Exxon finds good use for its money

ExxonMobil’s announcement that it was buying XTO Energy for $41bn ($31bn stock and $10bn in debt) is a good answer to the critics who have been looking for the world’s biggest publicly listed oil company to do something besides pay dividends and buy back shares with its huge stockpile of cash.

While the Rockefeller family’s push of last year for Exxon to stake out a future beyond oil sounded good, Exxon insisted those sectors were not right for the company. Exxon has been built on fossil fuels. And it knows the business well.

In moving decisively into unconventional natural gas with the XTO purchase, Exxon is investing further in the fossil fuel business it already has perfected. Yet natural gas is not only less carbon intensive than oil, but new technology has made it abundant.

Accessing unconventional gas from sources such as shale rock, tightly packed sands and coal bed methane may be different from just capturing the gas that comes up during drilling a typical oil well, but it is a business Exxon understands.

And Exxon is smart enough to bring the XTO team on board to help it learn what it does not know. The boom in shale gas in the US has been dominated by the small oil and gas producers who figured out how to economically extract the gas, but the business is now big enough that the majors should be getting into it, if they are not already.

Indeed, Exxon is not a first mover. BP and BG Group of the UK; StatoilHydro, the Norwegian energy company; and Eni, the Italian oil company, have all bought into the US gas industry in the past 18 months to learn from the little guys so they can take the process abroad. Gas has adequate scale and infrastructure to replace oil in some cases and is about 30 per cent less carbon intensive than oil and about 50 per cent less carbon intensive than coal. And there is shale around the world just waiting to be exploited.

Exxon’s move signals it will be part of this bigger play. Given how long it is going to take to make meaninful inroads in solar, wind and biofuels, this seems like a good move. Especially when one notes Exxon is working on a pilot project to capture and sequester carbon emissions from natural gas. If it can totally clean up gas, there will no reason to any environmentalists should lobby for renewables instead of natural gas.

Related links:

Should the US majors be rushing into shale gas? (FT Energy Source, 14/09/09)
Exxon’s biofuel’s research is not such a shocking move
(FT Energy Source, 14/07/09)
ExxonMobil bulking up on reserves again (FT Energy Source, 05/11/09)

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