Exxon-XTO Deal to Terminate If Congress Passes 'Anti-Fracking' Law

(THE WALL STREET JOURNAL via Dow Jones), Dec. 16, 2009

Exxon Mobil Corp.'s $31 billion deal to acquire gas-producer XTO Energy Inc., announced Monday, includes language that would terminate the deal if Congress passes laws making hydraulic fracturing illegal or "commercially impracticable."

Hydraulic fracturing, or fracking, is the method XTO and other natural-gas companies use to produce gas from hard shale rock formations. Critics contend that it can cause pollution, especially to drinking water, a charge the industry rejects.

Washington observers said they don't believe Congress will pass any legislation before the Exxon-XTO deal closes in the second quarter of 2010. Only one bill has been introduced so far that would regulate fracking, under the Safe Drinking Water Act.

But 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. Markey said he plans to look at environmental concerns related to air pollution and water contamination from hydraulic fracturing.

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 disclosures, he had never seen warnings 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.

"There is probably headline risk, but we don't see any serious risk of legislation that would trigger the clause," he said.

The inclusion of this clause in the Exxon-XTO merger agreement highlights the increased attention regulation of hydraulic fracturing is receiving in the industry.

Hydraulic fracturing involves high-pressure pumping of liquids to break up dense shale rocks and free gas molecules.

If Congress passes new regulation either banning the use of hydraulic fracturing or, more likely, requiring practices that increase the cost of drilling and completing wells, this could have an impact on the valuation of many companies involved in shale gas development.

An Exxon spokeswoman didn't have an immediate comment.

Copyright (c) 2009 Dow Jones & Company, Inc.


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