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The Sunday Telegraph: Tillerson’s hand on Exxon’s tiller

EXTRACT: Unlike Royal Dutch Shell, which was hit three years ago by a scandal about its reserves accounting, Exxon has replaced more than it has produced for the past 12 years.

THE ARTICLE

(Filed: 27/08/2006)

Exxon’s Tillerson ‘disappointed’ by BP shutdown of Prudhoe field

The new head of the world’s largest quoted oil group is confident he can steer it to greater success, he tells Sylvia Pfeifer

advertisementIn the next few days, a station in the far east of Russia will begin pumping oil through a pipeline to an export terminal 140 miles away on the Tartar Strait.

The oil will be the first export cargo from Sakhalin 1, the giant field operated by ExxonMobil.

It will be a significant milestone for the world’s largest oil company, which started work on the project more than a decade ago.

By the end of the year, the field will contribute 250,000 barrels of oil a day in new production to the company. Exxon owes much of its success in Russia to Rex Tillerson, the new man at the helm.

A civil engineer who came up through the ranks, Tillerson, 54, took over from the long-serving Lee Raymond as the company’s chairman and chief executive at the start of this year.

He has spent most of his 31 years at Exxon in the upstream end of the business – finding and developing oil and natural gas.

It was Tillerson who, in the 1990s, led the talks with the Russian government to develop the fields off Sakhalin and whose negotiating skills are credited with clinching the deal.

Tillerson will need those skills and more to lead Exxon over the next few years. Although the industry is enjoying record oil prices – which helped to power Exxon’s profits to a record $36.1bn (£19.2bn) last year – the benign operating envir-onment is not without its challenges.

In the US, the outcry from Americans who are being squeezed at the pump has resonated all the way to the corridors of power in Washington.

Exxon, which is sitting on a cash pile of about $30bn, is top of many people’s list of targets. Critics believe that, as the world’s largest publicly traded oil and gas producer, the company is doing too little to help develop alternative fuels and curb consumption.

Tillerson is all too aware of the potential political fallout. In an interview with The Sunday Telegraph during a visit to London last week, he said: “While the high price is certainly providing a lot of value to our shareholders … from a longer-term perspective this environment is not particularly good for a number of reasons.

“You get a lot of views … emerge from policymakers, a lot of views emerge from the public that are probably misplaced because people begin to start operating on the assumption that we are going to stay in this environment forever, and we won’t.

“This is still a commodity business and there is nothing that I can see out there that suggests that this commodity is not going to continue to behave like a commodity, which means it goes up and goes down.”

He will not predict when prices will come down. “If I could do that, I would take all of my savings and bet it on that position and then I’d retire,” he jokes.

He does, though, believe that the current price of about $70 a barrel no longer reflects the fundamentals. There is, he says, “a complete disconnection between the fundamentals of supply and demand on crude oil. If you had a supply and demand connection, the price would be somewhere between $30 and $40 a barrel.”

What does he make of the criticism that the oil companies are not investing enough, ploughing too little money into finding hydrocarbons while giving too much back to shareholders?

Exxon, for example, increased its dividend by 10 per cent this year and bought back $12bn worth of shares in the first half of the year alone. At the same time, oil and gas output has remained largely flat for the past five years.

Tillerson rejects the claim. Exxon has increased its capital expenditure budget from $18bn last year to around $20bn this year, a near record for the company, he points out.

Earlier this year the company outlined 22 major projects over the next three years, from Angola to Norway and the North Sea to Malaysia. Simply throwing more money at investments would be a formula for disaster, says Tillerson.

“The kind of numbers we talk about are hard for people to deal with, but spending $20bn a year in investment money at the same time as you have operating spending going on in excess of $250bn a year – that is a lot of activity to manage and to do it well.”

Exxon prides itself on the disciplined way in which it makes its investment decisions. But how worried is he about being able to boost production? Exxon has said it hopes to increase its oil and natural gas production from around 4.5m barrels a day to 5m barrels a day by 2010.

The company, he says, is fairly confident it will be able to grow volumes until the end of the decade. His confidence, he says, stems from the fact that Exxon has the industry’s largest resource base – 73bn barrels, of which 22bn are proven reserves.

In other words, even if Exxon failed to find or buy new reserves, the company would profit for years from developing those it already has.

One of the biggest challenges facing the world’s oil companies is finding new resources to replace the oil and gas they are pumping out of the ground.

Unlike Royal Dutch Shell, which was hit three years ago by a scandal about its reserves accounting, Exxon has replaced more than it has produced for the past 12 years.

Nevertheless, many industry observers say that not only has competition for resources increased but also oil-rich nations, flush with oil money, are becoming less willing to open up to Western oil companies.

It is a threat that Tillerson is not particularly worried about. “They are a new set of competitors that have entered the scene … I think we have to adjust to that competition, and the way we have to adjust is to be able to make the case to the host governments, whoever owns those resources, as to why they should select us rather than someone else,” he says.

Exxon, he adds, makes its case largely on the basis of its technological capabilities and its know-how relating to particularly large and complex projects.

If there seems little difference in the strategic outlook between Tillerson and Raymond, there is a notable difference in style. Raymond, who was nothing if not adversarial, became a lightning rod for environmentalists by challenging the scientific evidence for global warming.

Tillerson is happy to discuss the issue at length. Exxon holds that, despite gaps in the scientific evidence, “climate change is a serious issue” and that “what we know is that carbon emissions are one of the factors that contribute to climate change”, he says.

The company is adamant that the substance of its position has not changed – just that it is clarifying its long-held position on global warming. Exxon, Tillerson adds, is a strong advocate of energy efficiency and is investing in research for alternative fuels, citing its contribution to the Global Climate and Energy Project at Stanford.

So would he have signed up to the Kyoto Protocol? No, he says, noting that it excludes not just a large part of the consuming world but also that part of the world “that is going to generate 80 to 85 per cent of the growth in carbon dioxide emissions”.

Will Exxon ever be a big investor in renewable energy like some of its peers, notably BP, which has invested millions in a new business? Only if it makes economic sense.

And what of the prospect for more consolidation in the sector? Exxon, says Tillerson, is in no hurry.

“In our case, because of that large resource base and the size and the scale of what we’ve got and the opportunities that we see before us … there is nothing that we need to do in a hurry anywhere.”

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