two years of drawing on their credit cards, their IRAs, their friends, and their families to gather the $110,000 they needed to buy their first field on April Fools' Day, 1994. It was a small oil patch in a residential neighborhood of Whittier, Calif. When Eson called the company that owned it to inquire whether it might be for sale, the person in charge of keeping track of such things responded: "We have a property in California?"
It was pulling 200 barrels a day at a cost of $14 a barrel--and selling them for that same $14. Venoco quickly updated the lift system, making it more energy efficient and more powerful, which resulted in an increase in production to 400 barrels a day and a reduction in cost to $5. Soon, Marquez and Eson were clearing close to $100,000 a month and using the field as collateral to buy their second property and increase their staff to six.
On April 1, 1995, exactly one year after acquiring its first field, Venoco closed on the Beverly Hills High rights. There, Wainoco had barely been breaking even on the 750 barrels it was pulling daily. Venoco installed new pumps that cut electricity costs by 20% and dug two new wells, which increased the lifespan of the site's reservoir by at least a decade. Before long, the company was clearing close to $45,000 a month, which helped it establish an $8 million line of credit. "That's when we became a player," says Eson.
Between 1997 and 1999, Venoco purchased 10 new fields, including its first offshore field--in the Santa Barbara Channel. The company was increasing its reserve base by 150% per year in an industry that looked favorably upon 20% a year. For two consecutive years Venoco made Inc.'s list of the 500 fastest-growing private companies in America. Throughout the late 1990s the company's staff seemed to double and redouble year after year, peaking at 197 in 2001. Revenue soared from nearly $6 million in 1996 to $94 million in 2000, a 1,468% growth rate. That year, the company's earnings before interest, taxes, depreciation, and amortization topped $40 million, almost twice what it had been the previous year.
Along the way, Venoco received a large equity infusion from another, far bigger company that was also having tremendous success rethinking the energy business, the Enron Corporation. Enron had skin in almost every game out there, and it had been sniffing around Venoco for the better part of a year. Ultimately, in 1998, Venoco sold 6,000 preferred shares, approximately 30% of the company, to Enron for $60 million. The capital and cachet that came with the investment was precisely what Venoco needed, Marquez and Eson believed, as a staging event for going public. "If the unquestioned leader of the industry saw fit to invest in us," Eson thought at the time, "we figured it would be a big enough feather in our caps to bring deals our way and set us up to go public in the hot IPO market." Venoco started preparing the necessary papers.
The Gang of Five
"How did you go bankrupt?" a character is asked in Hemingway's The Sun Also Rises. "Gradually," he answers, "and then suddenly." And so it seems with Venoco--which, though not bankrupt, has suffered an astonishing fall from grace. What would end up looking like a sudden series of coincidental catastrophes had actually been developing for some time.
In late 1998 Marquez used almost half of the Enron money to fund a $28 million acquisition in Gwenville, Miss. The purchase flouted Venoco's core competencies in several ways: It was outside California and it required exploration. Venoco was no longer looking for oil only where it already knew there was oil.
Marquez understood it was risky, but this was the oil industry. To win big you had to bet big, and Venoco's geologists said the property had 25 or 30 misdiagnosed areas that might house millions of dollars of natural gas. Eson, though he now says he was uneasy about the decision, said nothing at the time. He didn't like confrontation. Things were going too well.
And then suddenly, the company was caught overleveraged. Venoco didn't find the gas Marquez thought it would in the time he thought it would take, and it was forced to sell the property at a large loss. The company had abandoned its bread and butter and paid dearly. "Our lead banker, Wells Fargo, put us in workout," says Eson. Even so, the financial fallout was small relative to the human fallout. Eson remembers a conversation from this time that ended in a pivotal moment when he realized that he and Marquez would never be true partners:
"Tim, we got something good going on here and I want to make sure we have some stability for our families. Don't you want stability for your kids?"
"No, that'll just spoil them," Marquez responded. Eson understood that Marquez wasn't really serious--and that it wasn't that Marquez didn't care about providing for his family; Marquez just wanted to be the biggest, the best, and the most powerful. Rather than assert his leadership to counterbalance Marquez's impulses, Eson began to recede. He took on the tasks of government relations and exploring international opportunities--both of which kept him out of the office for long stretches at a time. The cautious yin to Marquez's wildcatter yang was gone.
And then in early 2001, seemingly out of nowhere, Enron officials began suggesting that they wanted to be bought out. By August, their overtures became more and more insistent and they called for a dinner. Ultimately, Marquez and Venoco CFO Bill Wineland sat down in Santa Barbara with the two Enron officials who oversaw the company's investment, Jesse Neyman and Richard Lydecker. What Venoco didn't know at the time was that Enron needed cash to conceal its mounting losses. Only three months from that night, the company would file the then-largest bankruptcy in United States history. At the dinner, Neyman and Lydecker offered Enron's shares back to Venoco for $65 million that would be financed through the issuance of high-yield corporate bonds--junk bonds. The deal would include a $10 million payout to Marquez, Wineland, and Eson.
Marquez read the proposal over drinks. Shaking his head, he stared into the men's eyes. "This is a nonstarter," he said.
The Enron guys were livid. While Marquez believed the deal would burden Venoco with interest payments it couldn't afford, Enron, still riding high, couldn't believe such a small company would challenge its judgment. (Enron declined comment for this article.)
"If Venoco wants to f--- with Enron," Marquez remembers one of the Enron guys shouting, "Enron will f--- Venoco." The dinner ended just short of a fistfight.
Months passed. For all the turmoil, Venoco was actually doing okay financially. The company was pulling in close to $10 million in revenue a month, and for 2001 it netted a profit of $31 million. But the strain between Venoco's founding partners was growing. At Marquez's request, the company's outside directors--Eson calls them "Marquez's friends"--had conducted a survey of executive salaries in the oil industry and concluded that Marquez deserved a significantly higher raise than Eson. The companies surveyed had all been public, Eson argued, and thus had no bearing on the salaries given to the partners of a private company, but the issue went unresolved.
And other issues surfaced. The company had always partied hard. "I swear every time we had a party we'd get at least one employee complaint about harassment," says Wineland. But now the company was less a family than a full-fledged corporate entity, with an HR department. When Marquez, who often railed against corporate orthodoxy, suggested that he might wear a dress to the 2001 Christmas party, HR got nervous. "They said, 'We got to stop this s---," Wineland remembers. "So, of course, Tim goes bonkers." (Marquez says he never suggested any such thing and that he wore a suit to the party.)
Marquez rushed back to his office and demanded to see Eson's e-mails. What he found exceeded even his most paranoid fears.
Wineland and Eson say the party debate forced them to ask themselves a number of important questions: Had the company outgrown its leadership? Why did Marquez seem to have final say on everything? Why was Eson's role diminishing? Eson and Wineland decided that the company needed training, a consultant--someone objective to steer a ship that seemed headed in the wrong direction.
When Wineland and Eson suggested as much to Marquez, the CEO was surprisingly receptive. He had recently been named a Henry Crown Fellow, a prestigious award given by the Aspen Institute to young executives it considers America's leaders of the future. One of the institute's fellows, a dot-com CEO, had told Marquez about sending a group of her brightest employees into the woods to talk about how they could improve their company. Marquez suggested Venoco do the same.
In January, the co-founders chose five independent and insightful midlevel managers to do an internal evaluation. They hired a professional facilitator and sent what became known at Venoco as the Gang of Five to a local resort for two days. Leading up to the getaway, employees from every level of the organization were encouraged to send the group suggestions, pet peeves, and anything else they thought might help. "I was looking for inefficiencies, better ways to incentivize our work force, ideas to help us grow," Marquez says. Eson and Wineland were hoping for something more dramatic.
A few weeks later, the Gang of Five filed a 30-page report. It found that Marquez's micromanaging had gotten out of hand. In particular, the acting president Marquez had brought in to rein in costs, Ed O'Donnell, was widely disliked by employees. The Gang of Five made three specific suggestions: Marquez should back off and let people do their jobs, O'Donnell should be fired, and Eson should involve himself more in day-to-day operations. Not surprisingly, Marquez was incensed--a reaction compounded by the feeling that forces were beginning to align against him. "I expected helpful suggestions, not a radical reorganization," he says. The CEO rejected the report in its entirety. But now he felt pressure from all sides: from Enron, from the company's employees, and especially from his old friend Eson.
For the first time, Eson began to contest his partner's decisions: We're moving too fast. We're spending too much money on offshore exploration. We're losing focus. Why, Marquez wondered, was Eson doing this--especially after so many years of seeming content. Marquez's suspicions grew, as did his isolation. All Marquez needed to do, Eson insisted, was "to listen." But Marquez wasn't the talk-it-out type. "We wanted him to concentrate on what he does best, which is driving the company forward with big-picture stuff. His management of the day-to-day was a liability, and he had to give it up," says Eson. "But there's no disagreeing with Tim: You're either with him or against him."
Despite it all, Marquez, Eson, Wineland, and their wives were scheduled to take their annual vacation together, a trip to Jamaica, in March 2002. But they hadn't spoken, really spoken as partners, for months--and Wineland and Eson pulled out a few days before they were to leave. Marquez and his wife went anyway. During this time Eson asked O'Donnell to lunch. "He told me he was the new CEO," says O'Donnell. "He told me Tim went to Jamaica to figure out whether he wanted to stay on in a diminished role or leave outright." O'Donnell, who had interviewed a fresh-out-of-college Marquez and worked with him at Unical for more than a decade, was amazed that Marquez had said nothing to him. When Marquez returned, O'Donnell sat down with the man who had entrusted him with the thankless task of cleaning house. Over lunch, O'Donnell talked about his conversation with Eson--and Eson's assertion that he would be the new CEO. "What!" Marquez shouted. "Are you kidding me?"
Marquez rushed back to his office. He asked his tech-support employees to grant him access to Eson's and Wineland's e-mails. What he found exceeded even his most paranoid fears. There, before his eyes, was an actual unreleased press release announcing Eson as the new CEO. In one conspiratorial note after another, he found that Eson had been talking behind his back with, of all people, Jesse Neyman of Enron. In one e-mail, Eson suggested that Neyman stall on an offer by Venoco to repurchase Enron's stock so that the two could discuss the offer and "make this work to our mutual advantage." What exactly did this mean? Marquez saw in it a plot to get the Enron guys on the Venoco board so that they could turn the company over to Eson. Which is precisely what happened.
The next day, Marquez fired both Eson and Wineland. But they countered quickly, convincing Enron to back them. As a group, Eson, Wineland, and Enron represented 68% of Venoco's shares, and they quickly took control of the board, installing both Enron officials and Eson's wife. It all went to court, and on June 6, 2002, a state court held Eson and Wineland in breach of their fiduciary duties to Venoco. Specifically, the judge found that through his e-mail communication with Neyman, Eson had disclosed information to aid Enron in its negotiations to sell its shares in exchange for gaining Enron's support to oust Marquez. But because the Enron officials had not gotten involved in anything beyond obtaining the board representation they were entitled to, the court found that the company had not been harmed. Not only were no damages awarded, the judge ruled that Marquez's termination of Eson and Wineland could not stand. Twenty-four days later, on June 30, 2002, the board of directors--now including the Enron guys and Eson's wife--voted to terminate O'Donnell and Marquez.
Rod Eson became Venoco's CEO. Tim Marquez filed a lawsuit.
Marquez saw a plot office and demanded to see Eson's e-mails. What he found exceeded even his most paranoid fears.
It Doesn't Take a Rocket Scientist
And then Erin Brockovich showed up. On a clear Wednesday evening last March, under the art nouveau ceilings and massive Italian chandeliers of the Beverly Hills Hotel, more than 600 people gathered for a performance. The Los Angeles personal-injury law firm of Masry & Vititoe, where Erin Brockovich works as "director of research," had rented one of the hotel's ballrooms to address a group of Beverly Hills High School alumni, students, parents, teachers, and neighbors. The goal: to convince potential plaintiffs that the oil operation on the school's campus was giving them cancer and that the city, the school, and the oil companies, including Venoco, were to blame.
As the guests shuffled in, some seeing each other for the first time in years (none of the most famous alums--Angelina Jolie, Nicolas Cage, Lenny Kravitz, or Monica Lewinsky--made an appearance), Brockovich and a small platoon of lawyers worked the room, handing out business cards and making small talk. A striking 5-foot-9-inch blonde in high heels and a low-cut black suit, Brockovich swooped into conversations, comforting victims, pleading her case to the reporters on hand, and offering concise, provocative sound bites to the TV cameras she'd invited.
"This is not a publicity stunt," Brockovich told the parents, teachers, and students. "This is not about another movie to be made."
When Brockovich first walked onstage there was a collective gasp. No doubt, many present had seen Erin Brockovich, the movie version of her successful attempt to hold Pacific Gas and Electric responsible for polluting the drinking water of Hinkley, Calif. Weeks before, Brockovich had told a Variety columnist that the film rights for the Beverly Hills case were "up for grabs." But she later said the comment had been made in jest, and now onstage, she felt obligated to announce, "This is not a publicity stunt. This is not about another movie to be made."
Brockovich began with the story of Lori Moss, a 1992 Beverly Hills High graduate who was diagnosed in 1996 with Hodgkin's lymphoma and in 1998 with thyroid cancer. Moss had waited for three hours at a Brockovich book signing (Take It From Me: Life's a Struggle But You Can Win) to tell the author about her own harrowing experience. Inspired by their encounter, Moss went searching for other young alumni who had fallen ill. She found them--two, three, then 20 and more, all desperate to know why. At that point, Brockovich says, she started sleuthing, too.
What she found, she told her audience, was a big-time oil operation. Pumping 740 barrels of oil and 330,000 cubic feet of natural gas a day, Venoco's 18 active wells were bringing the school system and the city a combined $700,000 a year in royalties. It was, Brockovich suggested, a cash cow that no one wanted to lose--regardless of the danger. The most damning piece of evidence was air testing Brockovich's team had obtained by sneaking onto the high school football field in the middle of the night--in front of KCBS news cameras. "When the test results came back," she said, walking the stage with the force of righteous indignation, "we were surprised to see that the benzene levels at the Beverly Hills High School athletic field were five times higher than the results we got at the corner of the 405 Freeway and Santa Monica Boulevard."
Parents in the audience were irate. "The school and the oil companies will pay for this," said one man, blood-red with anger. Young cancer victims wept uncontrollably. The bevy of journalists, including a camera crew from the Today show, captured it all. A little over a month later, at the 7 a.m peak of the morning show's national viewership, Katie Couric somberly narrated a piece about Moss's battle with cancer and Brockovich's efforts to lay the blame. "The oil company," Couric stated simply, "says the well is not causing air pollution."
In the court of public opinion, Brockovich vs. Venoco was no contest. "I have 300 cancers staring me in the face and an oil-production facility underneath the school," she told all who would listen. "It doesn't take a rocket scientist to figure out that the two fit together."
On June 9, on behalf of 21 former students, including two who were already dead, Masry & Vititoe filed a wrongful death and negligence lawsuit against Venoco and more than 17 other oil and gas companies that had worked on the site over the last 50 years. On August 1, the firm filed an additional action on behalf of 407 more plaintiffs, including 208 with cancer. But some scientists familiar with the case believe that establishing a causative link between the cancers and the oil will be difficult. The South Coast Air Quality Management District (AQMD) has conducted a number of tests and each has found the air quality to be normal. Wendy Cozen, an epidemiologist for the USC Cancer Surveillance Program, says statistics do not support Brockovich's claims that there is a heightened incidence of cancer among Beverly Hills residents. "There is no reason to expect that there is an excess in any types of cancer due to exposure to an oil well on the campus," says Cozen. "The biology doesn't make sense."
Brockovich and her law firm have long had their share of critics, who view the current case as nothing more than junk science employed by someone for whom 15 minutes of fame wasn't enough. "People are too often threatened by the mystique and settle," says Hudson Institute investigative science journalist Michael Fumento, who has written extensively about the firm. "[Defendants] should fight in court, because those who do generally win."
But right now, Rod Eson, still getting his feet wet as CEO, has more immediate concerns.
Chicken Eggs and Ostrich Eggs
Venoco is in a holding pattern these days, still dealing with the Marquez litigation, the need for capital, and especially the Enron payoff. The bankrupt energy conglomerate wants out of Venoco any way it can get out, whether that means getting bought out or somehow obtaining enough shares to take control of the board and liquidate the company's assets. Enron's entreaties have managed to push Eson and Marquez to the negotiating table to try to settle their own differences. Neither one of them will discuss specifics, but there seems to be a potential settlement emerging. The rough framework has Marquez getting some money and two oil properties in exchange for dropping his lawsuit.
Marquez and Eson are headed in different directions. Marquez plans to use the properties he would get from the settlement to jump-start a new business. In fact, he's already relocated to Denver, plugged CEO by his name once more, and started Marquez Energy--where he plans to follow the same strategy that built Venoco--but this time he plans to be unswervingly faithful to his aggressive instincts. "We'll grow faster than Venoco ever did," he promises.
Eson, of course, is taking a different approach. Steady cash flow from high oil and gas prices has kept Venoco afloat but done little to ease its strained banking relationships. "The banks haven't been happy with all the trouble we've been through, so we're paying down a big chunk of our principal," says CFO Wineland. "That's about $23 million a year that should be going to developing properties and acquiring new ones." And that's a problem. "We've got great assets, a terrific team, and a solid reserve," says Eson, but he understands that "in this game, if you're not growing, you're dying." The next few months will be tough. The company now employs 168, and a 20% staff reduction is in the offing, but the ultimate goal is to restart Venoco and rebuild a business that grows, only steadier and slower this time. "I'll take chicken eggs over ostrich eggs," he says.
Eson recently had to hold an uncomfortable all-company meeting. A man who doesn't like confrontation had to tell nearly 150 of his employees that the next few months will be rough. Some of you, he told them bluntly, aren't going to have a job. Almost an hour after the meeting, he got a call asking him to come back down to the conference room. Eleven of his top managers had never left. They told Eson they'd like to help him cut overhead. They said they believed in the company. Eson walked away thinking he'd finally spoken up--and he was heard.
Marquez, when asked what lessons he learned at Venoco, lets his anger flare: "Eson had all this stuff brewing in him for years, and he never said a word. Come talk to me." But then he stops for a moment--and changes direction. He says he's had conversations with his new employees, warning them he can be overly hard on people and overly passionate about this business. He told them they need to tell him when he makes mistakes. He told them he is willing to listen.
Both men wish their partnership and their dream had played out differently. Perhaps the ultimate lesson is that it takes far more than a great idea to build a company. "I used to think life was like an engineering equation," says Eson. "You plug in the right variables and the right answer comes out." He pauses. "And that's just not the way it is."
Now they're both back to will and hope and the opportunity to build a business. But they're both smarter now, and if they succeed, the past will be forgotten. Maybe each man could have gotten where he is today only by doing what they did together.
Tahl Raz, an Inc. staff writer, attended Beverly Hills High School.