by Steve Coll
This was not as radical an idea as it might have sounded, but it was not going to be the basis for the board’s succession decision.
After the succession contest was established, at the annual board meeting each October, when Raymond asked all ExxonMobil executives to leave and then spoke to the directors about Galante and Tillerson, he always framed his report by saying that he could offer his views about the men’s strengths and weaknesses relative to each other. He did not know, however, how strong a leader either of them would prove to be in an “absolute” sense, tested over many years and compared with other Fortune 500 chief executives. Raymond told the board that the most important quality his successor would require was toughness—the ability to stand up to governments, pressure groups, environmentalists, and special pleaders of all types. His advice was a projection of how he saw himself.
Galante had supporters on the board until the final decision was made. Gradually, however—one board road trip or meeting retreat after another—the weight of opinion gathered around Tillerson. Raymond finally recommended Tillerson directly. He told colleagues that he felt he owed whoever followed him a firm endorsement, so that he would not leave any lingering doubts in the minds of directors who had deliberated over the decision.
ExxonMobil ended the succession contest publicly in 2004 by appointing Tillerson as president and the sole number two. In the summer of 2005, the corporation confirmed that Raymond would retire at the end of the year and that Tillerson would follow him as chairman and chief executive.
In the last year of Lee Raymond’s leadership, ExxonMobil earned a net profit of $36.1 billion, more money than any corporation had ever made in history. That broke the previous record of $25.3 billion, set by ExxonMobil the year before. Even if the profits made during the late 1950s and 1960s by such postwar corporate giants as General Motors, Ford, International Business Machines, and General Electric were adjusted for inflation, none could match the size of ExxonMobil’s 2005 profit. During the span of Raymond’s tenure, from 1993 to 2005, ExxonMobil’s market capitalization—the total value of the corporation’s shares in the stock market—rose from $80 billion to $360 billion. The company also paid out $68 billion in dividends during that time. It was difficult for an oil corporation of ExxonMobil’s size and experience to fail, particularly after oil prices began to rise in 2004. Yet ExxonMobil’s performance reflected in substantial part Raymond’s relentless focus on cost and efficiency.17 Raymond’s record on behalf of the corporation’s shareholders was by now less well known than his record as a self-appointed climate scientist. As part of his transition to retirement, Raymond was in the running to become the chairman of the John F. Kennedy Center for the Performing Arts in Washington, D.C., a prestigious and visible position, but environmentalists in the Kennedy family blocked him. On Wall Street and within the industry, however, Raymond commanded considerable respect. Competitors such as Royal Dutch Shell hosted farewell dinners for him, where he was feted as one of the most accomplished leaders in oil industry history and perhaps the most effective in the United States since John D. Rockefeller himself.
Whose profits were they? Under the law, of course, they belonged to ExxonMobil’s shareholders, to be managed for the shareholders’ benefit by the corporation’s board of directors, subject to the rule of law. In political terms, however, oil profits were distinct. They arose from the sale of energy products, particularly gasoline, that the American public had no practical choice but to purchase. Some energy industry profits—those made from the sale of electric power to homes and businesses—were capped and regulated in the United States by state utility commissions whose mission expressly included protection of the public interest. It was in some respects an accident of American political history—as well as an expression of the enduring power of the largest oil corporations—that electric energy was treated as a public entitlement subject to close regulatory scrutiny, while gasoline was not. Even setting aside all ideological arguments about the costs and benefits of free versus regulated capitalism, the incentives ExxonMobil and its peers followed—Wall Street signals, competitive signals, and obligations under the law to maximize shareholder value—had practical consequences for working- and middle-class families. As Petroleum Intelligence Weekly put it, “What many of the companies have in common is a reluctance to sacrifice high financial returns for stronger output growth.” There were surely many efficiencies in this system, but one of its problems proved to be poor long-term performance and underinvestment by the big companies in oil exploration and production, which contributed to tighter supply and more volatile prices that occasionally socked American consumer budgets unexpectedly.
Unarguably, the margin for error in the global oil supply system was shrinking. Just a few weeks after ExxonMobil announced Lee Raymond’s prospective retirement, Hurricane Katrina gathered force over the Bahamas, crossed into the Gulf of Mexico, and came ashore near New Orleans; the storm claimed more than eighteen hundred lives and caused about $80 billion in property damage. A month later, Hurricane Rita smashed into Texas and caused about $11 billion in damage. America’s five largest oil refineries lay in the paths of the two storms. Chaos and shutdowns in the gasoline supply chain caused retail gas prices in the United States, which had been rising steadily during the previous year, to spike suddenly toward three dollars per gallon. In general, gasoline prices rose and fell in tandem with global prices for crude oil, but occasionally, as in this case, bad weather or strikes or other local disruptions could cause a spike upward. Within a few weeks, senators and congressmen responded to outraged phone calls and e-mails from angry, financially strapped constituents by introducing legislation to prevent ExxonMobil and other large oil corporations from reaping windfall profits from popular misery. It did not help ExxonMobil’s public relations position that it announced on October 25 record third-quarter profits of just under $10 billion.
Lee Raymond flew to Washington on an ExxonMobil jet and arrived around 9 a.m. on November 9 at the Dirksen Senate Office Building on Constitution Avenue. There were few Washington rituals that more aggravated Ken Cohen and his colleagues in Irving’s public affairs department than congressional hearings called for the purpose of theatrically interrogating Raymond and other oil industry chiefs about rising retail gasoline prices. Faced with the complex problem of the oil industry’s role in America’s economy and environment, about which it was not prepared to act seriously, the U.S. Senate could be relied upon to hold inflammatory and partisan hearings. Ted Stevens of Alaska gaveled a joint hearing to order as Raymond took a seat beside David O’Reilly, his counterpart at Chevron, as well as senior executives from Shell and BP. “Energy Prices and Profits” was the title Stevens had selected for the day’s questioning.18
The eighty-two-year-old senator immediately fell into argument with Barbara Boxer, a liberal Democrat from California, about whether it was necessary to have Raymond and the other witnesses stand before the cameras, raise their hands, and swear to tell the truth, as tobacco industry executives had been forced to do at a 1994 congressional hearing, before they testified falsely that cigarette smoking was not addictive. Stevens refused; he said it was not necessary. “I remind the witnesses as well as the members of these committees, federal law makes it a crime to provide false testimony,” he declared.
“Did your company or any representatives in your companies participate in Vice President Cheney’s energy task force in 2001, the meeting?” Senator Frank Lautenberg of New Jersey asked Raymond.
He answered in a single word: “No.”
Lautenberg moved on; all of the other executives at the witness table issued similar denials. His question, with its reference to “the meeting,” was in some respects ambiguous, but Raymond’s answer could be defended as truthful only in the most technical, lawyerly sense. He had met one on one with Cheney to discuss the energy task force’s broad mission, ExxonMobil’s Washington office had been in contact with the White House during that review and the parallel rev
iew of climate policy, and Raymond had spoken with Energy secretary Spencer Abraham a few weeks before the task force finished its work, in what Abraham later called a “telephonic meet and greet.”19 By commonsense definition, these were forms of “participation.” It would have been easy enough for Raymond to construct a truthful but self-protecting explanation about his energy policy contacts in Washington, but seven weeks from retirement, he evidently could not be bothered. Nor would he ever be held accountable for his testimony.
With apparent weariness, Raymond addressed question after question from both Republican and Democratic senators about the nature of global oil markets, how prices were set, and what ExxonMobil might do to control them. Afterward, Senate staff composed dozens of questions and submitted them to Raymond. The ExxonMobil chairman spent some of his last hours in power at the corporation signing off on answers to the same fundamental questions about oil, science, and American power that he had been attempting to control for more than a decade.
“The National Oceanic and Atmospheric Administration has projected that the country and the Gulf of Mexico have entered a cyclical period of twenty–thirty years during which the Gulf and coastal areas are likely to experience a greater frequency of hurricanes and higher odds of those hurricanes making landfall in the U.S.,” Jeff Bingaman of New Mexico began. “What preparations has your company made to deal with a greater hurricane frequency?”
“Whether there will be a greater hurricane intensity or frequency in the future remains unclear,” Raymond answered. “Evaluating the future frequency and impact of weather events is an imprecise and uncertain area of science.”
“What is the relationship between the price of oil that Americans are paying and the profits you are making?” asked New Mexico’s senator Pete Domenici.
“In fact, the vast majority (approximately 70 percent) of ExxonMobil sales and profits are made outside of the United States,” Raymond replied. “Because oil is a globally traded commodity, the absolute level of crude oil price, established on a global basis, is a key factor impacting American consumer costs and energy industry earnings.”
“Do you believe that Americans are dangerously dependent on oil and its refined products?”
“No. The emergence of abundant, affordable energy over a century ago provided a key foundation for the tremendous gains in living standards and quality of life achieved in the United States and throughout the world. . . . We do not view the projections for increases in production from the Middle East as a significant concern.”20
Lee Raymond leveraged his friendship with Vice President Cheney one last time. ExxonMobil’s upstream division was negotiating with the Abu Dhabi National Oil Company over a stake in a 50-billion-barrel complex oil field called Upper Zakum. The government of the United Arab Emirates was willing to sell a 28 percent interest in the field in exchange for technology and engineering work that would enhance production and profitability. The terms offered by the U.A.E. were tough—“The government takes something like 99 percent” of revenue, Frank Kemnetz, ExxonMobil’s regional president, remarked. Yet it was an immense prize, one of the largest undeveloped fields available in the world, hosted by a small, friendly emirate that possessed just less than 10 percent of the world’s oil and the fifth largest reserves of natural gas. The U.A.E. depended upon American military protection for its very existence, yet American oil companies had managed to secure only 13 percent of the foreign participation available to international majors; European and British firms had 60 percent. The Upper Zakum sale would provide the corporation that bought in with a substantial boost to its booked oil reserves. Initially, ExxonMobil, BP, Chevron, Shell, Total, and a Japanese company submitted bids. The Supreme Petroleum Council narrowed the field to ExxonMobil, BP, and Shell, and the negotiation ultimately came down to a competition between ExxonMobil and Shell. A wide gulf of perceptions emerged between how the U.S. embassy in Abu Dhabi saw its efforts on ExxonMobil’s behalf and how the corporation saw them. The embassy “has a long tradition of advocating on behalf of U.S. oil companies for government contracts and tenders,” the post reported to Washington. “Our close and continuing relationships with the powerful elite in the U.A.E. has no doubt led to increased U.S. exports, selection of U.S. firms for various contracts and tenders, and positive resolution for U.S. firms in commercial disputes.” Yet in the clinch on the Zakum talks, ExxonMobil believed that State was not doing enough to pry the deal loose from Shell.21
Finally, Dan Nelson persuaded Raymond to place a call to Cheney. “What in the hell is with this country?” was the thrust of Raymond’s message. The largest corporation headquartered in the United States by profits, a locus of American employment and shareholder wealth, could not persuade State to intervene aggressively in a prospective overseas deal even when the only competitor was a non-American firm? The vice president’s office later reported back that even they had been unable to persuade State diplomats to lobby hard for ExxonMobil—an early indicator, perhaps, of Cheney’s declining stock during Bush’s second term, or else a confirmation of Raymond’s long-standing hypothesis about State’s general uselessness and antipathy toward American oil companies. Ultimately, ExxonMobil’s representatives were told, Vice President Cheney had picked up the phone and called contacts in the U.A.E. government himself. ExxonMobil won the exclusive right to negotiate for the project, pushing Shell aside. Raymond flew to the emirate early in October 2005 and met U.A.E. president Khalifa bin Zayed “in order to allow Abu Dhabi to raise any major outstanding issues” in the deal. The issues that remained were “mostly about money” and Zayed appeared sanguine. And now that ExxonMobil was on track, it wanted the Bush administration to back off: When Energy secretary Samuel Bodman arrived the following month, the embassy briefed him: “ExxonMobil would prefer that we do not carry a strong, specific advocacy message on its behalf for the Upper Zakum bid, citing the sensitive nature of the negotiations and the timing.” ExxonMobil could be as maddening a partner for State diplomats as for its peers in the oil industry; the corporation wanted what it wanted, and it was not easy to please. ExxonMobil soon finalized a twenty-year contract to raise production in Upper Zakum; a U.A.E. official involved in the talks emphasized that “Exxon’s technical proposal was the deciding factor” and that given the geological complexity of the oil field, Abu Dhabi was “more interested in know-how” than money. The corporation’s “capabilities to increase oil recovery and efficiently build production capacity were key considerations” in its success in winning the deal, ExxonMobil reported publicly. The corporation’s executives often claimed that they did not require favors from the U.S. government, did not take direction from the White House, and preferred global independence. The reality was more complex. The corporation had a direct line to Cheney and negotiated with State and Abu Dhabi as its interests dictated.22
Raymond retired on January 1, 2006. Between the day he started work at Exxon in 1963 and the end of his career, he had seen whipsawing change in the global energy industry: the nationalizations and price shocks of the early 1970s, the price collapse of the 1980s, the cold war’s end and the opening of new oil frontiers in Africa and Central Asia, two oil-fueled wars in Iraq, the emergence of global warming as a threat, and the market-upending growth of China and India as oil importers. Since 1993, Raymond had steered the corporation through these events with his eye firmly fixed on ExxonMobil’s profits. “This is perhaps the single biggest and most powerful legacy of Lee Raymond—raw profitability,” wrote Paul Sankey and Adam Sieminski of Deutsche Bank, in an assessment timed to Raymond’s retirement. “The current level of cash flow being generated by the company is unprecedented by historic standards.”23
ExxonMobil’s return on capital employed, the metric Raymond had long promoted as the best indicator of an oil company’s performance, came in at 31 percent during his last year, a jaw-dropping number and the best in the corporation’s peer group that year. The gap between ExxonMobil and its competitors in this self-assigned c
ategory reflected in part the superior performance of its chemical business and its downstream refinery division, where Raymond and his colleagues had driven annual profits to $8 billion, a fourfold rise in four years. Raymond had risen within Exxon mainly as a downstream performer and he left behind the oil industry’s “strongest refining and petrochemical businesses—bar none,” as the Wall Street analyst Mark Gilman put it.24
For all of these stellar financial accomplishments, yellow warning lights were blinking about ExxonMobil’s future. Annual oil and gas production remained flat, no higher than it was at the time of the Mobil merger, despite repeated promises from Raymond and other executives that production would rise. Upstream oil and gas production generated industry-leading profits because of ExxonMobil’s discipline in project investment and operations, but strategically, in Gilman’s view, Raymond “did not position the company properly in the upstream business,” where most of the industry’s profits and potential lay. The Mobil acquisition was a triumph, Gilman believed, but afterward, “they milked the developed inventory that had been previously established—there was little left for his successor to draw on.” The rise of state-owned oil companies meant that in the long run, access to new oil and gas properties would require cooperative partnerships with myriad governments and foreign rival companies, but Raymond had exacerbated Exxon’s historical “organizational arrogance,” and so they were “not, in my view, the favored partners.”