Exxon Chief Rex Tillerson Has Two Years to Save His Lost Legacy

Tillerson looks to make another big bet on Russia

Tillerson and Putin

Photographer: Alexei Druzhinin/AP Photo

It was a moment of triumph for the chief executive officer of ExxonMobil. Almost a decade into the job, Rex Tillerson learned in September 2014 that the costliest well in the company’s history had struck oil a mile beneath the icy seas off the Siberian coast. It was what the industry likes to call an elephant—as much as a billion barrels, then worth about $97 billion. Exxon’s Russian partner, Rosneft, estimated the ocean floor around the $700 million well could hold more crude than the entire Gulf of Mexico. Tillerson had bet big on Russia, and it looked like he’d finally silence concerns that Exxon’s crude output had plummeted for most of his tenure.

Yet no sooner had the company made the energy industry’s most promising find in 45 years than Exxon was packing up the drilling rig and going home. The short-lived victory had been snatched away by economic sanctions imposed in response to Russian leader Vladimir Putin’s support of Ukrainian rebels. The setback reignited debate over whether Tillerson, who along with Exxon declined to comment for this story, bet too much of the company’s future on Russia, a country led by a former spy with a bent toward military interventions and economic nationalism.

Tillerson’s options got more complicated on April 8, when Royal Dutch Shell offered $70 billion for Britain’s BG Group. Its move could force Tillerson back into the big-ticket dealmaking that he has avoided for the past half-decade. And with just two years before he reaches mandatory retirement at 65, Shell’s deal could make it more difficult—or expensive—to achieve his goal of leaving Exxon in a better position than when he took over.

The bittersweet Arctic win shows the complexity of that challenge. “The tenure of Mr. Tillerson has been made of light and shadows,” says Leonardo Maugeri, the former head of strategy for Italian oil producer Eni. Russia, he says, is “one of the shadows”—a risky foray made at a time of deceptively high prices and mounting political tension.

Drilling in Russia.

Drilling in Russia.

Source: Rosneft

Russia is looking like Tillerson’s second big swing and miss since he became CEO in 2006. In 2010, Exxon paid $35 billion for shale gas producer XTO Energy, its biggest deal in more than a decade. The ink was barely dry when North American natural gas prices crashed amid a supply glut that shows no sign of abating.

The challenge for Exxon is that it’s so big that only huge bets such as XTO and Russia can allow it to maintain its size. Average daily crude production during Tillerson’s tenure has fallen by 421,000 barrels, or 16 percent—equivalent to all the oil pumped daily from the largest U.S. oil field at Prudhoe Bay, Alaska.

There’s no risk of the lights going out at Exxon’s headquarters in Irving, Texas, for quite some time. The company has a market value of $357 billion, little debt, and 2014 revenue roughly equal to Taiwan’s gross domestic product. The largest offspring of the Standard Oil Trust founded by John D. Rockefeller in the 1880s, Exxon is renowned for engineering prowess and an obsessive focus on long-term planning that keeps it steady amid turmoil. “For all its history, Exxon had a principle: We will never rush when the others are rushing,” says Maugeri, now a fellow at Harvard University. Buying XTO so quickly “was a major departure from this philosophy.”

Drilling in Russia , however, is in tune with Exxon’s long history of extracting resources from some of the globe’s riskiest, most isolated reaches. Tillerson helped run the company’s Russian operations in the 1990s, including the giant Sakhalin-1 oil project in Russia’s Far East. He got to know all the big players, from Putin on down.

Tillerson’s boss, then-CEO Lee Raymond, almost made a deal in 2003 with oligarch and opposition figure Mikhail Khodorkovsky to buy a stake in Yukos Oil, then Russia’s largest oil company. Raymond was interested only if Exxon would ultimately gain control. Putin, uneasy about Americans commanding a key Russian resource, blocked the proposal. Khodorkovsky was later jailed, and Yukos’s best assets were sold to Kremlin-controlled Rosneft. Raymond, who retired in 2005, cooled on investing in Russia.

In 2011, Tillerson decided to risk Russia again by teaming with his old Sakhalin partner, Rosneft. The different approaches of the two CEOs must be judged by their circumstances, says a former executive at a big Exxon rival who asked not to be named discussing a competitor. Abundant exploration options gave Raymond the luxury of skepticism, he says, while Tillerson, after initially dismissing shale drilling as too costly to turn a decent profit, had few Exxon-size alternatives.

In Russia, Tillerson “underestimated the risks and overestimated his opportunities to influence policy,” says Alexander Temerko, the former deputy chairman of Yukos, who now lives in the U.K. “It turned out that not everything that’s in the interest of Exxon is also in the interest of governments.”


Tillerson’s Russian ties go deep. He first met Putin in 1999 on remote Sakhalin Island, and in 2013 the Russian president gave him the Order of Friendship, one of the nation’s highest honors. In 2011, Putin championed granting the Arctic prize to Exxon, believing the U.S. company’s experience would help vault Rosneft into the top tier of global oil producers, according to a person with knowledge of the matter who was not authorized to speak about it. Last year, despite the Ukrainian conflict, Exxon completed exploration agreements in the Arctic that quintupled its exposure to Russia. It signed the contracts in May, but by September they were dead letters as a new round of sanctions barred it from drilling those fields. “There are only so many sufficiently large opportunities in the world when you’re that big of a company, and Russia is one,” says Edward Chow, a former Chevron executive who’s now a fellow at the Center for Strategic & International Studies in Washington.

Partly because of the Russian sanctions, Tillerson in March told analysts the outlook for boosting production in 2018 and beyond is murky. The end of a four-year bull market for crude also has coincided with mounting exploration failures worldwide, according to Exxon’s filings.

The 16 percent decline in crude production since Tillerson took over is worrying, particularly since oil is far more profitable than natural gas. Crude fell to 53 percent of the company’s output in 2014, vs. 63 percent in Tillerson’s first year as CEO. Exxon’s reserves have increased 18 percent during that period, but only because capital spending was raised to what Wolfe Research analyst Paul Sankey calls “eye-watering levels.”

Oil industry insiders say Tillerson is again looking to acquisitions, and the crash in oil prices may work to his advantage. “They’re in a really good position to take advantage of low prices and try to get some undervalued assets,” says Michael Lynch, president of consultant Strategic Energy & Economic Research. “They are a supertanker, but they’re also a big shark that can swallow almost anything.”

Tillerson said in March that Exxon’s financial strength, coupled with the weakened state of smaller players now that energy prices have fallen, presents a golden opportunity for the only oil company with a AAA credit rating. Exxon has also repurchased $226 billion in common shares over the past 16 years that can be used to fund a transaction. Its acquisition priorities hew toward the U.S., including America’s expansive shale fields, where oil can be extracted with little or no political risk. Boosting energy from shale would go a long way toward reaching Tillerson’s goal of lifting Exxon’s total global production 8 percent, to the equivalent of 4.3 million barrels a day, by yearend 2017.

The biggest oil giants missed out on the early years of the shale revolution because the potential didn’t look promising enough. Shale exploration is still an uncomfortable fit, says Ian Taylor, CEO of Vitol Group, the world’s largest independent oil trader. “The majors’ specialty is big, complex projects,” he says. “In shale, they can’t bring their economies of scale to bear.” That’s why Exxon managers likely won’t be giving up their Russian visas anytime soon.

The bottom line: Exxon's new well in Russia's Arctic could hold more than 1 billion barrels of oil. For now, sanctions put the find off-limits.

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