Exxon Bets Big On Natural Gas With Acquisition of XTO Energy

Posted by Steven Zweig on December 15, 2009 at 11:02 am

Exxon Tiger: “Natural gas is g-r-r-r-e-a-t!” (Apologies to Tony.) (image: tigerradio-kfxm590.com)

Exxon announced Monday that it will buy natural gas producer XTO Energy in the largest energy deal in years. As reported by the New York Times, the $41 billion acquisition ($31 billion of stock, $10 billion of debt assumption) appears to be a shrewd one for Exxon, reflective of where the company thinks growth in the energy market will come from:

• XTO increases the size of Exxon’s natural gas holdings at time when natural gas, cleaner burning than coal, is seen as more supportive of curbing carbon emissions and more in tune with the emerging clean energy zeitgeist. Exxon believes that natural gas can help reduce the carbon footprint of electrical generation by up to 60 percent, compared to coal.

• XTO has expertise in tapping unconventional gas resources, such as the shale gas discovered in formations such as the Marcellus Shale. Recently, large amounts of gas—and oil, too—have been found in unconventional reserves throughout the United States and abroad; indeed, world unconventional fossil fuel reserves have been growing steadily. XTO’s techniques and skilled employees could be used to exploit not just domestic Exxon gas holdings, but also the company’s unconventional reserves in Argentina, Canada, Germany, Hungary, and Poland.

While there are downsides to natural gas—it’s not the “magic bullet” on climate change that its more bullish supporters make it out to be—the combination of large domestic reserves (read: “supports energy independence”) and lower carbon emissions is sure to make it an even more important part of the U.S. energy mix. Exxon is positioning itself to cash in on growth in gas demand. Indeed, the energy giant recently predicted that natural gas consumption will increase because of gas’s “abundance, versatility, and economic advantages as an efficient, clean-burning fuel for power generation.”

However, Exxon is not merely doubling down on fossil fuels; they’ve also bought insurance at the table by investing in alternative fuels as well, such as its announcement this year that the company will spend $600 million for R&D related to algae-based biofuel. No matter what we burn for energy, Exxon wants a part of it.