Rex Tillerson, chairman and CEO of ExxonMobil (left), and Bob Simpson, chairman and founder of XTO Energy (right)

On Jan. 21, the U.S. House of Representatives’ Subcommittee on Energy and Environment held a hearing on the proposed US$41 billion merger between ExxonMobil and XTO Energy. This deal would make ExxonMobil the largest producer of natural gas as well as the largest holder of natural gas reserves in the country should it be completed.

Rex Tillerson, chairman and chief executive officer of ExxonMobil, and Bob Simpson, chairman and founder of XTO Energy, informed the subcommittee that the deal was important for the continued development of unconventional natural gas plays in the U.S.

“[This merger] combines the complementary strengths of our two companies: XTO’s technical expertise and their substantial unconventional natural gas resource base in the United States, and ExxonMobil’s own global resource base, our advanced research and development, proven operational capabilities, our global scale, and, importantly, our financial capability. It will better position us to meet America’s long-term needs for affordable, reliable, clean-burning natural gas,” Tillerson told the subcommittee.

“Our proposed merger would enable us to continue to apply the technical expertise and operational excellence we are known for to a greater number of unconventional natural gas opportunities throughout the United States,” Simpson said.

Prior to the hearing, it was expected that the subcommittee members would seek answers to what effect the proposed merger would have on energy markets. However, much of the hearing focused on the question of whether hydraulic fracturing would be outlawed. It appears that the merger has the full support of both the Democratic and Republican parties.

Most subcommittee members took the time to state that they supported the merger because of its ability to ensure America’s long-term natural gas needs, as well as create jobs.

“It is no secret that I disagree with ExxonMobil on many aspects of energy policy, but when America’s biggest company makes a big move in the energy sector, policymakers need to listen and understand what that means … This merger heralds a fundamental long-term shift in U.S energy markets and one that deserves our close attention,” Rep. Edward Markey (D-MA), the subcommittee chair, said.

He added that natural gas will play an important role in U.S. energy policy in the future as a bridge fuel away from crude oil and coal towards cleaner alternatives. These sentiments were echoed by Rep. Gene Green (D-TX).

“The proposed merger validates the demand for clean-burning natural gas as a fuel source, which will only continue to grow. By 2030, natural gas will be the largest source of energy globally, and demand could further increase as governments consider imposing costs on carbon emissions,” Rep. Green said.

It appears as though the only aspect that could diminish the deal, short of rejection on anti-trust issues from the U.S. Federal Trade Commission, would be if hydraulic fracturing regulations altered the cost to produce natural gas.

The merger agreement includes a provision that allows the deal to be canceled by ExxonMobil should hydraulic fracturing be “made illegal or commercially impractical.” This provision appears to be primarily focused on the FRAC ACT (see Gas Processors Report 07/02/09), which would remove the exemptions from the Safe Drinking Water Act currently in place for the oil and gas industries.

Despite much political grandstanding by members of both parties, it appears as though there is little to no worry over whether hydraulic fracturing would be banned. Indeed, the subcommittee invited Rep. Diana DeGette (D-CO), vice chair of the House Committee on Energy and Commerce as well as one of the authors of the FRAC ACT, to join in the hearing.

Rep. DeGette told both Tillerson and Simpson that the FRAC ACT would not place bans on hydraulic fracturing.

“I have absolutely no intention of outlawing fracking. In fact, I think fracking is important to get a lot of these [unconventional natural gas] reserves out of the ground,” she said. She added that the FRAC ACT would not make it illegal or commercially impracticable to use hydraulic fracturing.

“I support the use of hydraulic fracturing. Please let me say that again – I support the use of hydraulic fracturing, but I also support it being done in an environmentally responsible way … The oil and gas industry is the only industry exempted from one of the nation’s landmark drinking water laws, the Safe Drinking Water Act, and frankly, all of our constituents have the right to know what chemicals are being used in their community, particularly if they are near underground sources of drinking water,” she said.

The bill would require companies to disclose the chemicals used in the fracking fluids, but would still protect the proprietary formula used for the fluid, Rep. DeGette added.

Simpson informed the subcommittee that natural gas producers are leery of legislation such as the FRAC ACT, due to uncertainty of how it would be implemented.

“We [XTO] have comfortably lived in 18 different states for a good while now subject to state regulation and without incident. So I don’t believe it is necessary. I think the risk is, if we are not careful, we go backwards,” he said.

Tillerson also pointed out that many of the important gas-producing states already have regulations in place to ensure safe drilling and fracking methods and that in the history of hydraulic fracturing there has not been a single incident of a freshwater aquifer being contaminated by hydraulic fracking. In his view, an additional layer of federal fracking regulations would add unnecessary costs and hinder development in unconventional resource plays.

There were also some questions as to how a potential cap-and-trade scheme on carbon emissions would effect not just this merger, but the industry in general.

“We have said for some time that there is no question climate is changing, that one of the contributors to climate change are greenhouse gases that are a result of industrial activities … The real challenge I think for all of us is understanding to what extent and therefore what can you do about it,” Tillerson said in response to Rep. Jay Inslee’s (D-WA) question on whether CO2 emissions were responsible for climate change and whether this merger was in response to some likelihood of some form of carbon-reduction legislation.

“We have identified now over the last few years the growing response of natural gas, much of which we would attribute to consumers around the world understanding that there are moves under way and already our policies are in place in much of the world … that do put a price on carbon and that does shift you towards natural gas demands,” Tillerson said.

He added that ExxonMobil opposed the Waxman-Markey bill, which would put in place a cap-and-trade scheme to reduce carbon emissions, because the company didn’t feel such actions represented the most cost-effective means to reduce carbon emissions.

“You can meet any target if you don’t care what it costs. If you are willing to suffer enormous job loss and reduced economic activity – because one of the ways that you achieve those [carbon emission reduction] targets is you shut activity down. That is the easiest way to reduce emissions – you just don’t emit them,” Tillerson said about the Waxman-Markey bill and its likely effect on the industry. – Frank Nieto