Exxon's Costs To Increase As Fracking Fear Grows

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The shale gas industry has seen several major players like Exxon Mobil and Chevron expand their operations significantly over the past few years as companies scout for energy prospects closer to home.

With the release of a draft report by Environmental Protection Agency (EPA) that linked chemicals found in water samples with those used in the process of hydraulic fracturing, however, stricter regulations on shale extraction are expected to be put into place over the next year. This could potentially increase the cost of shale exploration.

Environmentally inclined investors have also renewed their demand that exploration and production (E&P) firms give due consideration to the risks involved in shale exploration. [1] Gas extracted from America’s shale plays now accounts for a third of the country’s total natural gas production.

We have a $93 price estimate for Exxon Mobil, a 15% premium over its current market price.

Tougher regulations foreseen

Over the past two years, 21 shareholder resolutions have been proposed that would force companies to implement safeguards and disclosures related to the shale extraction process, according to a report released by the Investor Environmental Health Network and the Interfaith Center on Corporate Responsibility. [1]

One such proposal, submitted to Exxon in May, was rejected by a 72% opposition. The board of directors recommended that the resolution be defeated as the company was already committed to act in an environmentally responsible manner.

A recent EPA report that uncovered chemicals used in fracking in water samples in Wyoming may increase calls for voluntary safety practices. However, analysts also expect the government to implement regulations in order to monitor air and ground water pollution resulting from shale exploration, and force the industry to adopt best practices. (See: Rig Count Slide, EPA Water Pollution Report Weigh on Baker Hughes)

Stricter regulation would likely impact the margins on natural gas in the U.S. where prices are already suppressed. Shale gas is generally more costly to extract than gas from conventional resources.

Via: Forbes