Exxon CEO Defends Frac’ing

Rex Tillerson,  CEO of Exxon Mobil (XOM), has a special fondness for what some think is new technology, frac'ing.

In 1976 Tillerson went to East Texas to follow around rigs drilling for natural gas and complete the wells.  Completion means pumping water, sand, and chemicals down into a well at high pressure, causing cracks in the stone where the gas was trapped and allow more of it to flow; or frac'ing.

Today Tillerson is betting much of his company's future growth -- and a good portion of his legacy -- on the promise of frac'ing. Two years ago Tillerson engineered a $35 billion acquisition of natural-gas producer XTO Energy in large part to buy the company's hydraulic-fracturing expertise. It is easily the largest deal the energy giant has done since the $88 billion mega-merger with Mobil orchestrated by Tillerson's predecessor, Lee Raymond, in 1999.

In buying XTO, the 60-year-old Tillerson has further reshaped the company. In 2011, Exxon reported sales of $486 billion -- a gargantuan number that could vault it past Wal-Mart (WMT) to recapture the No. 1 position in this year's Fortune 500. The $41 billion in profit it earned was the second-largest total in corporate history, behind only the $45 billion record that Exxon set in 2008. Those astronomical earnings have been driven by persistently high oil prices. But today Exxon, the prototypical oil giant, gets about 50% of its production from, and has 50% of its reserves in, natural gas.

It's not just Exxon that has profited. Over the past several years frac'ing has unlocked a vast new source of energy supply in the U.S. Advanced forms of the process that Tillerson used in the 1970s, combined with innovative methods of drilling, have enabled energy companies to extract huge quantities of natural gas and oil trapped in shale rock -- assets that were previously thought to be either impossible or uneconomic to produce.

It is widely thought that the U.S. now has 100 years or more of domestic gas supply at current consumption rates. Already there has been a frenzy of exploration. The shale gas industry employed more than 600,000 workers in the U.S. in 2010, according to IHS, and by 2015 it will contribute some $118 billion to the U.S. economy.

Large shale deposits in South America, China, and Europe mean that it should eventually be a global trend as well. The International Energy Agency estimates that the world currently has a 250-year supply of natural gas. "In my 50 years of following the energy business, this is by far the biggest event that I've seen," says John Deutch, an MIT professor and a former CIA director who last year chaired a Department of Energy subcommittee on shale gas.