Business Week: April 9, 2001 

Exxon Unleashed :How the world's most powerful corporation plans to 
dominate the new age of oil exploration 

The important visitor from the east landed in his jet and taxied to a private 
hangar at the edge of the airport. There, he was bundled into a limousine and 
driven to a secluded location. Guards met him at the door of a fortress-like 
building and ushered him into an elevator. The doors slid open, and he made 
his way through a series of anterooms into an office where The Man waited at 
a desk beneath a painting of a ferocious tiger. The visitor flashed his most 
disarming smile, knowing full well it wouldn't do him any good. The Man, as 
always, would be courteous but implacable. ``If he gives his word, which he 
is reluctant to do, he will keep it,'' the visitor said later. ``But he is 
very difficult to deal with.'' 
The Man is not a head of state, but the distinction is academic. He is Lee R. 
Raymond, the chairman and chief executive of Exxon Mobil Corp. (XOM), the 
largest and arguably the most powerful corporation in the world to-day. 
``It's a good time to be Exxon,'' acknowledges Raymond, 62, a career Exxon 
exec who won the top job in 1993. ``But it's a great time to be Exxon 
Mobil.'' Exxon's purchase of Mobil in 1999 for what now looks to be a bargain 
$83 billion was the largest oil acquisition ever. 
Exxon's clout is not just a function of its overwhelming size and wealth, nor 
of its central position in the most strategic of industries--oil. At a time 
when so many Internet growth schemes have been exposed as sheer fantasy, 
Exxon Mobil is bruising, hard-bitten capitalism exemplified. Exxon ``is a 
machine, and it grinds its own way,'' says our VIP visitor. ``They only have 
one way of doing things: the most efficient, with the least risk. They want 
to see the studies. If the studies are yours, they want to redo them. They 
have a clear line of sight to the target.'' Exxon's aim was never truer than 
in 2000. Its $17.7 billion in net income was the most ever earned by a 
corporation, and its $232.7 billion in revenues vaulted it back to the top of 
the list of America's biggest companies. 
GEARING UP. Even so, 2001 marks the start of a challenging new era for the 
oil behemoth, which is based in Irving, Tex. For nearly two decades now, 
Exxon has reduced and retooled its way to superior returns in a financially 
undisciplined industry. Even the Mobil deal was as much an efficiency play as 
an expansion move; to date, Raymond has squeezed $4.6 billion in cost savings 
out of the combined companies. Late last year, though, the CEO slipped his 
company into internal growth mode. For the first time since the late 1970s, 
Exxon is gearing up to expand its output of oil and gas, which already 
exceeds that of most OPEC nations. ``The industry is going through another 
major expansion cycle driven by geopolitics and technology,'' Raymond 
explains. ``We have opportunities today we could not have envisioned 10 years 
ago.'' 
Exxon Mobil excels at both the grimy art of petroleum production and the 
high-tech science of oil exploration. Its vast, geographically diversified 
array of oil and gas properties is the envy of the industry. ``Just to read 
the list makes you salivate,'' says John J. O'Connor, Texaco Inc.'s (TX) 
exploration and production chief. And yet, for all Exxon Mobil's advantages, 
there exists deep skepticism in the industry that this lineal descendent of 
John D. Rockefeller's Standard Oil Co. can, in fact, grow. ``It's one thing 
for Exxon to say they are going to do something and another to do it,'' says 
Gene Van Dyke, president of Vanco Energy Co., a Houston-based independent. 
``They are going to have a hard time.'' 
Some of the skepticism is rooted in resentment of what is widely described as 
Exxon's arrogance. ``I have a lot of respect but not much affection for 
Exxon, as do a lot of people in the industry,'' says a well-connected oil 
consultant. ``Exxon finds modesty an unbecoming virtue.'' It's not for 
nothing that the plush senior management suite at Exxon's headquarters is 
known within the industry as ``the God pod.'' 
The enmity of its peers can have adverse consequences for Exxon, since even 
the largest producers band together in partnerships to spread the risk of 
exploration and development projects. But the real issue isn't Exxon's 
unpopularity with its competitors or even with the American public but 
whether this lordly, inward-directed colossus formerly known as Standard Oil 
of New Jersey can muster the creativity and finesse to adapt to today's 
rapidly evolving energy markets. ``A culture of radical cost reduction is not 
particularly friendly to a culture of innovation and new-business building,'' 
argues Jeffrey K. Skilling, CEO of Enron Corp. (ENE) 
Over the 1990s, more and more governments around the globe opened domestic 
energy markets to outside investment and increasingly let those markets 
operate freely. By the late 1990s, the scale of the resulting opportunities 
had left even the largest oil companies feeling undersized. Exxon's 
acquisition of Mobil was just the largest in a series of mega-mergers by 
which the big got even bigger over the past few years. But at the same time, 
all sorts of specialized new companies have flowered forth from the cracks 
that deregulation opened in the Big Energy monolith, including the 
opportunistic new breed of trading-minded wholesaler shoved into the 
spotlight by California's electricity debacle. 
ULTIMATE THREAT. Today's increasingly globalized energy markets are pregnant 
with profit, but they also are more complex and more volatile than ever. To 
an established giant like Exxon, though, the ultimate threat probably lies in 
the emergence of a disruptive new fuel technology. A cost-effective 
alternative to hydrocarbons is the Holy Grail in a growing number of research 
labs. In the 1970s and '80s, Exxon itself invested well over $1 billion in a 
fizzled attempt to develop alternative energy sources. Exxon Mobil continues 
to collaborate with General Motors (GM), Toyota Motor (TM), and others to 
develop fuel-cell technology, but this is probably best characterized as a 
hedge against the company's massive wager that demand for oil and gas will 
continue to increase steadily to 2010 and beyond. Says Raymond: ``I don't 
think alternative energy sources are going to be cost-competitive for a long 
time to come.'' 
Exxon does have an impressive record of technical innovation in oil and gas. 
``I am a strong believer that you have to be on technology's leading edge,'' 
says Raymond. He likens the magnitude of the technological challenge of 
extracting oil from the ocean depths to manned space travel. Raymond, who has 
a bachelor's degree and a doctorate in chemical engineering, is the latest in 
a long line of engineers to run Exxon. 
The company's growth plan is a calculated bet on a long-established but 
treacherously volatile commodity. Since mid-1998, the price of crude oil has 
soared from $10 a barrel to a high of $35 and now goes for about $26. The 
average price from 1990 to '99 was $18, a mark that Exxon's management 
believes will be comfortably exceeded over the current decade as worldwide 
consumption of oil increases at 2% a year and natural gas in excess of 3%. 
The company's goal is to grow at about the same rate, raising its daily 
capacity from 4.3 million oil-equivalent barrels (this includes natural gas) 
to 5 million by 2005. 
There was a time when the prospect of renewed empire-building by Exxon would 
have sent shivers through the populace. It is a measure of the current 
concern over the price and availability of petroleum that the company's 
expansion plans have mollified its most vociferous Congressional critic, 
Senator Charles Schumer of New York. Schumer, a liberal, was berating Exxon 
just a few months ago for not moving more aggressively to add to its reserves 
of oil and gas. 
``OUTMODED IDEA.'' If the Bush Administration were to succeed in persuading 
Congress to open the Arctic National Wildlife Reserve to drilling, Raymond 
would be there with bells on. But Raymond has nothing but scorn for the 
politically fashionable notion of promoting national energy self-sufficiency. 
``The idea that this country can ever again be energy independent is outmoded 
and probably was even in the era of Richard Nixon,'' he says. ``The point is 
that no industry in the world is more globalized than our industry.'' 
In many industries, 3% annual growth would be a letdown, but for an oil 
company of Exxon Mobil's heft, it is a momentous undertaking fraught with 
risk and uncertainty. Just maintaining existing production capacity requires 
intensive development because the output of mature fields tends to diminish 
by 7% to 8% a year. To offset this shrinkage and add 3% on top will require 
Exxon to pursue dozens of costly development projects. In 2001 alone, the 
company plans to invest about $10 billion in exploration and production. And 
a growing portion of the new flow must come from wells sunk into the ocean 
floor at depths of up to 5,000 feet in the territorial waters of Third World 
countries where poverty and political turmoil are the only constants. 
At the same time, Exxon also must step up its hunt for new reserves in many 
of these same problematic locales. To remain in business long term, an oil 
company must replace the reserves it extracts for sale with an equal volume 
of new discoveries. In Exxon's case, it must find 1.6 billion barrels a year 
just to stay even. What is more, it must add these volumes cost effectively 
to have any hope of turning a profit. This is one area where Exxon's 
technical expertise has really worked to its advantage. The company's finding 
costs in 2000 averaged just 65 cents a barrel, compared with $4 in the 1980s. 
If a company wants to boost its future production, it must first achieve a 
so-called replacement rate of well above 100%. In other words, the only 
reason that Exxon Mobil is now in a position to add to its output is that for 
the past seven years in a row it has discovered more new oil and gas than it 
has pumped. This translates to an average annual replacement rate of 120%--a 
marked improvement over the company's 89% rate for the preceding six years. 
In the end, of course, profitability depends on price as well as cost. Exxon 
may be the largest private-sector oil producer, but with 5.6% of the world's 
output of 77 million barrels a day, it has nowhere near enough clout to set 
prices. The Organization of Petroleum Exporting Countries (OPEC) not only 
accounts for about 40% of world production but can adjust its output to 
influence market price. By contrast, even the largest oil companies feel that 
they must operate flat-out all the time to maximize shareholder wealth. Harry 
J. Longwell, Exxon's senior vice-president for exploration and production, 
says that even in high-cost regions of the world, the company will be able to 
earn an attractive return on its investments in new capacity as long as oil 
prices remain ``in the mid-teens to the high teens.'' 
``OLD CULTURE.'' In the 1990s, Exxon changed the very measure of oil-patch 
macho as the exacting Raymond showed the industry that what really counts was 
not how much product you pump from the ground but how efficiently you deploy 
capital. However, in shifting its emphasis to growth, Exxon now is following 
the industry, not leading it. Most of its competitors--including fellow 
``supermajors'' Royal Dutch/Shell (RD) and BP Amoco (BP)--already have set 
out to raise their annual production by 3%, 5%, or more. If OPEC sustains its 
recent decision to trim output, the cartel will cede market share to the 
companies. If it doesn't, competition is likely to escalate to a level of 
ferocity not seen since the 1970s. 
To merely maintain market share in an era of generally expanding supply puts 
a premium on salesmanship, which is not Exxon's strong suit. The 
give-and-take of dealmaking has never come naturally to the sovereign state 
of Exxon, accustomed as it is to using its superior technology and financial 
muscle to dominate not only rival companies but whole countries. ``Read Titan 
(Ron Chernow's Rockefeller biography) again,'' says an oil-industry adviser 
who counts Exxon among his clients. ``There are sections in there on the old 
culture of Standard Oil that still describe Exxon to a T. It is very 
inward-looking and suspicious of outsiders.'' 
Many oil industry analysts applauded its union with Mobil as a combination of 
dissimilar but complementary companies that might have the effect of 
loosening Exxon up a bit. Where Exxon's historic strengths lay in finance and 
engineering, freewheeling Mobil long ranked among the industry's most 
accomplished dealmakers and marketers. Its panache was personified by its 
globe-trotting CEO, Lucio A. Noto, a native New Yorker renowned from Riyadh 
to Jakarta for his high-octane energy and charm. 
Although Raymond freely acknowledged his admiration of Noto, he stuck him 
with the honorific title of vice-chairman and did not give him much to do. 
Throughout the senior management ranks, the Mobil managers who remained 
generally were subordinated to their Exxon counterparts, with the exception 
of petroleum refining and marketing. Eugene Renna, Mobil's president and 
chief operating officer, was put in charge of these ``downstream'' 
businesses, operating out of Mobil's old corporate headquarters in Fairfax, 
Va. Some of Exxon's own downstream executives lost their jobs, and most of 
those who remained were required to move from Texas to Virginia, underscoring 
Renna's authority. At retail, the new company maintained both Exxon and Mobil 
stations, allowing Mobil's winged horse to coexist with Exxon's tiger. 
But even in Fairfax, the hope of some Mobil executives for a ``merger of 
equals'' died a quick death. Shortly after the merger closed in late 1999, a 
memo went out from headquarters ordering the installation of an electric sign 
with a radar speed gun on the long driveway leading into the Fairfax 
building. ``The people most upset were the Exxon folks who'd transferred from 
Texas and thought they were coming to a looser environment,'' says a former 
Mobil manager. So many howls of complaint went up that the sign was taken 
down after a few days. Even so, there was no question where ultimate 
authority resided. Exxon's dominance of Exxon Mobil was underscored on Jan. 
31 when Noto, 62, announced his retirement. 
Despite its size, decision-making at Exxon remains highly centralized. 
Raymond, a self-described micro-manager, has been known to personally involve 
himself in big deals of all kinds. After the catastrophic Valdez tanker oil 
spill in 1989, Raymond spent much of the next two years in Alaska directing 
efforts to negotiate a settlement of criminal charges brought by the state 
and federal governments. Raymond, who was president and chief operating 
officer at the time, so thoroughly immersed himself in the legal details of 
the case that he relegated Exxon's lawyers to the periphery. 
FIERCE LITIGANT. However, the rigorous, dry-eyed approach that makes Raymond 
so effective in many business settings does not play nearly so well in the 
public arena. Exxon paid out $1.1 billion to settle the Valdez charges with 
the government and another $2.2 billion to clean up the oil but still emerged 
looking like a villain to many when Raymond drew the line at paying the $5 
billion in punitive damages levied against it by an Alaskan court. The 
company's position is that the spill was an accident and that Exxon should 
not be punished for something beyond its control. Exxon is a fierce litigant, 
but even the company's relations with Wall Street are chilly. At Exxon's 
annual analyst briefing, Raymond is famously combative. Says Fadel Gheit, a 
veteran analyst at Fahnestock & Co.: ``Every time you see a young punk 
analyst challenge Raymond, he'll slap him down. A couple of years ago, he 
zapped me, too.'' 
In terms of Exxon's growth plans, the key issue now is how its penchant for 
centralized control will play out in the entrepreneurial business of natural 
gas. The industry owns enormous reserves of gas, which is coming into its own 
as a cleaner-burning alternative to coal and oil. The problem is that most of 
it lies under forbidding terrain, far from potential customers. Exxon, for 
example, has gas fields in Turkmenistan from which it hopes to service 
booming gas consumption in eastern China. Pipelines must be built, and 
underground oceans of the stuff converted into liquid natural gas (LNG) for 
transport by ship. To justify these costly capital projects, producers are 
competing fiercely to sign utilities and other big users to long-term 
contracts. 
Gas marketing was the old Exxon's glaring weakness. Much of its production 
came through partnership arrangements in which the gas already was committed 
to buyers under long-term contracts. In other words, zero salesmanship was 
required, least of all by Exxon, which often was a passive partner in these 
joint ventures. Even its most lucrative gas asset, the vast Groningen gas 
works in the Netherlands, was (and still is) operated by Royal Dutch/Shell 
Group. Mobil, on the other hand, has made gas its forte. In Indonesia's 
province of Aceh, Mobil built an LNG complex, PT Arun, that has contributed 
disproportionately to its profits ever since it opened in the mid-1970s. 
Industry insiders theorize that Mobil was driven into Exxon's arms by its 
inability to prepare for the eventual exhaustion of the fields that supply PT 
Arun by developing a new ``core asset'' of comparable profitability. 
Exxon has yet to reap any dramatic benefit from Mobil's high-powered 
gas-marketing arm. In fact, BP Amoco just aced Exxon Mobil out in China, 
which is widely considered the El Dorado of future gas consumption. On Mar. 
20, BP was chosen by China National Offshore Oil Corp. to help build China's 
first LNG receiving terminal. This gives BP a leg up in the ongoing bidding 
for the 20-year contract to supply the new terminal with LNG. ``Exxon now has 
the knowledge of how to develop an LNG business that it probably did not have 
before,'' says Nancy Vaughn, director of upstream services for Petroleum 
Finance Co. ``But the fact is, they haven't been able to make a move on any 
of their big projects.'' 
Meanwhile, there is no better illustration of the geopolitical risks inherent 
in Exxon's growth strategy than its Mar. 13 decision to suspend production at 
Arun and evacuate its employees there because of escalating violence directed 
against it by separatist Aceh rebel forces. The shutdown has strained the 
company's relations with the Indonesian government, which is heavily 
dependent on gas revenues. It is not clear when, or even whether, Exxon Mobil 
will return to Arun, which, by the company's estimate, has about 10 years of 
reserves remaining. 
SAKHALIN SNAFUS. Indonesia is the only place where Exxon is caught in the 
crossfire of armed conflict, but testy dealings with host governments are 
nothing new for the company. In 1995, Exxon and several partners negotiated a 
preliminary agreement with the Russian government to develop a big oil and 
gas find off Sakhalin Island, near Japan. About the same time, Royal 
Dutch/Shell joined a separate group in a similar project on a nearby offshore 
block. Exxon's project, Sakhalin 1, has been plagued from the start by 
operating snafus and disputes with authorities while Shell's venture, 
Sakhalin 2, has proceeded smoothly. ``Work with Exxon goes on with great 
difficulty and with much friction,'' complains Valery Z. Garipov, Russia's 
Deputy Energy Minister. ``Shell is more active and more flexible than Exxon.'' 
Exxon says that the Sakhalin 1 consortium already has invested $500 million 
and plans another $150 million in outlays this year. The company concedes 
that its gas-development plans have been slowed by its inability to find 
buyers in Japan and China. However, it blames the Russian government for 
holding up its oil prospecting. In Exxon's view, existing legislation 
authorizing production-sharing agreements needs to be amended to shore up the 
assurances given foreign oil companies. In a recent speech, Longwell said 
that one of the biggest obstacles to oil development throughout the world is 
that many countries ``don't appreciate the importance of speed and do not 
move quickly to resolve problems.'' 
Longwell did not single out Russia, but he hardly needed to. By Western 
standards, the Russian approach to business is highly politicized and 
exasperatingly improvisational. Yet other foreign oil companies operating in 
Russia have been willing to proceed without the degree of contractual clarity 
that Exxon demands. ``Exxon has a different approach than the rest of us,'' 
says a Western oil executive based in Moscow. ``They like to see everything 
signed on the dotted line.'' 
In Indonesia, Angola, Chad, and other countries, Exxon's dealings have been 
further complicated by conflict with environmental and human rights groups. 
In general, the company's critics want it to do more to ensure that its 
investments improve the lot of the average citizen, rather than funding arms 
purchases or lining the pockets of corrupt officials. As a practical matter, 
oil companies are not in a position to agitate for social change in countries 
where they operate as licensees of the existing regime. But Exxon, in 
contrast to such self-styled industry progressives as BP and Shell, rarely 
even deigns to make symbolic gestures in support of human rights campaigns. 
``Exxon is so consistently recalcitrant that it's almost funny,'' says Arvind 
Ganesan of Human Rights Watch. 
Raymond brushes aside such criticism as naivete. ``The biggest thing this 
company can bring to some of these countries is the opportunity to see 
capitalism and the free market work,'' he says. ``Am I comfortable with 
everything the government of Chad does? No. Am I comfortable with the concept 
that we're now going to give the Chadian people an opportunity to improve 
their lot through economic development? Extremely comfortable.'' In October, 
Exxon began construction of a 650-mile oil pipeline that will cut through 
Cameroon to the Atlantic. Exxon estimates the project will create as much as 
$8.5 billion in economic value for Chad, the world's fifth-poorest country, 
over its 25-year life. 
Chad is far from Exxon's biggest project, but it exemplifies the 
indomitability that emerges, in the final analysis, as the company's defining 
attribute. Exxon discovered oil in Chad in 1969, but it took 31 years to put 
together a cost-effective and politically and environmentally acceptable 
project. ``Exxon has always tried to look through the cycle to the long-term 
fundamentals, recognizing that the lifeblood of the company is capital 
investment,'' Raymond says. ``You have to be very careful in how you manage 
your capital resources, because if you make a mistake, it lasts for a long, 
long time.'' 
Exxon's gusher of profit will diminish this year if oil and gas prices remain 
below the levels of 2000. The company might fall short of its goal of 3% 
production growth this year--and next. But even if Exxon fails to measure up 
to the standards it has set for itself, it is unlikely that Shell, BP, or any 
other competitor will overtake it. ``It would take an extraordinary 
performance to catch Exxon,'' concedes O'Connor of Texaco, which is merging 
with Chevron Corp. to form the world's fifth-largest oil company. There is no 
question that Exxon's insistence on doing things its way breeds conflict most 
everywhere it goes. But this is one American company capable of a continuity 
of approach and a tenacity of purpose that makes even the institutions of 
government seem transitory by comparison. 

By Anthony Bianco   
With Stephanie Anderson Forest in Dallas, Stanley Reed in London, Catherine 
Belton in Moscow, Alyssa Webb in Beijing, and Jonathan Wheatley in Sao Paulo   
     

Copyright 2001 The McGraw-Hill Companies, Inc.