Financial Times: In his own words: Exxon’s Rex Tillerson

On the energy bill:

“This current energy bill that’s out there almost defies any sense of logical or rational thinking. I think it’s playing on a lot of emotions that are evident among the American people today, who for a lot of good reasons are upset with the high prices of energy, something they’re not accustomed to – $3 a gallon gasoline, higher electricity costs – and for a lot of people that is a serious problem, when their energy costs go to that level. And for a lot of other people, they just don’t like it. It may not be a serious problem, because when you look at the demand situation, at this point there’s been little demand response to the high prices. So for most of the people my conclusion is that they don’t like it and they complain loudly and bitterly about it, but it’s obviously not something that’s causing them to alter very many things around their normal daily habits or routine. But I think people are reacting to that and in a not very rational way.“

“There’s really nothing in that energy bill that I can tell is going to in any way alter the current energy supply or demand pricing situation. In fact it runs a risk of actually making it worse; certainly in the short term it doesn’t do anything; it has very high aspirations for alternative fuels, biofuels, decades out into the future, ten, 15, 20 years out, which doesn’t do anything for today. And those aspirations, because of the state of technology, are questionable. And many of the things in the bill actually will in all likelihood aggravate the supply situation over that time period and lead to higher prices.“

On alternative energy:

“All the other things that are in the debate – solar, wind, biofuels, tick the list of the favourite children – are developing on the back of basically government prop-ups, subsidies, mandates, tax incentives, because they do not stand on their own. They start from a small base. So even if you allow them to grow at a fairly rapid rate, that’s not going to solve your problem. Again, I think from a policy standpoint, put all those things on the table. People want to invest in them and develop those and make them part of the energy supply equation, I say: that is terrific. We need everything we can get.

“But you really have to look at what do we know how to do today, because an awful lot of the future energy policy is dependent upon things that people have aspirations to do, but that we don’t know how to do today, and even when we figure it out, to scale up so that it’s meaningful will take quite some time. So US energy policy has to deal with its future, but it has to deal with the path between now and the future, and that’s what’s not being dealt with, it’s what are we going to do between now and the time all these aspirational things may be available.“

“I keep reminding people it’s good and it’s proper and we should have these aspirations to find other options, but that’s a journey that you have to travel that’s going to take some number of years, and what’s going to fuel you on the journey between now and then is what we’re using today. So don’t throw obstacles in the way of the fuel that still lets you drive the truck or the car to the destination or you’re never going to get there.“

On biofuels:

“I think the conventional bio-fuels production, which is largely ethanol, whether it’s sugar cane, sugar beet or corn-based ethanol, I think is going to reach a practical limit fairly soon. Now, the 7.5 billion gallon ethanol target for 2012 is, we think, very achievable. We’re already at about 5bn gallons a year now and getting to 7.5bn is do-able. [But] it comes with some further tension in the food markets. Beyond that, then I think the tension just rises, because you’re taking and consuming more and more of a food crop, whether it’s directly into the food products for human consumption or feed for animal consumption for food products,. So once you get beyond that 7.5bn gallons I think things are going to get even more difficult from the standpoint of those tensions. And to get to what most people view as the maximum capacity in the US for corn based ethanol, which is 12bn or 15bn gallons a year, clearly then you’re really approaching a lot of practical limits and issues around water usage, whether in fact there is significant enough energy net gain in using that as a fuel feed stock.

“And whether there’s any environmental benefit at all becomes questionable, because of the huge amounts of fertiliser that are consumed, [and] water, [and] all of the machinery involved in planting and harvesting and processing. When you do the balance on all that, and I’m sure you’ve all seen the analysis that’s been done by a number of different academic institutions and others, that balance is pretty close as to whether you’re really seeing a net gain or not. So the only justification for it is… energy security. People say, well even if it’s a net wash, it addresses my energy security concern, so we ought to go ahead, even if I don’t get any environmental benefit out of it and even if it has other economic consequences, I’ll trade those off for energy security. [That] seems to be where a lot of people go today. Now, depending on what states you come from you make a huge argument for economic benefit or you make a huge argument for economic debit. So it just depends on who your voter constituency is.”

“There are two separate challenges with cellulosic ethanol today. One is the enzymes required to convert cellulose to the sugars and the other is what I would call a logistics challenge. When you start with, to use President Bush’s famous switchgrass, but some plant material; you gather this material up and the first step of the process is you have to strip them to get the lignin out of the material and then extract the cellulose from that. And that’s through enzyme processes. And when those enzymes extract the sugars to convert, it extracts two kinds of sugars, whereas when you’re using sugar cane, sugar beet or corn you get one kind of sugar when that conversion process occurs. On cellulosic material you get two kinds of sugars. And the enzymes that produce those sugars don’t like each other and so the system wants to shut down on people. And so a lot of work is under way on enzymes and the researchers will figure that one out. I’m fairly confident that the enzymes are going to be available, so that challenge will eventually be overcome.

“The bigger challenge though, again, is the massive amounts of material that you have to gather up. Switchgrass or whatever you want to use, you’ve got to collect a lot of material, take it to a central location to be processed and the amount of material that you have to move around is enormous, to generate anything of scale. I mean, if you want to have a small gee-whiz 50m gallon a year plant, well, you know, it’ll be interesting and you probably could do a lot of tours of people wanting to come by and see it; you might make more money charging tickets to see it than you make over fuel. But to scale up to something like is in the energy bill, where they’re talking 20bn gallons a year of cellulose ethanol, that is a huge amount of ethanol. And it’s a huge amount of plant mass to move around. So it’s very much a logistical challenge and a capital intensive challenge because that takes a lot of equipment, so there’s huge up-front capital cost just to gather this material and do that front-end processing I was talking about. Once you get through that, the rest of the ethanol production looks just like pouring of sugar; there’s nothing to it.“

“Shell’s got a joint venture with Iogen. And that’s probably the most advanced, largest – at least as I understand it, I haven’t seen it – pilot plant that’s in operation today. And I don’t intend to sound overly harsh or certainly not trying to trivialise the technology when I’ve just described it as largely a research project, a lab experiment. But that really is what we’re doing here. These are really laboratory experiments trying to figure out how to make this process work on a continuous stable basis, and then we can talk about now I can make a few gallons a day of this stuff; now I want to scale up to billions of gallons a year. It’s that scale up problem; once you figure it out, then you’ve got this front-end material handling issue which I call logistical challenge. How do you handle all the material it takes to then get it into that process? And then to roll it out on a commercial basis and, as I said yesterday, if you look at most breakthrough technologies, and once you get the technology solved it’s 12, 15, 16 years before it reaches a meaningful application.”

On US oil and gas resources:

“The US, which has been in an energy import position now for quite some time, really needs to put all of the options on the table and not just summarily rule out anything…. There’s no question in my mind that domestic oil and gas production in the US could be expanded if a lot of the areas that are currently not available to industry were made available”

“There are huge amounts of the off-shore continental shelf that are currently off limits; most of it is off limits. The only part of the continental shelf in the US that’s been developed is the central and western Gulf of Mexico. So there clearly are significant oil and natural gas resources in the eastern Gulf of Mexico. There’s likely resources on the Atlantic Basin. We know there are significant oil and natural gas resources off the western coast, because there’s current oil production, but it’s been limited since there’s been no development. And without doubt there are significant resources in Alaska. And then a lot of areas within the continental US that have been off limits…I think we basically understand why. It’s largely opposition to new development activities [based on] concerns over protection for the environment, all of which are legitimate.”

“I think in many regards the US has been stuck in a bit of a time warp of the 1960s with regard to its balanced view around environmental protection and energy development. The rest of the world has not been stuck in that time warp. Certainly the UK offshore continental shelf hasn’t been; the Norwegian offshore continental shelf has not been, [or] the Netherlands, [or] Australia. Pick any other developed strong economy and they have developed their natural resources. But the United States has chosen not to develop its natural resources. They’re largely blocked because of environmental concerns. And my view is that people need to re-examine that. In the last 30 years, this industry and its technology and capabilities have so far advanced in terms of how we’re able to explore and develop and produce and do that in a safe, reliable way. And there doesn’t seem to be an acknowledgement of that when it comes to the US energy policy around use of domestic resources.”

“The number that people seem to accept is that the oil potential is probably somewhere in the mid-30bn barrel range. And the gas potential is probably in excess of 100 trillion cubic feet. So it’s sizeable…If we had a sensible policy around access it would serve you well; not to throw everything all at one time, because the industry could not assimilate that anyway. But [we need] sensible, responsible opening up of areas, like the rest of the world has done, and to begin to allow industry to go out to get all the data, shoot seismic, drill some wells, find out what’s out there, or whether this is all a big argument about nothing.”

On nuclear power:

“We support a full evaluation and promoting on a economic basis all the alternatives, and with regard to nuclear, we have said nuclear really has to come back on the table for discussion.”

“I think people’s mindset is stuck in some other point in time, 20 or 30 years ago. And anyone who takes an objective look at the performance records of nuclear power around the world recognises it as being one of the most reliable, safest, forms of energy delivery on the planet. Now, there are obviously issues you have to deal with around waste fuels, spent fuels, proper handling of those from a safety standpoint as well as a security standpoint. But all of those are solvable.”

“The reason we exited nuclear was because the government regulation around uranium enrichment changed. All the value around the nuclear fuels business at the time we were in that business was around processing, upgrading and enrichment to fuels grade uranium. When they changed the law and partly regulated that, it took all the profit out of it and that’s when we exited the business. I don’t expect that that’s going to change, that regulatory structure around the fuels upgrade, because there’s some much concern around security these days. So right now I would have the expectation that we would re-enter that business.“

On improvements to road transport:

“We are confident there are still significant improvements to the internal combustion engine yet to be captured, so just in terms of making that engine much more fuel efficient and therefore less emissions per unit of activity, and we’re doing a lot of work in that area and have been for some time, both on gasoline combustion engines and diesel. Certainly a greater penetration of diesel engines into the US automobile transportation market would have an important impact. So I think that that’s where the near term emphasis should be: there and on the further advancement in hybrid vehicles… Our view for some time has been that the hybrid vehicle, what I’ll call the traditional hybrid vehicle, the one I just described, will continue to grow in its popularity, the cost will come down as they build more manufacturing capability, just because of industrial engineering improvements to the process and you continue to find lower cost ways and continue to have some improvements in battery technology. The manufacturers will just get better and better at those things, such that some time along about the mid to latter part of the next decade, our expectation is that about one in three new vehicles that are sold in the United States is going to be a hybrid type vehicle or equivalent in terms of energy efficiency. And that is going to begin to change the demand for conventional transportation fuels in the US. As diesel engines make a penetration that’s a piece of that, because they’re much more fuel efficient.“

“We’re working on that whole issue around how to make the internal combustion engine much more efficient on two fronts; one is around HCCI, homogeneous charge compression ignition, which is a technology that is better understood in diesel engines than it is in gasoline engines, but if you can control that process in a gasoline engine you can get up to 10-15 per cent fuel efficiency improvements in a gasoline engine. And we’ve been working on that for some time at our research laboratories, so I think there will be further improvements in the internal combustion engine. We’re also looking at different ways you deliver the fuel to the engine to make it more efficient. And we think we’re very close on a few things that we may be able to put into the marketplace here in the not too distant future. We’re working through a joint effort with Toyota on a number of these.”

On the rise of national oil companies:

“It’s just more competitors and different competitors. National oil companies don’t operate under the same enterprise value model that we operate under. I don’t think you have to be a genius to figure that one out. So it means that their behaviour in a competitive situation is quite different than ours.”

“Our response to that is no different than our response to competition has always been, we have to bring value add to our opportunity. If everyone were equal, if all of us had the same technology capabilities and the same know-how, then it would just be a straight up bidding war. You know, I’ll give you 10, and the next chap says, I’ll give you 11. But we’re not all equal, and most of the host governments recognise that we’re not all equal, and so that’s the case we have to make, is that we bring some things that others cannot bring that is going to take the value of your resource opportunity. And if on a zero-sum basis the value is this big, if you allow us to work on it through technology and know-how, we’re going to increase the value of that to this big.”

“That’s the case we have to make and so it becomes somewhat a function of the nature of the resource opportunity, what are the technical challenges around it? How large is it? How significant is it to the country? And that’s where we get to come in and make that case. And that’s why in some cases we’re going to lose opportunities to these other competitors, because it may be something that’s quite simple, that there’s not a lot that we can add to it.“

“In terms of how that’s going to play out with all the industry players, I think it’s hard to say. There are still a lot of opportunities around the world to pursue. Obviously the greater your technology capability and all of the other know-how; and examples of that are like our ability to execute complicated projects, things like Sakhalin, things like deepwater Angola, that allows us to go some places that a lot of these other new entrants cannot go. So we don’t encounter the competition in many parts of the world. So to the extent that other competitors out there don’t have that unique capability, they would be more threatened, because they’ll always have to compete in the same venue that some of these new entrants can also compete.“

On China:

“I don’t think they’ve behaved irrationally, other than perhaps the value that they place on certain opportunities is different than a lot of companies in the private sector would place. But the notion that they have decided that they want to send some of their technologists out into various parts of the world that have large resource opportunities and secure a position doesn’t seem illogical to me at all. The United States has been doing that for years and the UK has done it for years and middle Europe has done it for years, and so I think they’ve just finally got to the point where they had the capability to begin to go out and participate.”

“If you look at what they’re doing, there’s very little that they are taking positions where they are the developer, they are the operator; they’ve taken interest in a lot of things where there are other partners who are in control. And that seems very logical to me, because they get an exposure to the global energy scene set out there and it gives them better information. They’re going to understand the situation better now that they’re out there participating, and they’re going to learn a lot in these joint ventures that involve other companies, like ourselves. So I think it’s a very logical kind of evolution for them.”

On consolidation in the oil industry:

“The political environment today would make it very difficult for consolidation within the industry, at least among any of the larger players. And even for some of the mid-size players there’s been some opposition when some deals have been tried. The conditions that led to the consolidations the last time, we were in a very different price environment, some companies were in fact in financial difficulties, and the time was right.

“I think also at the time, at least of our own merger, a lot of these things that have now played out, that we’re talking about, the emergence of the national oil companies, you could look at the future and see that that was likely to happen. And it has. So for us it was also to position ourselves to be more competitive in a different world. Size does matter in some things, not all things, but it does matter in some. And to make the kind of investments in research and development that we make, and I mentioned yesterday a billion dollars a year, and we spend that kind of money year in and year out, whether it’s $10 oil or $70 oil, we put that kind of money into R&D. You can only do that if you’ve got sufficient size and scale that you are confident you’re going to have opportunities to apply that technology in enough places that it’s going to give you the payback, but also give you a competitive advantage. So if you’re too small it really limits your ability to pursue new technology and you’re reduced to having to purchase and use the technology that’s generally available to everyone.

On climate change policy:

“I am not a proponent of regulation in general, so philosophically I do not support regulatory action. And the reason I don’t is because it gets in the way of innovation. When you mandate solutions and you mandate behaviour, you have essentially chosen a path that others might do different if left to their own devices. So I think the other aspect of building a regulatory framework, my comment on it has been it is apparent that a lot of governments in the world have come to the conclusion that they have to do something.

“So let’s talk about what’s the sensible thing to do. Now, whether I think that’s what we ought to do or not is somewhat irrelevant because I’m not a politician, I’m not a government official, I’m not a policy maker. I’m a business person. And I want to share with you the impact I think it’s going to have on the economy, on business, and if you’re going to structure it these are some things to think about in terms of managing those three colliding forces I was talking about: energy security, economic progress, and now you’re working on the environmental piece of it. And my only point is, you can’t work on the environmental piece in isolation; you’ve got to consider the other two. So how do you want to structure that? And I philosophically have always had a view that the lighter the regulation, the more you facilitate competition, innovation, technology advancements, because the entrepreneurial spirit will win the race against the regulated spirit every day. Every day.

“And so if you really are looking for the kind of breakthroughs and improvements and efficiencies, the solution is going to be a whole host of things. There is not one thing the world’s going to go out and do and solve the greenhouse gas problem. It’s going to be the accumulation of literally thousands and thousands of different things that people have chosen to do. And what you want to do is unlock all of the creativity and the innovation that you can so as you’re putting in place this regulatory structure be very careful that you have not suppressed the creativity and the innovation and the entrepreneurialism that is probably going to provide many more solutions than a heavily regulated environment will provide. That’s really my point.”

On Exxon’s future:

Today the world uses 85m barrels a day of oil. The US burns 350m gallons of gasoline a day, every day. So even if you have 30bn gallons a year of bio-fuels, that’s, what, 100m gallons a day of bio-fuels and we just talked about what it’s going to take to get there. Well, if there’s no demand growth, none, then there’s still 250m gallons of gasoline or diesel that are needed. So I don’t think we’re ever going to not have a need for the product. Now, the implications from my perspective are it just says that those who are in that business are going to have to be the most cost efficient because those who are less cost efficient will probably be squeezed out. So there’ll be some rationalisation, the highest cost suppliers are going to be the first that will not be able to sell because they won’t be able to compete. So all of our business is built around being the most energy efficient, cost efficient, in our business. And that’s been our track record.

So that’s my business strategic response to it, but in terms of, gee this is going to put me out of business because there’s no demand for my product, or it’s going to drive the price right down to the bottom, you have to remember we’ve built our business to operate at the bottom of the cycle, so things go back to $20 oil or they go back to refining margins of three or four or five dollars, because of the way we’ve built our business from an efficiency standpoint, we can still make money; we just won’t make as much money. That’s in the United States. There’s a whole big, wide world out there and it probably doesn’t have the same notion around bio-fuels that the US does. They may have other issues.

So for the next, foreseeable, future, pick a time horizon, 30 years? That’s a pretty long way to look out. I think our business is going to perform quite well. When you look way out, trying to look way out into the future, I’ve said many times, and I said it yesterday, some day there will be something that replaces conventional fossil fuels as the primary energy source. But then deploying it out to the consumer and to the end user will take some time because the entire energy infrastructure of the world has been built on fossil fuels. It’s kind of the hydrogen issue I was talking about. So even when that breakthrough comes it’s going to take some time and it’s going to take considerable investment to put the distribution system in place, whatever that is.”

“I told a reporter one time, I said, ‘well, all I can tell you is in all likelihood I’ll get driven to my funeral in a hearse that’s using gasoline or diesel’.“

Published: June 27 2007 16:43 | Last updated: June 27 2007 16:43

Copyright The Financial Times Limited 2007

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