Exxon Mobil places hefty bet on natural gas
The oil giant will pay $29 billion for XTO Energy -- and the
promise of unlocking massive new energy reserves from shale.
By Ronald D. White
The Los Angeles Times
December 15, 2009
Exxon Mobil Corp.'s purchase of a Texas natural gas producer for $29 billion could reshape the U.S. energy landscape, setting the stage for the fuel to challenge coal in the nation's electrical grid and helping to alleviate American dependence on foreign oil.
The wager by the nation's largest oil company positions Exxon Mobil to thrive in a world where petroleum, its key product, is getting tougher to come by.
The deal is a "game-changer" that could shift the U.S. energy mix while reducing carbon emissions, said oil expert Daniel Yergin, author of "The Prize: The Epic Quest for Oil, Money & Power." Natural gas burns cleaner than oil or coal and is expected to be in particular demand as restrictions are tightened on the release of greenhouse gases.
"These are not only very large domestic resources," Yergin said. "They are also low-carbon energy resources."
Exxon's purchase of Fort Worth-based XTO Energy Inc. will be an all-stock deal. Exxon, of Irving, Texas, will also assume $10 billion of XTO's debt.
By purchasing XTO, Exxon becomes an instant leader in the extraction of natural gas from shale, a relatively new process that has opened up the U.S. to a new gold rush of potential fuel. Other energy companies are also positioning themselves to expand their natural gas businesses as gas is used increasingly to generate electricity and to power buses and trains.
If the industry grows as expected, as many as 175,000 jobs could be created over the next 10 years, said John Felmy, chief economist for the American Petroleum Institute.
Key, he said, are the improved technologies that allow the fuel to be drawn from shale, making it so abundant that it could cheaply replace fuel that now has to be purchased from overseas.
On Monday, Felmy was on the road in an impoverished part of north-central Pennsylvania. Felmy said that area is now thought to harbor 500 trillion cubic feet of natural gas in a shale formation. "You might as well produce it here -- generate jobs and revenues for governments and reduce the trade deficit," said Felmy, who was in the region to help convince local officials and residents that the gas could be recovered safely and in an environmentally sound way.
Analysts said Exxon's purchase of XTO was a sign that the giant oil company was betting on a much larger role for natural gas in the U.S. energy future.
Natural gas will probably be used to fuel more U.S. power plants. Bus and truck fleets are projected to lead a massive expansion in the use of natural gas for short- and medium-range transportation. A big increase in natural gas-powered personal vehicles might be much further down the road, said Phil Weiss, an oil analyst for Argus Research.
Some consumer groups criticized the deal, which must be approved by shareholders of both companies as well as by federal regulators.
Tyson Slocum, director of Public Citizen's energy program, said Exxon would have too much influence over the price of natural gas, which so far has been abundant and relatively cheap. He also said the move was disappointing because it showed that the company continued to emphasize fossil fuels over alternative forms of energy.
"This just underscores the fact that big oil and gas companies aren't serious about solar and other forms of alternative energy," Slocum said. "They just want to stay big oil and gas companies."
XTO, founded in 1986, has emerged as a major player in the domestic natural gas production field. Its properties include parts of a major find called the Bakken Field in North Dakota and other holdings in the Appalachian regions of Pennsylvania.
The company uses what industry experts call "unconventional means" to extract natural gas, including removing the fuel from shale. It is this unconventional recovery that experts say holds the greatest hope for increased natural gas production in the United States.
"XTO is a leading U.S. unconventional natural gas and oil producer, with an outstanding resource base, strong operational expertise and highly skilled employees," said Rex W. Tillerson, Exxon's chairman and chief executive. The deal, he said, will give XTO's natural gas extraction operations the backing of Exxon's financial and operational reach.
If approved, the purchase would position Exxon to take advantage of natural gas resources that are vastly larger than previously thought.
In June, the Potential Gas Committee, which is based in Golden, Colo., said that new discoveries and reassessments of old formations had increased its estimate of how much natural gas was available for extraction. The group said the future supply of natural gas in the U.S. would be 2,074 trillion cubic feet, up 35.4% from previous estimates.
That was the rough equivalent of 100 years' worth of fuel at current natural gas usage rates, according to the American Petroleum Institute.
Exxon's decision to enter this market is a bold move, said energy analyst Weiss. "Exxon does not have much of a position in U.S. natural gas, and this gives them one," he said.
XTO's stock price closed up $6.37, or 15%, at $47.86 after the announcement. Some of its competitors were swept along by the excitement, with EOG Resources up $4.34 to $90.39 and Southwestern Energy up $3.01 to $44.46.
Exxon's own shareholders were skeptical, driving the trading price down $3.14 to $69.69.
In New York futures trading, oil for January delivery slipped 36 cents to $69.51 a barrel, and natural gas for January delivery rose to an 11-month high, up 16.9 cents to $5.33 per million British thermal units.