Share

--

--

CHRISTINE TODD WHITMAN:  We now come to the final event for most of you who have been through two days, I guess, of this conference.  And I can think of no better way to bring this to summation than with our speaker this afternoon.  Rex Tillerson is someone who -- well, as you all know, ExxonMobil is the world's largest company today, market cap company, and he is somebody who has seen it from the ground up, starting in 1975 entering the company and working his way through it and up, to a company that today truly  understands the dynamics of the world international competitive market and how we have to -- how companies have to be flexible and how they can meet the demands, the changing political demands as well as the changing economic demands.

I would say, in matters of housekeeping, you should know this is being recorded.  Please turn off your cell phones, BlackBerrys, anything that's going to buzz, beep, chime, anything like that, at this point.  There are those who are going to be listening to this via the telephone and the connection, so this is going to get a broader audience than those of you just right here.

We will have a question-and-answer period.  And when we come to that I will remind you, but I will put in your minds right now, when you are given the mike, wait for the mike, raise your hand, get identified, stand up, please, say who you are and what your company is and then ask your question.

With that, I am delighted to present this afternoon's speaker, Rex Tillerson, the chairman and CEO of ExxonMobil. 

REX TILLERSON:  (Applause.)  Well, thank you, Christine.  Let me see if I can get untangled from my microphone here.  And I also want to thank Richard for inviting me today. 

Although this is my first time speaking at the Council on Foreign Relations, from a historical perspective, it feels a little bit like home.  Some of you may or may not know the building we're in was once the private residence of Harold Pratt, who was a former director of the Standard Oil Company.

I also feel at home because the Council was founded on a number of beliefs that I share and that I trust most of you do, as well, and that is the belief in the promise of international engagement and in the potential for global approaches to meeting this nation's challenges.

In the very first issue of Foreign Affairs, statesman and founding Council member Elihu Root wrote, and I quote, "No nation whose citizens trade and travel need consider whether it will be a member of the community of nations.  It is compelled by the situation.  Because of this," he said, "there is a pressing demand for popular education in international affairs."

Now, Root wrote this at a time when Americans were debating whether to choose an isolationist foreign policy or an internationalist one.  The Council on Foreign Relations advocated the latter, and thankfully, this view eventually carried the day.

Today a similar debate is taking place regarding energy security:  Should the United States seek so-called energy independence in an elusive effort to insulate this country from the impact of world events on the economy, or should Americans pursue the path of international engagement, seeking ways to better compete within the global market for energy?  Like the Council's founders, I believe we must choose the course of greater international engagement.  We are compelled by the situation.

Such a global approach is important to achieving greater U.S. energy security, and it is also the key to achieving greater economic and environmental progress.  Greater international engagement requires we meet the pressing need for popular education in energy affairs, beginning with a broader public understanding of the energy challenges before us.

By the year 2030, the world's energy needs will be about 50 percent greater than they were in the year 2005.  This growing demand for energy reflects a growing demand for an improved quality of life, especially in the developing nations.  In fact, most future energy demand growth will occur in the non-OECD countries.

Meeting this tremendous demand requires an enormous industry, the sheer scale of which escapes most people.  Each day consumers worldwide use over 230 million barrels of energy, as measured in oil equivalents, from all sources.  Oil alone is consumed at a rate of 40,000 gallons a second.  Developing and delivering energy involves literally thousands of producers, refiners, contractors and retailers in a vast global network.

To provide you a sense of the industry's magnitude, consider this.  As Christine indicated, ExxonMobil is the largest publicly traded energy company in the world, yet we produce no more than 2 percent of the world's energy.

Meeting this demand also requires long-term thinking.  The time frames  involved in the energy industry are often hard for policymakers to grasp.  Many elected officials think in terms of -- for obvious reasons -- two, four or six years, based on their campaign cycles.  But the energy industry thinks in terms of two, four or six decades, based on the life cycle of our investment projects.

Let me give you just one example.  The resources ExxonMobil are currently producing offshore Sakhalin Island in Russia, which we just started up, were first discovered in the 1970s, and production will likely continue through the middle part of this century.  So all told, that's 75 years for that investment project.  Well, 75 years ago Franklin D. Roosevelt was elected president and beginning the first of his four terms.  So that's the political cycle that our projects must perform over.

Massive investments are also required.  The International Energy Agency estimates $8 trillion will be needed by year 2030 for oil and gas development alone.  Between 1991 and the year 2005, my company alone invested a total of $210 billion.  That's about half of our current total market capitalization, and it's a figure that exceeded our total earnings throughout that period.

It is within this context that we must consider the issue of energy security.  At its most fundamental level, energy security means the availability, reliability and affordability of fuel and power supplies.  Increasingly, however, energy security has taken on not just economic meaning but political and environmental meaning as well.  In fact, for some, energy security has evolved into the sum of nearly all fears.  Allaying these fears and finding workable ways to achieve greater energy security requires that first we distinguish between perceptions and realities.

A Council on Foreign Relations independent task force, led by Jim Schlesinger and John Deutch and coordinated by David Victor, made an important contribution in this regard, outlining several so-called myths about U.S. oil dependency, and presented the facts to dispel them.

I'd like to take a similar approach and review some current perceptions and realities of U.S. energy security.

First is the perception that the world may soon reach the point of so-called peak oil production, after which it is all downhill.  And the reality is that while oil and other fossil fuels are indeed finite, they are far from finished.  In fact, according to the U.S. Geological Survey, 2 trillion barrels of conventional oil resources remain to date.  That's twice the amount that has been produced and consumed since the dawn of time for man.  Now, you can add to that at least an additional 1 trillion barrels of unconventional oil resources such as heavy oil and oil shale, and it is clear that abundant supplies exist to be tapped.

Another perception is that the United States is mostly dependent on imports of oil from the Middle East.  The oil producing countries of this region do indeed play an important and pivotal role in global energy markets, but in reality, only 15 percent of America's oil needs are met by Middle East imports.  The largest U.S. suppliers historically are Canada and Mexico, which, along with our own domestic production, meet about 55 percent of total U.S. oil demand.

Some believe dependence on oil imports leads to economic weakness, but this belief is not backed by the facts.  Eight of the world's 10 largest economies are net importers of oil.  This includes the United States, of course.  Our economy has doubled in size since 1983, while at the same time, the percentage of our energy needs met by imports has increased.

Another perception is that oil exporting nations are inevitably unstable or threatening.  But the reality is that there are many examples of oil exporting countries which are neither unstable nor threatening; and in fact, even the exporting countries of the Middle East have a remarkable record of reliable supplies throughout periods of war and internal strife.

The world's endowment of fossil fuels is indeed a blessing; it's not a curse.  The challenge is how we manage it.  Some believe that Americans can insulate themselves from price volatility by reducing our dependence on energy imports.  A look at Canada's experience suggests that reality is different.  Canada is a major oil exporter, and yet the prices Canadians pay for fuels parallels the prices Americans pay.  Worldwide energy supply and demand drive energy prices, even in so-called energy independent countries.

Finally, a perception that has gained in popularity recently, the belief that Americans can effectively meet their energy needs through homegrown sources such as corn-based ethanol -- ethanol is making a growing contribution to the U.S. energy supply.  And, given the enormous energy demand challenge the world faces, any source that can be economically developed is welcomed.  But because of inherent limitations of scale and cost with current technologies, ethanol can only play a limited role.

For example, in 2006, it is estimated that domestic, corn-based ethanol supplies totaled close to 5 billion gallons, which met about 3 percent of U.S. gasoline demand.  To achieve this 3 percent share required roughly 20 percent of the U.S. corn crop.  At this rate, even if Americans were to devote our entire corn harvest to the production of ethanol, it would only meet about 15 percent of our current gasoline needs.

Other sources of bioenergy could prove technically and economically viable in the future, and in fact ExxonMobil is the leading sponsor of the Global Climate and Energy Project based in Stanford University, which is conducting research into cellulosic sources of energy, for example.  However, without significant breakthroughs that would enable broad commercial application of cellulosic ethanol technology, biofuels will continue to have a limited role in meeting the country's and the world's growing energy needs.

Those are some of the perceptions and the realities, but the central reality is this:  the global free market for energy provides the most effective means of achieving U.S. energy security by promoting resource development, enabling diversification, multiplying our supply channels, encouraging efficiency, and spurring innovation.  The global markets for oil and natural gas help mitigate the impact on American consumers of sudden supply shocks, price spikes and chain breaks.

To understand how this works, just look at Wall Street.  As any investment banker would attest, the best hedge against market risk is a diversified portfolio.  The same holds true for the international oil and gas supply portfolio.  More energy from more geographic sources mitigates the impact from a downturn or interruption in any one supplying country or region.

The security inherent in the global market system was perhaps best demonstrated in the aftermath of Hurricanes Katrina and Rita two years ago.  At one point, nearly 30 percent of the U.S. refining capacity was shut in as a result of these storms, but thanks to a rapid influx of refined product imports from Europe, prompted by a market price signal, American's suffered only short-lived shortages and price spikes.  The market proved extraordinarily resilient.

In this global market, the nationality of the resource is of little relevance.  Energy made in America is not as important as energy simply made wherever it is most economic.  Look at this this way:  our global market system essentially creates one vast pool of energy into which all producers deposit and from which all consumers draw.  Enlarging this global energy pool, not dividing it, draining it, diverting it or damning it up helps lift all energy security boats, including our own.

This has important implications for policymaking.  Trade barriers, punitive taxes, artificial subsidies and other market manipulations may appear to some to be in the interest of U.S. energy security.  But to the extent they inhibit development and diversification of global economic energy supply, they clearly are not.  A more effective means of strengthening U.S. energy security is by facilitating free trade and investment, promoting stable fiscal, tax and regulatory systems, strengthening partnerships between producing and consuming countries and taking other steps that expand and fortify a global free market for energy.

Lifting restrictions on oil and gas development in this country is one step U.S. policymakers can take immediately.  The United States has been endowed with the second largest oil and natural resource base in the world, but much of it, nearly 50 billion oil-equivalent barrels, is currently off-limits to development.  Allowing the industry with its latest technology and operating know-how access to this potential could easily boost U.S. oil production by a million barrels a day.

Concerns about the environmental impacts of developing these resources prompted lawmakers to first rule them off-limits in the 1980s, but over the years since, our industry has made tremendous strides toward reducing our footprint and improving safety and have successfully deployed these same capabilities in offshore developments the world over -- offshore of the United Kingdom, offshore Norway, offshore of the Netherlands, Australia, Africa and the list goes on.

For example, at the project in Russia that I mentioned earlier, ExxonMobil is using precision directional drilling techniques to reach undersea fields from an onshore site through a well drilled one mile deep and six miles horizontally.  That's the distance from this spot to Yankee Stadium, and our drilling technology will allow us to place the bit in a target on a line between home plate and the pitcher's mound. 

Technology is a great enabler.  But unlike Manhattan, this project is located in extreme Arctic conditions and in a seismically earthquake-prone area.  Despite these obstacles, we are producing today one-quarter of a million barrels of oil in a safe and environmentally sound way.  We can certainly do the same in the offshore areas of the United States where conditions are considerably less challenging. 

The global market system also has important implications for the issue of climate change.  This is an extraordinarily serious but complex issue.  While there are a range of possible outcomes, the risk posed by rising greenhouse gas emissions could prove to be significant. 

So it has been ExxonMobil's view for some time that it is prudent to take action while accommodating the uncertainties that remain.  ExxonMobil is taking action to address the risk by working to reduce greenhouse gas emissions in our worldwide operations, in our partnerships with auto and engine makers and through our support of such research initiatives as the Global Climate and Energy Project, which I mentioned earlier.  Consumers can take action, too, by using energy more efficiently. 

In terms of public policy, many proposals with the objective to reduce emissions have been put forward.  ExxonMobil hopes to be a constructive participant in the dialogue about these proposals, and help move forward on this important issue.  To that end, we are participating in discussions with industry participants, environmental leaders, think tanks and trade groups. 

In our view, the most effective policies will maximize the use of the markets.  This will help promote global participation and facilitate the rapid spread of successful technologies and initiatives.  Consistent with this market-based approach, effective policies will maximize transparency, minimize complexity and provide sufficient flexibility to adjust to new developments in both the climate science and the future economic impacts of such policy choices. 

Strengthening U.S. energy security and advancing environmental progress depends on continued development and deployment of new technologies.  Perhaps because the oil industry's principal consumer products, gasoline, seem less sophisticated than, say, a cell phone or a plasma TV, we're not viewed as being particularly innovative.  But ours is an industry that has, throughout its history, operated on the very edge of new developing technologies.  The extended reach directional drilling technology that I described to you earlier is just one of the innovations that testified to the high-tech nature of our business. 

Such technologies would not be possible without the applied intellect and ingenuity of thousand of trained scientists and engineers.  This expertise begins in our nation's classrooms.  To innovate, we must educate. 

The United States is currently failing to do so adequately and as a consequence, we as a nation are losing ground.  One recent study showed that between 2000 and 2003, the United States fell five places among 32 countries ranked in terms of undergraduate science degrees earned.  The United States must add to, not subtract from, the number of math and science graduates of this country if we are to meet the energy security and environmental challenges that confront us. 

50 years ago, after the launch of Sputnik, Americans realized that security and education were linked.  Our defense depended on new technologies like satellites, which depended upon cultivating new generations of scientists and engineers to develop them.  This nation rose to the challenge by passing the National Defense Education Act and taking other measures to promote math and science education. 

Today, we face a similar challenge in regards not just to our national security but to our energy security, which is why I'll be announcing later today -- in fact, right after this event -- that the ExxonMobil Foundation is committing $125 million to support the National Math and Science Initiative, a non-profit organization helping to scale up proven math and science programs to a national level.  By 2020, the goal of this initiative is to provide 15,000 new-degreed math and science teachers, in thousands of school districts nationwide, with the training to instruct and inspire an entire generation of young Americans in these subjects. 

In conclusion, our global free market system currently enables Americans to achieve energy security by encouraging further development and diversification of our energy resources.  Misperceptions, however, are leading policymakers to consider protectionist policies that threaten to undermine this global market system.  Our focus should instead be on strengthening the system while fostering a culture of innovation through the promotion of math and science education.  Technology is vital to our future energy security.

During the last century, Americans chose the path of international engagement over isolationism, thanks in parts to the effort of the Council on Foreign Relations.  This choice ultimately strengthened U.S. national security.

In this century, we face a similar choice in regards to U.S. energy security.  And, as it did then, the situation compels us to choose the course of international engagement and, in the words of Elihu Root, "meet the pressing demand for popular education."  And if we do, I'm confident the United States can lead the world towards a more secure and prosperous future.

I thank you for your kind attention.  (Applause.)

WHITMAN:  Thank you very much, Rex.

And we will open it -- I know there -- come join me here -- I know there are going to be a lot of questions from the audience, and I will take the advantage of the chair, howsomever, to ask a few first.

You mentioned several times the importance of United States involvement in the international scene, and you also talked about the free market economies and technology drivers.  But how much do you see the international domestic policy -- political policy agendas affecting what you're trying to do?  We talked a little bit at lunch about the fact that there will be probably be a carbon constrained economy here at some point, and you indicated that ExxonMobil is in fact working with some of those who are discussing this to try to create a system that will work and make sense.  What about on the international scale?  Many would argue that in Europe and countries that have ratified Kyoto, there is going to be a demand for U.S. companies as well as others to be able to show their benchmarks, their greenhouse gas emissions.  What kinds of things is ExxonMobil doing there?  And what do you see (as being ?) that influence on energy policy?

TILLERSON:  Well, let me first answer it more broadly -- perhaps in a more broad context around energy and what the U.S. policy choices and decisions made today, how that affects energy development and supply internationally and then come back -- and then I'll come to your question around carbon.

I think the troubling thing out there today, from my perspective, are some of the choices that are being talked about by policymakers around energy, which would send a very negative signal to the international markets as well as to policymakers in other countries.  And I'll give you just one example, and that is the whole -- am I still on? -- the whole debate around the Deepwater royalty leases of the '90s and whether those should have had a price relief provision in them or not.

Well, the fact is the contracts are what they are.  They were entered into, eyes wide-open on everyone's part, and huge investments and dollars have been spent on the basis of those contracts, and now people have decided, because we're at the top of the commodity price cycle -- which won't last forever; it's still a commodity -- that now we need to change those contracts.

Well, look, I deal with heads of state and governments around the world, and over the last 20 years of doing that, I've always been able to point to the United States and say, you know, the United States has the most successful oil and gas industry in the world.  It's where all the innovation, all the creativity has -- to a large part has been developed and borne.  And the reason that happens is because we have a stable environment.  We can make these long, 20-, 30-year type investments, and we'll take the geologic risk, we'll take the cost risk, and we'll even take the price risk, because once we know what the rules are, we don't have any risk that those rules are going to change.

Now, that's not true in every country.  And it worries me that that might not be true in this one anymore.  So that is -- a particular concern of mine is whether the United States is going to continue to be the example of stability or not.

Now, as to the questions of how the carbon programs affect us internationally, we obviously have been a participant under Kyoto.  We have huge holdings in Europe, large refining petrochemical operations, and so we have had -- we've got some experience with performing within that system, and so far, we've been able to perform quite well.

Now, I think it's also interesting to note -- and most everyone in here probably is aware -- that under Kyoto, greenhouse gas emissions in Europe have gone up.  They've gone up at a rate considerably faster than they have in the United States, where we don't have Kyoto.  So clearly that system isn't achieving its desired objective, which, as I understand it, would be to lower greenhouse gas emissions.

We participate in those systems.  We talk to people about how that impacts our ability to conduct our affairs and what the implications are for future cost of energy.  And that's what we're doing here in the discussions in the U.S., is just talking about the various options and how we think those can either work in a productive way to achieve the objective or where they may be deficient.  And we can talk about any of that, if you want.

WHITMAN:  A follow-up question.  You mentioned in your address and you mentioned -- in answering the question, you talked about energy security.  And while, as you point out, only 13 percent of our imported oil and gas come from the Middle East, which is probably -- well, I don't know; Venezuela is starting -- there -- is being problematic, and some might say, "Well, you need to watch what's happening in Mexico pretty carefully."  We still import 63 percent of our oil and gas.  To what extent do you feel that that is something about which Americans should be concerned?  Has it influenced our foreign policy?  And has that been for good or ill, in your opinion?

TILLERSON:  Well, I hope in my remarks I made the case that it's not an area -- should not be an area of concern.  Again, I think I said eight out of the 10 largest economies in the world are net importers of energy.  And as long as we're -- as long as we keep the trade channels open and we keep the lines of communication open, and we treat this as a global source of energy, as I said, from which people deposit supplies and users withdraw -- and today the way that system works is, it works very elegantly.  It allocates the lowest cost of supply to the proper places.  That's the way the market's working, because it's all out there in the global pool, and the purchasers of that can shop around and find what works best for them, what fits their needs best.  And as that changes, the system reallocates.  So it's performing exactly the way you want it to. 

So again, whether it's energy made in America or energy made in Russia or energy made in Southeast Asia should be irrelevant if the system's allowed to continue to function properly.  And I think that's -- you know, that is -- the policy choices we made need to support the continuance of that system.

WHITMAN:  You talked about the importance of technology again on a number of different occasions.  To what extent do you think that government regulation or the prospect of government regulation has helped spur focus on R&D for new technology?

TILLERSON:  Well, for my own company, our investments in R&D technology have been constant for quite some time.  We invest about $700 million a year in research and development, and we've done that whether the oil price is $70 or when the oil price was $10.  And it's the nature of technology development and research and development discovery that you have to take that kind of a consistent approach, because the discovery process is a long-term one. 

So I'd have to say the same thing, I think, is true from the standpoint of regulations.  Regulations may cause you to focus on a particular technology need that perhaps you were not before focusing a lot of your attention.  But it's not going to accelerate the discovery process.  And I think it's one of the things that -- I'm always a bit perplexed by policymakers when they say, "Well, let's just put another $10 billion towards research and development, and we'll find it -- we'll find the solution faster."  Well, if that's -- if that worked, we would have already found the cure to cancer. 

So it's not a question that people are not trying and working hard on the issue.  That's the nature of scientific discovery.  It is a process which requires a lot of effort and a lot of activity on an ongoing, consistent basis.

So it is important, I think, that there be support for ongoing research on energy issues, ongoing research on environmental issues.  And to the extent the government is able to support that through my preferred means or through tax credits or tax -- favorable tax treatment or on research, so that you also allow the competitiveness of the research activities to stay in the marketplace, because various players will emphasize different technologies as they see a business opportunity somewhere out there in the future.  That stimulates the innovation and the creativity that you need to make those discoveries.

WHITMAN:  Let's open it up to the public, to the participants here now.

Yeah, wait -- again, I'll just repeat if you'd stand up, identify yourself and then ask your question.

QUESTIONER:  Thank you.  Bal Das from InsCap Partners.  You made an excellent link between innovation, technology, education and the long-termness of thinking that has to go with it.  I'd be curious any of your thoughts as to how much Exxon is doing and how much the industry is doing combining all these three in the context of alternative to fossil fuels.

Thank you.

TILLERSON:  The decision to place emphasis on alternative fuels -- and I'll speak for ExxonMobil because obviously if you look across the landscape of the industry participants, each company is making different choices.  So it's really a business judgment that we're making about whether that is an opportunity that we think is going to be useful to our shareholders over the long term or not.

What we do in the alternatives is we've looked at the current slate of alternative energy technologies that are available today.  We don't see many where we have a lot to bring to the party.  We typically are going to pursue investment opportunities where we think we can add some value, either we've got a technology know-how or a capability that we can bring to bear on that and it'll create more value than just putting money into it as a portfolio investor because we're not portfolio investors.

We're monitoring those technologies, and we're supporting research both at Stanford, but we also have research internally in our own labs where we're really looking at the next generation of technology.  Where is this going to go?  It does not seem to me today, if you look at the slate of alternatives -- wind, solar, biofuels -- those alternatives are not starved for investment capital.  With the price being where it is, with some of the tax programs and mandates that are in place, there seems to be plenty of venture capital and plenty of private equity capital that those sources are being supported today at a fairly healthy level.

So for us, again, to just bring money doesn't make a lot of sense.  So we are looking at next-generation biofuels; I mentioned engine fuel performance improvements.  We've had research activities under way for some time with automotive and with industrial engine manufacturers towards new fuel systems and new compression -- or new ignition systems that would improve the efficiency of the internal combustion engine by as much as 30 percent.  That has a huge economic benefit, and it has a huge emissions benefit, obviously.

So we're working on not just alternative fuels, but how can you use the fuel that we're so good at producing, how can you use that in a different way to achieve some of the same objectives.

WHITMAN:  Yeah, in the back.

QUESTIONER:  Garrick Utley of the Levin Institute.  You mentioned the importance of stability, predictability and continuity such as we have in the United States for the energy industry or any industry for that matter.  And yet your life personally and the company's life involves operating in all kinds of different political environments.

Russia and the former Soviet republics -- given the political environments there, given the natural resources there, given the history of what has happened to certain energy companies in terms of their role and participation in equity holdings there, could you share your thoughts on Russia as an attractive, stable, predictable place to operate?  (Laughter.)

TILLERSON:  Well, it'd probably helpful to at least take just a short second here and put into the context for you the investments that we are making.  I mentioned Sakhalin Island, the project under way there.  We've currently spent on a gross basis about $6 billion.  It's the first phase of what will be future phases as well.  All of those investments are being made under a fiscal contract that was negotiated in the post-Soviet break-up and before the new laws were passed, and there was, obviously, a gap in there where the laws didn't exist.  So we came in and in effect created the rules.

And as the Russian government then moved forward as they should to begin to create the long-term laws and regulations around their natural resource development, they have honored those deals.  The law specifically contains language that says as to the Sakhalin-1 Project it will be governed by its production-sharing contract.  That's the rules.  That's what governs.  Now that leads to a lot of conflict within the Russian system because we have bureaucrats that don't know anything about that contract that are trying to enforce rules that our contract says those don't apply because we undertook this under a different set of rules.  That's what leads to a lot of the conflict you hear about or really it's not necessarily an overt attempt by the Russian government to undermine what we're doing, as much as -- it's a very complicated bureaucratic overlay. 

Now having said that, clearly as time has gone by, the Russian government has evaluated how it wants to develop its natural resources, and they made a choice.  They made a very deliberate, I think, choice in terms of the direction they wanted to go about three years ago.  And my view at the time was that that was going -- there was going to be a lot of chaos in that.  And there was going to be a lot of internal competition going on that would have nothing to do with us, and I didn't really want to get in the middle of all that. 

We had the Sakhalin opportunity.  It's a huge investment, so we pursued it.  I think as Russia kind of resolves this whole question of, this is how we want to develop our natural resources -- and I think they are getting very close to the end of getting that once and for all settled.  The laws are moving forward; they're sorting out the role they want their national oil companies to play.  Then it will be clearer as to how a foreign investor like ourselves might participate in the future. 

And in my conversations with the Russians, what I have told them is, I understand what you're doing.  I don't need to impose myself on that.  You let me know when you see the role that you think I might play, and then we'll talk about whether I think we're interested in doing that or not. 

So to your specific question:  Around the Sakhalin project, we have had good stability.  They have honored our deal.  It doesn't mean we don't have a lot of regulatory debates day in and day out, but we have that going on in this country day in and day out, too. 

And I would say that I think Russia will present opportunities in the future for further foreign investment.  It will be -- on the judgment, it will be made by every company as to once these laws and these rules are in place, is it something you feel you can earn a decent return for your shareholder as to whether you choose to participate or not.  And I think we're very near seeing stabilizing to the point that some judgments can be made around that. 

WHITMAN:  Does that in any way undermine what you talked about -- about the international marketplace and the stability and really what -- that the United States should not have any concern about the amount of oil and gas being imported? 

TILLERSON:  Well, I think the only concern would be, the United States should want to do everything possible to encourage Russia to give them their views on ways you create a stable investment environment, so that the investment dollars are brought to bear on the Russian natural resources.  Russia has enormous natural resources.  Unfortunately, they are located in some very difficult places, which means they will be high-cost.  So they will be on the higher-end cost of the next -- in terms of supply. 

But I think in terms of U.S. energy security, our interest would be to promote Russia developing those natural resources.  Because again, they will go into this global pool of supply, and someone will determine, this is the right increment of barrel for me to buy, and it's from Russia; it fits my needs.  And that means a barrel someplace else is available to go to some other country.  So that's the way the global supply market works.  And to the extent we can get more barrels put into it, that's good for U.S. energy security. 

WHITMAN:  Yeah, in the back, the lady in red.  I think that's a movie, but go ahead.  (Laughter.) 

QUESTIONER:  Hi, my name is -- (inaudible.)  I have a question which is slightly related, but it's more global in nature, which is that you had mentioned a startling statistic, that $2 trillion worth of oil resources were yet to be used up, more than twice what we had ever used.  And I guess the interesting question is, because oil is used as a political tool, what percentage of this yet-to-be-mined resource lies in the countries that we are currently -- have contracts with and are doing business with?  What if it's countries like Iran, which we would be -- you know, they might have a lot of oil, but whether we would be able to use it is another question. 

TILLERSON:  Well, clearly, you know, the largest concentration of the resource base is in the Middle East, but it's spread across a number of countries in the Middle East.  I think the thing that I try to encourage people to do is -- I understand we have -- you have geopolitical situations that exist in countries today.  20 years ago, we had different conditions in those same countries. 

At one time, you know, the industry was heavily invested in Iran.  At one time, the industry was heavily invested in Iraq.  And events changed and things changed.  And my view is that 20 years from now, we'll have another set of circumstances in some of those countries. 

And from time to time, countries have either an attractive government system or set of geopolitical conditions in place that promote a healthy development of its natural resources.  And it's in their interest to do that, and so it occurs.  And then from time to time, those conditions change and it's not the case. 

You -- when you're thinking about energy supply, you have to think in terms of decades. 

I've often said to people -- they'll ask me, "Well, what are you working on today?"  And I'm working on things that are going to happen 15 years from now, because what's going to happen to supply energy between now and the end of this decade's done.  It's done, it's in place, it's under way, the investments are ongoing because it takes five, six, seven years from the day we start investing to deliver the first barrel.  So we're really thinking about, well, what is it going to be 15, 20 years from now, and so what are the conditions in some of these countries likely to be? 

Now, we don't have a crystal ball, but what we do in our business is we think about a range of outcomes in any given country or any region of the world or geopolitically, so what's the possible range of outcomes and how do we want to be positioned to land somewhere in that range?  And then depending on whether it's at this extreme or that extreme, are we positioned such that we can adjust to that?  And I think the same is true when you think about a lot of the geopolitical situations in these countries. 

Many of them, if you examine the underlying fundamentals, we know it's not sustainable.  It's a question of how long it takes before that situation changes, but I'm convinced the situation will change and some of these areas will open back up.  So how do you want to get from where we are today to some future point is, I think, where a lot of the policy debate always ends up being centered.

WHITMAN:  Let's go up here to the front for a change.

QUESTIONER:  Hi.  I'm Ron Feinman (sp) from Mayer Brown (sp).  You said that the markets currently allocate very fluidly the resources that are available.  Do you have any concerns or comments about the health and stability of the financial markets through whom these allocations -- through which these allocations are made?

TILLERSON:  Well, I'd say through which some of these allocations are made.  In terms of our own business, we deal in the physical barrel trade only, so we're buying and selling barrels all the time.  An interesting statistic that a lot of people don't realize about us, we produce 2-1/2 million barrels a day of oil, roughly; we refine 6 million barrels a day of oil, because we have the largest refining network in the world.  So we are a net purchaser of 3-1/2 million barrels of crude oil every day.  We're going out into that global pool and we're buying these barrels to meet our refining needs.  We do that directly. 

In terms of our own activities, the financial markets have little impact on the way we do it other than the financial markets can move the day-to-day price one way or the other.  And I think your question is probably maybe perhaps around recently what's been the effect of that as that market has grown to become fairly sizable.  And my answer to that is, I don't know.  And we ask ourselves -- we ask our own folks a lot, ask that question a lot as to what is the impact of the trading activities both in the physical barrels but more in the commercial paper barrels; what effect is that having on the price?  That is a very difficult question to answer.  And quite frankly, we've not been able to sort that out as to what that effect is.

Now, I would say the markets -- having said that, those markets play an important role in helping people manage risk.  I mean, they play a useful role.  So they're doing what they're designed to do, which is to price in the cost of this with all the risk considered.  That's what they're doing.  They're saying, you want to manage your risk?  Here's the cost of managing that risk.

WHITMAN:  Another question in the back here.

QUESTIONER:  Andy Robinson, Spanish newspaper La Vanguardia.  I wonder if you could tell me if you feel encouraged by the new oil legislation in Iraq, and whether you feel that that will enable Exxon to build on its existing position in Iraq.  Thanks.

TILLERSON:  Well, first, we don't have an existing position in Iraq.  We, along with a consortium of foreign companies, discovered all the oil in Iraq back many decades ago and drilled a lot of the wells and built a lot of that infrastructure that they're still operating, so it gives you an idea of how old it is.  So we do know something about it, but we don't have any position today.

As to the oil legislation, I think, you know, we're still trying to understand all of the aspects of that ourselves.  It's kind of short on specifics in a number of areas, obviously.  But I think it is important that the process is moving along. 

What we have always said is no different than most foreign investors would say, is, you know, what are conditions needed for us to begin to participate?  Well, first we have to know what the rules are.  And then we have to have a secure situation on the ground.  Now, we could have a secure condition on the ground, but if we don't know what the rules are, nothing happens still.

So I think the step they've taken is a very important one because the process is under way of the Iraqi people and the Iraqi government building the framework for our participation, or at least the conditions under which we can then look at and evaluate and make a judgment as to whether this looks like something that we could invest and participate in. 

So I'm very encouraged that if the process is moving forward -- I'd just have to say I think it's a little premature to draw too many conclusions from what's being debated at this time, but I'm very glad they're moving on with it. 

WHITMAN:  Let me just ask you a quick follow-up to that.  You mentioned the infrastructure.  How concerned is ExxonMobil about infrastructure security?  I mean, that's another part of the whole discussion here.

TILLERSON:  Well, it's -- obviously it's an issue that's important to the entire industry -- and I say all industry players, whether it's -- not just international oil companies but national oil companies -- is the protection of the infrastructure.  I would tell you that there has been considerable effort across all players in the industry over the last several years to step up our security measures and procedures around infrastructure.

Having said that, we know that we have vulnerabilities, just like we have vulnerabilities in other parts of the economy.  And I would say that I'm comfortable with the level of what we are doing today.  Do we know we're protected a hundred percent?  Absolutely not.  We know we're -- we know we have vulnerabilities. 

I think the other question, though, is, in the event we had an incident, what's the impact of that?  And we have taken a look at that.  And I'll give you one example, because people worry a lot about the stability in Iran, stability in Venezuela.  And I hear people wringing their hands and saying, "Well, you know, we just -- we can't have our economy in the hands of people like this."

So I asked -- we took a look and said:  Well, if you took 3-1/2 million barrels a day off the market -- (snaps fingers) -- just like that, you know, something happens -- Iran's about 2 (million); Venezuela's, you know, about 1-2 (million), in terms of exports -- if you took that off line, for whatever reason, for six months, what happens?

And it turns out that you're going to have a lot of volatility, obviously, over in those -- down the street here, there will be a lot of volatility.  But in terms of the physical supply, because of the Strategic Petroleum Reserves, not just in the United States but in Europe and other parts of the world; and what I would call -- there is a -- there's an element of surge capacity in the global system, where literally you can create a surge of capacity for a short period of time -- basically, you're just drawing down a lot of inventory is what you're doing -- that, in effect, the demand can be met, and there will not be a physical supply shortage.  There will be a scrambling around of people, and there will be a lot of volatility on the price of it, but a physical shortage is unlikely to occur.  Now, you go beyond six months, and you start then having to probably -- and you have to take some steps, then, to begin to mitigate that.

But my guess is, if we had a situation like that, we'd start using the reserves.  The governments would probably implement immediately some modest level of consumption reduction, like we had when we had gasoline lines before.  You buy your gas based on your license plate, odd/even days.  And so you'd have a little bit of a demand response, and then you'd manage your supplies. 

And my view is that within six months' time, that situation is changed.  It's either changed because the conditions inside those countries will have changed it, because their ability to stay off line that long is not very likely, or because of the effect it's having globally, the situation will be changed in some way.

So this interruption of supply from these countries is -- I think the threat of that -- while I don't want to diminish it -- I think, is not very well understood in terms of what would really happen. 

WHITMAN:  Yes?  And wait till you get the microphone, so everyone can hear. 

QUESTIONER:  Enzo Viscusi of Eni.  Can you see the day when ExxonMobil and other companies will be able to go into Mexico and be active in exploration/production activities?

TILLERSON:  I don't know if y'all could hear.  The question was about Mexico.  I think it is in Mexico's interest for them to find a way to invite and open up to foreign investment, because of the technologies and the know-how that's needed. 

Now, Mexico, I think there's no question, has significant resources offshore.  It's interesting that if you look at a map of the offshore areas of Mexico and where all the wells and the rigs are, you can look at that map and without looking at the water depths, you can draw a line around the edge of it, and it goes out to 600 feet of water.  And that's where the conventional Gulf of Mexico development went for years and years with 600 people.  It was kind of as far as we could go until we developed the new technologies that now allow us to go to 10,000 feet.

Mexico doesn't have that capability, and they're going to need it to fully explore their offshore areas.  This is a highly emotional issue for Mexican citizens.  The nationalization of the oil industry from 1938 is still a national holiday celebrated with a lot of pride.  And I think it's going to take some time for the political leadership of Mexico to help the Mexican people understand why it is in their national best interest to create a framework that allows foreign participation.  It's not -- I think, unfortunately, it's viewed as giving away a national resource; it's not.  It's actually developing a national resource and probably developing even a larger national resource than they have otherwise.  I don't have any real optimism on how quickly that's going to happen.

WHITMAN:  Well, in the interest of time, even though I know there are many more questions we could be asking -- and I still wanted to hear some discussion on the nuclear --

TILLERSON:  (Laughs.)

WHITMAN:  -- I think we have to draw this to a close now.  And I want to thank you very much for your participation.  It's been great.

TILLERSON:  My pleasure.  Thank you.  (Applause.)

STAFF:  Let me just thank Governor Whitman for being here today, for her service on our board at the Council, and speaking of service, for her years of service to this country.

And let me thank Rex for, again, his being here today, for being a real example of an American corporate statesman.  It's just the sort of thing we've learned to look for but not always expect -- sensational -- and also for his for his company's support of the Council, which is appreciated, and also of what you said today.  You didn't get the -- I think the reaction you deserved, the idea that -- this announcement that you're going to be giving $125 million to promote the teaching and learning of science, math and so forth in our schools -- it's just sensational.  (Applause.)

For everyone here and those sitting up here, I'd like to say that I hope you've got some takeaways that have made the last 24, 48 hours worthwhile.  We look forward to your feedback, particularly your positive feedback.  (Laughter.)  As I constantly -- I've been married for about 16, 17 years, and I constantly my wife the whole idea of constructive criticism's overrated.  (Laughter.)  So -- but despite that, if you do have constructive criticism, I'll direct it to the right place.  (Laughter.)

You started using these metaphors.  Let me dig myself deeper.  The last 24, 48 hours are essentially a date, and I hope it's been a good one for you all.  It's been an interesting one.  But what we're interested, though, is in a relationship, and that's the other 363, 364 days of the year.  So we hope to see you here often.  We hope that those who are our corporate members really get a lot of this relationship.  We get a lot out of it in terms of the exchange of ideas.  So again, we hope you take advantage of us in the best sense of that.  (Laughter.)

Let me also thank -- let me thank David Kellogg and his team.  (Applause.)  "It takes a village," as has been said, to do this.

Lastly again, to all of you who have traveled from points far and wide, thank you for your interest.  Thank you for your making this third such event so interesting.  We look forward to seeing you here next year at our fourth such event.  If you have ideas about how we can make this or any other aspect of this relationship more useful to you, more interesting, again, we are open to it.  Most important, travel safely.  Have a wonderful weekend.  And again, we look forward to seeing you here back at the Council.

Thank you.  (Applause.)

C) COPYRIGHT 2007, FEDERAL NEWS SERVICE, INC., 1000 VERMONT AVE.

NW; 5TH FLOOR; WASHINGTON, DC - 20005, USA.  ALL RIGHTS RESERVED.  ANY REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION IS EXPRESSLY PROHIBITED.

UNAUTHORIZED REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION CONSTITUTES A MISAPPROPRIATION UNDER APPLICABLE UNFAIR COMPETITION LAW, AND FEDERAL NEWS SERVICE, INC. RESERVES THE RIGHT TO PURSUE ALL REMEDIES AVAILABLE TO IT IN RESPECT TO SUCH MISAPPROPRIATION.

FEDERAL NEWS SERVICE, INC. IS A PRIVATE FIRM AND IS NOT AFFILIATED WITH THE FEDERAL GOVERNMENT.  NO COPYRIGHT IS CLAIMED AS TO ANY PART OF THE ORIGINAL WORK PREPARED BY A UNITED STATES GOVERNMENT OFFICER OR EMPLOYEE AS PART OF THAT PERSON'S OFFICIAL DUTIES.

FOR INFORMATION ON SUBSCRIBING TO FNS, PLEASE CALL JACK GRAEME AT 202-347-1400.

THIS IS A RUSH TRANSCRIPT.

-------------------------