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Exxon Mobil bets billions on natural gas

Exxon Mobil, the world's largest publicly traded oil company, is making a $31 billion bet that pressure to curb climate change will mean natural gas — cleaner than coal and suddenly much easier to reach — will become a crucial source of U.S. power.

Exxon agreed to buy XTO Energy in an all-stock deal at a 25 percent premium, showing how eagerly a company that is among the most conservative in a conservative industry is jumping into the market for natural gas.

As negotiators haggled in Copenhagen over a global plan to curb carbon emissions, the deal suggested Exxon sees change coming for an energy source best known now for heating homes.

The deal announced Monday was also the largest for the U.S. energy sector in at least four years and Exxon's biggest acquisition since it bought Mobil Corp. for $75 billion in 1999.

XTO Energy, founded in 1986, excelled in using the complex technologies needed to unlock natural gas from tight rock formations, which helped the company grow almost unnoticed into the nation's second-largest gas producer.

The new technologies used by XTO and other companies have advanced so rapidly that energy experts have raised their estimates of how much fuel is available by 35 percent in just two years. The emergence of massive supplies of natural gas in the United States coincides with the nation's focus on cutting emissions.

Utilities have cited the newfound supply and looming climate legislation as reasons for shuttering old coal-fired power plants and scrapping plans to build new ones. Climate legislation would put utilities in the crosshairs, and many are aggressively seeking new fuels like natural gas to minimize the economic hit.

"From the outside view, it does look like this move makes much more sense in a world where there's carbon policy because that ensures a growing market for natural gas," said Amy Jaffe, a fellow at the James A. Baker III Institute for Public Policy at Rice University.

Just this month, Progress Energy became the latest utility to announce it would close coal-fired power plants in favor of natural gas. Exxon Mobil expects global demand for gas to grow 50 percent by 2030.

The acquisition extends Exxon's bet that fossil fuels will remain a critical part of the nation's energy supplies for decades to come. Natural gas is a cleaner-burning fuel than coal, with half the carbon dioxide emissions. For that reason, it is considered as a potential "bridge fuel" on the lengthy path to a renewable, carbon-free economy.

"Natural gas is really well-suited to meet that growing power generation demand, both from the standpoint of its lower environmental impact, but also its capital efficiency and its flexibility," Exxon Mobil chairman and CEO Rex Tillerson told analysts.

Through August, utilities used gas to generate 23 percent of the nation's electricity, up nearly 3 percentage points from last year. Coal's share was down about 13 percent.

XTO claims about 45 trillion cubic feet of gas, much of it trapped in tight shale formations. Technology developed over the past decade has made it much cheaper to pull natural gas from those formations.

In recent years, energy companies have discovered large reserves of natural gas trapped in shale rocks in Texas, Colorado and Wisconsin, as well as in the Northeast. The discoveries have led to a gas drilling boom that has greatly expanded domestic resources, while also raising some environmental concerns, including charges of groundwater contamination in communities near certain drilling sites.

Already on Monday, energy experts were laying odds as to which natural gas companies would be sold next, and which oil companies might follow Exxon's lead by snapping them up.

"Exxon is the group leader, and it sets the trend. I would expect more acquisitions in the next three to six months," said Fadel Gheit, senior energy analyst for Oppenheimer.

Oil still remains the biggest part of the global energy mix, but its stranglehold has slipped from 36 percent in 2000 to 34 percent in 2007, according to the International Energy Agency. Natural gas stayed steady at 21 percent and is expected to grow about 1.5 percent a year, compared to oil at 0.9 percent.

European oil companies are already cutting deals with Chesapeake Energy, one of the biggest independent U.S. natural gas companies. Companies like Royal Dutch Shell and Statoil want more exposure to natural gas fields in the United States and the technology to extract gas.

Exxon is moving beyond the United States to ramp up natural gas production and last week gave the go-ahead for a $15 billion natural gas project in Papua New Guinea. The deal would position Exxon to provide energy to a fuel-hungry China.

Exxon has been on a spending spree recently. This year, the company announced it would spend $600 million in research and development of biofuels made from algae; it has offered $4 billion for a stake in an oil field offshore in Ghana; and it has bid strongly for fields in Nigeria and Iraq.

XTO's chairman and founder, Bob Simpson, said his company can develop the unconventional resources that have given North America more than 100 years' worth of natural gas supplies.

The deal was valued at about $31 billion based on Exxon's closing stock price Friday. Exxon shares fell nearly 5 percent on Monday, placing the deal's value closer to $29 billion.

Information from the New York Times was used in this report.

Exxon Mobil bets billions on natural gas 12/14/09 [Last modified: Monday, December 14, 2009 11:34pm]

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