In a rare, candid interview with a Wall Street oil analyst, Lee Raymond, CEO of ExxonMobil from 1999 to 2005, was asked what was the one issue that kept him awake at night. His reply was ‘reserve replacement’. Steve Coll’s detailed roll through the corporation’s last 13 years is the story of the quest, common to all super majors, to satisfy shareholders by replacing stocks annually. For ExxonMobil, that is a billion barrels a year. As Coll explains, it is like asking the airline industry to fly higher and faster year-on-year, a drive that has led Exxon into danger spots the world over – Aceh in Sumatra, Nigeria, Chad, Equatorial Guinea, the Arctic and Iraq.
Corporate Culture with a ‘Military Flavour’
It has also led ExxonMobil, the world’s most profitable corporation, to develop a unique corporate culture. Headquartered in Dallas, not Manhattan, Lee ‘Iron Ass’ Raymond promoted a pro-Christian, pro-marriage, insular and arrogant corporate ethos. From defying the Securities Exchange Commission on reserve reporting to appealing every claim for punitive damages made against the company, to choosing when and where to call on – or dispense with – the ‘advocacy’ services of the US government, Exxon has stood alone, doing what it does best, contributing an extraordinary $493 billion net cash flow to the US between 1999 and 2011. Whatever the revelation – tortured bodies within its compound in Aceh, a drunk captain in charge of the Exxon Valdez, an extraordinary set of payments to the Equatorial Guinean ruling family – Exxon has marched on, apparently impervious.
In 2010 the corporation faced its biggest threat: it was set to replace only an astonishingly low 45% of its oil and gas reserves, a rate that, as Coll points out, would lead to liquidation if it continued. As with all the super-majors, Exxon had missed the one boom that came with water-tight contracts and stable government – the US ‘shale revolution’. Fixated on the industry’s own measure of efficiency – Return on Capital Employed (ROCE) – a measure first adopted by Raymond and foisted on Exxon’s competitors, the boards of the super-majors had kept their eyes firmly focused on the mega-reserves of the Arctic, Saudi Arabia, Kurdistan and Brazil, while neglecting home territory.
In 2010, CEO Rex Tillerson, who followed Raymond as CEO, finally moved to buy the successful shale company XTO for a staggering $41 billion, bumping its reserve replacement back up to a healthy 209%. It was an acquisition made at the top of the market, which has been followed by a slump in US oil and gas prices, leading Tillerson to recently comment, “We are all losing our shirts over shale gas.” Should Steve Coll feel like writing a sequel in ten years’ time, it will be sure to make interesting reading.
The Climate Change Challenge
With Tillerson as CEO, Exxon has moved – incrementally, and without admitting any previous wrong-doing – to improve its corporate image, most notably on climate change. Exxon has slid subtly from a position of absolute denial to one of ‘insurance’. From having financed scientists and lawyers whose purpose was to obstruct opponents as well as pressure groups, academics and front organisations – including one set up specifically to demand investigations into Greenpeace’s tax affairs – Exxon has surprised the US public and government by recently advocating a straightforward carbon tax. As Coll speculates, this may simply be a reflection of Exxon’s confidence that such a tax will never happen in the US and is therefore a sure-fire bet. But, as the author explains, it also reflects the industry’s awareness of the travails of the tobacco industry, and the genuine fear that one day Big Oil may be similarly accused of deliberately withholding or manipulating evidence.
For anybody who wants to understand how the industry thinks and functions, Coll’s book is a highly readable though confusingly structured encyclopaedia. It is full of insights and nitty-gritty detail, told with much drama but enough broad-brush strokes to give a clear and convincing narrative of an iconic corporation in challenging times.