The independent exploration and production (E&P) companies pioneered the natural gas industry’s rebirth in North America, but ExxonMobil Corp.’s decision to buy one of the most nimble unconventional producers, XTO Energy Inc., could signal a changing of the guard in the oil patch. The transaction, however, also has focused a brighter spotlight on ExxonMobil, which has few friends in the Democratically controlled Congress, analysts said this week.

Many of the world’s largest oil and gas producers long have been major players in the gas fields of the United States and Canada. BP plc, the biggest player in the San Juan Basin, was the largest North American gas producer in 1Q2009, according to the National Gas Supply Association. BP also was the largest gas marketer, followed closely by Shell Energy North America and ConocoPhillips, in NGI‘s 3Q2009 rankings of gas marketers.

In unconventional gas plays, many of the majors were taking a wait-and-see attitude, using, among other things, joint venture drilling agreements, which have become one of Chesapeake Energy Corp.’s biggest money makers.

ExxonMobil, which pursues drilling opportunities around the world, already is a top-tier player in the unconventional gas fields of the Piceance Basin of Colorado. And last year it acquired a big stake in the Horn River Basin of British Columbia (see Daily GPI, May 2, 2008), and today it holds about 300,000 net acres in the emerging shale play.

If the transaction with XTO is completed, ExxonMobil would have about eight million acres of potential unconventional gas acreage across the globe.

“Based on 2008 filings of U.S. Securities and Exchange Commission [SEC] Form 10-K, the post-transaction ExxonMobil would have been the largest producer of natural gas and the fourth-largest producer of crude oil and natural gas liquids in the United States,” the Energy Information Administration said Wednesday.

ExxonMobil wants to get the transaction completed by the end of June, but there may be obstacles in the way. On Tuesday Rep. Edward Markey (D-MA) said the bid by ExxonMobil “raises a number of issues” that need to be reviewed in congressional hearings next year (see Daily GPI, Dec. 16). Markey chairs the House Energy and Commerce Committee’s electricity subcommittee. Among other things, Markey said he wants to consider the role of natural gas and unconventional resource extraction techniques, including hydraulic fracturing.

FBR Capital’s trio of energy analysts said Wednesday the bid by ExxonMobil highlights the growing importance of unconventional gas in the United States, but it also “stimulates the political risk posted by hydraulic fracturing by Congress’ effort to regulate the practice under the Safe Drinking Water Act” (see Daily GPI, June 29).

“Although Congress is unlikely to repeal the fracturing exemption, evolving media coverage of threats to water in the growing shale plays poses a continuing risk of a public backlash,” said the analysts (see related story). “Spills, like the one in Pennsylvania earlier this year, while very rare, pose the most significant near-term risk” (see Daily GPI, Nov. 23). “Moreover, we note that ExxonMobil is a favorite target of environmental policymakers and that its planned acquisition of XTO, most of whose wells are fractured, once again brings the hydraulic fracturing issue to the forefront for activists in Congress and the news media.”

As the FBR team noted, “Big Oil” means a “bigger spotlight.”

Unlike ExxonMobil and other major producers, which the FBR analysts said have “few friends in Congress, the Democratic caucus is concerned about small natural gas producers, and keeping gas prices low is important for manufacturing union and agricultural employment. Recently, we have seen the advancing political influence of the natural gas lobby. It is unclear how much influence (if any) ExxonMobil’s prominence in the space will have in Congress. However, Congressman Markey’s hearing highlights Congress’ concern.”

William Hederman, an energy analyst with Concept Capital’s Washington Research Group, said Wednesday he also doesn’t see any “significant danger” of legislation being enacted in the near term that would impact the transaction. The language in the ExxonMobil-XTO agreement was noted by the FBR team, and it also piqued Hederman’s interest.

“Among the material adverse effects specified as potentially terminating the deal are ‘changes to applicable laws related to hydraulic fracturing…that…have the effect of making illegal or commercially impracticable such hydraulic fracturing or similar processes.’ In our opinion, this makes it clear XTO’s hydraulic fracturing technology know-how and its development opportunities are major elements of Exxon’s interest,” Hederman wrote.

Markey’s call for hearings creates a headline risk, he said, but “we continue to believe it is unlikely that legislation will be enacted in the near term to require federal permitting of hydraulic fracturing.”

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