In an era of global
turmoil, volatile oil prices, and muscle-flexing state-owned petroleum
companies, ExxonMobil still rules the roost. In an exclusive conversation with
Foreign Policy, New America Foundation President Steve Coll, author of the new book Private Empire, explains how ExxonMobil has managed to
exert such market dominance -- building operations in often sketchy "frontier
regions" -- while still keeping its hands (relatively) clean.
Foreign Policy: How did this book come about?
Steve Coll: When
I was looking at the big oil supermajors and thinking about how to write about
the subject and finding my way towards ExxonMobil, one of the things that
attracted me to them as a subject is that their global footprint is very evenly
distributed compared to some of the others. They're not so lumpy in the Caspian
or the former Soviet Union or elsewhere. They operate in more than 160
countries. In the upstream -- and what's interesting about the dilemma that all
of the supermajors headquartered in the West face, but especially an American
company like ExxonMobil with its enormous size -- is the huge reserve
replacement challenges each year. They pump out 4.5 million barrels of oil 365
days a year, so that's a lot to find and replace on an annual basis. So if
you're ExxonMobil, you look out on the world and you ask, "Where can we own
oil and gas?" in an era of resource nationalism. It's not a question they asked
in the 1970s when they were part of Aramco in Saudi Arabia; they owned more
than they knew what to do with in the Middle East in Iran, Iraq, and Saudi
Arabia in the early postwar period. Now they look out into the world and say,
"Where can we own oil and gas?"
Really, there are two big answers. One is in the free market
where property rights are sacrosanct, but the problem is until recently there hasn't
been that much growth in oil and gas discovery in the West; the other answer,
which is what explains the global map where they operate, is by in large weak
states -- which are so weak that they can't build up a state-owned oil company
to take prerogative and be the vehicle for resource nationalism. So ExxonMobil ends
up disproportionately in West Africa, for example, in Equatorial
Guinea, Nigeria, Chad, Angola, and other states that might wish to control
their oil for nationalistic reasons but have fallen on hard times. ExxonMobil
is knocking at the door, just like Iraq, where they just went into Kurdistan.
And they hold their own -- or they try to hold their own -- against
state-owned companies competing globally through technological prowess and by project
management. So if you're the emir of Oilstan and maybe you have a state-owned
company but it's run by your cousin and it doesn't work very well, it's got a
lot of your patronage machine employed in it, maybe some good engineers but not
world class, and you want to realize the cash value of your oil and gas
holdings quickly, ExxonMobil will turn up with a PowerPoint presentation and
tell you pretty reliably that a) they have the technology to extract the most
value out of the ground for you of anybody in the world, especially if your oil
is in deep water or under ice or in some difficult place, and b) whether your
oil is in a difficult geology or not, they'll also say pretty reliably, "We're
very good at coming in on time and on budget."
Their competitive edge is project management on a huge industrial
scale, and they like to operate these projects independently -- not share them
with others. Their case is: "Don't make us partner with inefficient state-owned
companies. Let us run the thing, and then we'll make sure everyone gets paid
and gets paid on time." That's their world in a nutshell.
FP: But what happens when they come to a place
like Aceh, Indonesia, which had enormous political strife at the time?
SC: This company was born of a merger closed in late 1999 between Exxon
and Mobil, two "Baby Standards" -- two independent decedents of the breakup of Standard
Oil in 1911 that was ordered by the United States Supreme Court. Essentially it
was a merger of equals when there were a lot of combinations of big oil
companies in the late 1990s when prices fell and the whole industry was
confronted with structural problems. They combined to better manage their
positions and also to compete with the state-owned companies that were rising
in Russia and Brazil and elsewhere, but the merger was really Exxon buying Mobil.
When Exxon bought Mobil,
however, it bought a company whose overseas holdings were in far more
adventurous places than Exxon's were. So they basically bought a bunch of wars
and they bought a lot of Africa and they ended up with a map that had
geopolitical risk in it to a much greater degree than Exxon alone had been
forced to confront.
Probably the most
important property they bought in 2000 was this giant gas field in Aceh, Indonesia, and
some liquefied natural-gas facilities next door to the field. At that time,
this Aceh field accounted for about a quarter of Mobil's
overseas profits; it was an enormous cash cow due to some contracts they had
set up with the Japanese and South Koreans. So Exxon buys this thing, and
somehow their investment bankers didn't do full due diligence to report to the
board of directors, "Oh yes, you're also buying a war."
movement really ramped up and started attacking ExxonMobil's gas fields directly,
and the Indonesian military, which did not want to see Aceh go after losing
East Timor, was determined that that was it -- they were going to draw the line
at Aceh. At that point, they were essentially under contract with ExxonMobil to
defend these gas fields and they undertook a pretty brutal campaign to put down
the Acehnese rebellion. This included setting
up detention centers on the perimeter of Exxon's gas fields where they detained
Acehnese men and tortured them, and also conducted sweep operations in local
villages that could also be violent and menacing.
This presented Exxon with a series of
dilemmas that they frankly hadn't had to reckon with in the previous 10 years
when they were operating on their own in places like Australia and or in Europe.
They had entered Angola but it had settled down; they had a field in Chad but
they hadn't developed it yet. They had a few of these dilemmas in places like
Yemen, but nothing of this scale. And the records from the lawsuits that were
eventually filed claiming human rights violations that ExxonMobil either had
known about or should have known show that the company was pretty much over its
head, at least initially and really didn't know quite what to do about this.
So how does a massive company like ExxonMobil set itself up to absorb a
significantly higher degree of risk? These are the same sorts of problems that
got Chevron in trouble in South America, Shell in Nigeria. How do they reconfigure
corporate culture to absorb an entirely different type of business?
They have basically a political risk department that is central to their
corporate planning and to their annual strategy discussions at headquarters. It's
run by a woman named Rosemarie Forsythe who used to be on the National Security
Council, and she basically goes into the management committee -- which is the
top group of executives that's looking out over the world from quarter to
quarter and year to year -- and she presents political risk analysis, both
regional and global. I spoke to her a little bit about what her PowerPoint show
sounds like, and basically she describes a world in which more and more of the
oil that ExxonMobil is going to be interested in or already owns is in unstable
places; that's what the basic map looks like. They color code it and they
divide the world into different groups and so forth, but fundamentally the oil
they can access is in unstable places. Now an academic might also point out
that the oil is in unstable places because oil can be destabilizing in weak
countries, but I'm not sure ExxonMobil does that analysis.
FP: That might be a chicken and egg problem. What are some of these other places?
About a quarter of ExxonMobil's liquids production, as they say in the business -- that is oil but also gas liquids, which is the most valuable of the properties
that they own -- about 25 percent of that production is in West Africa in basically
in four places, Nigeria, where they have large-scale production offshore, and a
little bit of an onshore footprint. Compared to Chevron and Shell they're very
fortunate to be out in deep water, so when the guerrillas try and attack them
they have to go on speed boats and they're not as accessible -- it still
happens, though. And then Equatorial Guinea, this tiny but fantastical dictatorship -- a small
country, one of the few Spanish colonies in Africa, and they are the major
producer offshore there. Chad, where they entered in this radical World Bank
nation-building experiment -- building a pipeline across Cameroon to try to
create a new model of oil revenue management that would lead to Chad's social
development. They started there in 2000; 12 years later, they're the only big operating
producer in the country and the World Bank experiment has ended. Chad is still
at the bottom of the Human Development Index tables but Exxon is still
producing a couple hundred thousand barrels a day. And in Angola they have a
very large presence, mostly offshore.
Elsewhere, Venezuela was a very important property to them until they
were expropriated in 2007. They and Conoco were the two companies that
responded to President Hugo Chavez's confrontational reform plans by leaving. Everyone else
compromised. If you count the geological survey numbers on a barrel basis, it's
an enormous amount of oil, but it's hard to mine and expensive and not as
profitable per barrel as, say, Nigerian crude, which is some of the most
profitable in the world. But anyway they got thrown out of Venezuela. They're
trying to get into Brazil but it's not clear what they're going to end up with.
Russia is another important story for them. They were in Russia early
in the 1990s in the Yeltsin era, way out in the Far East on Sakhalin Island. This
is an example of how their technological prowess got them into a place that
might otherwise have been difficult to enter because they alone could credibly propose
to drill in these Arctic conditions of the Russian Far East, and they have
created this pioneering horizontal drilling project under frozen seas. And they
used that as leverage to try and get into some of the bigger Russian oil plays.
They negotiated to buy the majority of the stake in Yukos before Mikhail Khodorkovsky
was arrested in 2003. That failed, but now they've come back as a
big partner of Rosneft where they're now up in the Arctic in Russia, which is a
big part of what they hope to do in the future.
Another footprint that's really important to their current
financial profile is in Qatar, where they basically have a huge liquefied
natural gas and chemicals manufacturing operation. They basically are the most
important partner of the Qatari government, which is coming into its own
because of these gas assets. They're also in the UAE, where they've got important
oil fields and they've come back into Iraq over the last two years.
really interesting, because in 2009 when Iraq finally started auctioning off
some of its fields in order to get its production up as the war settled down,
Iraq went in with the other supermajors and did business with the Baghdad
government and ExxonMobil got a piece of the field in the south. It was
advertised by everyone at the time as just a sort of beginning of what they
hoped would be a long-term presence in the Iraqi upstream. And then this year, they
shocked everyone by defying the preferences of the Obama administration and the
Bush administration before them by doing business directly with the Kurdish Regional
Government. They now have signed an agreement with the Kurds which Baghdad
regards as illegal. And these fields in question are not only disputed because
the Kurdish Regional Government has auctioned them off, but they're also in
areas that are the among the most disputed between the Arabs and Kurds.
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."
FP: To what
extent does that sort of behavior reflect a long play? ExxonMobil intends to be
in these countries putting in serious assets in place, exploiting wells over
the course of decades. Is this an intentional strategic position whereby they're
actually intending to improve governance -- thereby hedging that there's a
lesser chance that they'll get screwed in a couple of years?
SC: I think there's
some of that too. I also think that the way they win these deals in a place
like Chad or Papua New Guinea or Angola is, in effect, they go to the host
country and say: "Look, we recognize that you can deal with the Chinese, and
you'll get soft loans and guns and things that you think are more valuable than
what we can offer you, but what you'll also get is really lousy project
management. You'll get less oil pumped, you'll get less royalties, you'll get
less taxes, so you'll end up net poorer. Why not come work with us under our
rule of law, under a really straightforward contract? And what our record shows
is that you'll end up with more cash faster -- and then you can use that cash
to buy whatever guns you want? But you'll have the money to carry out what ever
plans you have; and we're reliable, we'll come in on time."
It's sort of like if you're buying a new appliance, and
you're going to the store and somebody offers you rebates and a free toaster
and three other things to incentivize you to buy one brand. Well, you look at
that brand and you think oh, that thing's going to break down in a few years. Whereas
the other one, it's more expensive, but it's top of the line. And that's kind
of ExxonMobil's argument.
FP: How long until
the Chinese oil majors and the state-owned firms catch up in terms of
obviously already on their way now, but my impression is with all these
state-owned Chinese firms, the problem is not their technical proficiency or
their human capacity -- they've got the brains, they've got the Ph.D's, they've
got the baseline of technical training, education, and no doubt they've stolen a
lot of intellectual property over the past few years to speed things along. The
problem is politics. Do they really have a system of corporate governance and
incentives and a relationship with a party and the state that would create
conditions for them to operate efficiently on a global basis? Like the Chinese
banks, their role in the world is so distorted by the party, the patronage, and
the imperatives of the Chinese state that they're not really in a position yet
to take advantage of their own talent, and of the partially indigenous and
partially stolen IT. I think, in the long run, the question is what kind of
state is China going to become and what will that mean for its big companies.
FP: So Houston is
still safe for the time being?
SC: I think for
10 or 20 years. They're still winning some of these big projects, even though
the competition looks hard. You know you might think that, in the BRIC world,
maybe the Brazilians, maybe Petrobras will rise and escape from this politicized
dilemma. But all of these state-owned firms seem to be partially if not
substantially constrained by the disease of state ownership. BP used to suffer
from it, Total still suffers from it, ENI still suffers from it.
The funny thing about ExxonMobil is that they are a state-owned oil company. There are our
Total, our BP -- but they live in defiance of the government. They're truly an independent
entity that sees itself as sovereign on its own. And the advantage has been
that they operate with a kind of ruthlessness about their own efficiency that's
very difficult for politicized companies to achieve. And the disadvantage is
that they operate with a ruthlessness which has consequences for the way in
which they live in the world.
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