Getting serious about shale

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Exxon Mobil this week announced plans to buy the independent gas producer XTO Energy for $41 billion – by far the largest deal for the company since the merger between Exxon and Mobil a decade ago.

Clearly this purchase signals a deeper commitment to developing natural gas: XTO has about 14 trillion cubic feet of proven gas reserves. But it also shows a clear focus on producing gas from shale. A large portion of XTO’s reserves are located in so-called unconventional sources, such as shale rock. Shale has long been recognized as a major source of oil and natural gas, but the technological challenges of getting to it have left much of that fuel untapped.

The New York Times offers a good overview of the Exxon Mobil’s systematic strategy in recent years to accumulate unconventional natural gas sources including shale. By adding XTO to its mix of existing properties, the company shifts shale gas production from a niche business to a core one.

In all likelihood, the acquisition will probably set off a race among many oil producers to develop natural gas and oil from shale on a much larger scale. Already, there are many sizable shale development projects underway, such as Range Resources’ Marcellus Shale project in Pennsylvania that produces 100 million cubic feet of natural gas per day – enough to power about 500,000 homes. Chevron has hinted that it is interested in making an acquisition that would give it a base of shale gas reserves large enough to make development economically feasible.

The importance of shale to the global energy industry and to domestic energy independence can hardly be overstated. Recent estimates suggest the world’s supply of shale oil resources exceeds its supply of conventional oil reserves. And the largest deposits are right here in the U.S. Of course, accessing more of that oil, and natural gas, will depend on finding technologically and economically feasible ways to do so.

As more money is committed to this promising source of domestic fuel, the technology used to develop it will inevitably improve, putting more volumes of shale oil and gas on the market. This steady supply tends to lead to greater price stability and that, in turn, increases demand. It’s a cycle by which a commodity comes to be mass produced and all signs suggest that for shale rock, that moment has come.