NATURAL GAS:

Exxon-XTO deal hinges on fracturing legislation

Exxon Mobil Corp.'s $41 billion bid for natural gas producer XTO Energy won't proceed if Congress passes legislation curbing use of a controversial drilling technique needed to tap many XTO reserves, according to contract language filed by Exxon with the Securities and Exchange Commission.

The proposed all-stock deal is contingent on Congress not passing laws that would make the hydraulic fracturing drilling technique "illegal or commercially impracticable," the provision says.

The Exxon-XTO deal would boost the oil and gas behemoth's position in domestic unconventional gas reserves. Together, the two companies hold the industry's largest acreage portfolio of unconventional reserves, Exxon said. It would also grant Exxon access to XTO's significant expertise in tapping hydrocarbons trapped in shales, tight sands or coal seams.

Many industry insiders have praised the deal as a strong show of support for the drilling technique known as hydraulic fracturing. But the contingency is a sign that Exxon is interested in XTO for its hydraulic fracturing expertise, some say.

"In our opinion this makes it clear XTO's hydraulic fracturing technology know-how and its development opportunities are major elements of Exxon's interest," William Hederman, senior vice president for energy policy at Concept Capital, a research firm advising institutional investors, said in a briefing paper released today.

Hydraulic fracturing blasts water, chemicals and sand or plastic beads into compact rock to release trapped fuel. The method has been used for decades in oil-producing areas but has gained popularity recently as a way to tap vast shale gas reserves. Critics are concerned that the technique could contaminate water supplies, deplete local watersheds and release toxic substances into aquifers.

There are two active bills addressing hydraulic fracturing in Congress: H.R. 2766, from Reps. Diana DeGette (D-Colo.) and Maurice Hinchey (D-N.Y.), and companion legislation (S. 1215) from Sens. Robert Casey (D-Pa.) and Charles Schumer (D-N.Y.). The bills would require companies to comply with the Safe Drinking Water Act by revealing the ingredients of their fracturing fluids.

Yesterday, Rep. Ed Markey (D-Mass.) called for hearings early next year about the Exxon-XTO deal in the Energy and Environment Subcommittee that he chairs in the Energy and Commerce Committee.

"This proposed merger also raises a number of issues with respect to the future direction of the U.S. domestic oil and gas industry, competition within the industry and the potential environmental impact of increased unconventional natural gas development," Markey said in a statement (E&E Daily, Dec. 16).

Hederman said in an interview current bills are not likely Exxon's primary concern. And he added that any legislation regarding hydraulic fracturing would not likely pass before the Exxon deal closes in the second quarter of 2010.

"We don't think [the contract language] is specific to any drafted legislation," Hederman said. "But they want some protection if any legislation were to move forward, if there were any compromise on a climate change or energy bill -- you know how amendments can be included. They want to be ready."

Nonetheless, the natural gas industry expressed concern about the contract contingency.

"It's a scary bit of news, to be sure, but I think it also underscores the serious nature of what DeGette, Casey and others are trying to do here," said Chris Tucker, a spokesman for Energy In Depth, an industry-backed group. "Their bill isn't some sort of cosmetic exercise, contrary to what they've been telling their worried constituents. It would initiate an unprecedented expansion of EPA authority, and if passed, would have serious consequences on jobs, revenue generation and energy output."

Exxon would not comment on the specific hydraulic fracturing language in the SEC filing.

"According to SEC requirements, we filed the merger agreement on Dec. 14, and it contains a number of customary provisions for transactions of this nature," a spokeswoman for Exxon Mobil said.

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