These days, everyone wants a piece of the rock -- domestic shale, that is. With oil-drilling costs north of $3.5 million per well and natural gas trading below $3, global energy companies are all about American shale. In November, Europe's second-largest supplier of natural gas, Norwegian-based StatOilHydro (STOHF), signed a $3.4 billion agreement in November to acquire 32.5% of Chesapeake Energy's (CHK) 32,000 shale-gas leases in Pennsylvania, West Virginia, New York, and Ohio.
This week, the other shoe dropped: ExxonMobil (XOM) spent $31 billion to acquire XTO Energy (XTO), one of the nation's largest producers of unconventional natural gas. Analysts quoted in The New York Times speculated that Devon Energy (DVN) may be ExxonMobil's next takeover target. The deal suggests that ExxonMobil won't be rebranding itself in the style of British Petroleum's (BP) "beyond petroleum" campaign, but will stick with what it knows: drilling rigs and refinery cracking towers.
Gas as a Weapon
ExxonMobil's move into shale gas comes at a time when natural gas is increasingly weaponized. When Ukraine balked at Russia's price for natural gas in January 2006, Russian president Vladimir Putin shut off Ukraine's gas supply -- in the dead of winter. And in a brief 2008 war between Georgia and Russia, the Baku-Tbilisi-Ceyhan pipeline -- one of two pipelines supplying much of Europe's natural gas -- was almost hit by mortar fire.
The use of North American shale gas could help neutralize such a supply-chain risk. And experts agree that natural gas is fast becoming the primary transitional fuel, bridging our reliance today on fossil fuels with a future ideal dependent on renewable energy. So while StatOil's and ExxonMobil's drives into domestic natural gas might seem to make little economic sense, they're part of a long-term stragtegy.
The Shale Rush
But why now? For decades, global oil companies have seen the U.S. as an oil-and-gas backwater, mostly of historic interest. Yet within that realm, smaller companies like Chesapeake, Devon, and XTO began developing unconventional extraction methods that began making more economic sense when oil and gas prices rose.
One of those methods, horizontal drilling along vast seams of shale, took years to perfect but ultimately makes a bountiful resource greatly attractive. Deep seams of shale -- called the "shale-gas play" -- run from Texas to New York State. Mark Herndon, an independent oil geologist in Oklahoma, told me last year that people in his home state "were quitting full-time jobs to drive trucks for the drilling outfits." A land grab for shale-drilling rights was raging: One directional driller told me he'd been so busy that he hadn't seen his family for months -- even though he was working on a site just 45 minutes from home.
The big globals had no expertise in shale gas, so they bought into partnerships with the independents. Then the bottom fell out of natural gas: The price dropped to from $8 per million cubic feet to $3, a historic low. Chesapeake's Aubrey McClendon spoke on CNBC about Chesapeake's shares losing 30% of their value:
Chesapeake was fortunate to have a deep-pocketed partner in StatOilHydro, but other overextended gas companies, like XTO Energy, have seemed ripe for the picking. It's all about strategic growth during a downturn, says Andrew Clyde, an oil-and-gas analyst at Booz & Company. "Relatively well funded players...pursue acquisitions to consolidate existing positions, enter new regions, or expand into adjacent sectors," he wrote in an oil and gas letter in March, citing BP, Statoil, and Chesapeake Energy deals "to gain footholds in US natural gas shale basins."
But the independents' natural-gas leases are set to expire soon. "All of that leasehold needs to be drilled before the leases expire, and that requires a lot of capital," Herndon says. That may be another reason for ExxonMobil's acquisition of XTO. And it might mean rival companies, like Chesapeake and Devon, can expect Big Oil to gobble them up soon.
Mark Svenvold, author of Big Weather: Chasing Tornadoes in the Heart of America, teaches at Seton Hall University in South Orange, New Jersey.
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