Rex Tillerson, ExxonMobil and the separation of oil and state

Rex Tillerson’s big break came in January 1998 when he took over Exxon’s operations in Russia and the Caspian Sea region, which included the promising but challenging Sakhalin 1 oil project.

Under his leadership, the development began producing in October 2005, on schedule and only about 30 per cent over its original budget. It was quite a feat: Royal Dutch Shell’s Sakhalin 2 liquefied natural gas project in the same area was a year late and its budget doubled to $20bn.

The problems at Sakhalin 2 created an opening for the Russian government, which strong-armed Shell and its partners into selling a controlling stake in the project to Gazprom. But at Sakhalin 1, Exxon retained its position alongside its partner, the state-controlled oil group Rosneft, and the project is still going strong.

“Exxon are very systematic and meticulous, and that worked out very well for them at Sakhalin,” says Thane Gustafson of IHS Markit, the consultancy. “Their relationship with Rosneft has on the whole been very good.”

Mr Tillerson’s experience in Russia has become the central issue in the controversy over his nomination by President Donald Trump to be the US secretary of state. At the 64-year-old’s confirmation hearing at the Senate committee on foreign relations this month, he faced an attack from Senator Marco Rubio over President Vladimir Putin’s record on human rights, and was repeatedly questioned about his views on the sanctions imposed by the US on Russia following its invasion of Crimea.

The suspicions about Mr Trump’s connections to Russia, and the allegations about the support he received from Mr Putin, make Mr Tillerson’s ties particularly sensitive. John McCain, a senator from Arizona, described himself as “very concerned” about Mr Tillerson’s acceptance in 2013 of Russia’s Order of Friendship from Mr Putin.

By the weekend, however, Mr Tillerson’s path appeared to be clearing. Both Mr McCain and Senator Lindsey Graham from South Carolina, who had also expressed reservations about Mr Tillerson, said they would support his nomination in the Senate committee vote, scheduled for January 23.

‘Everything fits’

There is another way to look at Mr Tillerson’s experiences in Russia: as an indication of his character and competence. He worked at Exxon — which became ExxonMobil in 1999 — for 41 years, and led it as chief executive for 11, before stepping down at the end of last year. That record is the key to understanding his strengths and his weaknesses.

Mr Tillerson is an engineer and Exxon is an engineer’s company, fixated on efficiency and precision. “Exxon has a very strong culture,” says Robin West of the BCG Center for Energy Impact. “Asked to define Germany, Angela Merkel said it’s a country that has tight seals on windows. That’s how Exxon works: everything fits.”

A former executive at another oil company says meetings with Exxon on joint projects were always a source of amusement. The Exxon team would turn up with identical crewcuts, khakis and white short-sleeved shirts, and arrange their pencils and notepads in the same alignment on the table. 

The defining moment in cementing that culture was the 1989 grounding of the tanker Exxon Valdez, which spilled 257,000 barrels of crude into Prince William Sound on the south coast of Alaska.

The accident, by some measures the worst oil spill in the US, was devastating for Exxon’s reputation. Determined not to repeat it, the company reviewed its procedures and introduced what is called its operations integrity management system, described as a “disciplined” framework for managing risk and ensuring safety. Today everything is done by the book, or the ring binder, setting out OIMS requirements.

It is a model that has been adopted across the industry. While executives at other companies may chuckle at Exxon, they admire it, too, and its results are undeniable. Large projects completed during 2011-15 went about 17 per cent over budget on average for the industry as a whole, but Exxon’s were only about 7 per cent over, according to a company presentation last year.

Mr Tillerson is steeped in that exacting culture. After BP’s Deepwater Horizon disaster in 2010, he made no attempt to conceal his contempt for the mistakes that had allowed the accident to happen. “It was a breakdown of management oversight,” he said in 2011. “When you do things the proper way, these kinds of things do not happen.”

A tough act to follow

He studied civil engineering at the University of Texas — inspired, he has said, by the 1969 moon landing, run from Houston mission control only about 90 miles from his high school in Huntsville. After joining Exxon in 1975, he had different roles, including running production in Texas and Oklahoma, and co-ordinating international gas sales.

After his successful stint in Russia and the Caspian, he was made Exxon’s president in 2004, marking him out as the heir-apparent to Lee Raymond, the widely acclaimed chief executive. When Mr Raymond left at the end of 2005, it was inevitable that Mr Tillerson would succeed him.

The hard-edged but brilliant Mr Raymond was going to be a tough act to follow. “Whatever environmentalists thought of him, Lee Raymond was the most inspiring CEO,” says the former chief executive of another large oil company. “It was extremely difficult for Rex to make the same impact that Lee did.”

Mr Tillerson also took over as conditions were becoming challenging for all big oil companies. The US shale revolution, first in gas and later in oil, was led by small and midsized companies that were more agile than the industry’s lumbering giants. Rising concern about the threat of climate change encouraged governments to support renewable energy including biofuels, electric vehicles, and improvements in fuel efficiency.

Mr Tillerson has made clear he accepts, as he put it at his confirmation hearing, that “the risk of climate change does exist”, but that view has not made it any easier to navigate the shifting terrain of the energy business.

Some of Mr Tillerson’s decisions, however, looked like unforced errors. He agreed to buy XTO Energy, a leading shale gas producer, for $41bn including debt, in December 2009, shortly before US gas prices went into a years-long decline. Some say it is still too soon to call that deal a failure, and it brought Exxon valuable expertise in shale production. But Anish Kapadia of Tudor Pickering argues that the XTO deal “didn’t really work out”, because Exxon was too slow in transferring that know-how from gas and to more profitable oil production.

Over his 11-year tenure as chief executive, total shareholder return, including share price movements as dividends, was 112 per cent while he was in post; better than Shell’s 63 per cent return over the same period, but well behind Chevron’s 205 per cent.

The perennial question for Exxon has been how can a company of that size find growth, and last year those concerns became even sharper. Output volumes were flat, and the company projected that they would stay at about the same level until 2020. Production now is below its level in 2000, immediately after Exxon concluded its acquisition of Mobil. Concerns about growth were heightened in February, when the company revealed that, for the first time in 22 years, it had failed in 2015 to add new reserves to replace all the oil and gas it had produced. Then in November it warned that it might have to “de-book” a further 19 per cent of its reserves. Low oil and gas prices mean that some of the resources that Exxon has previously reported as proved reserves now might not be economically viable to produce.

Rumours suggested Exxon was looking at another big deal, potentially of Anadarko Petroleum or Occidental Petroleum but nothing materialised. Crude prices and oil shares started rising and the moment to snap up a bargain seemed to have passed. Just lately, some of the gloom has lifted. Exxon has never been a world-beating explorer for oil and gas, but it has scored a success offshore in Guyana: the Liza field is said to hold 1.4bn barrels of oil equivalent.

Last week, Exxon acquired an estimated 3.4bn barrels more, buying companies with drilling rights on 275,000 acres, most of them in the Permian Basin of New Mexico, from the wealthy Bass family of Texas for up to $6.6bn. The deal had been negotiated with the Bass family by Mr Tillerson for a year.

The moves prompted Paul Sankey of Wolfe Research to shift his view of Exxon’s outlook from “underperform” to “peer perform”. He wrote last week: “Our major concerns . . . are being addressed”.

Russian equation

There is, however, one large piece of the jigsaw still missing: Russia.

In 2011, the good relationship that Mr Tillerson had developed with Rosneft — and in particular with its chief executive Igor Sechin, a close ally of Mr Putin — appeared to have paid off handsomely. Rosneft had an agreement with BP to explore in the Arctic waters north of Russia, but the plan was scuppered by objections from the Russian billionaires who were BP’s partners in its TNK-BP joint venture. So Exxon stepped in, signing a series of deals for projects in the Bazhenov shale of western Siberia and the Black Sea, as well as the Arctic.

The deals looked like they could open up growth potential for decades to come. It was a bitter blow for the company when US sanctions imposed in 2014 blocked all those operations.

Exxon has always made it clear that it sees the obstruction as temporary. It has

not booked the $1bn cost of writing off its assets there permanently. If the US sanctions were lifted, it would mean a significant boost for Exxon, and Mr Trump has repeatedly indicated he is open to that idea.

Mr Tillerson repeated at his confirmation hearing that in office he would serve the interests of the American people, not ExxonMobil. He would also sever all financial ties with the company taking his remaining compensation, worth about $180m, in cash rather than shares. He has already made clear, however, that he is sceptical about sanctions. Speaking to Exxon shareholders in May 2014, Mr Tillerson said: “We do not support sanctions, generally, because we don’t find them to be effective unless they are very well implemented.” 

He said later that Exxon’s views were being heard “at the highest levels” and he made five visits to the White House in 2014-15. The company has stressed that it was providing “information on the impact of sanctions”, and expressing “our view that sanctions should treat American companies fairly,” not lobbying against them. He echoed those views at his confirmation hearing, describing sanctions as “a powerful tool”, but one that needed to be designed properly.

In a few days’ time, Mr Tillerson may be able to express those views from inside the administration. As chief executive, he may not have been able to open up a whole new growth area for Exxon. Mr Trump could help to accomplish exactly that.

Letter in response to this article:

Where will the ‘alternative facts’ lead Tillerson? / From Firdaus Ruttonshaw, London, UK