ExxonMobil CEO: Open more federal land for oil and gas

Soaring energy prices are once again sapping consumers spending power while generating big profits for the oil industry. As chairman and CEO of ExxonMobil, Rex Tillerson runs the worlds biggest oil company, a juggernaut that earned more than $30 billion on revenue of $370 billion last year. And even he says prices, with oil at nearly $110 a barrel, are not justified at these levels based on the supply available. But Tillerson still takes issue with the governments energy policy and the limitations on where big oil can drill. Below is my interview with him, edited for clarity and length.

Q: Oil prices have been skyrocketing. Many people are struggling with $4-a-gallon gasoline. Are these prices justified?

A: Its what the cost of the commodity is today. Gasoline prices are a direct reflection of the cost of the raw materials to produce the gasoline, no different than any other product that you would buy, whether its a good or some other consumable, or its a luxury item. Its all a function of what do the raw materials cost.

Q: But in terms of supply and demand, is there enough oil and gas in the world today, or are prices high because of speculation? And how long would you expect them to stay elevated?

A: The markets are well supplied today. If you look at inventory levels here in the U.S. and around the world, they are in a strong condition. So supply is not the issue. Whats reflected in the price is the uncertainty around what might happen in the months or years ahead if there are further interruptions in supply. That is because of what you are seeing around the world in some oil-rich regions. It really is at what cost is it going to take to replace that supply if it is lost. And thats whats reflected in the market.

Until there is more stability in many parts of the world, or there is a reaction on the part of other governments, including our own, to address putting more supply into the market, and making more supply available, then its hard to see what changes this.

Q: President Obama has outlined a plan to cut oil imports by one-third over the next 10 years. Is this feasible?

A: We expect gasoline demand in the U.S. to decline about 17% over the next 20 years. And thats a function of both efficiency standards that have been put in place for automobiles, but also an ongoing penetration of hybrid and hybrid-electric vehicles. Theres going to be a natural decline in demand for motor fuels from that. That will be partially offset by increasing demand for heavy-duty fuels like diesel. That, along with the penetration of bio fuels, is going to result in a mitigation of imports. Whether we eliminate a third of the imports is hard to say. Another piece of our success will rest on whether the U.S. government decides to make available the lands that it controls, because 60% of the remaining oil resource in the U.S. is on federal lands and 40% of the remaining gas resource. Its up to the federal government to allow the industry to explore those lands and develop those resources that could have a big impact on supply in the future.

Q: We have been talking about hybrids and electric cars for a long time. But the public has yet to buy into it in a substantial way. You do think the time has come and this will happen?

A: On the back of government mandates, and on tax incentives that will essentially offset the incremental cost of purchasing these types of vehicles. But even at those penetration rates, theres still going to be a large segment of the motor vehicle fleet that will continue to be conventional internal-combustion engines and diesel engines.

Q: Meanwhile, you have made a big bet on natural gas, acquiring natural gas company XTO for $35 billion. There is still no energy policy encouraging natural gas use. What kind of potential do you see here?

A: Weve recognized that natural gas would be the fastest-growing of the conventional fuels: oil, natural gas, coal. And so, we see the important role that natural gas will play globally and more importantly the important role it will play in the U.S. in terms of meeting future energy demand. Our expectation is that natural gas demand globally is going to grow about 60% over the 25-year period from 2005 to 2030. We have been blessed in many respects with the explosion of the development of shale gas resources here in North America. Its both U.S. and in Canada.

The fact is the U.S. has enormous resource potential available to it. We are still the third-largest oil producer in the world and have a world-class oil and gas industry that develops all the leading technologies. I would hope that our own government and the American people would recognize the value of this industry and allow it to produce for the U.S. what it does for so many other countries around the world.

Q: What is the status of the Gulf of Mexico a year after the tragic oil spill?

A: With respect to the deep-water Gulf of Mexico, were just now getting back to work. We received our first permit to resume exploration drilling two weeks ago. We have a rig on the location. It is now drilling in a part of an area where weve made other discoveries. But it is very much a slow return. And it remains unclear to me how the regulator intends to manage the pace of both exploration activity, but also development activity going forward. So that one is difficult because we have plans in place. Well have to move at the pace that the regulator is willing to allow us to move.

Q: What is the appropriate pace? How do you make the case to resume after what happened with BP?

A: The BP Macondo incident was a terrible tragedy for the individuals, and it was a tragedy for the industry. But in many respects, unfortunately, its part of risk management or development. And I would hope the public and policymakers are looking at the broader picture, that there have been 14,000 deep-water wells drilled successfully around the world without a similar incident. That there have been hundreds drilled in the Gulf of Mexico without a similar incident. And as the presidential commission concluded, in this particular incident there was a failure of management oversight and a failure of individuals to carry out normal industry best practices.

Were continuing to do it all around the world. No other country ceased developments or exploration in the deep water. Only the U.S. took that action. That was a poor decision. I continue to think it was an overreaction. Its in the best interest of the American people to allow the industry to go back to work in the Gulf of Mexico, doing the things we have demonstrated we can do. We have looked at the incident. Weve learned from the incident. We will get better as an industry, because we always learn from tragedies, just as every industry does.

Q: Meanwhile, you have committed about $100 million a day for the next five years on capital projects, up to $37 billion per year, through 2015. Where is the opportunity for project development?

A: Its really quite global, as has been characteristic of our portfolio for many years. Part of our risk-management approach is to be globally diverse. So we will continue to invest significantly in the Middle East, West Africa, Australia and in Papua New Guinea. So its a portfolio that really spans all of the resource countries the world over. And we will continue to be a significant investor in North America, Canada and the U.S. Because there are opportunities available to us, particularly in the shale gas and unconventional areas that we believe are going to be very attractive.