The planned takeover of XTO Energy by Exxon Mobil has been touted as a big bet on natural gas, a vote of confidence for shale gas, and all sorts of other superlatives related to the big blue flame.
But according to the fine print in the merger agreement, if Congress takes steps to put more regulations on hydraulic fracturing — a key process for getting gas out of natural gas shales — the deal could be called off.
The language reads:
“Parent Material Adverse Effect” means a material adverse effect on the financial condition, business, assets or results of operations of Parent and its Subsidiaries, taken as a whole, excluding any effect resulting from, arising out of or relating to (A) changes in the financial or securities markets or general economic or political conditions in the United States or elsewhere in the world, (B) other than with respect to changes to Applicable Laws related to hydraulic fracturing or similar processes that would reasonably be expected to have the effect of making illegal or commercially impracticable such hydraulic fracturing or similar processes (which changes may be taken into account in determining whether there has been a Parent Material Adverse Effect), changes or conditions generally affecting the oil and gas industry or industries (including changes in oil, gas or other commodity prices), (C) other than with respect to changes to Applicable Laws related to hydraulic fracturing or similar processes that would reasonably be expected to have the effect of making illegal or commercially impracticable such hydraulic fracturing or similar processes (which changes may be taken into account in determining whether there has been a Parent Material Adverse Effect), any change in Applicable Law or the interpretation thereof or GAAP or the interpretation thereof,…
The piece of legislation out there, known as the ‘frac act,’ would essentially require companies to disclose the chemicals mixed in with the mostly-sand-and-water fracturing fluids.
It seems like saying what’s in the soup wouldn’t be that difficult — and it’s not.
But the argument against disclosure goes like this: the mixes are proprietary and it would be like giving away the formula to Classic Coke. If they had to reveal that information, they wouldn’t use hydraulic fracturing. No fracturing, no natural gas boom.
The counter-points to those arguments: the same companies that create the fracturing fluids are used by many different drilling and production companies, so there’s a constant sharing of information and techniques from site-to-site, job-to-job. The idea that the formulas could be kept secret, or really are that much of a mystery, is a stretch.
The deal will likely close before any new laws regarding fracturing are passed by Congress, but Rep. Ed Markey (D-Mass.) is calling for a hearing on the merger to discuss concerns over fracturing.
A spokesman for Energy in Depth, an industry group, said the bill “isn’t some sort of cosmetic exercise”:
“It’s not about disclosure or transparency. It’s about shutting the entire process down, and initiating an unprecedented expansion of EPA authority while they’re at it. To the extent this news sets the record straight and disabuses those who think these guys are just playing around, it might actually be helpful.”
The folks at FBR Capital Markets aren’t quite as concerned. In a research note this morning. they observe that Markey’s committee can’t actually draft any laws and that even though the EPA was asked to study the issue it was not appropriated the money to do so in 2010. For now, it’s really more of a “headline” risk, FBR says:
Although Congress is unlikely to repeal the fracturing exemption, evolving media coverage of threats to water in the growing shale plays poses a continuing risk of a public backlash. Spills, like the one in Pennsylvania earlier this year, while very rare, pose the most significant near-term risk. Moreover, we note that ExxonMobil is a favorite target of environmental policymakers and that its planned acquisition of XTO, most of whose wells are fractured, once again brings the hydraulic fracturing issue to the forefront for activists in Congress and the news media.
Exxon put out a statement (ok, really a statement that doesn’t say much) regarding the ‘frac act’ provision:
“We are pleased that ExxonMobil and XTO have reached this agreement and we expect the transaction to be completed in the second quarter of 2010. According to SEC requirements, the company filed the merger agreement on December 14, which contains a number of customary provisions for transactions of this nature. We have no further comment to make on the materials filed with the SEC ahead of the proxy filing.”