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At Exxon, only a change of style

Jerry W. Hoefer for The New York Times

'What we do brings good things to people,' Rex W. Tillerson, Exxon Mobil's chairman, said of the company's role in society.

By Jad Mouawad The New York Times

If Rex Tillerson has his way, Exxon Mobil will no longer be the oil company environmentalists love to hate.

Since taking over as Exxon's chairman three months ago from Lee Raymond, who famously dismissed fears of global warming and branded environmental activists "extremists," Tillerson has gone out of his way to soften Exxon's public stance on climate change.

"We recognize that climate change is a serious issue," Tillerson said in an interview last week, pointing to a recent company report that acknowledged the link between the consumption of fossil fuels and rising global temperatures. "We recognize that greenhouse gas emissions are one of the factors affecting climate change."

But despite the shift in style to a less adversarial tone, the substance of Exxon's position has not changed with the new chairman. The company said the recent report only clarified its long- held position on global warming. Indeed, Tillerson noted that he, like Raymond before him, remains convinced that "there is still significant uncertainty around all of the factors that affect climate change."

To Fadel Gheit, a longtime industry analyst at Oppenheimer. Tillerson certainly presents a kinder, gentler face for Exxon. But in the end, Gheit cautioned, do not expect much difference between Tillerson and his abrasive predecessor.

"It's the same old wine in a new bottle," he said. "You can't expect a company this size to change on a dime, but you might see changes in how it projects its image to the public, to its clients."

Tillerson, who replaced Raymond in January, also said he saw no reason for any sharp departure in strategy. Exxon's business is about increasing oil and gas supplies to consumers, he said, not chasing alternatives that offer little prospect of replacing the fossil fuels that he views as the only realistic way to meet the world's huge and growing demand for energy.

In contrast to his rivals at BP and Royal Dutch Shell, which plan to invest billions of dollars over the next decade to start developing renewable energy sources like wind and solar power, Tillerson sees Exxon's future still firmly tied to oil and natural gas.

The answer to today's high prices? "More supplies." President George W. Bush's reference to America's addiction to oil? "An unfortunate choice of words." Exxon's role in society? "A good business and what we do brings good things to people."

A 30-year Exxon veteran, Tillerson takes over at a time when the oil industry faces formidable new challenges. Not since the 1980s has there been as much talk about energy costs and the nation's dependence on oil.

After nearly two years of high energy prices, U.S. oil companies are facing public discontent at expensive gasoline and political pressure over their record profits. Tillerson said this offers him an opportunity to better explain his company's position.

"The only thing I've said to people will change, maybe, is the management style, the way I communicate," Tillerson said. "We're all individuals. Lee Raymond is Lee Raymond. He has his style. I am Rex Tillerson and I have my style."

Whatever his legacy on the environmental front, there's no arguing with Exxon's financial success under Raymond, who pulled the company far ahead of its rivals by engineering the 1999 merger with Mobil that partly recreated the original Standard Oil trust.

Exxon is now the world's largest publicly traded oil and gas producer. Last year, its net income surged to $36.1 billion, the highest for any American corporation, ever, and a 43 percent jump from the previous year. That's a legacy Tillerson is proud to defend.

But to its many critics, Exxon, based in Irving, Texas, is locked in an increasingly frustrating race for additional oil supplies and is failing to help develop alternative fuels, curb consumption, and act on the real threat of global warming.

"They have to be part of the solution," said Kert Davies, a research director at Greenpeace. "They have too much money, they are too powerful. Without Exxon pulling with the rest of the world, it will take longer to solve global warming."

But at Exxon, executives see very little reason to alter a course that has proven exceptionally profitable.

In a capital-intensive business, the company's obsession about costs has allowed it to outperform all its rivals. Its rate of return on capital employed, which the company says is the best indication of performance and cost-management, reached 31 percent last year. BP had the second highest return among the giant oil companies with 20 percent.

"Exxon has really been about discipline," said Daniel Barcelo, an analyst at Banc of America Securities. "What Exxon brings to the table is their balance sheet, the technical expertise, and their operational management and development. That's where they shine."

But he said the company's conservative management also had a downside.

"Others have been more willing to take risks," Barcelo said. "Some say Exxon is actually being blind and missing out on huge opportunities for growth."

Indeed, oil analysts argue the company has been plowing too little money back into finding hydrocarbons. Last year, Exxon paid $23.2 billion in dividends and share buybacks, to the benefit of its shareholders, more than the $17.7 billion it spent on exploration and development.

Tillerson joined Exxon in 1975 as a production engineer. He ran some of Exxon's American operations. In the early 1990s, he was responsible for negotiating the company's investments in Russia's Sakhalin Island field as well as the Caspian Sea.

Since he started at Exxon, the energy business has changed radically. The easy-to-find oil has been mostly located, opportunities for new resources are scarcer, competition is rising, and governments are tightening the screws on international oil companies.

But since taking over, Tillerson has already scored two major coups, gaining access to the world's fourth-largest oil field, in the United Arab Emirates, and prevailing in a five-year-old dispute over the development of Indonesia's largest untapped oil reserves.

In both cases, Tillerson met with national leaders to break deadlocked talks or make a final pitch for his company. In Indonesia, the government fired the head of the national oil company, who was opposed to Exxon. His replacement quickly signed a deal.

But if both agreements proved a success for Tillerson, they also mask a starker reality for oil companies: Their access to the world's best hydrocarbon deposits is more limited than ever.

At Exxon, the problem is magnified by the company's size. Each year, its geologists must find huge amounts of oil and natural gas - the equivalent of nearly 1.5 billion barrels - just to replace the company's production of about 4 million barrels a day.

The model for Exxon's expansion strategy has been perhaps best displayed in Qatar, a small state in the Gulf that holds the world's third-largest deposits of natural gas after Russia and Iran. In the early 1990s, Exxon approached the Qatari government with an offer to serve as a joint partner. Today, Exxon is the largest foreign investor there and has Qatar on track to become the leading producer of liquefied natural gas in the world.

"We are looking for the large opportunities," Tillerson said. "We're going to work on large things and leave smaller things to others."

Referring to Qatar, Tillerson said, "That approach can be replicated around the world."

But can it? Recent setbacks in Venezuela and Russia suggest the obstacles are multiplying. After briefly welcoming foreign oil producers, Russia has now mostly shut the door to new foreign investments. In Venezuela, Exxon is battling the demands of President Hugo Chavez's nationalist government, which wants to increase royalties and other taxes on foreign investors. But rather than give in and set a bad precedent, the company prefers to scale back its investments or shut down fields.

Still, Tillerson insisted that Exxon is not constrained by a lack of prospects or partners.

"There are other opportunities," he said, "in the Middle East, in the Caspian, in other parts of the world where we will continue to take the same approach."

To develop these projects, the company plans to increase its capital spending to $20 billion a year by the end of the decade, up from $18 billion in 2005. In all, Exxon hopes to increase its oil and natural gas production to 5 million barrels a day by 2010 and lift its capacity by another 2 million barrels a day after 2015.

 

Jad Mouawad is a reporter of The New York Times. Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published by The New York Times Times, on March 30, 2006. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld 04/02/06

Copyright ©2006 Jad Mouawad/NYT. All Rights Reserved.

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