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ExxonMobil's Tillerson Defends Onshore Gas Drilling

ExxonMobil Corp. CEO Rex Tillerson, who helms the largest natural gas producer in North America, attempted civility and then cut short a barrage of critics Wednesday who voiced their concerns about hydraulic fracturing (hydrofracking) at the company's annual meeting in Dallas.

The nearly three-hour meeting, which gave Tillerson a forum to highlight the positives from 2010, at times rose to a heated exchange between the CEO and some of the more hostile shareholders in the audience. This year it was all about hydrofracking.

Tillerson, who has returned fire on company critics in past meetings, again demonstrated that he would have none of it.

"The early detractors slap a label on something, and then it takes us a long time to get it peeled off," Tillerson said. Gas drilling critics are "wrong" about hydrofracking. "It's not new to us." Drilling is a risky business, but he said if hydrofracking were to create environmental contamination, the companies would clean it up. "There are ways to deal with that."

Tillerson said the company "supports and agrees" that "we need to go out and get data" about the safety of hydrofracking. "We fully understand it and we have solutions to it. Once we understand and know what our contribution will be, we'll act...We've taken an enormous position in the unconventional space, and it's vital to our U.S. success. We've got to address it and we are confident it can be addressed."

However, oversight is better done by the states than federal regulators, he said. State-level regulators "manage the water...they understand better than anyone and can do better oversight. The same is true of point source air emissions in urban areas."

In states where drilling is fairly new, additional regulatory oversight may be needed. "We are in discussions in Washington and elsewhere to bring state regulators together" to share their knowledge, Tillerson said.

Another speaker said it "behooves the company for the management at Exxon to take a leadership stand on fracking disclosure, well management and oversight...instead of hiding behind your positions here...These are issues investors clearly care about."

Tillerson wasted no time in educating the speaker about what ExxonMobil does.

"I don't think you've been paying very close attention to what we're doing in terms of the speaking I do and senior management does at public forums, investor forums, academic forums...All I would say, I take issue with you quite frankly about leadership because we feel we are a leader" on many controversial issues, like climate change and carbon taxes. "We don't report every meeting" held with elected leaders and regulators.

"As far as leadership in the industry on hydraulic fracturing...deepwater safety, you wouldn't have to search very hard to figure that out. You're not paying attention, quite frankly, to what we're doing. With all due respect, we'll continue to do what we think are the right things to do...

"If we can't get it right, we're not going to do it. We'll find solutions to challenges, as we have proven that we've done for many, many years."

ExxonMobil has launched a campaign to help educate the public about the federal and state regulatory mechanisms in place to ensure that drilling is done safely and with few risks, the CEO explained.

After conducting some public polling and finding that there are concerns about drilling's environmental impacts, Tillerson said ExxonMobil in response is aggressively buying advertisements to persuade critics that the industry is able to drill safely and will clean up any contamination that may result.

"We're not trying to characterize this as an activity that does not have risk," he said. "But we think there have been a lot of pretty casual statements about risks that are simply not backed up by facts."

It's an argument that ExxonMobil has to win in part because it has such a huge stake in North America's unconventional resources, said the CEO. After buying onshore giant XTO Energy Corp. last year ExxonMobil now owns more natural gas reserves than oil, he said.

The transaction has yet to prove a positive for the global giant, in large part because gas prices are low. ExxonMobil's share price rose 7% in 2010, but that number was well below that of its rivals last year. Chevron Corp.'s stock price was up 19% year/year, while ConocoPhillips saw its stock jump 33%.

"Our approach is to selectively invest across a broad range of industry and market conditions," Tillerson said. And natural gas is the future, he added. Three "major" upstream projects completed this year have forecasted production of 120,000 boe/d, and two are gas-related: RasGas Train 7, a continuing LNG joint venture with Qatar Petroleum, and the Golden Pass LNG terminal in Sabine Pass, LA, which recently began commissioning cargoes. The third project is the Sakhalin-1 Odoptu project.

"Global energy demand to 2030 is expected to grow by about 35%," said Tillerson. "There is strong growth for gas, which is well suited to support our objectives," which include lower greenhouse gas emissions and more efficiency gains.

"Natural gas is expected to be the fastest growing fuel source," he said. "We expect U.S. natural gas supply and demand to increase on the strength of unconventional gas resources. Significant resources will be required to offset ongoing declines in conventional natural gas."

However, the "energy challenge" is that the industry must meet the world's growing needs "safely while minimizing the impact on the environment. The scale of the challenge is enormous and growing and requires an integrated set of solutions...and the pursuit of all economic options."

Unconventionals in North America and around the world make up about 20% of the super major's resource base. Including the XTO merger and "subsequent acquisitions," Tillerson said ExxonMobil now has 100 Tcfe of unconventional gas and oil reserves. In the United States alone, the company estimates it has a well inventory of 50,000 in "multiple plays."

"The XTO merger positioned us to pursue other unconventional resources," both in North America and worldwide, with access to more than 10 million net acres -- six million outside the United States, he said. In the United States ExxonMobil is "positioned to double production over the next decade."

Slightly more than half of ExxonMobil's resource base is in the Americas. About 24% of the projects are conventional oil and gas, while 21% are in heavy oil/oilsands. Acid/sour gas projects make up 11% of the resource base, LNG is 10%, the Arctic is 8%, and in the deepwater, the resource base totals about 6%.

"We remain active in the U.S. Gulf of Mexico [GOM]," said the CEO. "With 2.1 million net acres in multiple plays...we are actively building our prospect inventory." The producer recently acquired large-scale seismic studies of the western GOM, he added.

However, the industry, he acknowledged, "faces multiple uncertainties and risks."

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