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Exxon bets big on natural gas

The oil giant's purchase of XTO indicates it sees growing importance of gas as a source of U.S. power.

December 15, 2009 at 3:47AM

Exxon Mobil, the world's largest publicly traded oil company, is making a $29 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.

The technology to unlock natural gas from tight rock formations has advanced so rapidly that energy experts have raised 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. The newfound supply and looming climate legislation have been cited by utilities this year as they have shuttered old coal-fired power plants and scrapped plans to build new ones.

Climate legislation would put utilities in the cross hairs, and many are 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.

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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.

"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 on a conference call.

Through August, utilities used gas to generate 23 percent of the nation's electricity, up nearly three 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.

Already Monday, energy experts were laying odds on which natural gas companies would be sold next, and which oil companies might snap them up.

The deal was valued at about $31 billion based on Exxon's closing stock price Friday. Exxon shares fell nearly 5 percent, to $69.42, on Monday, placing the deal's value closer to $29 billion. Irving, Texas-based Exxon will issue about 0.7 shares of common stock for each common share of XTO. Exxon will also assume $10 billion in XTO debt.

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XTO shares rose $6.11, or 15 percent, to $47.60 Monday.

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about the writer

about the writer

MARK WILLIAMS, A ssociated Press

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