December 15, 2009 2:00 am

XTO bid answers questions on Exxon strategy

ExxonMobil's move to buy XTO Energy answers the question investors and analysts have been asking about the strategy of the world's biggest listed oil group over the past couple of years.

The $41bn deal, which includes $10bn of net debt, brings with it a resource base equivalent to 4,500bn cubic feet of gas, mostly unconventional such as that trapped in shale rock, tight sands and coal bed methane. It also complements Exxon's similar holdings in the US, Canada, Germany, Poland, Hungary and Argentina.

And exploiting that unconventional gas will be a priority. Following completion of the deal, Exxon said it would establish a organisation to manage global development and production of unconventional resources, enabling the rapid development and deployment of technologies and operating practices to increase production.

"This is a significant day for ExxonMobil,'' said Rex Tillerson, Exxon's chief executive. "We're excited about the opportunities.''

While US natural gas prices are off last year's highs, Mr Tillerson stressed Exxon is never about the short term: "This is about the next 20-30 years,'' he said.

Indeed, many forecasts predict that demand for natural gas will grow.

Gas has adequate scale and infrastructure to replace a significant amount of oil use and is about 30 per cent less carbon intensive than oil and about 50 per cent less carbon intensive than coal.

The fuel is gaining support from legislators at a time when the world is looking at ways to reduce carbon emissions.

In October, the Congressional Natural Gas Caucus was launched to develop Congressional policy on the importance of gas in the country's energy portfolio. Sixty Congressmen have signed on.

Mr Tillerson noted natural gas's claim as a cleaner form of energy, following criticism of the company in recent years. Some shareholders and industry watchers have urged Exxon to move into wind, solar and biofuels to secure its future in a world many predict will run less on Exxon's primary commodity - oil.

Indeed, the Rockefeller family, the longest continuous shareholder of Exxon, made a high-profile push for such investment in early 2008, which Exxon thwarted with protestations that it would not invest in areas requiring government subsidies.

Yet even as many in the industry accepted Exxon's explanations, some wanted it to put its large net cash position - a record $60bn at the end of 2008 - to use. But Exxon continued to focus on buying back shares and funding its capital programme.

Many analysts, nonetheless, predicted this year that Exxon would pick up assets from companies under pressure from the credit squeeze, economic downturn and fall in commodity prices.

But the only other sizeable move by Exxon until now had been its bid in October to move into Ghana. And even that was seen as underwhelming by analysts, given the agreement to acquire a large stake in Ghana's Jubilee oil field from its private equity owners for about $4bn was uncharacteristically small for Exxon.

Still, completing that deal, which is currently tied up in political wrangling, would give it a toehold into what the industry expects to be one of the most lucrative oil discoveries in the world in recent years.

Yet the bigger focus has been on why Exxon, and the other US majors, were missing out on the unconventional natural gas play in their own backyard.

The small independent oil and natural gas producers, including XTO, have, in the past three years, increased estimates of US supplies from 30 years, at current usage rates, to 100 years supply, mostly by figuring out how to extract gas from shale rock economically.

Meanwhile, the Europeans have got in on the action. 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 year to not only produce but take what they learn about extracting gas from shale rock abroad.

And PFC Energy, a consultancy, estimated the unconventional gas move could be taken global, noting that advancements made by the independents in developing natural gas from shale could, if taken abroad, more than quadruple gas resources, increasing supplies of this alternative option to greenhouse-intensive oil, coal and oil sands fuels.

This makes the XTO purchase a good fit for Exxon, with its international reach. Not only will it give the company access to the US production boom but also brings with it a team that has the expertise and technology to make this a global play.

Still, there are potential pitfalls. Robin West, chairman of PFC Energy, the consultancy, noted the onshore unconventional gas industry has been dominated by smaller players, who specialise in the short-term nature of the business, which requires constant reinvestment and drilling to maintain production.

This is at odds with the traditional Exxon strategy of large, long-term, highly efficient assets. "The success of this investment will depend on whether Exxon can keep the XTO culture in its team,'' he said. "It's a different business.''

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