Exxon: Juggernaut or Dinosaur?

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

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Even before Moffett's announcement, some analysts were disparaging Exxon. In this high-risk, high-reward industry, giant reservoirs go to those willing to gamble. "Exxon could have finished the well. They would have done fine," says oil analyst George Froley. "They just didn't have the guts."

Or perhaps the hunger. Exxon seems almost blasé about the future of energy. It is particularly out of step with its peers on the issue of alternative energy. Tillerson allows that a shift from fossil fuels is coming, but not for decades. Exxon forecasts that oil and gas will continue to supply 60% of the world's energy needs through 2030, and that a "game-changing" shift to alternatives will begin only after 2050.

On the other side of the debate are the other companies that comprise Big Oil, along with global carmakers, Silicon Valley, and most experts, who speak of a major transformation coming much sooner. With fewer giant oil fields around the world, project costs are rising significantly for the same volume of oil. Add to that climate change, which has created demand for cleaner energy, and you have a formula for an industry in turmoil.

ALTERNATIVE-ENERGY HOLDOUT

Exxon's rivals are girding for what comes next. France's Total (TOT) says it's evolving into a "power company," touting expertise in building nuclear power plants. Chevron (CVX) is investing in algae. BP has plopped down $500 million to endow a biofuels-development center in California.

In contrast, Tillerson told reporters in January that Exxon isn't investing in existing alternative energy technology because "we think these technologies are old. If there is going to be a fundamental shift" away from fossil fuels, the technology "hasn't been discovered." The company is financing basic research, he said. It will spend $125 million over 10 years at the Global Climate & Energy Project, a Stanford University facility also funded by General Electric (GE), Toyota (TM), and Schlumberger (SLB).

Apart from that, Exxon is not a recognized player among the alternative-energy labs in and around Silicon Valley. Vinod Khosla, one of the world's most aggressive investors in alternative fuels, says he regularly meets representatives of Big Oil, though not Exxon, which "still lives in a different world." Jay D. Keasling, a professor at the University of California at Berkeley whose alternative-energy ideas have attracted about $1 billion in private investment, including $500 million from BP, says he has spoken to Exxon, but that "I think they are going to play a waiting game to see what the other companies do."

Exxon is also behind the times in its dealings with foreign governments. For years, Big Oil had been shut out of large parts of the world by a growing petro-nationalism among countries such as Russia, Brazil, and Venezuela. That is starting to change. BP has attempted—so far unsuccessfully—to form a global partnership with Russia's Gazprom, while Italy's Eni (E) has established friendships with national oil companies around the world. Venezuela, battered by the plunge in oil prices, has invited oil companies to increase their investment in the Orinoco Basin.

The invitation so far appears not to extend to Exxon, which is suing Venezuela. The dispute dates from 2007, when President Hugo Chávez told foreign oil companies they had to sell back a big slice of their holdings to the state. Chevron, BP, Total, and Norway's StatoilHydro (STO) went along with Chávez; later, Eni struck a separate, $10 billion investment deal in Orinoco. Exxon, along with ConocoPhillips (COP), refused, losing 40,000 to 50,000 barrels a day of production. A Venezuela deal would be a rare opportunity to get new oil onto Exxon's books. Merrill Lynch (MER) predicted in a January note to investors that the two sides would make up. Others consider that unlikely. "We worked hard to stay in Venezuela," says Exxon's Cohen. "When the terms became unreasonable, we were, in effect, expropriated."

With reserves and production flat and oil prices falling, Exxon indeed seems poised to make a major acquisition. In an October meeting with reporters in Chicago, Tillerson addressed the issue. Ever the disciplinarian, he suggested that potential sellers need to experience a bit more pain before they'll accept the kind of price he'd be willing to pay.

Sure, a major acquisition would make Exxon larger. But "bigger isn't necessarily better," says J. Robinson West, CEO of PFC Energy, a Washington consultancy. "You have to run faster and faster to stay in place." That is Exxon's big gamble: that running in place will be good enough.

LeVine is a correspondent in BusinessWeek's Washington bureau.