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Financial Times: A subtler force at the top of ExxonMobil

A subtler force at the top of ExxonMobil


By Thomas Catan

Published: April 24 2006 03:00 | Last updated: April 24 2006 03:00


On New Year's Day, Rex W. Tillerson woke up to find himself at thehelm of the world's largest publicly traded company. If that was not enough to worry about, he was stepping into a job vacated bya man widely regarded as one of the most successful chief executives in the oil business. 


But if Mr Tillerson is apprehensive, he is not showing it. Did he ever imagine that he would be heading ExxonMobil, the company he has been employed by for his entire adult life?


“No,” he laughs in a deep, Texas baritone. “I don't think it's something you ever aspire to, quite frankly.” He adds that he never spent any time thinking about it, “which might surprise a lot of people”.


ExxonMobil is famously suspicious of outsiders and, like previous chief executives, Mr Tillerson has come up through the ranks. Joining straight after graduating in civil engineering at the University of Texas at Austin in 1975, he worked his way up to serve as president under Lee Raymond, who retired last year after 13 years as CEO.


His predecessor was a legendary figure in the oil industry, capping his tenure by engineering the union of Exxon and Mobil in 1999. But he was also irascible, excoriating analysts and reporters when they dared question his judgment. The combative oilman also became a lightning rod for environmentalists by challenging the scientific evidence behind global warming, denouncing the Kyoto agreement and pouring scorn on the potential of renewable energy.


Mr Tillerson, by contrast, comes across as an affable figure, keen to discuss the company's position on climate change and other sensitive issues for the oil industry. Exxon holds that, despite gaps in the scientific evidence, the “risk to society posed by greenhouse gas emissions may prove significant”, he says, adding that “action is justified now”.


The position is virtually identical to that of BP, which may surprise consumers influenced by BP's multi-million-dollar green make-over. But Exxon insists this has has been its position all along. “What's happened over a long time is that the extremists have been trying to define ExxonMobil's position on a wide array of issues, and they have wrongly described our position,” Mr Tillerson says. “To some extent, maybe that's our fault because we're not out telling people what our real position is in a clearer manner, broadly enough or often enough.”


The style may differ from that of Mr Raymond but, so far, the substance has been largely the same. That will cheer investors, who like the company's record of delivering solid results year after year by maintaining strict capital discipline, choosing its projects carefully and executing them well.


By most measures, ExxonMobil leads the other “supermajors” in the oil industry – BP, Royal Dutch Shell, Total and Chevron. The company made the largest profit in corporate history last year, posting a net income of $36bn (£20bn). It has increased its dividend every year since 1983 and distributed $38bn to shareholders since 2001 through share buybacks.


With a relentless focus on operational efficiency, Exxon has consistently achieved a higher return on capital employed than any of its peers, seen as a key measure by the company and many analysts. In private, many of Exxon's competitors express admiration for the disciplined way the company is run, even if it is unloved by the general public.


So does Mr Tillerson's accession represent a real shift for Exxon or is it old wine in a new bottle? Some analysts say that the change in style could prove important as the industry takes more heat than ever from environmentalists, consumers and politicians.


“I think you are going to see a much better public image projected by Rex than any of his predecessors,” says Fadel Gheit, an Oppenheimer analyst and long-time Exxon-watcher. “He is very firm but with a friendly manner. He can carry the same message but in a kinder, gentler manner. It will, I think, serve the company very well.”


There are other reasons why Mr Tillerson's more emollient style may help. Around three-quarters of the world's oil and gas reserves are now off-limits to international oil companies, and a resurgence of resource nationalism around the world threatens to further curtail their access.


In this new environment oil companies are having a tough time replacing the oil and gas they are extracting from the ground, and none more than Shell, which in 2004 admitted to inflating the size of its reserves by around a third. Over the past five years, Shell has managed to replace just 72 per cent of its reserves, well below the 100 per cent expected by investors.


By contrast, ExxonMobil has managed to notch up a reserve replacement ratio of 117 per cent over the past five years. Among its closest peers, the record was topped only by BP, which was virtually alone in persuading Moscow to let it buy into a big Russian oil company. The formation of TNK-BP was seen as a testament to the negotiating skills of its chief executive, Lord John Browne.


“The resurgence of resource nationalism means that success for supermajors now depends as much on diplomatic as on technical excellence,” says Alex Turkeltaub, managing director of the Frontier Strategy Group, a consultancy.


“BP has adapted to this new world much faster than ExxonMobil, and the challenge for Rex Tillerson will be to make up lost ground in this sphere.”


Mr Raymond commanded a great deal of respect in the industry but he was hardly diplomatic. Some state oil company officials who sat in on talks with Mr Raymond say he could come across as arrogant and high-handed. Subsequent talks with Mr Tillerson ran far more smoothly, they say.


“He is a businessman but also a diplomat,” says Mr Gheit. “He gets into negotiations with heads of state or energy ministers and heads of national oil companies. So he has to handle them with finesse. This is probably one of his greatest attributes.”


Mr Tillerson has had extensive experience negotiating with prickly host governments in the Middle East, Russia and the Caspian. In the 1990s, during a highly chaotic period in Russia, he managed to negotiate Exxon's massive Sakhalin-1 development off the east coast of Russia.


Before embarking on any negotiation, Mr Tillerson says he immerses himself in the country's history and culture, avidly reading books on his subject. “I spent a lot of time with people who are native Russians and try to understand the culture and what's going on,” he says.


But Exxon has never been a soft touch. When Venezuela imposed tough new operating contracts on oil companies recently, most reluctantly signed up. Exxon did not, instead selling its stake in an oilfield to apartner. Similarly, the company stunned observers by walking away from a vast natural gas project in Saudi Arabia a few years ago because it did not meet its investment criteria.


In a world where a growing number of companies are fighting over a diminishing pool of opportunities, can Exxon afford to be so choosy?


“Well, I think we can,” says Mr Tillerson, noting that the company already has discovered resources of around 73bn barrels – the highest level in the industry – some 50bn of which are still waiting to be developed. “We do have a certain view that with that very large resource base, we have a lot to work on, and we can be patient and persistent and deliberate about the opportunities we pursue to add to that inventory.” Despite regular rumours, he is not going to Wall Street to drill for resources either. “The acquisitions that have occurred, when I look at what's been paid, seem pretty pricey to me,” he says. “It's pretty hard to see where anything's going to make sense at these prices.”


When the price of oilfalls, as Exxon believes it will, some deals may make sense, he says. Meanwhile, the company will continue with the long and painstaking process of coming up with attractive projectsand negotiating with host governments.


“Anyone that approaches this business with a view that you're going to get things done in a hurry probably doesn't understand it very well,” he says.

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