Exxon Mobil Corp. yesterday became the first multinational oil giant to gamble significant capital on rapidly expanding U.S. natural gas resources, in a $31 billion deal to buy Fort Worth, Texas-based XTO Energy.
If XTO Energy's shareholders endorse the deal, Exxon's purchase of one of the nation's largest independent natural gas producers will give it access to gas shale fields in the Rocky Mountain, Great Plains, Texas and Appalachia regions. The move by Exxon, which is known for taking a conservative approach to mergers and acquisitions, could further reinforce industry claims that a 100-year supply of natural gas rests under the continental United States.
The purchase also places a significant bet that natural gas demand will increase if Congress and the Obama administration lock in a U.S. climate policy that puts a price on carbon dioxide emissions.
In a conference call with reporters, Rex Tillerson, chairman and chief executive officer of Exxon Mobil, said natural gas is in a good position if the U.S. government mandates emissions reductions but that climate policy was not a major factor in the purchase.
"Not directly, other than clearly natural gas does offer a number of advantages relative to some other alternative fossil fuel choices, particularly in the power generation sector," Tillerson said. "To the extent that climate change legislation creates advantages or disadvantages for fuel choices, natural gas clearly is a competitive fuel, as a price for carbon might be put in place."
Power generators can add to their fleet of gas-burning plants at a reasonable cost, he added. "It's a very flexible configuration to handle load changes in power usage."
Soaring supply estimates
Energy policy as it relates to natural gas has been a conundrum for Washington. The climate debate has to a large extent focused on fuel choices, and lawmakers have been reluctant to fully embrace natural gas as a fuel that is abundant and cheap enough to replace a large portion of coal-fired generation.
Some fear price volatility, which occurred earlier this decade as gas prices increased rapidly and sent some U.S. manufacturers overseas. Others fear higher gas prices would cause an increase in home heating costs if too much gas is used for electricity generation.
Recent gas industry estimates about how much North American gas is accessible have changed the energy equation. In the late 1970s, the industry worried that it could access only about a 10-year supply. Periods of boom and bust in recent years caused consumers to quake at their gas and electricity bills, and drilling in the Gulf of Mexico had left traditional gas reserves depleted.
In the past five years, the gas industry has transformed itself by developing horizontal-drilling and other technology that can access hard-to-get gas supplies embedded in rock formations.
XTO Energy was among the first producers in the Barnett Shale, a gas formation under Fort Worth that began the industry's effort at unconventional gas development. The investment in Barnett did better than expected, and independent gas producers such as XTO, Chesapeake Energy, Devon Energy, Anadarko Petroleum and Apache Corp. planted their flags in unconventional gas fields across the south-central region and, in recent years, in Pennsylvania and northern New York.
But the oil giants, including Exxon, the world's largest publicly traded oil company, spent their money on building infrastructure to import liquefied natural gas (LNG) from the Middle East and expanding their overseas oil resources. For Tillerson, folding XTO into its portfolio fits into its increasing international gas portfolio.
"This is beyond the resource base of XTO alone," Tillerson said. "But it's really about creating additional value by applying their expertise in additional plays around the world."
Unconventional move by a conservative company
In its world energy outlook last week, Exxon said its expects natural gas to grow at a faster rate than oil and coal, and much of that supply will come from onshore, unconventional gas reserves. That outlook also marked the first time the company had assumed a specific U.S. carbon price. Its forecast through 2030 included a carbon price that starts at $30 per ton of carbon dioxide and rises to $60.
Both companies' boards have approved the all-stock transaction, which includes about $10 billion of existing XTO debt.
Fred Lawrence, vice president of economics and international affairs for the Independent Petroleum Association of America, called the Exxon-XTO deal a "game changer." It illustrates the importance of gas shale and tight sands development for the U.S. market and the prospect for international growth.
"The U.S. phenomenon is probably now going to become more global as integrated, multinational companies export these deals overseas," he said. "This is the type of deal that could start breaking down barriers for a fuel that has been more continental-based and constrained in terms of shipping."
The Potential Gas Committee, an industry panel out of the Colorado School of Mines in Golden, Colo., estimates that the United States has 2,047 trillion cubic feet of potential natural gas supply, which is a 35 percent jump from its previous estimate two years ago and is enough to supply the U.S. market for nearly 100 years. The notion that the United States has huge recoverable gas reserves rests on the rapid expansion of shale, tight sands and coalbed methane gas fields in Texas, Oklahoma, Arkansas, Louisiana, Pennsylvania and New York.
In a November report, the International Energy Agency said the surge in U.S. production of unconventional gas changes the energy equation for North America and, potentially, for much of the world.
Exxon has already planted a flag in the global gas market by investing in the Sakhalin Island gas production project off of Russia's Pacific coast and through LNG infrastructure in the United States and abroad.
A 'big buy-in' globally
But it has also quietly moved into unconventional gas fields in Europe and South America, where the security of natural gas supply has been a growing economic and political issue. Through partnerships with regional companies, Exxon has acquired access to gas formations in Germany, Poland, Hungary and Argentina. Countries in Central and Eastern Europe have been concerned they are too reliant on Russian gas giant Gazprom for their supply. Exxon hopes to help develop onshore domestic supply in areas of Europe where there is ready access to pipelines.
Exxon is also expanding development in British Columbia and northern Alaska, and this fall made a $4 billion play for access to hydrocarbon resources off the coast of Ghana.
"It's not as if they just discovered gas potential," Lawrence said, "but this is a big buy-in for the economics of shale going forward."
Few analysts would predict yesterday whether Exxon's purchase suggests other independent U.S. gas producers will be scooped up in the coming months. Acquisitions have come more slowly than expected this year, as some had predicted that sustained rock-bottom gas prices would pressure some independents to sell off to bigger companies. Gas prices have crept up in recent weeks, and yesterday, the gas futures contract for January delivery reached an 11-month high of $5.33 per million British thermal units.
"It's not a decision about commodity price," said Bob Simpson, chairman and founder of XTO. "The capital needed to bring the resource into development is huge."
Blake Fernandez, a Houston-based energy analyst for Howard Weil Inc., said much of the acquisition's success rests on whether Exxon can retain XTO's workforce, which he said has become expert in developing difficult gas shale fields.
"If they can, it's a pretty good deal," he said. "But it's hard to retain the more entrepreneurial workforce of an independent."
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