30 December 2016

** An Oilman's Guide To Foreign Affairs

Regardless of politics, everyone seems to agree that Donald Trump will be an unconventional U.S. president. It comes as little surprise, then, that many of his picks to fill Cabinet posts are also unorthodox. Chief among these selections is Rex Tillerson, the CEO of Exxon Mobil Corp. and Trump's nominee for secretary of state.

At first glance, Tillerson may seem a strange choice to fill Washington's top diplomatic post; after all, the past several secretaries of state have had backgrounds in government or diplomatic service. But Tillerson's experiences in the oil and natural gas industry have doubtless prepared him for the weighty and often delicate duties of the job. Though he lacks a diplomatic track record, Tillerson's actions as head of the world's largest oil company bespeak a pragmatism and view of reality that will guide him - and the future of U.S. foreign policy - if he is confirmed.

To adequately assess the possible risks to a prospective project, an oil company must know a country's geopolitics inside and out, from its current political climate at the local, regional, national and global levels to its long-term trajectory. Oil companies must have a thorough understanding of the land that their pipelines, wells and platforms will occupy - and the local or foreign actors that may contest its control. Furthermore, energy projects can take decades to get off the ground or recoup initial investments, and political leaders may come and go in the meantime. Since the governments in many oil- and gas-producing countries depend on energy revenue for funding, their leaders play an active role in overseeing the industry. When investing in projects in these countries, then, international oil companies often must negotiate with high-ranking officials, including heads of state.

As CEO of ExxonMobil for the past decade, Tillerson has occupied a role not unlike that of a foreign minister, and he has been received as such in the countries where his company does business. During his time at the helm, ExxonMobil has worked with several national oil companies whose close ties with their governments often turn them into battlegrounds between rival politicians. It has also experienced insurgent attacks on its production infrastructure in the remote areas of Indonesia and Nigeria that revealed the limits of those governments' reach. Tillerson has led the company through challenges brought on by geopolitical forces at every level and facilitated negotiations over thorny issues, such as Chad's 2006 dispute with the World Bank, which erupted just five days after he assumed control of ExxonMobil. More important, his company's endeavors around the world have exposed him to the complicated political environments in Iraq and Russia, countries that will be high on the agenda for the next secretary of state, whoever that may be.

Between the Kurds and Baghdad

If confirmed, Tillerson will enter his post as secretary of state well versed in the intricacies of Iraqi politics. In 2009, ExxonMobil won the rights to develop the West Qurna-1 oil field in southern Iraq, a flagship project for then-Prime Minister Nouri al-Maliki. But the terms of the deal were not terribly favorable. Because the project was a service contract, ExxonMobil could not include the reserves it was developing in its reports to the U.S. Securities and Exchange Commission, and Baghdad quickly fell behind on its payments to the company. As a result, ExxonMobil decided to take its chances on a deal with the autonomous Kurdistan Regional Government (KRG). The decision was risky: Baghdad claims sole ownership of all energy resources in Iraq's borders and denies Arbil's right to regulate its own oil and gas sector. Moreover, the Iraqi government threatened to blacklist oil companies doing business with Arbil and to revoke their contracts with Baghdad. Arbil offered attractive production-sharing contracts to entice foreign companies to incur the risk of investing in the KRG, however, and ExxonMobil signed contracts for six exploration blocks in the Kurdish region in northern Iraq. (The KRG knew that attracting a company of ExxonMobil's stature would lend it legitimacy.) Despite al-Maliki's protestations, the company understood that Baghdad would not risk delays on West Qurna-1 just to reprimand it.

By signing on with Iraqi Kurdistan, ExxonMobil not only angered the Iraqi government and inflamed tensions between Iraq and the KRG, but it also defied the U.S. administration's policies. In addition, the deal has proved challenging for ExxonMobil. The company's projects in Iraqi Kurdistan have endured major upheaval brought by the Islamic State, the conflicts between Baghdad and Arbil over disputed oil-rich territory, and the growing competition between Turkey and Iran. ExxonMobil has pulled out of three of the six exploration blocks, which yielded lackluster results. What's more, the KRG is falling behind on its payments to the international oil companies already producing in its territory. ExxonMobil's experiences in Iraq have been a mixed bag, all in all. Still, they have familiarized Tillerson with the challenges that surely await the next secretary of state in northern Iraq.

Strictly Business

It is no secret that Tillerson has a well-established relationship with Russia. Since 1998, when he was named vice president of ExxonMobil's Russia and Caspian unit, Tillerson has forged deep ties with Russian President Vladimir Putin and his rival, Igor Sechin, the head of Russian oil giant Rosneft. These relationships, however, have been characterized as much by tension and compromise as by collaboration.

Tillerson's dealings in Russia have followed his usual pattern of establishing joint ventures with national oil companies, which receive preferential access to their countries' energy resources. Once Tillerson took over the company, ExxonMobil pursued this strategy in Qatar and the United Arab Emirates, as well as Russia, enabling those countries' national oil companies to benefit from the U.S. titan's technical prowess and ample capital. In 2012, ExxonMobil struck several wide-ranging strategic partnerships and expertise swaps with Rosneft. The two companies agreed to jointly explore and develop projects in the Kara and Black seas - a boon for Rosneft, given its limited deep-water experience. To compensate for the massive upfront costs of the projects, the Kremlin offered ExxonMobil an offshore tax regime to make the agreement more attractive. The deal was so strategically important to Moscow that Putin himself attended its signing.

But when the United States implemented its sanctions against Russia in 2014, ExxonMobil's projects with Rosneft took a hit. The measures barred the company from continuing its deep-water and Arctic drilling and maintaining its technology transfers to Russia, leading the company to begin shutting down its rigs - and creating tension with Rosneft. In response to ExxonMobil's withdrawal, Rosneft reportedly threatened to seize the assets involved in the projects, namely drilling rigs in the Arctic's Kara Sea. The Russian oil company soon backed off its threat, though, because it could not operate the rigs on its own and could not afford to risk alienating ExxonMobil.

In the years that followed, Tillerson has blasted the enduring sanctions regime against Russia. At the same time, he has continually demonstrated that his interests in Russia are strictly business-related, notwithstanding the personal rapport he has with the country's leaders. The question now is how Tillerson's stance on Russia will translate into diplomacy and foreign policy decisions if he is confirmed as secretary of state. His experience working with Russia has given him a deep understanding of the country's imperatives, as well as its tactics. It has also afforded him unusual insight into the inner workings of the Kremlin and its players. Tillerson has shown a willingness to stand up to Moscow's games and to compromise when necessary. As secretary of state, he would take the same approach, perhaps with even more leeway to resist the Kremlin's demands. Although Moscow may try to coax him toward removing sanctions sooner than later, Tillerson would not lift the measures unless Washington received something in return. And no matter who represents the United States in negotiations, Russia will not concede much, focused as it is on stemming Western encroachment in its borderlands. Tillerson's experience dealing with Russia could be an advantage, but it will not be a magic bullet; Russia and the United States still have their own strategic imperatives to consider.

A Pragmatic Approach

In guiding ExxonMobil's activities in Iraq and Russia, Tillerson exhibited an unwavering pragmatism and an unclouded view of the countries' realities. His position left no room for ideology or even a consideration of the United States' policies as he evaluated the constraints that Baghdad, Arbil and Moscow faced and tried to determine how best to operate within them. Tillerson's practical view of the world, along with his experiences at ExxonMobil, will inform his actions as secretary of state, even beyond the realm of foreign policy.

Tillerson's stance on climate change, for instance, will likely draw on his history in the oil and gas industry. Though environmentalists have been quick to criticize his nomination, Tillerson has steered ExxonMobil from a climate change policy rooted in denial to one based on acceptance. (That said, the company is still mired in legal proceedings over whether it covered up information relating to climate change.) He has even come out in support of a carbon tax and the 2015 Paris agreement on climate change mitigation. Of course, Tillerson probably made these efforts in part to clean up ExxonMobil's image in service of the company's interests - not strictly those of the environment. Nevertheless, he may well promote similar policies as secretary of state, pushing the United States toward its goals on climate change, albeit perhaps less enthusiastically than President Barack Obama and Secretary of State John Kerry have. Tillerson will also be careful to avoid infringing on business concerns as he addresses climate change with the world's leaders.

An area in which Tillerson has less experience, but one that is no less controversial, is the future of U.S. relations with Iran. Years of tension and sanctions against Iran that kept Tillerson from doing business there prevented him from cultivating the same kinds of ties he has forged in Russia and Iraq. Even so, pragmatism would likely prevail in Tillerson's negotiations with Tehran. Trump has criticized the Joint Comprehensive Plan of Action (JCPOA) - the agreement that the United States and five other countries struck with Iran to limit its nuclear program - as a "disaster." But pulling out of the JCPOA would be exceedingly difficult and would provoke backlash from Iran, as well as from some U.S. allies in Europe, such as France. Furthermore, the prospective secretary of state likely sees the value in maintaining a balance of power in the region to keep vital sea-lanes open and avoid reigniting conflict in the Strait of Hormuz. Tillerson would almost certainly assess the JCPOA with his characteristic realism, noting that preserving the deal is in Iran's best interest right now.

Although Tillerson would not be in charge of U.S. energy or trade policy as secretary of state, he would have a say on the subjects as one of the president's confidants. When asked about the United States' prospects for energy independence or security, Tillerson has always answered bluntly that they are a political pipe dream and that the country will always be a part of the global system. He has argued that the best way to secure the U.S. energy supply is to ensure that the global supply is stable and growing since a disruption anywhere would have consequences everywhere. This attitude reflects his understanding of international trade and oil markets, something that he will draw on when establishing his foreign policy objectives and responding to crises.

If Tillerson is confirmed as the next secretary of state, his experiences at the helm of the world's most powerful international oil company will shape his interactions with world leaders and influence the trajectory of U.S. foreign policy. Though he is perhaps an unusual candidate for his prospective office, he comes to the job with an intimate knowledge of the power dynamics in some of the world's most volatile areas. As Tillerson has demonstrated throughout his tenure at ExxonMobil, he is a realist. His understanding of the global system - and its deep integration - raises the question of just how far the president-elect's plans for U.S. isolationism and retrenchment will go. 

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