Energy News | ExxonMobil’s Grand Entry to North America Shale Gas

Leave it to ExxonMobil to make a splash. It was officially announced a few days ago that ExxonMobil had acquired Fort Worth-based XTO in a $31 billion deal. This is a major announcement, as XTO is a top-10 producer in the U.S. natural gas market. It also has a strong track record of finding and developing resources at a reasonable cost, and has built a portfolio of desirable acreage positions. But most importantly, it is one of a handful of companies that comes to mind when the topic turns to domestic development of shale gas resources. The latter point is, of course, the punch line. Specifically, ExxonMobil — along with its balance sheet — is stepping into the domestic shale gas market in a major way.

In addition to what it means for ExxonMobil, this acquisition is a signal that more major oil and gas producers may begin to enter the fray in more pronounced way in the North American gas market when it comes to shale. While BP already has a strong position in North American gas, companies such a Shell and Chevron could very well seek to establish a stronger upstream onshore presence through merger and acquisition (M&A) activity. In an era where concerns about reserve replacement have dominated discussions, expansion through acquisition could be a very good strategy. Not only because it enhances the current reserves portfolio, but because it also provides a growth opportunity, which makes investors happy. This latter point, coupled with current low natural gas prices, is why we could see more M&A activity in the next few months. When the economy recovers, demand will increase, meaning prices should rebound a bit, and buying low and selling high is a pretty sound long-term strategy. In a larger sense, as the major energy companies step into the domestic gas market in a more pronounced manner, we should see supply growth and cost reduction. There are tremendous economies of scale in the upstream business, and these companies bring tremendous scale. The major energy companies will more than likely keep the experienced personnel of the acquired company, but add a level of capital depth not yet realized.

An additional point that strengthens the motivation to move into gas concerns carbon dioxide. Specifically, as regulation of carbon dioxide emissions loom, natural gas stands to play a major role going forward. So, one has to ask, “What better position is there for traditional upstream oil and gas producers to take?” The opportunity that shale gas presents in the North American gas market leverages what these companies already know how to do very well, and capitalizes on what portends to be very real growth potential.

Kenneth B. Medlock III is the James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics at the Baker Institute and adjunct professor in the Rice University Department of Economics. Medlock has served as an adviser to the Department of Energy in its energy modeling efforts and is a regular participant in Stanford University’s Energy Modeling Forum.