By Tom Bergin
London May 8 When Exxon boss Rex Tillerson
walked into a meeting with the President of Ghana on the
sidelines of the United Nations General Assembly, he thought he
was set to strike a deal with an important new oil producing
Instead Tillerson - who had flown into town aboard an
executive jet bigger than those used by many heads of state -
was rebuffed by an irritated John Atta Mills, who had expected
to be wooed rather than given a tough contract to rubber-stamp.
That scene in a New York hotel room in 2009 sums up a
corporate attitude which dozens of industry executives, bankers,
analysts and government officials say is damaging Exxon's
balance sheet. In a world where oil rich nations now call the
shots the U.S. giant's imperious approach is increasingly a
liability, they say.
Exxon has struggled to access new oil and gas reserves in
recent years. In March t he company slashed growth plans and by
some calculations slipped behind PetroChina as the world's
biggest listed producer of oil. Last week it revealed a fall in
output and profits that knocked its share price.
A bossy approach worked well as long as oil-rich nations
signed purely financial deals, and stuck to them. But when oil
prices began to ramp up around a decade ago, a wave of resource
nationalism blew through countries like Russia, Venezuela and
Libya and changed the game.
These countries set new rules, claiming the right to redraft
contracts in the event of changing circumstances - such as huge
leaps in the price of crude oil between the date of a contract
being signed and the start of production.
Many oil nations also expected help with development, an
area where Western companies were initially outmanoeuvred by
Chinese state oil groups.
That's hit the biggest hardest.
"The game has changed. You can't act like you have all the
power any more," said the chief executive officer of a close
Or as Joe Tatusko, fund manager with Westport Resources
management in Connecticut, who holds Exxon stock, put it: "You
have to share".
Exxon agreed to comment on specific production issues for
this story but declined to comment on the company's business
THE RELIGION OF COMPLIANCE
Exxon was born in the early 20th century out of the breakup
of John D Rockefeller's Standard Oil following an anti-trust
probe initiated by President Teddy Roosevelt. Industry lore
traces its straight-laced culture back to Rockefeller, a devout
Baptist - but if the company has a true religion today, it is
compliance to company procedures.
That buttoned-down culture, underpinned by a disciplined,
top-down management system, has long been credited with making
the company the most efficient operator in the business: strict
standardisation means it can employ the same business approach
around the world and save money.
Its uniformity of thinking extends even to dress sense - the
CEO of one rival oil firm joked that male Exxon staff invariably
turn up for meetings in blue suits, white shirts and red ties.
That intense focus extends to the way in which Exxon
perceives the role of business, a free market world view which
is reflected in boss Tillerson's taste in literature. In a 2008
interview with Scouting Magazine, he named Ayn Rand's 'Atlas
Shrugged' - a totemic novel that lionizes a harsh breed of
capitalism and rejects government intervention - as his favorite
SLAP IN THE FACE
When Tillerson walked into the room in New York, President
Mills knew what the CEO wanted to discuss.
Kosmos, a Houston-based oil explorer backed by private
equity firms Blackstone Group and Warburg Pincus, had recently
put its stake in Ghana's Jubilee field up for sale. The
billion-barrel field was one of the industry's largest finds in
a decade and explorers believed it could be one of a series of
major fields that existed along the West African coast --
offering bidders the prospect of a major new oil and gas
Rather than ask Mills for his blessing for a bid, though,
Tillerson simply informed him that he had already agreed a deal
with Kosmos's American managers to buy the Jubilee stake.
For Mills, the deal was unacceptable.
"The Chairman of Exxon presented it as a fait accompli and
Ghana wouldn't take that," said Kwabena Donkor, head of Ghana's
Petroleum Commission, which is responsible for regulating and
developing strategy for the country's oil industry.
Exxon's apparent indifference to the Ghanaian government's
ambitions was supported by a strict reading of Ghanaian law,
which said a buyer didn't actually need the government's
blessing to buy Kosmos's stake.
But Ghana pushed back, accusing Kosmos of irregularities in
the sale process. The government refused to sanction the Exxon
deal and hired Goldman Sachs to seek partners for a rival bid to
Even as the rhetoric escalated, industry executives
predicted a deal would be done; Exxon and Kosmos would make some
concessions to the Ghanaians, to allow the government to save
face and advance Mills's desire to develop Ghana's own state oil
company Ghana National Petroleum Corporation(GNPC).
Instead, Exxon stuck to its guns, sources close to the
process said. The oil giant even threatened to sue Goldman Sachs
in the United States, alleging wrongful obstruction of Exxon's
business dealings, according to a senior Goldman banker.
No agreement was forthcoming and after almost a year, Exxon
announced it was pulling out of the planned deal.
It is not the only occasion on which Exxon has found itself
at loggerheads with oil powers.
Since around 2006, Exxon has been locked in a row with the
Kremlin over the right to export gas from its Sakhalin-1 project
off Russia's eastern coast.
Exxon argues its production sharing agreement -- signed
under the chaotic premiership of Boris Yeltsin and seen by many
Russians as unfair -- gives it the right to export gas to Asian
Most analysts agree the letter of the contract supports
Exxon's position. But state-controlled gas export monopoly
Gazprom has so far blocked exports, insisting that Exxon sell it
the gas from Sakhalin-1, likely at prices below international
market levels, so it can export the gas instead.
Exxon has refused. So vast quantities of gas that Exxon
might be able to book as reserves and sell remain undeveloped,
though the company says its oil production there is a success.
In contrast, at the neighbouring Sahkalin-2 field,
project-leader Royal Dutch Shell Plc took a more flexible
approach to the Kremlin's demands and agreed to sell a majority
stake in its project to Gazprom. Shell executives privately
accepted that the company's original contract had been too
advantageous and now brag that they are making strong returns on
Halfway around the world in Venezuela, Hugo Chavez in 2007
insisted state oil group PDVSA should have a majority stake in
oil and gas licenses. Exxon and U.S. peer ConocoPhillips
disagreed, and left the country rather than concede, while
Shell, BP, Chevron, Norway's Statoil and others accepted a
reduction in their stakes.
"We made a difficult decision at that time, we evaluated the
upside and downside for us and .. this was, on that occasion,
the best judgment on how to preserve value," Statoil CEO Helge
Lund told Reuters in an interview, defending his decision.
"The Venezuela authorities paid market value for the
resources and subsequently we are making money," he added.
Exxon sued Venezuela for up to $10 billion for the loss of
its fields. An International Chamber of Commerce arbitration
panel awarded the company $908 million in December, though
Venezuela has not yet handed over any money.
Last year, Exxon jeopardized its interests in a massive oil
field in Iraq by negotiating a production sharing agreement with
the semi-autonomous northern Iraqi region of Kurdistan, in
defiance of a de facto ban Baghdad imposes on companies that
invest in Kurdistan.
While analysts question the legality of Baghdad's ban, the
big foreign oil companies had all heeded it. Exxon's move
prompted a threat against its existing Iraqi asset and led to it
being excluded from the bidding in Baghdad's latest licensing
round. Two months ago, Baghdad said Exxon had backed down and
suspended its operations in Kurdistan. The company declined to
comment on the status of the Kurdish operations.
There is little doubt that Exxon's disputes have contributed
to an increasing reliance on domestic fields. In 2011, 27
percent of Exxon's reserves were in the United States, up from
19 percent in 2006. By comparison, only 17 percent of Chevron's
reserves are in the United States and 21 percent of Shell's.
The problem for Exxon is that, while places like Ghana,
Russia and Venezuela offer less legal certainty than developed
markets, they have more oil and offer better returns.
In 2011, Exxon reported a 9.3 percent return on capital
employed at its U.S. oil and gas fields, and a 39.2 percent
return for its non-U.S. upstream assets. The difference was due
to low U.S. gas prices and the fact that the U.S. oil fields are
often smaller and cost more to operate.
"Companies like Exxon don't have a choice focusing on the
U.S., they need to get out and be all over the world," said Mark
Coffelt, portfolio manager at Empiric Advisors in Austin, Texas.
Exxon may finally be learning that lesson.
In 2007, as Tillerson sparred with Russia about Sakhalin-1,
he declared Exxon would not consider new projects there until
the country's opaque legal transactions were clarified.
Analysts don't think the climate for foreign investors has
improved much since then. But earlier this month, Exxon sealed a
deal with state-controlled Rosneft that could see them invest up
to $500 billion to unlock tens of billions of barrels of oil
underneath the Arctic and Black Sea.
The company has even offered Rosneft the opportunity to work
with it on projects in the United States.
For investor Joe Tatsuko it's a sign that Exxon is learning.
"Exxon is as smart as the others they can adapt," he said.