The head of ExxonMobil Corp. last Wednesday told a House Energy and Commerce subcommittee that its pending $41 billion merger with unconventional gas powerhouse XTO Energy Inc. would be called off if Congress takes any action to limit or restrict the use of hydraulic fracturing (hydrofracing) in the prolific shale gas plays.
"That's correct" the pending marriage would be canceled, ExxonMobil CEO Rex W. Tillerson told Rep. Fred Upton of Michigan, the ranking Republican on the Energy and Environment Subcommittee, during a hearing to review the merger and U.S. shale development. The proposed merger, which was disclosed in December, is expected to close by the end of June barring no unfavorable action by Congress on hydrofracing (see NGI, Dec. 21, 2009).
"If you remove hydraulic fracturing as one of the key enabling technologies, this [shale] resource can no longer be recovered. So obviously our deal would make no sense," he said. "Without hydraulic fracturing, the gas that's locked in the shale rock stays locked." Hydrofracing involves the injection of fluids into wells at extremely high pressures to crack underground formations and stimulate the flow of oil and gas. More than 90% of oil and gas wells in the United States employ hydrofracing.
With a combination of horizontal drilling and hydrofracing techniques, "we can now find and produce unconventional natural gas supplies miles below the surface in a safe, efficient and environmentally responsible manner," Tillerson said. Because of these drilling advancements, he estimates that unconventional gas is going to be supply upwards of half of the total gas supply in the United States over the next 20 years.
Irving, TX-based ExxonMobil inserted the clause on hydrofracing into the merger contract to protect its shareholders, according to Tillerson. "I think it's just a recognition that we see a lot of regulation that comes out of the Congress and the U.S. government that provides little benefit...There's an enormous propensity to regulate in this country, so it's just a recognition that that's a risk."
Bob R. Simpson, chairman of the board of XTO Energy, noted that the technique of hydrofracing has allowed the nation to go from a "psychology of shortage" with respect to natural gas to "one of abundance" in the last 30 years. And because of that, "I just don't believe that...there's any real risk of legislation that would prohibit that [hydrofracing] practice," he said.
"It is incredibly telling that this kind of merger has to be conditioned on the government not pursuing an irrational policy, which will lock up our own natural resources," said Rep. John B. Shadegg (R-AZ).
"I commend the people who have put this deal together. I believe it is in our nation's interest, and I think it is time that we focus on producing American energy in America," he said.
"It would be detrimental to this country if they outlaw that practice," said Rep. John Sullivan (R-OK). Rep. Joseph R. Pitts (R-PA) called the pending merger the "biggest endorsement yet for shale production," and would "create the largest natural gas producer in the United States."
The merger agreement, which is subject to XTO stockholder and regulatory approval, would add around 45 Tcfe to ExxonMobil's resource base and lift its gas weighting to 45%. ExxonMobil would have a substantial unconventional gas and oil resource base in the United States to complement its holdings in Canada, Germany, Poland, Hungary and Argentina.
In some producers' minds, Rep. Diana DeGette (D-CO) is leading the anti-hydrofracing movement in Congress, but she said nothing could be further from the truth. "My bill would not make hydraulic fracturing [ExxonMobil contract language] illegal nor would it make it commercially impracticable. I support the use of hydraulic fracturing...But I also support it being done in an environmentally responsible way," she told the ExxonMobil and XTO Energy officials.
"Currently there's no requirement under federal law to disclose the chemicals used in hydraulic fracturing, although we know that many of those chemicals may be highly toxic. Frankly all of our constituents have the right to know what chemicals are being used in their communities, particularly if they are near underground sources of drinking water.
"What my bill would do is simply restore the EPA's [Environmental Protection Agency] ability to ensure that hydraulic fracturing does not endanger drinking water under the Safe Drinking Water Act [SDWA]." DeGette cosponsored a House bill that was introduced last June; a companion bill was offered in the Senate as well (see NGI, June 15, 2009).
In effect her legislation would turn over oversight of hydrofracing, which is currently handled by the states, to the federal government. Producers' hydrofracing activities are now exempted from federal regulation under the SDWA, and producers want it to stay that way. Energy analysts generally believe there is a low probability that Congress will repeal the SDWA exemption for hydrofracing this year.
Upton called on policymakers who are opposed to hydrofracing to take notice of recent comments by Energy Secretary Stephen Chu -- the top scientific expert in the Obama administration -- who earlier this month said he believes hydrofracing can be done right without fluids leaking into the water table.
"The question is, can you do this right so it [hydrofracing] doesn't leak into the water table? I think you can," Chu told reporters. However, he added "can you do it incorrectly and start to pollute water tables, yes.
"There's a hundred ways to mess up something. But a lot of it is, for example, making sure that as you go through a water table level to go deeper that the seal around the water table is intact and remains good...And so that means you have to be very careful about that...I think it can be done responsibly and the EPA and other agencies will be looking to ensure that it can be done safely and responsibly," Chu said.
"Yes, I think it is possible to do this [hydrofracing], but again you don't want to be mucking with shale that is very, very close to a water table, or if there is not a very stable fault line."
Questioned about lawmakers' attempts to ban hydrofracing, Chu said, "If it [oil and gas] can be extracted in an environmentally safe way, then why would you want to ban it? I'd rather say let's go down the path and show that it [hydrofracing] can be done in an environmentally safe way. And then you make sure there are safeguards and a measurement to do that."
Producers last week said they were encouraged by Chu's remarks. "We agree with...Chu, who at a Department of Energy roundtable...said hydraulic fracturing was safe and that lawmakers should be cautious in their efforts to restrict it," said the American Petroleum Institute (API), which represents major producers.
"Hopefully Congress will listen to what he [Chu] has to say on the matter," said Lee Fuller, vice president of government relations for the Independent Petroleum Association of America (IPAA).
"I think [Chu's comments] certainly are consistent with what producers have said about hydrofracing," he said. API, IPAA and other producer groups contend that hydrofracing does not harm drinking water and that stripping producers of this exemption would stunt natural gas production, particularly from shale gas plays. Environmentalists on the other hand argue that hydrofracing threatens water supplies.
"Unnecessary additional regulation of this practice would only hurt the nation's energy security and threaten our economy, especially since studies estimate that up to 80% of natural gas wells drilled in the next decade will require hydraulic fracturing," API said.
"Hopefully this will be a chance for the Energy Department to be more engaged in the issue." Fuller said the Department of Energy historically has been an advocate for U.S. energy development, and he believes that's a role the department should play with respect to hydrofracing.
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