A record-setting year in 2000 vaulted Exxon Mobil Corp. back to the top of the list of America's biggest and most profitable companies. While Exxon has benefited hugely from the runup in oil and gas prices, the company also took matters into its own hands by maintaining a rigorous cost discipline throughout the 1990s and by making a well-timed acquisition of Mobil, the second-largest U.S. oil company, at the bottom of the market in 1999. On Mar. 21, Senior Writer Anthony Bianco interviewed Lee Raymond, Exxon's chairman and chief executive, at company headquarters in Irving, Tex. Here are edited excerpts of their conversation:
Q: Exxon had an extraordinary year in 2001, your seventh as CEO. Did you feel that it was a culmination in some ways of your strategy?
A:I never view a year as a culmination. While obviously we had a very outstanding year, we're not so naive as to believe that all of that was the result of what we did. Obviously, prices were very strong. We spend a lot of time around here trying to look through, so to speak, the ups and downs to the fundamentals. It was a strong year, but it was a continuation of what we've been trying to do for years. I'd expect this year, price-adjusted, to be even stronger than last year. The fundamentals, such as efficiency, use of capital, employee safety -- these are all things I'd expect to continue to improve.
Q: Aside from size, what would you say differentiates Exxon Mobil from other oil companies?
A:There are a number of distinctive elements. First, and this was the case long before I was here, we have a view towards a long-term investment perspective. There is a recognition that the business is cyclical -- there are going to be ups and downs. In Houston many years ago, there was a guy who worked for me. He would talk about salesmen having the easy glum or the easy glow. When business was going great, the attitude was there was nothing they couldn't sell. When it wasn't, they didn't think they could sell anybody. When prices are high, a lot of people in our industry get the easy glow and do things they'll regret a few years later. One of our strengths is that we try to look through the cycle and avoid both the easy glow and the easy glum.
Also, I would say we have a commitment to technology unmatched in the industry. If you go back to 1980 and look at what we were saying then about the year 2000, you would find that we had total energy production in the world pegged within 1% of what it turned out to be.
Q: That's remarkable.
A:Yes, but don't get carried away, because we were a little off on mix. We thought there would be more nuclear, more coal, than there turned out to be, so we underestimated oil and gas usage. We weren't too bad on estimating total output. But we weren't good at all on what was OPEC and what was non-OPEC, which was much higher than we had expected. What we missed was the impact of the evolution of the technology for finding and developing oil. We just flat underestimated the technological change. I suspect that if we now were to forecast 2020, we'd miss it again, because we're probably still not going to recognize the extent of the technological change coming.
Q: In early 2000, about the time that Internet mania was peaking, you gave a speech in which you made a case for oil as an underappreciated technology industry. How do you feel now that the Silicon Valley-centric view of technology has been knocked around a bit?
A:I was trying to knock it around in my speech. It's a very narrow view of technology, and oil is not the only industry that has suffered from it. Contrary to this view out there in the world, we are the world's largest high-tech commodity business.
Q: Exxon is a company that has not had sustained production growth in a long time. Please explain the thinking behind the company's decision to try now to raise production by 3% a year through 2005?
A:The first thing we have to do is to replace the natural decline of resources we already have. This is a huge job for us and every oil company. In fact, it may be an even bigger problem for independent producers than for us because they have a smaller scope of opportunities. One of the reasons we put Exxon and Mobil together was to increase the scope of the opportunities we had and to high-grade them. The idea is to identify more opportunities than you actually want to do and pick the best of the lot.
Secondly, the industry goes through cycles driven by geopolitics and technology and the confluence of the two. In the mid-to-late 1980s, the number of places in the world where you had opportunities were limited. Before that, we'd all been thrown out of the Middle East. The focus was largely on the North Sea and the huge discoveries there. The geologists told us then that we'd found all the big ones in the North Sea, and they were basically correct. But today we've got a lot more places to look. The U.S.S.R. opened up and broke up. China is open. Some countries that were off-limits in the 1980s are now opening again: Venezuela, countries in the Middle East. These are the sort of large-scale, capital-intensive opportunities that our company seeks.
Q: Has the prospect of recession in the U.S. and elsewhere caused you to trim your 2001 capital spending?
A:No, we're sticking with it. It's not influenced by current price issues. I'd say that 60% to 70% of the spending was put in place by decisions we made as far back as 1999. People just don't get it. They think that we can decide this morning to go out and drill 18 new wells tomorrow. It takes a couple of years to decide where to drill. We're not going to shortcut the decisions that must be made to do it right. We are trying to speed up the development process, but that's nothing new.
Q: Exxon has found more new oil than it has pumped for seven years in a row, a much better performance than over the preceding decade. Why the improvement?
A:It's a combination of expanded opportunity plus selectivity. The industry went through a period in the 1980s where the opportunities were less, and we refused to lower our economic standards to compensate. There was a lot of criticism of us in the 1980s in that we didn't go out and pay a lot of money for reserves. It turns out that that was a pretty good decision. You shouldn't lower your standards because it is hard to get them back. It tends to be an irreversible decision.
Q: Jeffrey Skilling, the CEO of wholesale energy trader Enron Corp., and others have said that the vertically integrated oil company is a dinosaur, that the competitive advantage in the future will go to smaller companies focused on one specialty or another. Are you still a believer in integration?
A:Our back-of-the-envelope calculation is that over the next 10 years about $1 trillion will have to be invested in the industry to find and develop the oil and gas needed to meet worldwide demand. Amassing this immense amount of capital and using it efficiently is not going to be done by a lot of very small companies. While I understand that there is a trading element to the business, someone, somewhere has to produce something before it can be traded. If somebody wants to trade crude oil, someone's got to produce it first. To do that competitively, you cannot be small.
Q: Yet it's clear from your own results that you make higher returns "upstream," in exploration and production, than you do "downstream," in refining and marketing. Why not just concentrate on the upstream business?
A:There is a big risk element in upstream. That's why there is a return gap. You'll notice that there are a lot of oil companies that aren't in business anymore. If you factored into the industry results all the money lost upstream by the companies that are no longer around, the returns overall wouldn't look as high as they do.
Q: There is a lot of talk now about creating a national energy policy. In your view, what should be the key elements of such a policy?
A:It starts with a recognition that the country needs and wants to have economic growth. I'm not sure whether we can handle all the social and economic demands of this country, but without economic growth, I'm very confident that we can't. This applies to a lot of countries. And if you want economic growth, you have to use more energy. I'm sure that we do not use energy as efficiently as we could, but conservation and improved efficiency are no panacea. We need to find ways to have access to more energy supplies that are cost-competitive. We had to find more oil, recognizing that most of it is not going to come from within this country. We need to develop a broad array of sources outside this country.