Rex Tillerson's Corporate Realpolitik

How one deal in Iraq from Tillerson's past could complicate his future

A gas flare in the Penja Ali district of Kirkuk, the oil rich ethnically diverse city in northern Iraq that both the Kurdish Regional Government and Baghdad claim as their own.
A gas flare in the Penja Ali district of Kirkuk, the oil rich ethnically diverse city in northern Iraq that both the Kurdish Regional Government and Baghdad claim as their own. (Sebastian Meyer / Getty)

Rex Tillerson, Donald Trump’s nominee to be America’s chief diplomat, doesn’t technically have any government experience. Yet as CEO of ExxonMobil, he led for nearly 11 years what journalist Steve Coll once described as a “vast corporate state within a state”—a powerful company that earned $32 billion in profits in 2014. His responsibility there, Tillerson told Charlie Rose in 2013, was to manage risk, especially given that Exxon operates “in a lot of countries where the geopolitics are complex.” Doing so required its own kind of diplomacy. “[My] risk management responsibility is ... to develop important relationships. ... When you're going to make significant commitments you have to look the head of state of that country eyeball to eyeball and say to them I’m going to make this commitment. And I’m counting on you to meet your commitments because I will be here a long time.”

If confirmed, Tillerson, like the businessman-turned-president-elect who appointed him, will have to navigate the major differences between the private and public sectors. CEO Tillerson had to worry about keeping Exxon shareholders happy; Secretary Tillerson will have to steer a bureaucracy charged with pursuing global stability and safeguarding U.S. interests around the world. And the culture shift will be stark. “He’s going to go from running a $400 billion semi-sovereign—practically speaking—corporation to a $66 billion, quite dysfunctional, quite under-resourced bureaucracy,” Ali Khedery, who worked with Tillerson, told me in an interview. This, in addition to what Khedery called the “inter-agency turf wars and congressional oversight and pandering and whatnot” characteristic of government service. Yet the tenure of Tillerson the businessman also gives clues about Tillerson the aspiring diplomat. In addition to the Middle East, “you have places like Russia, Qatar, across Europe, across Asia, across Central and South America. Exxon has done business in all of those places and I think that’s what [Trump]’s hoping the secretary of state will do,” Khedery said. Trump, he added in an email, “wants his cabinet to do deals around the world to advance American interests in what is shaping up to be a neo-mercantilist model.”

Members of Congress, among others, have raised concerns about Tillerson’s business history in Russia and intimacy with Vladimir Putin. But there’s another region high on the American agenda where Tillerson’s semi-diplomacy has been tested: Iraq and the Kurdistan region. There, in 2011, Exxon secured a controversial oil deal that may inadvertently have lifted Kurdish aspirations for their own state—an outcome the United States and its Iraqi and Turkish allies oppose.

Khedery, an Iraqi American, was the “longest-serving American in Iraq” when he joined Tillerson and Exxon in 2011, having been a special assistant and adviser to several U.S. ambassadors and generals from 2003 to 2010. He stepped away, he said, when it became clear that Washington would continue to back Prime Minister Nouri al-Maliki, who Khedery felt would draw Iraq closer to Iran and govern as “a sectarian dictator who would give life back to al-Qaeda and destroy the results of the surge.”

When Khedery took a job as Exxon’s senior adviser for the Middle East, he said he was surprised to find a culture shaped by risk aversion, in contrast to what he had experienced working for the U.S. government in Iraq—despite the company’s operations in dozens of countries, including sometimes-unstable ones like Nigeria. That culture resulted in part from the fallout over the Exxon-Valdez oil spill in 1989. So when Khedery learned that only months before he started his job the company had signed a $25 billion deal to develop an oil field in southern Iraq, he was worried. “This very risk-averse company was taking a massive risk, potentially $50 billion of risk over the next 30 years in a country that I knew was going to go through hell and was going to become even more anti-American than it was. I said, this doesn’t make sense.”

Instead, Khedery convinced Tillerson to turn to the oil-rich region of Kurdistan in the north, which Western oil companies had been eyeing since the fall of Saddam Hussein. They’d been stymied by the Iraqi government, which was offering bad deals to companies like Exxon to revive the country’s busted up oil fields, many of them in the country’s south. Meanwhile, in 2007, the Kurds approved legislation signaling that that the region was open for hydrocarbon business.

The glaring problem, however, was the government in Baghdad, which had warned companies that they’d be barred from the rich reserves in the country’s south if they did separate deals with the Kurds. According to the Iraqi constitution, the federal government has control of existing oil fields; for new fields under exploration, the regions and provinces would have the authority to develop them. (Revenue distribution is a thornier matter.)

The Iraqi government also feared that any deals with the Kurds, long considered one of the world’s largest stateless ethnic groups, would embolden them in their pursuit of their own state. This was a delicate issue for Washington but, as Tillerson told Rose in 2013, “We do not represent the U.S. government as we travel around the world; we never pretend to do that. And we never ask the U.S. government to do anything on our behalf. We're perfectly willing and prefer to enter countries, construct our contracts and make our negotiations, [between] ExxonMobil [and] the host country.”

In February 2011, Khedery and over two-dozen executives, including Steve Greenlee, the president of the ExxonMobil Exploration Company, presented a plan to Tillerson to explore six oil blocks in land claimed by the Kurdistan Regional Government (KRG)—some of which lay in land Baghdad did not recognize as belonging to the Kurdish autonomous zone. The presentation to Tillerson focused primarily on the engineering and geological aspects of the deal, with an important bit on the politics (one slide out of a 10-slide Powerpoint presentation, Khedery said). “All of [Tillerson’s] questions ended up being on the politics,” Khedery said. “Besides asking questions, there was no talking on his part. It was all absorb, absorb, absorb. He’s known, in the company, to hold his cards very close to his chest … to the extent that oftentimes even [his senior deputies] don’t know what Rex is thinking.” After another briefing in April, Tillerson gave Khedery and a small team the green light to enter negotiations directly with the Kurdish government.

The deal, profiled in-depth by Reuters, moved quickly. By mid-October, Exxon was putting the finishing touches on six exploration contracts with the KRG, worth a billion dollars, much to the consternation of Maliki, who demanded that the Obama administration void it, perhaps unaware that that’s beyond the president’s power. Khedery claimed that Maliki (“a tragic, Nixonian, sectarian, divisive, nasty figure,” he said), had been informed about the impending deal numerous times. “All the oil revenues would flow to Baghdad and be redistributed by the Iraqi Finance Ministry. So we were essentially aspiring to grow the Iraqi pie, create more Iraqi jobs, create more Iraqi revenue, create more Iraqi reserve numbers,” he said.

James Jeffrey, who was serving as U.S. ambassador to Iraq at the time and has served as an advisor to Exxon, said that despite any potential political effects of the deal, it “was not the intent of the international oil companies” to somehow legitimize Kurdish aspirations. The exploration deal itself followed the letter of the law. Developing new hydrocarbon sources “made eminent economic sense and prepared [the Kurds] to survive in the ever possible scenario of a breakup of Iraq, including one the Kurds have nothing to do with.”

As with any exploration deal, the long-term fate of the Exxon project in Kurdistan is uncertain; Exxon has pulled out of three of the six blocks, largely because of poor exploration results. But the potential revenues from the deal weren’t the only thing at stake for the Kurds.

Joost Hiltermann, a Middle East and North Africa expert with the International Crisis Group, said that from the Kurds’ perspective, the deal was also about land, and using oil companies to help them secure their claim to it. The danger, he said, was in the Kurds’ desire to work with Exxon to develop three of the six blocks in disputed territory. Other companies explicitly pledged they would not do business in those territories. “Now, Exxon didn't care. And this was of course music to the Kurds’ ears,” Hiltermann said.

“With regard to KRG, border issues are a matter for governments to address through appropriate channels,” Exxon spokesman William Holbrook wrote in an email. “[I]t’s standard industry practice to regularly consider increasing, maintaining or reducing equity in any given project or area. We are committed to meeting all of our contractual obligations in all of Iraq.”

Regardless of Exxon’s own priorities, there were political effects to its decision—and potential lessons about unintended consequences for the future secretary of state. Once Exxon had laid claim to the blocks on the KRG’s behalf, this created what Hiltermann called “facts on the ground”: a sense of inevitability that, even as the land on which the blocks were located remained contested, it would eventually fall into Kurdish hands. Soon, it would mean that the Kurds no longer felt they had to pledge fealty to the green line, which demarcates the boundaries of Kurdistan. To this day, the Kurdish taking of land continues with the peshmerga’s fight against the Islamic State. “They’ve taken more land in the last two years in the disputed territories,” Hiltermann said.

Hiltermann takes no issue with companies seeking to do business in the Kurdish region. “My concern is the disputed areas, because these areas are not strictly Kurdish,” he said. “The Kurds are taking unilateral steps to incorporate these areas, and they're using companies such as Exxon, who are willing to be used, in order to further that goal.”

“It is true that the Kurds want to at least keep open the ‘option’ of going independent and a credible ‘claim’ that it is an option requires a functioning economy which is not dependent on the 17 percent of total oil earnings country wide Baghdad supposedly gives KRG,” Jeffrey wrote. “Thus an economically logical step also serves a political end.”

When Rose asked Tillerson in 2013 if Exxon’s decisions take America’s national interests into account, the executive responded: “Any steps we take to develop new resources, to promote trading relationships, to promote stability in countries from a socioeconomic and geopolitical perspective, that is—that is all in U.S. national interest.” If he’s confirmed as  secretary of state, the question is how this conception of America’s national interest will evolve. One test will be the fraught context of the Middle East, where the United States has relied on the Kurds in its fight against ISIS even while deferring to its allies in Iraq and Turkey, who oppose Kurdish expansionism. A deal Tillerson helped negotiate five years ago may make that delicate balancing act even more complicated.

In the end, Hiltermann doesn’t think Exxon’s deal with the Kurds was politically good for Iraq. Nor was it good for the Kurds. “People at Exxon will say that’s just smart business.”