MovieChat Forums > The Deal (2005) Discussion > What is wrong with The Deal?

What is wrong with The Deal?

posted 18 years ago by rabbit_13-1
7 replies | jump to latest

If you read the plot synopsis of The Deal and Syriana, they sound surprisingly similar. Someone uncovers some shenanigans related to the merger of two large oil companies. The potential for both intrigue and important information revelation here is tremendous.

While I do agree that this is a area desperately in need of discussion and presentation, I think The Deal is the worst possible vehicle for Hollywood to attempt to breach the walls of secrecy surrounding peak oil. In much the same way that The Day After Tomorrow was perhaps the worst vehicle to address global warming.

What is wrong with The Deal?

1) I could glean only 4 "facts" from this film: gas is 6$ per gallon, Blackstar provided 500,000 brls, Blackstar's reserves were valued at $20 billion, and oil reserves in the ground are valued at $3 x # of barrels in the ground (estimated at 7 billion). All of these facts are made-up. How many barrels a day does the US import? How many barrels of the world's reserve are located in the middle east? What is the rate of depletion in Saudi Arabia? What is OPEC's excess capacity? Given the constellation of actual useful facts not one of any merit was presented.

2) Hollywood uses the Russian Mafia the way they used to use neo-nazis, a PC bogeyman. Given Russia's perennial involvement in the Great Game, I don't object to them being involved, but why not portray them accurately? The Russian Mafia is a perfect stand in for the current brand of klepto-capitalism. The new industrialists in Russia were oligarchs who allied with state bureaucrats to loot state-owned assets to fatten their offshore bank accounts. Here they are presented as brainless eurotrash who cant even succeed in keeping a Harvard MBA tied to a bed with nylon cord.

3) To classify the "enemy" of this "war" as the Confederation of Arab States, is to miss the central point of the conflict we now face. Many of these states are our allies. There is no confederation, there are only faceless networks and splinter groups. There is no monolithic Arab State. Two minutes of stock war footage at the start of this film is the only explanation that there is a war. Later we learn that there is an embargo. Later still we learn that the "French or the Chinese" are presumably not involved in this war. Some obvious questions include, who are we bombing? There is no military power in the middle east with the exception of Israel that would take longer than 2 months for the US military to neutralize. This is the whole reason why middle eastern states avoid direct confrontation and prefer asymmetrical warfare.

4) Embargoes are ineffective in wartime. If the CAS embargoed the US, their revenue would drop to nothing. Let’s suppose they decide to sell all of their output to China, India and Europe instead, how do they transport it? By tanker. Who has the largest navy in the world? The US. Why wouldn’t US warships sit at the entrance to the Persian Gulf and just seize every tanker than tried to exit?

Many people at the Pentagon,, the State Dept, the CIA, and numerous think tanks have spent years analyzing many possible contingencies related to this hypothetical war. Richard Clarke the counter-terrorism expert has just finished a novel called Scorpion’s Gate about a coup by radical anti-western extremists in Saudi Arabia. This would be an excellent flashpoint around which to build a film like this.
Yet there is no mention of any geopolitical forces at play or the nature of the conflict. The only thing at stake is some investment banker’s reputation for signing a due diligence letter for a corporation that happens to have overvalued it’s oil reserves. There is no mention of depletion, the scarcity is entirely the result of the embargo.

I realized that this film could have followed pretty much the exact same formula if the commodity in question had been gold, caviar or Persian rugs. Engineer a conflict which prevents the free flow of some scarce resource, then present a possibility of profit for the Russian Mafia to act as go-between and sell the product to the US. Also, if the main stumbling block was getting this merger approved, then why merge? The Russian shell company could just as easily continued to purchase oil from the CAS and repackage it for transshipment to the US. This is called arbitrage. If the Russians were trying to hoodwink Tolson and split with their $25 million (????), then why was he the one preventing Hanson from doing the due diligence?

5) Why even bring in The Ethics Taskforce at the end of the film? (As if such a thing could possibly even exist after the Bush Administrations). Is the government complicit in this “merger?” Is that why the Senator covers up the whole scandal at the end? The most important person in this whole affair was the CEO of the large US oil company, Tolson. Wouldn’t it be more interesting if Tolson bought his way onto the ticket and would up as either the Secretary of Defense or the VP? That they then engineer a coup by radical extremists in Saudi Arabia which shuts down the oil supply. Also, Christian Slater should have played the bad guy, he makes a terrific villain, and a horrible good guy. Selma Blair should have been the protagonist, the bright Harvard MBA who figures the whole thing out, with the help of Fransoise Yip.

6) The Alternative Energy Tax Credit – I learned more about alternative energy sources on one episode of The West Wing last year. This was a total snipe hunt that detracted from the film as a whole, as if that is even possible.

[–] rabbit_13-1 18 years ago

Let's take a closer look at just the absurdly simple oil reserve valuation formula, shall we?

$3 x estimated # of barrels in the ground

From Energy Bulletin:
"In late 2003, Shell Oil, one of the world's largest publicly traded oil concerns, said that it had erroneously overbooked its proven oil and natural gas reserves by the equivalent of 3.9 billion barrels of oil.

The oil portion alone, about two-thirds of the revision, represents some $67.5 billion in potential future revenue, assuming moderate oil prices of $25 a barrel.

Reserve calculations, though technical and arcane, drive an oil company's prospects, much like revenue growth drives a technology company's outlook."

The fomula should probably be closer to

3 x price per barrel in USD x # of barrels provable reserves

So if a 3.39 billion brl reserve in ground is worth $67.5 billion at $25/brl
what is a 7 billion brl reserve in ground worth if gas is $6 per gallon?

At $25 per brl, gasoline was about $1.60
currently at $65/brl, gas is about $2.25
to get gas at $6 per gallon, oil would be near $150-$200 per barrel.

So even a conservative estimate of the value of 7 billion barrels of reserve is in the hundreds of billions of dollars range, not 20 billion.

This is the kind of factual sloppiness that makes this movie such a travesty.

[–] rabbit_13-1 18 years ago

http://www.hotel-online.com/News/PR2003_1st/Jan03_SyntheticFuel.html

Synthetic fuels, made from coal, are helping Marriott International improve its profits as demand for hotel rooms drops.

In October 2001, Marriott paid $46 million for four synthetic fuel plants. In this year's third quarter, ending Sept. 30, the hotel chain made $54 million more than it would have made without federal tax credits for producing synfuels.

Marriott International reported third-quarter profits of $103 million, a slight increase from $101 million for the same three months a year earlier. Synfuel production served to offset a travel slump that saw hotel revenues drop.

Federal synthetic fuel tax credits were designed to encourage the production of alternative fuels to decrease dependence on foreign oil imports.

Congress passed the Crude Oil Windfall Profits Act in 1980, after the Arab oil embargo of the mid-1970s and the start of the Iran-Iraq war.

The act encouraged entrepreneurs to make synthetic fuels from "unconventional sources." Some companies began claiming synfuel credits for producing ethanol from corncobs or oil from shale deposits in the West.

Then, beginning in the fall of 1999, a handful of electric utilities and coal companies began spraying already-usable coal with latex, diesel and pine-tar sprays to qualify for the credits.

Today, 55 coal synfuel facilities operate in the United States. To qualify for credits, those facilities had to be in operation by June 30, 1998. Many companies, such as Progress Energy, purchased existing synfuel plants in western states and moved them to West Virginia and Kentucky.

Synfuel credits are based on the energy content of the final product, measured in British Thermal Units. Coal mined in the Appalachian region is a better raw material, since its BTU content in higher than that of western coals.

Today, a ton of coal sitting in a barge on the Kanawha or Big Sandy River is worth between $21.50 and $24. If that coal is used to make a synfuel, it qualifies for a tax credit of about $26 a ton.

Synfuel production alone allowed Marriott to increase earnings by 9 cents a share during that quarter. Similar earnings from synfuel credits are likely to be reported in Marriott's new filings with the Securities and Exchange Commission next month.

Marriott's most recent 10Q report filed with the SEC revealed the company claimed $91 million in tax credits from synfuel plants by Sept. 6. If that rate continues, Marriott could claim about $120 million for the whole year.
"We began operating these facilities in the first quarter of 2002," Marriott reported to the SEC.

Ironically, the facilities actually lose money by turning coal into "synthetic fuel."

The SEC report stated, "Although we expect that the facilities will produce significant operating losses, we anticipate that these will be offset by the tax credits generated under Section 29, which we expect to reduce our income tax expense."

In the third quarter of 2002, Marriott sold $55 million worth of synfuels, but lost $35 million on those sales. During the first three quarters, Marriott sold $113 million worth of synfuel products and lost $81 million at its synfuel plants.

But Marriott International's "effective income tax rate" dropped from 36.5 percent to 9.9 percent, largely due to synfuel production, according to the 10Q report filed in October.

This year, it is likely that more than $1 billion in coal synfuel credits will be claimed. Progress Energy, based in Raleigh, N.C., produced more coal synfuels, and claims more credits, than any other company.

Progress operates seven synfuel facilities in West Virginia, Kentucky and Virginia. About 80 percent of the company's synfuel is made at three plants in West Virginia, located in Quincy, Ceredo and Cyrus Dock.

[–] 18 years ago

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[–] rei_t_ex 18 years ago

No, this is a film that WANTS to be intelligent, but is, due to its own ignorance, is actually rather stupid. I think I would prefer a film that makes no secret about its lack of intelligence, rather than one that tries to pass itself as something it obviously is not.

I was willing to forgive its wooden acting and stilted dialogue (see my earlier post on this thread - when I still thought the film was half-way decent), if the central intrigue had been smartly done. The latter, however, could not fight its way out of a wet paper towel.

Let's summarise:

The US is at war with a union of all the governments in the Middle East. Incredibly unlikely as it is to happen, for it would require many lunatics as opposed to rife corruption, I am willing to grant its plausibility - WWII was somewhat unlikely, yet it got its lunatics and its start.

As a result, Congress imposes a ban on the importation of ME oil (if it was the other way around - if ONLY the ME governments imposed a ban on the export of their oil to the USA, there would be no story - Conrad and Black Star would not be doing anything illegal. Indeed, ME governments would not be able to achieve such an embargo if they sold their oil to ANYONE, because they would be unable to control resale.). It also allows the price of gas to rise somewhat, and then imposes a price cap (hence the shortage - the are no shortages under the free market).

In the mean time, regardless of war on a massive scale, oil is merrily flowing out of the ME in excess of demand.

An American company wishes to make an illegal profit in this situation by some sanction-busting. Since it is prohibited by law from going directly to the Arabs, it arranges for a Russian middle man. The Russians would by oil from the Arabs who would resell it to Conrad. Even though the Russian shell company is set up with painful incompetence (it claims to own oil fields where there are no oil fields - while it is possible to finagle the precise size of one's reserves, I cannot just go out into my back yard and unilaterally claim I have 7 bboe), the plot WORKS! The Russian company (either through bribery of its own officials or through the fact that Russia is not refusing to buy oil from the Arabs) is able to get its hands on the oil, and whatever body is set up by Congress to vet all international oil movement and enforce the established embargo clears Conrad's purchase of 500,000 barrels of oil from them.

You would think everyone would be a happy camper. Conrad is making a killing running cheaper oil in and selling it for much more, Black Star is getting a fat intermediary cut of the profits for doing little more than reselling, the Feds are content that the deal is clean. So what does Conrad do? It decides to BUY Black Star!!! Not only in the knowledge that it would invite a hell of a lot of scrutiny from parties not previously involved (investment bankers, shareholders, the SEC), but also in the knowledge that doing so will KILL THE DEAL! After all, if Conrad could buy oil from the Arabs without a middle man (and by buying out the Russians Conrad would become its own middle man), it would have done it without involving Black Star. Indeed, I cannot see the Arab governments selling anything to the now-American-owned Black Star either. And if all it needed were some fictitious reserves making up reserves would be easier (not to mention $20 billion cheaper) for it itself, than for Black Star - Conrad at least has (presumably) some oil fields which it can claim to discover are far larger than previously thought. Black Star has to pull its reserves out of a magic hat.

That idiocy aside (and really how can you put it aside, since it destroys the whole point of the film?), how does Conrad proceed? It hires an investment bank (or group of investment banks - never mentioned in either case, but no merger is ever done without this) to be its main advisers for the deal. As is standard practice, it then needs SOMEONE ELSE to write a fairness opinion for the valuation. At first, it pulls of THE ASTONISHING MAGIC TRICK of writing the fairness opinion itself (which is, of course, impossible).

The CEO kills off the subordinate responsible for this for non-compliance, but instead of keeping his amazing good fortune and passing the task on to someone less scrupulous still within Conrad (hell, in this alternate reality he may as well pen it himself!), or even to someone working for the advisory banks (unlike a company writing its own fairness opinion, its main advisers writing the opinion for it is, at least, not illegal, even if it is discouraged), he hires some unknown fellow working for a bank renown for its integrity at the funeral of his murdered subordinate (keep in mind that everyone at his main advisers is obviously aware and, by extension, okay with the fact that the deal is a sham). Still, for reasons unknown he wishes to bring in another party not 'in on it' hoping that Tom, in his painful, painful ignorance of the field would somehow miss the patently obvious fact that Black Star is a shell (after all, all it takes is looking at some maps).

The rest of the drivel revolves around this.

[–] n-moss 18 years ago

Rabbit, I think you are ignoring the fact that this film is not set in the present day, but either in the near future, or an alternate time line (if you like to think in such terms - really it makes no difference). You are putting to much emphasis on the side issues, at the expense of the main issue. I'll address your points as you made them:

1) The issue at hand is not the effect of a depleting oil supply, or of 'Peak Oil', it is the effect of a sudden disruption to supply as a result of a conflict involving an oil producing nation. The issues of rate of depletion and capacity in the Middle East are irrelevant - it is not postulating a Middle East running out of oil, it is postulating a Middle East not supplying the oil it has. While it might be nice to have some more facts such as how much of the world's oil supply comes from this fictional Confederation of Arab States, it would be very much a fictional statistic, since the CAS is a fictional construct. Evidently, the withdrawal of CAS oil is enough to cause an oil crisis in the USA. Given what happened to oil prices in the 1970s, and to a lesser extent what has happened to them in recent years as a result of a worries about continued supply from the Middle East, it is not too wild a proposition to make.

2) Yes, the 'Russian Mafia' does seem to get used a lot as the archetypical bad guy. I'm not certain whether I would describe the description of the the behind the scenes operatives here as inaccurate, however. The group involved control a major oil company (Black Star), they are operating in a somewhat clandestine manner, they have an aim of milking the crisis in the USA to make money. Seems very much like the klepto-capitalism you talk about - money talking in the absence of effective government regulation. Unfortunately the 'henchmen' (Anna and Theo) are a bit stereotypically incompetent. But then again, if they weren't, then more than likely Abbey would have been killed, and that would not have been entirely desirable either. Certainly whoever came up with the idea of Anna's sudden accent change should be taken out the back and slapped - it was an unnecessarily weak moment.

3) Again, I draw attention to the fact this isn't depicting a real world conflict. It is a fictional war against a fictional country, albeit one based on topical concerns. This is a fairly common device - indeed, the West Wing made extensive use of similar fictional nations. I don't think the point was ever being made that it was an exact representation of a real world event. From what I could tell from the glimpses of maps we got to see in the movie, the CAS covered what is actually Iran, Iraq, and most of the Arabian Penninsula. I don't think it is too much a stretch of the imagination for such a nation to be able to keep American forces locked in an ongoing conflict, particularly if the American's were pressed for adequate oil supplies. Whatever the nature of the conflict, this film is not dealing with that, it is dealing with the flow on effects of such a conflict.

4) On the issue of the tankers, yes, that is a bit of a hairy one. Perhaps the tankers are from the states purchasing the oil, not the CAS, and as such, it may not be in the interests of the USA to seize them - particularly if they are from countries which are not hostile. Even so, there would also be overland transport routes - specifically to the north, through Kazakhstan, which is where Black Star was presumably getting the oil from anyway. On the subject of think tanks and radicals in Saudi Arabia, again you are trying to paint this as a real world conflict when it is a fictional one. The movie is not trying to portray the geopolitical forces in the Middle East. Perhaps that is too much a leap from the real world, but movies set in the near future or an alternate reality often make such leaps. Again though, the point of the movie is not what is going on in the Middle East, it is the effect of a disruption in oil supply on the USA. While the scenario could have been made with a numper of other scarce resources, few are as essential to modern society, or as easy to suddenly be disrupted, as oil.

As for the merger, I think you may have misunderstood. The Russians weren't trying to hoodwink Tolson at all. Tolson knew exactly what was going on - that there were no wells, and the oil was coming from the CAS. That's why he was wanting to prevent Hanson from doing the due diligence. One can also assume that the Russians behind the deal weren't interested in a steady stream of income from oil sales - they wanted the cash there and then (probably a wise move - if the thing unravelled at a later date, they have shot through with the money they want, and it is the Americans with their 'arses hanging in the wind'). In effect they have bought oil from the CAS and repackaged it for transhipment to the USA, then walked away with the profits and promptly vanished from procedings.

5) I think an Ethics Task Force is an entirely possible thing for a proposed near future. Whether the government is complicit or not is left up in the air, but certainly there are elements who are. Sure, Tolson could have bought his way into a political position, engineered a coup, Hanson could have been complicit in selling it, and Gallagher could have brought it crashing down. Really what your proposing as a completely different movie. Perhaps it would be more interesting. Perhaps not. Point is, this isn't that movie.

6) I don't think the alternative energy tax credit detracted at all. It was simply something else the company was working on. The movie wasnt attempting to make a major point about alternative energy, simply that such things were being considered (and wasn't it interesting that it was the weight of the oil companies that squashed it...)

--

Look, there are certainly ways the movie could have been better. Anna's accent change was grating. The plot was rather predictable. The twist at the end lacked impact.

But I think you have read too much into the nature of the conflict, and not enough into what the main issue was - namely, what would be the effect of a major disruption to oil supply? To what extent would an oil company go to overcome that disruption so that they could continue their business? To what extent would a government go to overcome that disruption so that the country didn't grind to a halt? At what point do ethics get overridden by practicalities? As the movie says, all the good intentions in the world can't change the world. That is the issue at hand. The movie did a good, but probably not great, job of addressing this issue.

NM

[–] rei_t_ex 18 years ago

7) Anna's accent change.

8) Anna's accent change.

9) Anna's accent change.

10) Anna's accent change.

I am watching the film right now (decent enough, even though it is obvious that no one involved with it ever came within 50 miles of either Wall Street or Big Oil - very, very much unlike Syriana - and are obviously completely clueless on the subject), but Ms Harmon going from hammy-British to oh-my-god-it's-raining-hogs-Russian, just to belabour the obvious identity of her employers caused me to fall out of my chair. Literally.

[–] 18 years ago

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