Supplement: Exxon's Tillerson Upbeat on Qatar, XTO

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More than a decade after making its first investments in the country’s LNG sector, Exxon Mobil is now enjoying the fruits of its carefully nurtured relationship with Qatar and with state Qatar Petroleum (QP), while also considering how another deal, its $36 billion acquisition of unconventional gas specialist XTO, might change the supermajor over the decade to come. Chief Executive Rex Tillerson discussed how that relationship with Qatar works, and how the XTO deal might prove equally transformative for Exxon, in an interview with PIW last week.

Q. Political change has been sweeping the Middle East and North Africa, in areas where Exxon Mobil does a lot of business. How does the situation affect the outlook in both the short and long terms?

A. We are still one of the largest investors in Saudi Arabia, you know about Qatar, a significant investor in Abu Dhabi, those are the big areas in the Arabian Peninsula, and of course we are in Iraq. I know people have a hard time understanding our business, but this is not the first time we’ve dealt with political turmoil. This is not the first time we’ve dealt with civil unrest in places we’re conducting operations or have a business presence. It’s all again part of a risk management landscape. First and most important to us where we have a presence already is to secure our people, to protect our people. That’s the first thing we think about. How do we make sure they are OK. If we need to get them out, we’ll get them out. Then we will worry about how to protect our assets, our future holdings, our business interests there. But the way we manage it for Exxon Mobil, we manage it with our global diversity. They are all very important places to us. The way we manage it is having the relationship in the country with the leadership, so that we have some sense of what direction they are trying to go in their country, and how do we fit into it, or not fit into it. So as time goes by, we are able to adjust appropriately to protect our people and our investments. Every country is different. It is by and large a reflection of the leadership of those countries.

Q. Including the US?

A. Including the US, and I don’t mean this lightly, and I’m not trying to be glib, either. Political risk in the US is very high. Not just for our industry, but for business in general. Managing our risk here is a significant undertaking, just as it is in many other parts of the world. This is not a particularly easy place to do business in.

Q. In the case of the Mideast country where you have made the biggest investments, Qatar -- it's a very small country, with a population that is about half indigenous people and half expatriates. Doesn’t that make it easier than, say, for a country like Egypt?

A. I think the fundamental reasons they [Qatar] have been successful are applicable anywhere. I think in some sense having a population that is half expatriates brings a whole other set of issues for a country that have to be managed carefully [compared to] a country with a larger population where an expatriate population is not such a large share. It goes back to having a leadership that are committed to laws, that are committed to rules, that are committed to honoring agreements, that are committed to their people in terms of education, that are committed to their economy, that are committed to the health and well-being of their people. That can be done in any country. It’s a question of whether you have the leadership committed to it or not. So I think where countries have struggled, I think it’s where the leadership has not been committed to their own people.

Q. Should Exxon Mobil shareholders expect the XTO deal to be as transformative as the Mobil merger?

A. In terms of its importance to the shareholders and the value that will be delivered, there is no question that it will deliver enormous value. You can look at the Mobil merger, and everyone will have their own definition of how that was transformative. From my perspective, it was transformative not just because we put a couple of good sets of assets together and two good organizations together, but because that merger caused the reorganization of Exxon Mobil entirely into the global functional structure that now has been in existence for more than 10 years. The transformative piece of that value was because of what it did to our organizational structure.

The QP relationship was transformative because you had such a uniquely enormous resource, and it was transformative in that you had what stands today as a hugely important example to other resource owners around the globe of how the IOC-NOC relationship can be successfully carried forward because of all those elements I already address. Anyone who wants to be successful as a major resource owner, as a nation or an NOC, here is the recipe of a major resource owner or NOC. Both sides have to be committed to it.

How our XTO relationship and step in a significant way into the shale and unconventional space will look 10 years from now is always hard to say. What I know we have done is recognize how important the unconventional resources were going to become. And for us it was -- do we build our position over some period of time, which we could do, or if the right opportunity came along, do we get critical mass again? We chose to make it transformative -- we chose to get critical mass. Again it is to take advantage of the capabilities we have and our global presence and to take advantage of what XTO had in terms of both the resource holdings and the critical mass of the organization and capacity. To build it organically and to build the type of organizational capability that we require to deliver and that we think is necessary would have taken us some period of time. So we think the reason for the XTO transaction was to get critical mass immediately on the resource entry and organizational capacity. We knew it wouldn’t be a single step, but it would give us the opportunity to build a significant unconventional position, not just in North America, but globally. We are not even a year into it, but we have already added a number of very high-quality resource holdings to that organization because we had the capacity to take it immediately. Now we can go out and very opportunistically pick up things of very good value. If there is a transformative element to that, that’s what it is today. What it will look like when we reflect on it 10 years later remains to be seen, but I’m very, very happy with the position we find ourselves in in the unconventionals.

Q. How does Exxon Mobil ensure it doesn’t repeat BP’s Macondo disaster on its own projects?

A. On the systems we have had in place for some time, they are not static, they are dynamic systems. They are undergoing upgrades and improvements all the time. I’ve never said something like [Macondo] could never happen to anybody because human error is always the most difficult to manage. In risk management, it’s the human behavior. That’s what our system does. It surrounds the human element with checks, with redundancies, with processes that are constantly coming in and looking at how things are being done. We feel fairly confident that we can manage all of the risks in our operations.

Q. How do you avoid diluting standards in nonoperated joint ventures?

A. We have a system that does the same thing in our nonoperated [ventures]. We have a system for managing in our nonoperated. Obviously, we don’t have much influence or certainly not much we can say in the day-to-day decision making, but that system conveys to other operators our views or what our expectations are around how they will do things. It does give them some metrics that we hope to hold them accountable, but often our joint-venture agreements don’t give us complete ability to do that. But it is a system where we are going in and proactively talking to them about the risk and how they are managing that. And if we get a view back that they are not managing things to an appropriate standard, it gets communicated to the operator at a higher and higher level until we are satisfied that they are taking some steps to address it. So that is how we have to manage it in an operation where we are not the operator. And we use all the same kinds of standards and tools and best practices that we enjoy in our own operations, and we freely share those with others. In certain parts of the operation, sometimes they will ask us to review their procedures, we will give them our comment on how they should be improved. At the end of the day they have to create the understanding within their organization on how they want risk to be managed, and not everyone does that the same. I know how we do it. And I have a pretty good sense of how others do it, because they operate on our behalf, so I have a window into how others do it. And again, where we feel there are issues that need to be addressed and where we don’t see attention, we elevate it.

Q. Are you more conscious of operating procedures now?

A. No more, no less.

Q. So you won’t say a serious incident wouldn’t happen to Exxon Mobil, that it would be less likely because of the systems you have in place?

A. I don’t lose any sleep at night worrying about it.

Q. After the shareholder meeting last year, you said the industry’s biggest challenge would be regaining its reputation for operating safely and in an environmentally responsible manner. Has it done so yet?

A. The industry has done just about everything it could do. First, it has done everything it has been asked to do by the regulators. It has done things proactively and voluntarily. As an industry we have done everything that was appropriate to do. And we have gone beyond what has been asked of us. I’m not sure at this point the industry has gotten the recognition for it. The industry did not fail to respond to the incident [...] to take the lessons away from it. We are still going to continue to take all the lessons we can from this tragedy. The only issue I’ve had is the broad-brushed characterization that the industry was operating on the edge of its capabilities. That is absolutely not the case. And I reject that conclusion. That’s just nonsense. For people to conclude that without some substantive investigation is just irresponsible. That is why I have spoken out so strongly about it.

Q. Exploration hasn’t been a strong point lately. It appears that Exxon Mobil has been more of an "exploitation and development" company than an exploration company.

A. We have not been as successful in some of the new plays as we had hoped, but we are not done yet, either. We still have a number of new plays to explore. When we step back and look at what other players have done, I don’t see the gap as great as what others do. There haven’t been any real significant exploration discoveries made by the industry in quite a while. The last ones that were made we were part of. There hasn’t been another Angola-type play found, and we found that one.

Q. You don’t consider Brazil a major play?

A. I think it is early days yet. The resources there are complex. I don’t think it is what Petrobras thought it was in the beginning, and they have acknowledged that. It is going to be very costly to develop. We’ve had discoveries not in the Santos, but in Brazil elsewhere that we didn’t feel attractive to develop. That’s part of asset management. We sold them to others who thought they were more valuable than we do.

Q. What about Africa? Are Angola, Equatorial Guinea and Nigeria enough?

A. We continue to pick up acreage in Africa, offshore Tanzania and elsewhere. We have been invited into three deepwater blocks offshore Angola. We are evaluating those, the terms on them. So we are not done in Africa by any stretch.

Q. But you passed up on the Tullow properties in Uganda and the Kosmos deal in Ghana?

A. We withdrew from Kosmos. We haven’t lost anything we wanted.

Q. How have you managed to avoid the stumbles that have caused other Western companies to run afoul of the Russian authorities?

A. It is very simple. In all of our commitments, we have stuck to the letter of our contracts, and we have said to the Russians, we expect you to do the same. I think Russia is one of those places where you don’t ever want to put yourself outside the lines of your agreement. If you ever put yourself outside the lines of your agreement, you put yourself at risk, and understandably. We have met all of our commitments, we have delivered on our commitments, we have stuck to the contracts. Every time there has been a disagreement, we have told them, we expect you to stick to your side of the contract, and they have. I want to give them credit, they have. And it is no more complicated than that. We have never disappointed them in terms of what we have delivered. And we continue to look for other things we can do there, as we negotiate final terms on the Black Sea exploration, as we would like to do more -- and we are hopeful. As everyone acknowledges, Russia continues and tries to decide for themselves what is the right type of contract structure and fiscal terms to meet their objectives, which is to have more involvement, but to meet the kind of control they want to have. We think they can accomplish that with a lot of models that are out there. We are patient.

Supplement: Exxon's Tillerson Upbeat on Qatar, XTO

MON, APR 11, 2011