Sheila McNulty Exxon’s XTO exit clause seems unlikely to be used

ExxonMobil managed to beat estimates with its fourth-quarter earnings 23 per cent lower, year-on-year. But analysts on the company’s conference call will be pressing the oil major’s executives on the viability of its decision to buy XTO Energy, the natural gas producer. The $41bn deal came with an exit clause allowing it to walk away if the key technology used in tapping unconventional natural gas becomes uncommercial.

That technology is what has enabled the boom in the US onshore gas play in recent years, growing estimates of US resources from 30 years supply, at current usage rates, to 100 years supply. The process involves drilling down, up to 20,000 feet, and then up to 4,500 feet across, accessing a much broader area than conventional oil and gas development, with ultimately less effort, environmental impact and expense.

Once a well has been drilled, water with fine grains of sand is pumped through at high pressure, fracturing the shale and leaving the sand to prop open the rock so the gas can escape. It is this so-called fracking process, which is under threat. While there is no national law in the works to outlaw fracking, individual states, lawmakers and local authorities are studying the possiblities of water contamination and regulating the industry to varying degrees.

Fracturing the rock takes significant water laced with chemicals, which critics fear could leak into groundwater and aquifers during the process or when disposed as wastewater. Critics have blamed shale development for contamination of water wells and death of livestock exposed to potassium chloride, one of the chemicals used. They also consider it a waste of a precious resource.

John Curtis, director of the Potential Gas Agency at the Colorado School of Mines, notes most fractured wells are thousands of feet blow any potable water zones. The natural formation water at that depth is most often a corrosive brine – or at least certainly not drinkable. But in the northeast, where people are more resistant to development than in the pro-energy producing states of Texas and Louisiana, Chesapeake Energy, a gas producer, recently revoked plans to drill in the New York watershed, which supplies unfiltered water to 9m people, amid mounting opposition.

But governments at all levels will find it difficult to support such efforts, given the boom created by the industry amid the downturn. A study by IHSGlobal Insight credited the gas industry with providing 2.8m jobs in the US in 2008, spread across 30 states.

At a Congressional hearing in January aimed at discussing the potential impact of the Exxon acquisition of XTO on energy markets, lawmakers focused on legislation to put regulation of the process under the Environmental Protection Agency, something industry fears would either lead to the banning of hydraulic fracturing or make it too expensive.

If the process became uneconomic, the boom in onshore gas would halt – making such a move very unlikely, given the boost natural gas is getting in Congress.

In October, Congressman Tim Murphy and Congressman Dan Boren launched the Congressional Natural Gas Caucus to develop Congressional policy on the importance of gas in the nation’s energy portfolio. Seventy Congressmen have signed on. The Caucus said in a November 2 letter to President Obama that responsibly developing this domestic resource can help reduce federal greenhouse gas emissions while creating American jobs.

With 15.3m Americans unemployed and President Obama pledging in his State of the Union address to focus on growing jobs, it is unlikely legislation will be passed on time to derail the deal, which is to be completed in the second quarter of 2010.

Related links:

How healthy is Barnett Shale? (FT Energy Source)
Fracking defended, just in case anyone planned to regulate it (FT Energy Source)