The attacks were nasty.
In the winter of 2011, Karen Kleiss, a reporter with the Edmonton Journal, wrote a story about how Koch Industries Inc. had hired a lobbyist in Alberta. The story provided background on the Wichita, Kansas-based energy conglomerate, its presence in Alberta, and its American billionaire owners, Charles and David Koch.
Kleiss reported at the time that no one from Koch Industries addressed her questions. Nevertheless, after her story appeared, Koch Industries went on the offensive. On their website, kochfacts.com – and in vivid red type – they lashed out at Kleiss’s article, claiming it was “slanted,” that it “parroted partisan political rhetoric and other distortions” and that its coverage of the Koch brothers registering a lobbyist in Alberta was a “purported story.” The Koch Industries representative summed up by saying:
“There is a place for opinion on the op-ed pages, on blogs, and on Twitter. It does not belong on the news pages of an objective journal.”
What the paragraph-by-paragraph rebuttal did not dispute was Kleiss's assertion that Koch industries is “an American energy conglomerate owned by two powerful billionaire brothers who help fund the Tea Party and climate change denial movements in the U.S.”
The attack was so strong that Lucinda Chodan, editor-in-chief of the Journal at the time, felt compelled to write a lengthy response to Koch defending her reporter’s work. The company replied by taking further potshots at the newspaper and at Kleiss’s judgment.
Around the same time, a similar scenario was playing out after Reuters ran a story entitled “Koch Brothers Positioned To Be Big Winners If Keystone XL Pipeline Is Approved,” that also detailed Koch’s holdings in Canada. It discussed how the Koch brothers would benefit if the Keystone XL pipeline was built.
Written by David Sassoon, a journalist who runs InsideClimate News— a Brooklyn, NY-based, Pulitzer prize-winning website that covers climate change issues— the Reuters piece eventually elicited a ferocious response from Koch’s PR department. The company accused Sassoon of publishing “falsehoods” and of being an “environmental activist,” and Reuters of printing “advocacy journalism.”
Koch Industries even took out ads via Facebook and Google with a photo of Sassoon under the headline “David Sassoon’s Deceptions.”
Once again, a Reuters editor had to intervene with a lengthy letter to Koch defending their use of Sassoon’s reporting. These attacks went on for some months. Today, Kleiss and Sassoon refuse to discuss these events.
But at that time Koch Industries’ campaigns against the media were not unusual. Their website, KochFacts, criticized reporting in The New York Times, The New Yorker, Mother Jones, Forbes.com,The Washington Post and Bloomberg's Markets Magazine.
By 2011, the Koch brothers – currently the sixth richest people in the world, with US$42.3-billion apiece – were attracting attention because of their efforts at influencing the US political system, helping foster the Tea Party movement, and attacking attempts to curb climate change. They were also emerging as political kingmakers: two weeks ago, the brothers were in the news for endorsing Scott Walker, the governor of Wisconsin, as their choice for the Republican presidential nominee (Walker is well-known for his attacks on labour rights in his state).
Koch Industries, the second-largest private company in the US, has become infamous for playing hardball.
Yet the broadsides on articles linking the Koch brothers to Canada might have had another purpose: to direct prying eyes away from their company’s history in this country. After all, few people know how Canada and its oil riches have been central to creating their vast fortune.
And what a fortune it is: today, Koch Industries is a global behemoth with annual sales of US$115-billion and a presence in 60 countries and employing more than 100,000 people worldwide. It has invested US$70-billion in capital expenditures over the past 12 years. They produce a wide range of products, and not only from the 750,000 barrels of oil they process every day: fertilizers, drywall, windowpanes, carpets, Brawny paper towels, Dixie cups, chemicals, and fibre optics.
As it turns out, Koch Industries also controls anywhere from 1.1 million to as much as two million acres of Alberta’s oil sands – or the equivalent of around 4,500 square kilometers – thereby guaranteeing the company’s prosperity for decades to come. The value of their oil sands holdings is in the tens of billions of dollars.
“You can say a lot of things about the Koch brothers, you can have a lot of criticisms – but what you cannot say is that they're stupid business people,” remarks Mike Casey, campaign manager of NextGen Climate, a Virginia-based environmental group founded by American hedge fund manager Tom Steyer. “They're very smart, they play for the long-term… And that's why they're invested in tar sands to such a huge huge extent.”
Refining Canadian oil creates the Kochs' fortune
Koch was founded by Fred C. Koch, who was born in Texas in 1900. He trained as an engineer at MIT and invented a new thermal cracking process that turned crude into gasoline. Koch made a fortune in the 1930s by helping Stalinist Russia upgrade its oil fields. He eventually moved to Wichita, Kansas, and founded an engineering company that formed the basis of what would become Koch Industries.
Fred and his wife had four sons – Frederick, Charles and two twins, David and William – who would be shaped by their father’s strong anti-government views. In the late 1950s, Fred was an early member of the John Birch Society, a far-right conspiracist political organization and an antecedent of the Tea Party movement. He wrote a best-selling pamphlet on the evils of communism, influenced by his time spent in the Soviet Union.
One of Fred’s smartest business decisions was to purchase a one-third stake in the Pine Bend refinery in Minnesota, which had been built in 1955, and was refining 25,000 barrels of Canadian crude every day. The Kochs also began buying and selling mineral leases in the tar sands as far back as the late 1960s, according to David Sassoon.
Of Fred's four children, three would enter the family business – Charles, who was groomed to run the company, and the twins, Bill and David (the eldest, Frederick, had no interest in the company). After Fred died in 1967, Charles took over as CEO, and his first big move was to buy outright control of the Pine Bend refinery for US$30.5-million. In his 2007 book The Science of Success, Charles refers to the Pine Bend purchase as “one of the most significant events in the evolution of our company” and that “this acquisition brought new capabilities to Koch Industries and led to many new opportunities.”
At the time of Fred’s death, the company was closing in on annual sales of US$250-million and had about 650 employees. “I think you could certainly say that the Pine Bend refinery – people in the company referred to it as ‘our cash cow’,” relates Daniel Schulman, author of Sons of Wichita, a book about the Koch brothers published last year.
“And the Pine Bend refinery essentially helped to fuel its investments in all of these other (areas)… It basically pushed them into chemicals. In the 1980s they bought a facility in Corpus Christi, Texas, that is one of their major (refineries). They bought another Texas plant. My understanding is that it was the massive profits generated at Pine Bend through refining this really heavy Canadian fuel that enabled them to make these investments.”
In fact, the importance of refining Canadian oil at Pine Bend was revealed due to a bitter lawsuit that tore the Koch family apart. By the early ‘80s, the Koch brothers had split into two warring factions, with Charles and David on one side and Bill and Frederick on the other. This divide led to Bill and Frederick selling their share in Koch Industries to their brothers for US$800-million in 1983.
But soon Bill felt he’d been ripped off in this deal – that Charles and David had deliberately undervalued the company’s assets. In 1985, Bill sued them over this issue, accusing his brothers of fraud.
Key issues in the lawsuit were the value of Pine Bend and Koch’s holdings in Alberta.
“The location of that refinery in the Midwest meant they had a monopoly in that market – that’s why it was so valuable,” says Schulman.
Court documents show that by 1982, Koch Industries as a whole was valued at US$1.5-billion and earning US$309-million in net profits (another valuation put it at between US$1.6-billion and US$2.3-billion). An expert witness hired by Bill put the value of Pine Bend alone at about US$660-million.
Another expert witness for the plaintiffs put the value of Pine Bend as high as US$1.2-billion by the summer of 1983. In court motions, Bill and Frederick claimed that “(Charles and David) hid from the selling shareholders their actions and plans to increase the capacity of the Pine Bend Refinery… and to gain access to greater volumes of low-priced Canadian crudes.”
The court records suggest Pine Bend was the most valuable single asset the company owned – and its revenues came almost entirely from refining Canadian oil, which it was designed specifically to do (by 1985, the refinery was refining 152,000 barrels a day, and generating US$115-million in net profits for the company). Eighty per cent of the crude Pine Bend was refining was coming from Canada by 2010.
The lawsuit also revealed the extent of the company’s oil reserves in Alberta. Notes by Bill from board meetings in the early ‘80s said: "Canada at this moment looks very encouraging” while Charles was saying "reserves in Canada fantastic but worth only 10 cents" – due to the low price of oil at that time.
In 1999, the court battle between the brothers finally went to trial in Kansas where the jury ruled in favour of Charles and David. By then, Pine Bend was refining 285,000 barrels a day and had turned Koch Industries into the world's number-one exporter of oil from Canada, ahead of Mobil and Amoco.
Today, Pine Bend refines around 320,000 barrels a day of primarily Canadian oil – and covers 1,000 acres with 16 kilometres of roads. Canadian sour crude travels through a network of pipelines that begin in Hardisty, Alberta, where the Kochs own an oil terminal with 670,000 barrels of capacity. The Kochs also control a 864-kilometre pipeline system that distributes its Pine Bend products to customers.
“They’ve made untold millions from that refinery from Canadian oil, for many decades now,” says Kert Davies, executive director of the Climate Investigations Center in Washington, DC. At times it’s refined as much as one quarter of the 1.3 million barrels of oil exported from Canada to the US per day.
But Pine Bend also has a troubling environmental legacy. By the late ‘90s, the company was being investigated by the EPA and FBI for illegally dumping millions of gallons of ammonia-laced wastewater and 600,000 gallons of fuel into the Mississippi River from the refinery. Allegations arose that Koch had tried to hide its environmental crimes by dumping the pollutants at night and falsifying records.
Kochs developing their tar sands holdings
While the Kochs bought up leases to the oil sands, most of this land has remained untouched. This might soon change.
This winter I travelled to Fort McKay, Alberta, a hamlet of 700 citizens that hugs the Athabasca River, a half hour’s drive north of Fort McMurray. It’s home to the Fort McKay First Nation.
A cluster of small, neat houses, this community is famous for being located at ground zero of the oil sands – whose manifestations are visible from the river’s bank. A Syncrude refinery lies a few kilometres down the road, belching out smoke all day long. Tailings ponds of polluted water surround the community.
“Every which way there is an open pit mine or proposed mine,” says Dan Stuckless, the band’s environment and regulatory manager. “We are at a point where we are 70 per cent leased on the territory here.”Oil sands pollution over Fort McKay. Photo by Andrew S. Wright