December 23, 2009
Energy's future may have come to light with Exxon Mobil Corp.'s proposed purchase of XTO Energy. If ExxonMobil's predictions are right, unconventional formations such as shale would provide significantly more of this country's generation and transportation fuels.
Texas-based XTO, which has the resource equivalent of 45 trillion cubic feet of shale gas, shale oil and coal-bed methane, might be the perfect fit for ExxonMobil -- or any deep-pocketed oil partner, for that matter. Indeed, Big Oil has made huge profits from high-priced gasoline in recent years and that money must get reinvested. By betting on natural gas, ExxonMobil is saying that fossil fuels will remain paramount but that tighter air quality restrictions are coming; natural gas emits far fewer emissions than either oil or coal.
"This is not a near-term decision; this is about the next 10, 20, 30 years," says Rex W. Tillerson, Exxon Mobil Corp.'s chief executive, in a conference call. "We think there will be significant demand for natural gas in the future."
The $31 billion deal that also includes the acquisition of $10 billion in XTO debt is expected to conclude in the second quarter of 2010. ExxonMobil's venture comes atop earlier estimates this year from the Potential Gas Committee that said the country's natural gas reserves are 35 percent greater than two years ago. Reserve levels now stand at more than 2,000 trillion cubic feet, it says, which is the most they have been in 44 years.
The increase is because of shale, which is a sedimentary rock that is less porous than sandstone where traditional natural gas is found. While explorers have always known that such formations are filled with gas, it has only been in recent years that retrieving those resources has been technologically feasible. With horizontal drilling, producers can move laterally beneath cities and neighborhoods to extract the product.
As for XTO, its holdings include the Bakken Field in North Dakota as well as those in the Appalachian region. But other fields such as the Barnett Shale in the Dallas area now supply 6 percent of the nation's natural gas. Meantime, there's the Haynesville Shale project in Louisiana and Texas as well as the Marcellus field that stretches from New York State down through Appalachia. Estimates are that 21 shale beds exist in 20 states but that it will take several years to prepare them for development.
To produce gas from shale, tons of water and chemicals must be pumped deep down into the wells to loosen it. And that has created concerns among many communities and environmental groups that say the process contaminates the groundwater. Along those lines, such organizations say that they recognize that natural gas is the cleanest burning fossil fuel but that its current appeal must remain temporary until green energy sources are primed.
The Outlook
That's because the demand for energy is expected to grow in the coming decades and that will require more of a contribution from cleaner-burning fuels. ExxonMobil, in fact, says in its annual energy outlook that it anticipates natural gas to grow faster over the next 20 years than either oil or coal.
"The energy outlook issued by Exxon Mobil Corporation underscores the pressing need to do all we can to develop all economic fuel sources, including America's own oil and natural gas resources," says the American Petroleum Institute.
"As the outlook shows, the world will still rely on oil and natural gas to meet much of its energy demand for years to come ...," it adds. "The outlook also underlines the growing importance of clean-burning natural gas. It notes that 'imposing higher costs for carbon emissions would impact energy prices and provide an incentive to switch' to natural gas and other less carbon-intensive fuels to meet electricity demand."
The ExxonMobil-XTO deal could spark similar deals. Big Oil, which has found the regulatory process in this country less-than-friendly to production, has typically invested much of its resources harnessing overseas oil fields. Natural gas development, in this country, has pretty much been left to the less-noticeable players.
The question now posed to energy analysts is whether other oil giants will start bidding on the smaller producers that might need more financial muscle. Already, some foreign oil developers such as BP and Statoil have invested here. The time for more mergers may be ripe, given that some domestic companies have been affected by low natural gas prices, which had been $2.50 per thousand cubic feet in September but which now stand at more than $5.
Longer term, the prospects are also appealing. The U.S. Energy Information Administration is predicting that total domestic natural gas production will grow from 20.6 trillion cubic feet in 2008 to 23.3 trillion cubic feet in 2035, with shale accounting for a quarter of that expansion. Meantime, Aruvian Research is reporting that -- globally -- natural gas-fueled cars, which now total 5 million, will rise 5.5 percent by 2015.
If those forecasts are correct, ExxonMobil would be in a good position. But other companies may follow suit, potentially leading to an overcrowded field that would be fighting for a sizeable but relatively fixed share of the shale market. Regardless of the corporate winners, it appears that natural gas' fortunes will get much brighter.
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