Exxon’s $41bn XTO deal: a bet that Copenhagen climate talks will succeed

Exxon Mobil’s $41bn deal to acquire XTO Energy, the US natural gas producer, is the biggest energy deal of the year. It provides a decisive answer the question of whether Exxon needed a big strategic move to sustain its growth.

For Exxon, long the most sceptical of all big oil companies about climate change, the deal marks something of a U-turn. For just as last week’s round of bidding for Iraqi oilfields showed companies betting against a decisive outcome in the climate talks at Copenhagen, Exxon’s move for XTO is in part a play on the likelihood that that the US will make further moves to curb greenhouse gases.

It is not that Exxon is suddenly going all touchy-feely on us. Its decision-making is still as hard-headed as ever. The investment in research into biofuels from algae, for example, is a cautious long-term bet, in spite of all the glossy TV campaigns.

Getting XTO gives Exxon a powerful position in US “unconventional” gas, including shale gas, where it has not been one of the leaders in the revolution that has opened up the huge new source of US gas supplies. With many of the resource-rich countries around the world still making life difficult for foreign investors (viz Exxon’s travails in Russia and Venezuela), resources in a stable developed country are attractive, and in Exxon’s own back yard particularly so.

In addition to those attractions, however, an important part of the case for buying gas assets in the US today is the prospect that energy and climate change legislation will tilt the balance of the energy mix away from coal and towards gas for power generation.

The gas industry has been slow to make its case compared to the smart and well-resourced coal lobby, but it is beginning to get its act together. Gas generates about half the carbon dioxide emissions of coal per kilowatt hour produced, and if America wants to cut its carbon dioxide emissions, then switching away from coal – which today provides half its power – to gas is one of the cheapest and easiest ways to do it.

Robert F. Kennedy Jr made the point very well in an opinion column in the FT in July. Lamar McKay, American president of BP, which was the country’s biggest gas producer, picked up the argument in a speech at an FT conference in September.

Now, in Copenhagen, Aubrey McClendon of Chesapeake Energy, another big US gas producer, has come to make the case at the world climate talks. His visit here was put on by the American Clean Skies Foundation, a think-tank backed by Chesapeake that makes the case for increased use of gas. Its event in Copenhagen was co-hosted with the Worldwatch Institute, the environmental group.

These are the people with whom Exxon will now be making common cause. It will be strongly in Exxon’s interest to see fuel switching from coal to gas, and one of the most certain ways for that to happen will be a strong agreement in Copenhagen that persuades the US Senate to pass energy legislation that includes an emissions cap-and-trade plan.

Environmentalists might just have found their most unlikely ally yet.

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