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Exxon's Built in Escape Hatch From the Shale Gas Game

ExxonMobil's buyout of XTO Energy was the story of December. It might be the story of 2009.

But equally important are the details now emerging about the deal. Particularly the "escape hatch" that Exxon built in.

Exxon is buying XTO to get into the shale gas game. Shale gas is one of the true revolutions we've seen across the commodities space over the last decade. And XTO has the expertise Exxon needs to quickly become a heavyweight in this arena.

But not everyone is convinced shale gas is a boon. Particularly environmentalists, who fear that the multi-stage fracs used to complete most shale gas wells could pollute local groundwater supplies.

As I've written before, the "anti-frac" movement is gaining momentum in the U.S. The major bone of contention is a 2005 law that exempts fracking from Environmental Protection Agency oversight. Allowing gas producers to frac wells without having to complete costly and time-consuming environmental impact studies.

There have lately been calls to re-visit that exemption. Several members of Congress have pledged to hold hearings on the environmental impact of fracking. This could start happening early in 2010.

And Exxon's buyout of XTO is bringing this issue to a head. Opponents of fracking realize that if Exxon is making an acquisition of this size, the major plans to develop shale gas on a major scale. Which of course, is raising a lot of concern.

Exxon is taking the opposition very seriously. So much so that (as revealed last week) they have included a clause in the XTO buyout allowing them to back out if Congress bans fracking or passes laws to make the technique "commercially impracticable".

The government certainly has the power to derail the shale gas revolution. Imposing extra costs for environmental impact assessments could throw play economics out of whack.

But even more than jeopardizing straight-up economics, extra permitting would create procedural risk for gas producers. Imagine a company identifies a drilling prospect. Securing the land for the play almost always involves up-front fees to government or private landowners. Do you pay the bonus (which could run in the millions of dollars), and then conduct your impact assessment? Running the risk that if the assessment comes back negative, you can't drill on land you've paid dearly for.

The environmental impact process creates one more uncertainty in an industry that already has a lot of unknowns. Maybe the concern over drinking water is warranted (although during my years as an environmental consultant to the oil patch I never saw a case of frac contamination). But regulators need to think carefully about how to deal with this issue. The fate of a much-needed energy revolution hangs in the balance.

Here's to pros and cons,

By. Dave Forest of Notela Resources




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