FP: But why did they do this? The Kurdish fields are not nearly as profitable as the southern fields and Baghdad has made clear that if they signed these deals they would be kicked out of these more lucrative fields. Plus there's the issue of a nonexistent pipeline to Turkey...
SC: A lot of people are asking that question. I think basically a couple of factors seem to have entered into their thinking. One is that they were disappointed by what actually unfolded in the field that they acquired in the south -- these sort of ambiguous contracts in 2009 where the terms weren't very favorable. And then they got in and started doing the work and found that the Iraqi government's actual performance and delivery on what were already pretty lousy terms (from their perspective) wasn't very good. I think they lost faith in the mainstream Iraqi oil play; that was one factor.
The other was that they got some advice and decided for themselves that, in the long run, the benefits of being an early partner in the Kurdish fields outweighed the costs of Iraqi disenchantment. And they weren't really persuaded that the Iraqis were going to be good long-term partners anyhow. As to what they think about the export routing I'm not quite sure. The Kurds obviously have their stories to tell about how they're going to build out this infrastructure over time and at a certain level of production you can finesse it as they've been doing, as Hunt Oil and others have been doing.
I report in the book this call that the CEO of ExxonMobil, Rex Tillerson, made to Hillary Clinton and her team to tell them that they were going to depart from U.S. policy and make this deal -- and as it was described to me, all he said was ‘I have to do what's best for my shareholders.'
FP: So to what extent do shareholders pressure Exxon's growth strategy? With such legendary quarterly profits, I would imagine the growth pressures are equally hefty. Are they relying on political volatility to keep oil prices high, or is there this constant sense of needing to expand and a life-or-death competition with these big state-owned enterprises that have risen up in the past 10-15 years?
SC: I think that's it. The reserve replacement challenge -- that is the need to find 365 x 4.5 million barrels of oil each year and bring it online when you're that huge -- is just enormously challenging, especially when large sections of world are closed off to you because of nationalism. Plus, where competition is available you have these big state-owned companies that are not only numerous and well-funded but are also run by governments that are willing to deal with host governments in unconventional ways, selling them arms or making them soft loans, inviting them to China, giving them security guarantees, so it's a really hard conundrum to replace the amount of oil and gas they produce each year, which has led to two big things in the recent period.
One is a shift to gas. More and more of what ExxonMobil brings online to replace its production each year is gas. In fact, I think now more than 50 percent of their production is gas. Now, that has consequences for shareholders because, in general, gas is less profitable on a per-unit-of-energy basis than oil. And it's just a more complicated subject than oil.
And then the other thing that it's led them to is more and more risk. It leads them to geopolitical risk of the sort that is operating in weak states, but also to other kinds of technical and environmental risk because, more and more, in order to win these competitions in these relatively narrow and tough environments, they've got to go out on the frontier and develop oil and gas that basically nobody else has the means to do. And that means they're taking on kind of frontier technology projects more and more as a percentage of their total endeavor. So, in Russia, how do they win this deal with Rosneft? Well, they said the polar ice cap is melting; currently, global warming is real after all. So let's go out and try to drill in these forbidden conditions that looked impossible a generation ago or even 15 years ago.
The basic assumption of the global oil industry is that the biggest plays in the world are either in very deep water or in the Arctic -- and the Arctic oil that's known so far is mostly in Russian territory. And the Russians obviously have very large, state-owned, oligarch-run oil companies, but these are typical of state-owned oil companies around the world in that their bureaucracies are politicized and they're often inhabited by patronage machines rather than by the very best and brightest.
And so they need a partner like ExxonMobil that's a really lean, technology-driven, highly efficient partner. ExxonMobil has now struck a deal with Rosneft in which Exxon's technology is supposed to lead the partnership into the Arctic to drill. When seasonal ice melts there are opportunities to drill for a few months and then hold the wells in place in the winter, but they can also use some of these techniques to just drill under the ice in the ways that they've done around Sakhalin Island. But you know, part of the problem with these techniques is that by their nature, they've not really been done before. And as the Deepwater Horizon shows, you make one bad mistake in these environments and it's very difficult to control what happens. So it sort of feels like aviation in the 1930s, when we used to crash planes all the time until it became so routinized that plane crashes became pretty unusual. That's the kind of era that you're in the Arctic and in deep water.
FP: To what extent does ExxonMobil use intermediaries, middlemen like the Eli Calils of the world, to win them business in these challenging frontier regions? Or is their technology so sophisticated that they have market advantage just by what they can bring into play?
SC: I think it's more the latter. I mean, everybody uses these consultants; this information works and ExxonMobil is hardly naive about it. They've stacked their own political risk department in Washington and internationally with former State Department officials, diplomats, intelligence officers, and military personnel. So they've got multiple human networks that they're using for access, drawing from peoples' relationships from time in government. It's not like they're just sending in a bid in response to a request for proposal. They have their own network. But their method tends to be to build things inside, and to try to hire away. I mean, for example, in their Washington office now the head of their Africa portfolio is a guy named Walter Kansteiner who was assistant secretary of state for Africa in the Bush administration -- and belonged to a family of commodities traders all over Africa. You know, he knows everybody in the resource business. He did even before he joined government; now he has the benefit also of a tour of the Bush administration, and you know, at the highest regional levels of the State Department.
And so that's the way they build these human networks. They do it again and again, hiring people from intelligence agencies and out of the military. They've hired out of Gen. David Petraeus's shop to build their Iraq team. But they do it more in-house and they tend to do it in a kind of state-building way, rather than through consultants.
And on the ground in Africa, the one thing that I encountered talking to Africans on the other side of these transactions is that they really do have a reputation of being sticklers, kind of a pain in their neck when it comes to rule-making and the way they play on the ground. In West Africa, everybody I met said, "Oh, we really miss Mobil. They were fun. They would give us a ride on their corporate jets, they would deal, they were loose. And Exxon bought them and now everything is by the book and we can't hop a ride on their plane and we have to go through channels and so forth."