A few weeks ago, Energy behemoth Exxon/Mobil purchased domestic natural gas supplier XTO, a company heavily invested in the Pennsylvania shale gas business.

On Wall Street, XTO share prices rose following the merger announcement. Indeed, the value of many companies involved in domestic shale exploration surged on the news of the purchase. The XTO purchase is the most significant acquisition Exxon has made since they purchased Mobil back in 1999. What does this thirty-one billion-dollar mega-merger mean for Pennsylvanians?

First and foremost, Exxon’s buy-in to the natural gas business it is a strong indication that the biggest energy company on the planet believes that in the near future, America will be powered by domestically produced natural gas. But if the future of Marcellus shale exploration looked so bright to Exxon executives, why were XTO executives willing to sell their company?

Times are tough in the energy industry. Low natural gas prices, a continuing tight credit market for businesses and --- most important of all ---- unanswered environmental questions, have conspired to make Marcellus shale production a financially risky venture for smallish gas companies.

Prices of natural gas have plunged to less than $6 per million BTU from a 2008 high of $13. The original business plan of smaller gas companies like XTO and others such as Devon Energy, Chesapeake, Anadarko Petroleum and Petrohawk, assumed that gas prices would remain high, providing them a generous stream of working capital to further develop shale gas fields. With natural gas prices now much lower, and expected to remain depressed for years, the companies don’t have the cashflow needed to fully develop and exploit the gas fields.

An additional problem for the smaller companies is credit. Business credit markets remain morbid following the financial crash of 2008 and gas companies are hard-pressed to find lenders willing to cough-up the large sums of cash needed to develop the shale fields.

Exxon’s situation is very different. The company is sitting on billions of dollars of cash and is more than able to ride-out the current economic downturn while continuing to make the capital investment needed to finance the expensive infrastructure that will be needed to produce and bring Pennsylvania shale gas to market.

Exxon is not the only big multinational energy company sniffing around Pennsylvania gas fields. French energy giant Total SA announced they are interested in acquiring companies involved in Marcellus shale exploration.

With the entrance of the energy giants into Marcellus gas development, the future of natural gas production in Pennsylvania seems assured, right? Well, maybe.

There remains one significant hurdle to large-scale Marcellus Shale gas production: determining the environmental cost of shale gas production. In Pennsylvania, that means making sure the state's water resources are not at risk.

Since early November, when Chesapeake Gas withdrew from drilling test wells on New York watershed lands, an awareness has begun to emerge that any gas exploration in the Northeast will be subject to increasing environmental scrutiny that will surpass what domestic drillers in Texas and other western states previously faced. Thus far, preliminary research into the long-term impact of extracting natural gas using hydraulic fracturing (fracting) on regional water quality is raising alarms among regulatory and environmental watchdog groups.

The energy industry successfully argued that the federal law protecting drinking water should not be applied to hydraulic fracturing. In 2005, Congress passed a law prohibiting such regulation. However, if ongoing environmental studies detect deterioration of water quality caused by the fracting process, expect Congress to revisit the issue.

Because of unanswered environmental questions, Exxon is hedging their bet on Marcellus gas exploration. Within the 76 page agreement that outlines the terms of the Exxon-XTO merger is a clause that allows Exxon to pull out of the deal “…if Congress changes a law that makes “hydraulic fracturing or similar processes ... illegal or commercially impracticable.”

The impact of fracting on regional water resources, and the subsequent cost of any mitigation, will determine the dollar cost per million BTU of Marcellus gas. Until that cost is determined, the financial viability of Marcellus gas production remains uncertain.

Perhaps it’s no wonder that the day after the proposed merger was publicly announced, Exxon’s stock fell almost 5%.

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Comment by Tom Copley on January 8, 2010 at 3:37pm
I hear you, brother.
Comment by Scott Roberts on January 6, 2010 at 7:52pm
Tom-- I pray that we don't have to choose between clean gas and clean water. I'm very hopeful that we will be able to have both. Gas IS the future.
Comment by Tom Copley on January 3, 2010 at 2:17pm
Scott--The E & P industry needs to do everything humanly possible to minimize water and air pollution. These companies and their stakeholders will earn a handsome return and in exchange need to uphold a very high standard. However, for the sake of argument, let's say they are trying to do it, and still there are a few issues such as at Dimock and Dunkard Creek. Beyond that point, doesn't it depend upon for what Pennsylvanians are sacrificing? If it is to live in a free, safe and secure country with all of the basic essentials such as a plentiful and dependable supply of energy for an abundant economy, then perhaps it is worth sacrificing. --Tom
Comment by Scott Roberts on January 1, 2010 at 8:58pm
Tom --- Couldn’t agree more that Marcellus shale promises a bountiful supply of domestically produced clean natural gas for millions of American consumers. And, as you rightly point out, domestically produced gas supplies are safe from disruption by foreign events outside our control. Coupled with the economic benefits: a smaller balance of payments deficit (because we’re not buying energy products overseas) and the economic revitalization of significant swaths of rural Pennsylvania, Marcellus shale production promises to be a positive catalyst for change. However, it is unfair to ask the men, women and children who live in rural Pennsylvania, many of whom are cash-poor and struggle daily to make ends meet, to sacrifice their health and clean water in order to produce cheap gas.

Why can’t we have clean gas AND clean water? If the shale reserves are so vast, and the price of production per BTU expected to be so low, how can we afford not to invest a few pennies per BTU in assuring that Pennsylvania water resources remain pristine? ---Scott
Comment by Tom Copley on December 31, 2009 at 7:19pm
Scott-- it's a shame that the role in providing stable energy prices, a bountiful supply of natural gas such as the Marcellus shale can provide, is not far better understood by the general public. Should the supply of imported oil or LNG ever be impaired by turmoil around the globe, then public sentiment may shift towards recognizing the blessing we have in our shale gas instead of obsessing over environment risk--real or imagined. --Tom

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