Monday, August 27, 2012

Private Empire by Steve Coll

Private Empire is a big book about a big company: ExxonMobil. Its author, veteran journalist Steve Coll, examines in detail how Exxon Mobil, America's largest company for decades, has grown through the years and how it is adapting in an era when it is becoming harder and harder for multinational oil firms to acquire new petroleum reserves. The topic of the book is oil, but Private Empire, like Exxon itself, is not concerned exclusively with the matter of drilling holes in the ground. Coll spends a considerable amount of time sifting through climate change legislation, international politics and human rights violations – things that ultimately affect Exxon's business model.

The book opens by describing in depth the event that would come to define the company in the public's imagination: Exxon Valdez. The spill, from a super tanker off the coast of Alaska in 1989, dumped hundreds of thousands of barrels of oil into Prince William Sound. Apart from being an ecological calamity, the spill was a PR and financial nightmare for the company. While most of the blame was placed on the captain of the tanker, who was drunk when the ship ran aground, the event came at a time when the company was deeply cutting costs. The fact that the captain's past drinking problems didn't raise red flags still rankles Exxon executives to this day. Valdez forced the company to reevaluate its worldwide operations. And in order to prevent future safety or environmental violations, big or small, the firm went on a safety code binge. Employees at its global headquarters in Irving, TX were tasked with the job of reviewing all protocols related to Exxon's businesses and rewriting or retooling the ones that didn't meet the highest standards. The resulting deluge of revised regulations micromanaged the work habits of thousands of Exxon workers, and the new, closely enforced mandates made long-time employees bristle. But, while seeming like overkill at the time, the issued rules have helped Exxon maintain a safety record, since the Valdez, that has trumped all other firms in the oil industry.

Requiring employees to pay close attention to detail in everything that they do for the company is a core theme of the book. Mediocrity, Coll reminds readers again and again, is not a characteristic that is looked favorably upon at the company. Within the industry, the company is known for hiring excellent engineers, meeting deadlines, coming in under budget, and in general, demanding excellence not only from itself but also the people it does business with. The reason that Exxon has been able to maintain a profitability ratio that is higher than its rivals is that the company is better at finding oil and at extracting it from the ground. That point might seem obvious, but the pursuit of competitive advantage and the search for excellence forms the basis of Exxon’s corporate belief system. This can't be said for all companies.

The task of finding oil that it can own, though, is becoming more difficult for the world's largest private oil company. Since the 1970s, a large chunk of the world's reserves have been taken out of play as nationalism in the Middle East has stopped governments from selling off valuable natural resources. This change has had a three pronged effect on Exxon's business strategy. For one, it has forced the company to seek out oil deals in countries that are politically unstable and are often dangerous for the company's employees. Searching for oil in inhospitable places has also meant that Exxon has been forced into drilling far offshore and in the Arctic. Secondly, it has meant that Exxon has had to turn itself into a part-time oil services firm much like Haliburton. In Iraq, for example, Exxon does not any own oil (except for a field that it might own in Kurdistan, but that is another story). It does, however, have a contract with the Iraqi government to develop the gigantic West Qurna Field outside Basra and is paid for each barrel of oil that it extracts. Lastly, Exxon has been forced to scour the globe looking for energy opportunities besides oil. The company now owns about as much natural gas (in barrels of oil equivalents) as oil itself. These three strategic shifts have been a challenge for the company - finding oil in dangerous places requires more resources and involves more risk, extracting oil on a per barrel basis is not the same as owning the oil, and natural gas is not nearly as profitable (in terms of return on capital) as petroleum.

The book also lays out an interesting comparison between the two most recent CEOs, Lee Raymond and Rex Tillerson. Raymond, who led the company in the 90s and early 2000s comes across as brash, arrogant, uncompromising, and self-assure. His tenure, measured by Exxon's stock price, was a success. While he was chief, he not only maintained Exxon's strong profitability, he also presided over the acquisition of Mobil. The merger, which took place in 2000 while oil was only $10 a barrel, turned out to be an uncanny business move when oil prices skyrocketed in the years following the deal. Tillerson, who took over from Raymond in 2006 was confronted with the same dilemma Raymond faced, namely the challenge of keeping shareholders happy at a time when Exxon's core competence (and major money-making center), finding and drilling for oil, was under threat. In response to this challenge, Tillerson bought XTO energy in 2009 for $35 billion. A leader in extracting natural gas from shale rock, XTO helped Exxon break into a growing industry that has transformed natural gas production in the United States. Unfortunately, for Tillerson (and the company's shareholders), Exxon bought XTO when natural gas prices were stratospherically high. Prices in the U.S. have fallen off a cliff since. XTO, without a doubt, provides value to Exxon, but if Tillerosn had waited a couple of years, it could have been had much more cheaply.

Exxon, the largest remaining piece of Rockefeller's Standard Oil, has a complicated relationship with United States government, and, more broadly, with the (American) public. Even though the company produces resources that help power our $15 trillion economy, oil companies have a bad reputation. Part of this sentiment is understandable: high oil prices in recent years have meant that Exxon and other oil companies have profited at the expense of middle class commuters who have little choice but to fill up their gas guzzlers. But politicians have fueled the flames by suggesting that oil companies have intentionally sent oil prices higher, even when there is no evidence of this. Unlike BP and Chevron, who have, over the last decade, tried to convince the public that they are “green” and friendly to the planet, Exxon has made no such move. Trying to pretend that its main business isn't selling carbon based fuels isn’t a charade that the company has been willing to participate in. That might be changing, though. Executives are starting to realize that in order to attract the best talent, your company has to have a reputation that people want to be associated with.

There is a lot covered in this book, and the details are meticulously reported. The most enjoyable parts are the numerous country case studies that detail Exxon’s operations around the world. The intersection of dictatorships, kidnappings, civil wars, bribery and billions of petro-dollars showcase the challenges Exxon, a company with a buttoned-down culture, has to deal with on a daily basis. It has been American companies, rather than military force, that have built the economic and cultural empire that America is constantly benefiting from. This book shows that Exxon is out on the pioneering frontier.