Bloomberg Businessweek - USA (2020-05-04)

38

BloombergBusinessweek May 4, 2020

conferencethathe“probablypaidtoomuchforXTO,”a

rareExxonmeaculpa.Tillersondidn’trespondtorequests

forcommentforthisarticle.

Exxonwasn’ttheonlyenergygianttowhiffearlyoninthe

shaleoilboom.SodidChevron,RoyalDutchShell,andBP.

That’spartlybecausethebusinesswasundergoinga funda­

mentalchangethatthesupermajorsweren’teagertoaccept.

Fordecades,politiciansandconsumerswereparanoidabout

runningshortofoilandgas.Thebiggestcompanies,led

byExxon,spentgreatsumsexploringanddrillinginever

moreexoticandforbiddinggeographies,seekingthenext

motherlode.

Shalechangedthecalculus.Nobodydoubtedanymore

thattherewereoceansofoilintheground;it wasa matter

ofgettingit outasinexpensivelyasyoucould.TheHamms

andSheffields,fueledbycheapmoneyfromWallStreet,were

drivingdownextractioncostsandrampingupproductionin

oldAmericanoilfieldsthatthebigboyshadlongagoaban­

doned.Someofthemwerea shortdrivefromExxon’sIrving,

Texas,headquarters.Exxon,meanwhile,wastakingchances

onfarawaylands.

ConsiderwesternCanada,whereExxoninvestedinthe

Kearloilsandsproject.If youbelievedtheworldwasshort

ofcrude,it soundedgreat:Millionsandmillionsofbarrels

werewaitingtobesqueezedfromAlbertasand,andExxon

hadthetechnicalprowesstoplumbthem.Butupfrontcosts

ran18%higherthanexpected,andin 2014 oilpricesbegan

a nearlytwo­yearswoonasOPECfloodedtheworldwithoil

inthehopeofsuffocatingAmericanshaledrillers.

Withcrudedippingbelow$40a barrel,Exxon’shand

wasforced.Inearly2017,afterinvestingmorethan$16bil­

lion,thecompanyhadtoerase3.3billionbarrelsfromits

listingofcrudereserves,mostofit fromAlberta.Thecom­

panycouldn’tcontroloilprices,ofcourse,buttheoilsands

write­offwasneverthelesspartofthedeepestreservescut

inExxon’smodernhistory.(Exxonlastyearrebookedsome

oftheAlbertareserves.)

Russiaseemedmoreofa surething.PresidentVladimir

PutinandTillersonhada history.In2003,underthen­CEO

Lee Raymond, Exxon had come close to buying into Yukos

Oil Co., the Russian oil producer owned by Putin adversary

Mikhail Khodorkovsky. Putin balked at the prospect of Exxon

calling the shots on production and other matters; Tillerson,

then an Exxon senior vice president, was just as wary of

Putin meddling with Yukos. He helped persuade Raymond

to back off, which forged a bond between Putin and Tillerson

that no other Western oil company executive enjoyed.

In 2011, Putin and Tillerson agreed on the first piece of

what was envisioned as a $300 billion exploration deal that

opened vast tracts of the Russian Arctic thought to contain

billions of barrels of oil. It was an ideal match: Exxon wanted

the natural resources, Putin the expertise and money. Then,

in 2014, the Obama administration imposed sanctions on

Russia for its annexation of Crimea. The sanctions prevented

Exxon from continuing work on most of the Russia project.

Another big fish had gotten away. Again, Exxon probably

couldn’t have predicted Crimea—nor was it alone in seek­

ing access to Russian crude. But maybe that’s what you get

for trusting Putin.

By the time Tillerson departed to join the Trump admin­

istration, Exxon looked a lot different than it did when it

reported those record earnings. Revenue and profit were

a fraction of what they’d been, and the stock had lost its

premium to other S&P 500 energy companies for the first

time since 1997. Worse, for the first time since the Great

Depression, Standard & Poor’s had stripped Exxon of its top

credit rating. And the company faced a New York state law­

suit alleging that it had intentionally misled investors about

the dangers of climate change. (The company won the case

in December 2019.)

When Woods became CEO in January 2017, there were

thepredictablemediastoriesabouthimsteppingoutof

Tillerson’sshadow.Thatwasn’tgoingtobeeasygiventhe

bigwrite­off, the S&P downgrade, and the other unfortunate

circumstances he inherited. But Woods was determined to

rebuild Exxon with projects in Brazil, Guyana, Mozambique,

and Papua New Guinea—the sorts of efforts that for some

shareholders conjured unpleasant memories of Canada and

Russia. Exxon had also finally jumped into shale oil with a

$6 billion acquisition of acreage—negotiated by Tillerson—in

West Texas’ prodigious Permian Basin.

Othersupermajorsweren’taseagertoembarkonnew

endeavors.LikeExxon,they’dspentheavily,thenpaidforit

duringthe 2014 ­16 crash. Burned investors were cooling on

energy stocks and diverting their money into tech, pharma,

and other sectors. Energy now makes up less than 3% of the

S&P 500, compared with more than 10% in 2009.

The growing movement to transition away from fossil

fuels to solar, wind, and other energy sources was also peel­

ing away investment. Such is the clamor in Europe that Royal

Dutch Shell Plc and BP have both pledged to become car­

bonneutralby 2050 andinvestheavilyinrenewableenergy

sources.Exxonhasmadenosuchpledge,insteadinvest­

inginearly­stage green technologies while insisting that the

world will need more and more oil and gas until at least 2040,

driven by China and India. Some on Wall Street see demand

peaking as early as 2030.

At his first annual Investor Day, in March 2017, Woods

vowed to spend more on new ventures so Exxon would

be ready when the market turned. “We are confident,” he

declared before dozens of analysts and shareholders in New

York. “Our job is to compete and succeed in any market, irre­

spective of conditions or price.”

Even then, a lot of institutional investors were inclined

totakeanExxonCEO’swordasgospel.Butanoddturning

pointcamea yearintoWoods’stenure.WallStreetanalysts

threwa littletantrumaboutthelackofforward­looking data

in Exxon’s quarterly reports. They were growing weary of

sunny promises belied by a lackluster share price.

With the company planning to spend so much money