An Interview with Jim Hackett,Anadarko Petroleum CEO,January 7, 2005by Arthur Berman (from the March, 2005 HGS Bulletin).Arthur Berman: E&P companies have not really done very well in the last decade or two at finding big new reserves, at least relative to the rate that we’re using them in the United States and elsewhere. The biggest source of reserve additions has been mergers and acquisitions. What’s you’re opinion on that and what’s your strategy for Anadarko?Jim Hackett: On the former point, I think there’s a lot of truth to that. I think when we look back 20 years we could’ve counted on several hands the number of companies that could grow through exploration. When you look at U.S.-based public companies, there are probably a handful that you could name that has succeeded in growing organically through exploration. We hope to be one of those companies, and believe we have been in the last 15 years plus since we’ve been a public company. But, it’s difficult to do it unless you’re internationally oriented at this point because of the laws of physics in North American basins. While it’s not impossible, the probability for growth is low for reasonably large companies through exploration in North American basins. It is tough to find in the quantities of petroleum or the field sizes you need to grow what is probably available in these basins.So, I think that increasingly you’re going into very deep waters in the Gulf of Mexico, or into frontiers areas like the MacKenzie Delta, or into international arenas. There it takes not only a good balance sheet, which many of the companies have, but it also takes a skill set that you’re willing to acquire and nurture. It’s not as easy as being in an Acquire and Exploit company. There’s higher G & A (General and Administrative) associated with it. There’s a greater need for management of scarce intellectual capital and there aren’t, frankly, enough good oil-finders to go around. As we’ve gone through different cycles since the late ‘70s, the growth and progression of true explorationists has been something that’s been hard to find. We haven’t had the right kind of environment to proliferate that talent in a greater way.Arthur Berman: Is that an issue of demographics or an ability to adapt to changing technologies?Jim Hackett: I think it’s a combination. I think the demographics follow the environment that’s created for young people to pursue careers in the petroleum field. I don’t think that the lack of college graduates coming out of engineering, petroleum geology, and geophysical programs is necessarily a reflection the schools willingness to offer the programs or students not being willing to go into them under the right circumstances. I think it is because the industry itself has not provided the kind of long-term career and the right image, if you will, for young people to pursue petroleum careers in the kind of numbers that they did back in the 1970s. So, I think it’s actually a cause-and-effect situation: the cause is the industry itself; the effect is that you don’t have as many people wanting to be in the industry now. It’s shifting slowly here in the last 3 years. But I would add to that, in addition to the difficulty and expense of pursuing exploration programs of the size needed by public companies, there is also pressure that has built up over the last 15 years or so on returns and capital. Most notably, in the last 5 years investors really had sea-change shift in the fact that they looked at the energy sector as just one alternative among the whole S & P 500 for their investment dollars. Prior to that, there had been a tendency to allocate a certain portion, although declining portion, of their investment dollars into the energy sector. I think 1998 was kind of the crowning blow for that philosophy where people got so punished with the price drop from ’98 through ’99 that they just said, “Hey, listen. We’re actually going to take a negative approach towards the energy stocks absent really compelling evidence and we’re going to insist that they get good returns on capital because they haven’t done it for 20+ years as an industry.”That started to drive a different behavior pattern in the management of companies to start taking less risk, in my opinion. And I think that that along with the difficulty of acquiring and nurturing good intellectual capital on the exploration side, that has also driven people to be more cautious about spending money on exploration. It doesn’t get immediate returns, it is riskier, and it gets no option value in the marketplace, whereas acquisitions and exploitation are near-term, lower risk strategies. So I think the managements of public companies have, understandably, reacted to that sentiment in the investment community and I think that’s what’s driven, to even a greater degree, the acquire and exploit strategy. I would tell you that any company that doesn’t want to be an acquisition company is a company that’s working without one leg, in my opinion. Anadarko, to get to our strategy briefly, is clearly committed to staying an exploration company. We feel we’ve had an unparalleled track record in terms of organic reserve or placement over an extended period of time and therefore feel comfortable pursuing an exploration strategy, even amid the reluctance of investors to necessarily pay you for that up-front. But we also have a very strong desire to be opportunistic in acquisitions. We think that in the right environment where we have technology advantages, or where we have scale advantages in a particular locality, or where we see compelling opportunity to advance a strategic