Six years of relentlessly rising prices have showered the oil industry with record profits even as whipsawing 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,” said Rex 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.”
PHOTO: NY TIMES NEWS SERVICE
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 country’s energy policy. 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 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 Rockefeller’s original Standard Oil Trust before the government broke up the enterprise. 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 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 about US$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 GDPs, it would rank between Austria and Greece as the 26th-largest economy. As oil prices peaked this summer, the company once again set a record as the most profitable American corporation, earning US$14.8 billion in the third quarter. Since 2004 alone, the company has rung up profits of about US$180 billion.
Throughout its various incarnations — the Standard Oil Trust, Standard Oil of New Jersey, Exxon Corp and now Exxon Mobil — the company has been an ambiguous fascination for many Americans. It is an enduring icon, as lasting as Coca-Cola or General Electric, but also a perennial corporate villain, one that reminds the country of its dependence on hydrocarbons.
Rivals acknowledge its expertise around an oil field, even as they bristle at what they call arrogance. Exxon’s own executives brag that their company outperforms its peers by sticking to their playbook.
“Exxon is a very professional company,” says Jeroen van der Veer, the chief executive of a leading competitor, Royal Dutch Shell.
Others say they respect the company’s clarity of vision.
“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 US$12 billion in government assets to fight what it considered an expropriation, the country’s oil minister accused the company of “legal terrorism.”
Whatever its critics might say about the company’s hard-headedness, it has paid off in Exxon’s bottom line. Last year, Exxon’s profit per barrel was US$17, exceeding BP’s US$12 a barrel, Shell’s US$14 and Chevron’s US$16, said Neil McMahon, a Bernstein Research analyst.
No one is apologetic at Exxon about what it takes to get those results, especially Tillerson.
“The business model is based on a disciplined and rigorous approach to dealing with scientific data and facts,” he says. “What we do is largely invisible to the public. They see the nozzle at the pump, and that’s about it. They don’t see the enormous level of risk that is managed very well to get that gallon of gas.”
Exxon has battled powerful forces in recent years, locking horns with governments and multinational rivals from Africa to Central Asia, from Eastern Europe to South America. But last spring, the challenge struck closer to home — at the company’s annual shareholder meeting in Dallas.
As oil prices zoomed above US$100 a barrel, a group of investors tried to force Exxon to lay out a new strategy for developing alternative fuels and addressing global warming. While the challenge was not unprecedented — raucous shareholder meetings have been a staple for years — the dissent was led by a symbolic, if slightly quixotic, constituency: descendants of Rockefeller, who founded Standard Oil in 1882.
“Exxon Mobil needs to reconnect with the forward-looking and entrepreneurial vision of my great-grandfather,” said Neva Rockefeller Goodwin, a Tufts University economist, speaking for the family. The company, she added at the time, was focused “on a narrow path that ignores the rapidly shifting energy landscape around the world.”
Exxon’s top managers easily brushed off the Rockefeller revolt, as they have so many obstacles over the years. Even so, Exxon and the other oil giants are facing a stark new landscape.
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.
“The largest oil companies are under tremendous pressure,” said Fadel Gheit, a veteran oil analyst at Oppenheimer & Co, who worked for Mobil Corp before moving to Wall Street.
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.”
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