Exxon Optimistic on Natural Gas

By KATIE HOWELL of Greenwire
Published: December 15, 2009

After quietly grabbing up unconventional natural gas reserves for years, Exxon Mobil Corp. moved boldly yesterday to buy one of the largest U.S. independent gas companies, XTO Energy, in a deal valued at $41 billion.The oil and gas behemoth announced that it planned to use XTO to establish a new business unit that would develop and deploy technologies to extract fuels from shales, tight sands and coal seams.

Analysts see Exxon's bid -- the company's biggest financial move since its merger with Mobil in 1999 -- affirming the growing status of natural gas as a U.S. energy source.

"I think what it is is a fairly massive statement of optimism in the long-term future of natural gas in the United States," said David Bloom, a regulatory attorney covering energy issues at Mayer Brown.

Over the past decade, Exxon Mobil has built up its reserves of unconventional natural gas resources like shale gas, tight gas and coalbed methane, which could hold decades of energy supplies but have historically been difficult to extract. New technological developments, like those developed and employed by XTO, have allowed such plays to become a viable part of the global energy mix.

Exxon has socked away natural gas reserves in tight sands, shales and coal seams in Colorado, Pennsylvania, Canada, Germany, Hungary and Argentina.

"Over the last decade we have grown unconventional gas resources to approximately 7 percent of our resource base," David Rosenthal, vice president of investor relations at Exxon Mobil, said yesterday on a conference call.

XTO's resources would add nearly 14 trillion cubic feet of proven reserves to Exxon's portfolio, with nearly 80 percent of those natural gas. Together, the two companies would hold the largest unconventional natural gas acreage portfolio in the industry, at nearly 8 million acres. An XTO acquisition would also bring its significant oil shale position to the table.

"We have been securing a portfolio of unconventional opportunities globally, and we like the position we've got, but now we have large areas that require appraisal and ultimately require an organization to develop those in the most efficient and profitable way possible," Exxon Mobil CEO Rex Tillerson told reporters. "This opportunity provides us both access to what we believe is a high quality resource base within the United States and a ready-built, purpose-built organization."

Access to XTO's expertise and experience in unconventional plays would be a major asset to Exxon, according to a Morningstar analyst.

"Exxon also gets XTO's experienced unconventional gas development team, which could be considered icing on the cake," Eric Chenoweth, the analyst, wrote yesterday.

The move -- a show of confidence in the future of unconventional resources -- could also spur additional investment in domestic unconventional natural gas plays like the Barnett in Texas, Marcellus in Appalachia and Haynesville in Louisiana.

"The scale of Exxon's investment is an indication that it believes the progress made so far is well-founded, and I think that's an important sign to the entire sector," Bloom said. "It clearly makes available massive new amounts of money for the development of these plays, and we're quite likely to see other parties come into the industry and make financial contributions."

Chenoweth at Morningstar said other companies that are major players in unconventional natural gas resources could also be attractive targets for major oil and gas producers looking to expand their positions in unconventional plays. Among those are large independents Chesapeake, Devon and EnCana and smaller firms Range Resources -- which has significant acreage in the Marcellus Shale -- Petrohawk, Ultra Petroleum and Southwestern.

"All of these companies have meaningful positions in U.S. unconventional gas plays that could be attractive to a major, though it would be more of a bolt-on deal," Chenoweth wrote.

'A variety of formats'

Exxon's move is not necessarily a surprise. In its world energy outlook released last week, the company said it expected natural gas demand to grow at a faster rate than coal or oil, driven largely by significant growth demand for power generation.

"These resources are attractively positioned to increase natural gas production and to meet the growing demand for natural gas, which is expected to be the single biggest contributor to the U.S. and global energy mix over the coming decades," Rosenthal said.

Some see the move as a significant bet by the long-time stalwart against climate change that proposed climate legislation would boost natural gas over coal in the power sector by placing a price on greenhouse gas emissions (ClimateWire, Dec. 15).

"It's a statement of optimism that natural gas will play a role in addressing climate change issues, whether as a bridge fuel as we transition to a greater use of renewables or as a competitor to coal," Bloom said. "But it's a pretty important statement that there's going to be demand for natural gas."

Kert Davies, a research director at Greenpeace, agreed, adding that Exxon doesn't make any decisions lightly.

"This decision was made deliberately with calculation of how important natural gas will be in the future," Davies said. "The oil industry is all about putting their chips on the roulette wheel, and this is an indication that Exxon is seeing natural gas as one of those players."

The announcement comes just five months after the oil giant announced a $600 million investment in algae-based biofuels, a surprise move that stunned the industry. The algae investment and a major unconventional natural gas investment point toward Exxon's willingness to adapt to a changing energy future.

"Exxon wants to be an energy supplier in the long-term future," Bloom said. "And that's going to come in a variety of formats."

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