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Cover Story February 5, 2009, 5:00PM EST

Exxon: Juggernaut or Dinosaur?

Cautious, rigid, and uninterested in alternative fuels, the wildly successful oil behemoth is lumbering ponderously into the future

By Steve LeVine

CEO Tillerson sees a shift from fossil fuels coming—but not for decades Daniel Sanchez/Bloomberg News

Like the ever-expanding universe, ExxonMobil (XOM) seems to know no bounds. Its $45 billion profit in 2008 was the biggest haul recorded by a public company in the history of the world. The runner up? Exxon, in 2007. No. 3? Exxon, in 2006.

Plunging oil prices are sure to devour some of those earnings this year. But even that presents opportunity, for Exxon, long the unchallenged exemplar of Big Oil, has an enormous stockpile of cash and shares with which to buy rivals. Indeed, it's difficult to imagine a scenario in which the company would soon be knocked from its perch. Even in the sharp recession, Exxon shares have held up, falling just 15% last year compared with a 22% decline by its rivals and 38% for the Standard & Poor's 500-stock index. "If one oil company is left standing, it will be Exxon," says Fadel Gheit, a long-time industry analyst for Oppenheimer & Co. (OPY)

Yet despite its seeming invincibility, Exxon is surprisingly vulnerable. Interviews with industry analysts, consultants, and current and former employees cast doubt on its strategy and growth prospects. Most immediately, Exxon's oil reserves and production are shrinking, and it is relying on less valuable natural gas to replenish them. Worse, it is getting much of that gas from a single country—Qatar—that could change the terms of their deal at any moment.

More broadly, Exxon seems overly wedded to a playbook drafted decades ago. The company's aversion to risk, a point of pride, has caused it to withdraw from lucrative exploration projects prematurely. And Exxon's perceived arrogance, reflected in its dismissal of alternative energy and its strained relations with foreign governments, has cost it business.

All of Big Oil faces the conundrum of size, but none more than Exxon. Its very bigness makes it hard to grow—or even sustain itself. Since the 1999 merger with Mobil, Exxon's total reserve base of oil and natural gas has barely budged, while production has fallen. Buying another oil company would add to its cash flow but wouldn't alter its inability to grow on its own.

A "GRIM" OUTLOOK FOR RESERVES

Exxon's production numbers represent a failure. In 2001, former CEO Lee F. Raymond vowed to increase daily oil production to 5 million barrels by 2005, from 4.25 million. Instead, the tally fell. In 2006, with oil prices surging, daily production averaged 4.23 million barrels, and Exxon extended its 5 million goal to 2010. In 2007 it pumped just 4.18 million barrels. As prices soared in 2008 before crashing later in the year, production dropped to 3.92 million.

Exxon's performance raises a question once unimaginable: Has the company effectively reached the limits of its productive capabilities? Company spokesman Alan Jeffers brushes off such notions. He says Exxon never set specific production targets but rather "estimates of production capacity growth." Those estimates, he says, turned out wrong: "Plans are plans, and actual events may be different."

Not only is Exxon producing less oil but it's also having difficulty replacing the oil it pumps from the ground. In 2007 the company replenished just 76% of the approximately 1.52 billion barrels it produced that year, according to its Securities & Exchange Commission filing. The 2008 numbers, to be reported this month, seem certain to be worse. That's because the SEC considers only those reserves that are economically viable at the price of oil on the last day of the year. On Dec. 31, 2008, a barrel of crude sold for $44.60, less than half the 2007 yearend price of $95.98. The lower the price of oil, the lower the percentage of Exxon's reserves that would clear the hurdle.

This year may not be much better than last. After complaints by Exxon and other companies that the yearend measure is arbitrary, the SEC will allow the companies to start judging the commerciality of reserves at the average annual price.

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