Rex W.Tillerson, the chief executive officer of Exxon Mobil, remains an unapologetic champion of fossil fuels.

By JAD MOUAWAD


Wind and Solar Are Nice
But Exxon Wants to Drill


SIX YEARS OF relentlessly rising prices have showered the oil industry with record profits even as quickly changing energy costs have left many Americans alternately furious and baffled.

Now that the roller coaster ride appears to be screeching to a halt, one corporate giant remains confident it can weather the slowdown and uncertainty better than its rivals.

“It’s not that we like lower prices, but our competitive advantage is more obvious to people in a low-price environment,’’says Rex W.Tillerson, the chairman and chief executive of Exxon Mobil, the world’s largest, mightiest oil company.“But in a high-price environment, our competitive advantage has been quite evident as well.’’

However undaunted Exxon feels, it’s still facing more complicated scenarios than mere price shifts. It’s straining to adjust to a host of potentially seismic issues that raise pointed questions about its long-term strategy. Oil reserves are harder to find, resource- rich governments have become more assertive, and global warming concerns have spurred forceful calls to action on environmental matters.

Moreover, with the election of Barack Obama, a new chapter is about to open for the nation’s energy policy. Mr.Obama says he wants to move away from oil dependence, and his policies are likely to emphasize conservation, alternative energy sources and new limits on the emissions of greenhouse gases responsible for climate change.

The question for Exxon, which Mr.Obama repeatedly singled out as an exemplar of corporate greed during the presidential campaign, is whether the model that has served the company so well for so long will keep it competitive - or whether it will still be producing hydrocarbons long after the world has moved away from dirty fuels.

Last year, Exxon, which is based in Irving, Texas, celebrated its 125th anniversary, marking a straight line that connects it to John D.Rockefeller’s original Standard Oil Trust before the government broke up the enterprise in 1911. While other oil companies try to paint themselves greener, Exxon’s executives believe their venerable model has been battle-tested. The company’s mantra is unwavering: brutal honesty about the need for oil and gas to power economies for decades to come.

“Over the years, there have been many predictions that our industry was in its twilight years, only to be proven wrong,’’says Mr.Tillerson.“As Mark Twain said, the news of our demise has been greatly exaggerated.’’

From a purely financial standpoint, there’s no doubt that Exxon’s business strategy has paid off. Despite the broader economic turmoil, Exxon is worth around $375 billion - more than General Electric, Bank of America and Google combined - making it the world’s largest corporation. Its balance sheet is pristine and its credit rating is better than that of most governments. If Exxon’s revenue were stacked against the world’s economy, it would rank between Austria and Greece as the 26thlargest economy. As oil prices peaked this summer, the company once again set a record as the most profitable American corporation, earning $14.8 billion in the third quarter. Since 2004 alone, the company has rung up profits of about $180 billion.

“Being Exxon is never having to say you’re sorry,’’ says Kert Davies, the research director at Greenpeace, the environmental advocacy group that has battled with Exxon for years.

What might be called the Exxon Way can be summed up in three ideals: discipline, patience and long-term vision. It is a formula the company drills into its managers from the moment they join Exxon, and which it keeps repeating through their careers. It explains the company’s resilience and its view that it has survived, and thrived, through countless commodity cycles.

“We are all homegrown,” Mr.Tillerson says.“That happens through a very deliberate and very closely managed process, and it starts the day the person walks through the door with us. And we are the product of that system. If there is a DNA it is something you grow into after many years of working with your colleagues. It is clearly the defining strength of the company.”

But the company’s DNA goes well beyond the surface. Rivals acknowledge its expertise around an oil field, even as they bristle at what they call arrogance.

“People know the rules when they work with Exxon,” said a top oil executive who asked not to be identified in order not to jeopardize his company’s relationship with Exxon.“Exxon can pick its battles. It’s a pretty good strategy to have if people know that you will fight to the bitter end.”

Examples of such grit abound. After a dispute with the Venezuelan government, during which Exxon persuaded a British court to briefly freeze $12 billion in government assets to fight what it considered an expropriation, the country’s oil minister accused the company of“legal terrorism.”

High prices have meant stratospheric profits, of course, but they have also led to more restrictions on access to oil fields around the world, making it harder for companies to increase their production and replace reserves.

In the 1960s, the so-called Seven Sisters oil companies, including Exxon and Mobil, controlled most of the world’s oil reserves. Today, state-owned companies, like Saudi Aramco, hold the vast majority of these reserves, while other resource holders like Russia and Venezuela have become increasingly assertive about limiting access to their reserves.

“The problem is very real,’’said Henry Lee, a lecturer in energy policy at Harvard University.“The oil majors are looking at a very different world than 20 years ago. That has big implications for the future of these companies. They all know it and they are all trying to figure out where they are going to be in 10 and 20 years.’’

At an analyst meeting on Wall Street in March, Mr.Tillerson acknowledged the difficulty he faces: “The challenge we have today is continuing to have access to resources.’’

Since 1999, Exxon has spent about $125 billion foraging for new energy supplies around the globe. Exxon plans to start up more than 60 fields or major projects by 2011, including dozens of offshore fields in West Africa, export terminals for liquefied natural gas in the Middle East, and scores of gas and oil developments in Australia, Indonesia, the United States and the Caspian Sea.

Yet Exxon’s shares are on track for their worst performance since the early 1980s, a result of the market sell-off and the drop in oil prices recently. But some analysts also said the poor stock performance reflected the questions hanging over the company’s long-term strategy.

“Exxon is a cash machine, and they could be using that cash to invest in clean technologies that would expand their base,’’ said Andy Stevenson, an energy analyst at the Natural Resources Defense Council.“Right now, they have no growth story. They are trapped in oil and gas.’’

Ultimately, the biggest test for Exxon’s long-term business model is the fact that rising energy use - whether in the United States or in China - will eventually have to be reconciled with reducing carbon emissions and finding low-carbon energy sources. But few topics are as touchy as Exxon’s stance on climate change.

Despite growing pressures on oil companies to invest in alternative energy, Exxon’s long-term view remains unapologetically tied to fossil fuels. Exxon’s belief is that as populations expand and economies grow in developing countries, they will aspire to the comforts and amenities taken for granted in industrialized nations, and this will mean more cars on the roads - and more oil to power them.

Meanwhile, renewable fuels, like solar, wind and biofuels, will grow at a brisk pace but they will account for just 2 percent of the world’s energy supplies by 2030, according to Exxon, while oil, gas and coal will represent 80 percent of global energy needs.

“For the foreseeable future - and in my horizon that is to the middle of the century - the world will continue to rely dominantly on hydrocarbons to fuel its economy,” Mr.Tillerson says. Whatever shape Exxon’s business model takes, analysts say it is unlikely that the company will get there quietly.

“They are tough, and they have the reputation of being an unyielding company,” says Michelle Michot Foss, who heads the Center for Energy Economics at the University of Texas at Austin.“But it’s a tough business. They are criticized for being too conservative. But they are very patient, and probably in the long term that pays off.”