The Rising Influence of Rising Affluence

[DewDiligence]

XOM Can Drop XTO Deal If Congress Restricts Fracking

[Further evidence of how political this deal could become. See #msg-44289380 for background.]

http://online.wsj.com/article/SB10001424052748703581204574600111296148326.html

›DECEMBER 16, 2009, 6:27 P.M. ET
By RUSSELL GOLD

Exxon Mobil Corp. can back out of its $31 billion deal to acquire natural-gas producer XTO Energy Inc. if Congress passes a law requiring stronger federal oversight of a controversial drilling technique.

The merger agreement contains language allowing Exxon to terminate the deal if lawmakers make hydraulic fracturing, known as fracking, illegal or "commercially impracticable."

Fracking is a now-common method that XTO and other natural-gas companies use to produce gas from hard shale-rock formations, which have recently become a major source of natural gas. Water, sand and drilling fluids are pumped into the shale under enormous pressure, creating fractures in the rocks that allow the gas molecules to escape.

Critics contend the practice can cause pollution, especially to drinking water, a charge the industry rejects [#msg-44289380].

A bill in the House and Senate would require the Environmental Protection Agency to regulate fracking under the Safe Drinking Water Act of 1974. It would also require disclosure to the public of the chemicals used in fracking fluid.

Rep. Ed Markey (D., Mass), chairman of the House Energy and Environment Subcommittee of the Energy and Commerce Committee, said Tuesday he would hold a hearing early next year into Exxon's acquisition of XTO. Mr. Markey said he plans to look at environmental concerns related to air pollution and water contamination from hydraulic fracturing.

Exxon, based in Irving, Texas, said it is confident that the XTO acquisition will close in the second quarter. It declined to comment on the deal's fracking-law language except to say that the merger agreement "contains a number of customary provisions for transactions of this nature."

But William F. Hederman, senior vice president of energy policy for Concept Capital, a Washington research group that advises institutional investors, said until the Exxon-XTO merger agreement, he had never seen provisions in a deal about the political risks involving fracking.

Even so, he said, bad publicity is probably more of a potential problem in the near term than congressional legislation. "We don't see any serious risk of legislation that would trigger the clause," he said.

Industry executives say the language is a sign that the sector is growing increasingly worried about the political backlash against fracking. If companies can't use the technique to extract gas from shale, the value of XTO and similar companies would plunge and the amount of recoverable gas would drop, they said.

The push for federal oversight is coming mainly from local communities above the Marcellus Shale, which extends from West Virginia across Pennsylvania and into southern New York.

"People who live in these communities are concerned and they don't feel like companies or state regulators are protecting their water," said Amy Mall, a senior policy analyst with the Natural Resources Defense Council, an environmental-advocacy group.

The Exxon-XTO merger agreement was filed soon after the deal was announced on Monday, but the fracking provision was buried in the 76-page document and word of it didn't start to circulate until Wednesday.‹