FORTUNE 500 2007  
FORTUNE 500    

The defiant one (cont.)

By Geoff Colvin, Fortune senior editor-at-large

It's worth noting that the company carries no genetic hatred of alternative energy. In the wake of the 1970s oil shocks, it conducted major research in solar energy, and it holds dozens of patents in the field. But it couldn't see how to earn a profit, and shut the program down. That experience also thickened the company's skin. While greens today vilify Exxon for not investing in solar power, back then they attacked the company for investing in it. The theory was that oil companies would monopolize solar and then withhold its benefits from the public to sell more oil.

Exxon avoids investment in alternative energy sources for yet another reason, one that reaches deep into the company's experience: Much depends on the future price of oil, and no one knows what it will be. Consider two scenarios. If oil dropped to $25 a barrel - about what it was (in today's dollars) just before 9/11 - alternative energy would look even less attractive economically. Exxon's decision not to invest would look all the wiser, but its oil-related profits would shrink. Conversely, if oil rose to $100, its profits would rise but many alternative energy sources would become economically viable - and Exxon wouldn't be able to capitalize on them.

The company considers low-price oil the greater risk. Experience has shown that when oil prices rise, customers are slow to cut back. Alternative energy may sell better in a high-oil-price world, but Exxon wouldn't care, since it believes those sources are destined to be small-scale - and it would be making huge profits in its traditional business.

Of course, no one knows the future price of oil. Says Tillerson: "We tell the organization, 'Folks, we really don't have a clue what the price of oil is going to be, and so given that, how should we run this business?' "

The answer is spelled out in a recent SEC filing: "Investment opportunities are tested against a variety of market conditions, including low-price scenarios. As a result, investments that would succeed only in highly favorable price environments are screened out of the investment plan." Alternative energy sources are precisely such investments.

Exxon does have a strategy for a carbon-constrained world; it just has nothing to do with alternative energy. The company's scientists are researching how to reduce CO2 emissions from oil and gas, and working with auto companies to make engines more efficient. Unlike, say, biomass or windmills, those are fields in which Exxon commands formidable expertise.

The whole process of Exxon's investment choices - the extraordinary returns on capital, the disciplined analysis, the spurning of alternative energy, the focus on the core business - hasn't changed in 20 years. One important thing, however, has changed: Exxon's public stance on global warming. Substantively, that's nothing compared with how the company directs its $20 billion of annual investment, and it doesn't make it one bit greener. But the company clearly realizes that it took a shellacking for no good reason and is trying, in its unique, Exxonish way, to do something about it.

The most important change is simply admitting the world is heating up. Ken Cohen, the company's communications chief, insists there is nothing new here: "Lee Raymond has said for many years that this is a serious issue." But Raymond never said, as far as we can tell, the simple words Rex Tillerson uttered at an energy conference in February: "We know our climate is changing, the average temperature of the earth is rising, and greenhouse-gas emissions are increasing."

That sentence would be a great big "duh" coming from anyone but the CEO of Exxon. For him, it signals a new corporate public relations strategy: The reality of warming is no longer debatable, and it's time to move on. That's a significant change.

Exxon's most stinging critics, such as Greenpeace and the Union of Concerned Scientists, have charged for years that the company has funded a range of global-warming doubters and deniers, and it's true. Public documents show that Exxon has long given money to organizations that publish papers, run websites, and write letters contending that global warming isn't happening, or isn't proven, or isn't connected to human activity. The company recently stopped funding some of those outfits - "about a half-dozen," says Cohen - though it may still be financing others. (Disclosure filings for 2006 are not available yet.) But at least publicly, Exxon accepts that the risk that human activity is warming the earth is great enough to warrant a response.

Exxon officials who once wouldn't acknowledge warming now publicly discuss the merits of, say, a carbon-cap-and-trade system vs. a carbon tax (they seem to favor the latter). They are even initiating meeting with critics they once shunned, including environmentalists and religious investors. Cohen has held a number of conference calls with bloggers on energy and climate. "I'm still fairly dubious," wrote blogger Stuart Staniford of the Oil Drum in a typical response, "but I also appreciate that they have been courteous and willing to sit through a couple of very frank exchanges of views."

Not that any of this has quieted Exxon's many critics. "I'm not sure I know what we're ever going to do that's going to cause them to have a different opinion about us," says Tillerson. "We may serve some other useful purpose." But Greenpeace research director Kert Davies says his organization doesn't need Exxon as an evil opponent. "I would love nothing more than for them to change their position and help us fix global warming," he says.

An alliance with Greenpeace is hardly imminent, but relations are more likely to warm under Tillerson than under his predecessor, the notoriously grumpy Lee Raymond. Tillerson, a native Texan and Exxon lifer who made his mark managing successful production deals in Yemen and Russia, has a softer edge. He often lets a grin break through his sober engineer's demeanor. If not exactly a barrel of laughs, Tillerson is much more likely to make friends. "He can disagree with you, but he does it with a smile," says Oppenheimer's Gheit. "He can tell you you're an idiot, but he doesn't make you feel like an idiot. That's the difference from Raymond."

Exxon's new attitude, though, still doesn't feel like much. With environmental news making headlines daily, with major competitors celebrating their work on alternative fuels, and with government leaders banging the green drum, Exxon's public stance seems somewhat oblivious. In truth, the company could say much more.

It could, for example, play up its $100 million in funding, over ten years, of Stanford's Global Climate and Energy Project, which conducts research into alternative fuels, including cellulosic ethanol. Or talk about its carbon-capture research with the EU. Or brag about how its operational improvements have reduced emissions. Or publish splashy ads, with lots of green ink, about its research into emissions-cutting technology and fuel efficiency. Why not out-BP BP - particularly since BP's image is looking rather frayed, given its now well-known operational issues?

Rex Tillerson answers before the question is even finished. "Intellectually, it's just not us," he says. "It's just not me, it's not Exxon Mobil. It's not the people of Exxon Mobil. We just don't take a view that we should try to paint a picture of something other than what we are." In other words, we're comfortable with ourselves and our actions, and you may make of us what you like.

Risky business

Thus, Exxon steams serenely forward on a course all its own, maddening critics, puzzling competitors, and gratifying investors. To adversaries like shareholder advocate Robert Monks, that's a sign of its arrogance and unmatched power. "Exxon is the single enterprise least accountable in any effective way to anybody outside itself," he says. "Vladimir Putin has more accountability than they do." To admirers like Fadel Gheit, it's a mark of Exxon's rigorous culture and a key to its success. "Exxon Mobil is not like other companies," he says. "They never take a day off." Both men have a point.

Maybe Tillerson will be proved wrong. Maybe wind or solar or "moonshine" will turn into huge businesses in which Exxon will lag far behind. Maybe retail customers will abandon its products out of irritation. But Tillerson is convinced that his judgments, which may seem out of line today, are not risky at all. And when you do the analysis from the perspective of a company in the profit business, it's hard to say he's wrong. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.