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Sept. 24, 2014

Policy, Responsibility and People: Leading the Way on Shale

Randy J Cleveland, President XTO Energy, Inc.

Randy J Cleveland President, XTO Energy, Inc.

Shale Insight, Marcellus Shale Coalition
Pittsburgh, PA

Thanks for that kind introduction, Dave [Dave Spigelmyer, President, Marcellus Shale Coalition]. And I’d also like to add my thanks to the Washington County Chamber of Commerce for sponsoring today’s luncheon.

And congratulations to the Marcellus Shale Coalition for hosting its fourth annual Shale Insight conference. XTO proudly serves on the Coalition’s Executive Board, and we’re pleased to be a part of this industry-leading event again this year.

Well, it’s a real pleasure to join you today. It’s absolutely gorgeous outside. The Pirates clinched last night, the Steelers won this week and hockey season has started – what more could you ask for?

Shale Insight has had three successful years in Philadelphia and I don’t think there’s any doubt it will be equally successful in Pittsburgh this year.

This conference is just one of many things that these two great cities share. Another one that we’re all familiar with is their football prowess. And as many of you are aware, not only do they share a passion for the game, but they once shared their teams. In 1943 the Steelers and Eagles were merged into one team – the “Steagles” – when their rosters were depleted as players joined the Armed Forces during World War II. Now something you may not know, however, is that a few years earlier the owners actually swapped cities, after one of them had some regrets about leaving his home town.

Football’s long history in Pennsylvania is a real treasure, especially for sports fans like me. That brings me to the point I want to make today. This region of our great country is sitting on another treasure of sorts – one with economic and social implications for generations to come. I have no doubt future generations will be gathered just like we are today, talking about the importance of energy. And I don’t think there’s any doubt they will be talking about the vast deposits of shale gas, which have transformed the Appalachian Basin into an energy hub, not only of the northeastern U.S., but of the entire nation.

So I want to talk to you this afternoon about what I believe it will take to keep the region competitively positioned to remain an “energy hub”. In my estimation, it boils down to three key priorities: policy, responsibility and people.

Before we get into it, let me tell you just a quick bit about XTO Energy. As Dave mentioned, XTO merged with ExxonMobil four years ago, and already was one of the largest U.S. independents at the time of the merger.

But since then, the portfolio we oversee has more than doubled to 11 million acres under lease, making us the nation’s largest holder of natural gas reserves and the largest gas producer - about 20 percent larger than our nearest competitor. We’ve got a very active drilling program across the U.S. and Canada, and we completed work on a gas processing unit just north of here in Butler County, a little more than a year ago. ExxonMobil, with XTO’s considerable liquids production factored in, is among the leading U.S. liquids producers.

We’re headquartered in Fort Worth, Texas, and have seven operating divisions spread across the U.S. and Canada. We operate in 16 states across the U.S., and we have a relatively new Canadian division based in Calgary.

Now much of XTO’s growth has come from strategic acquisitions, but also from assets we transferred across from ExxonMobil’s U.S. production operations. We operate in all the major unconventional plays in the country. Our Appalachia division – which includes Marcellus and Utica operations in Pennsylvania, Ohio, and West Virginia – is headquartered just north of here, in Warrendale. We’ve got about 300 employees or so in this area.

All told, we own interests in over 50,000 producing oil and gas wells across the U.S. and Canada.

Now one of the real success stories for XTO and, as you know, our entire industry, is what’s taking place right here in the Appalachian Basin. The Marcellus is the largest U.S. shale formation, and by a large margin. It already accounts for nearly 20 percent of our nation's natural gas production, and that number continues to climb every day. Perhaps more impressively, the Marcellus accounts for almost 40 percent of domestic shale gas production overall.

Add to that the emerging good news out of the Utica Shale, which the Energy Information Administration estimates is producing roughly 1 billion cubic feet a day, and it’s clear to see why this area has become an energy hub. Of course, with these impressive numbers come significant responsibility and opportunity.

So today, I'd like to discuss the size of that opportunity, and the steps that need to be taken in order to capture it for the benefit of not only this region – but for the nation.

The global energy outlook

Before we zoom in on Appalachia, let me pan out to the global picture. I'd like to discuss a bit about how U.S. unconventional resource development fits into some of the big trends underway across the entire globe, when it comes to our energy industry.

As I noted, my company is not only the largest U.S. natural gas producer, but also part of ExxonMobil, which has operations in more than 100 countries.

And each year, ExxonMobil publishes a long-term forecast called The Outlook for Energy.

We make the Outlook available to the public, but it's really not public relations. These are the actual long-term forecasts upon which we base our significant investments. The Outlook is available on ExxonMobil's web site, where you can read it in detail for yourself.

But, in essence, what the Outlook shows – first and foremost – is a world in which energy demand continues to rise, driven by population and economic growth, and expanding trade and development.

Global energy demand is projected to rise by about 30 percent between now and 2040. Now to put this increase in perspective: It’s equal to adding more than the combined current energy demand of Russia, India, Africa, Latin America, and the entire Middle East.

This growth is driven primarily by developing economies, where a rising middle class is driving new demand for energy and consumer goods. For example, over the next 25 years, China will go from having just seven cars for every 100 people to about 30 cars. That's a net increase of more than 300 million vehicles.

Even so, transportation is not the single largest source of global energy demand; it’s power generation. Today, 1.3 billion people across the globe live without access to electricity. As more and more people get electricity and living standards rise, increased electricity usage - for everything from cooking and heating to charging electronic devices - is expected to nearly double global demand for electricity over the next two and a half decades.

The scale of global energy demand will require the development of all economic energy sources.

Fossil fuels - oil, natural gas and coal - will remain essential. Together, they will account for about 80 percent of global energy use, about the same percentage as today.

But the largest net increase during the Outlook period will be seen in natural gas. Global natural gas demand is projected to rise by nearly 65 percent, more than twice the rate of oil.

And the reasons are pretty well-known. Gas is abundant, it’s affordable, it’s versatile, and well-suited to support the growth in power generation I mentioned earlier – while also meeting increasingly stringent regulatory demands.

Now in addition, natural gas liquids are a feedstock for the production of petrochemicals, which are in strong demand. ExxonMobil sees global demand for ethylene, the largest petrochemical building block, rising by 150 percent from 2010 to 2040, or about three percent a year. That's faster than energy demand, and faster than projected U.S. GDP growth in 2014.

Appalachia at the heart of the U.S. shale revolution

So what does all this mean for the United States?

You know the old saying "timing is everything"? What the U.S. has done is to find a way to safely unlock vast new deposits of natural gas at a time when global gas demand is accelerating.

And as a result, we’ve seen new waves of jobs and investment, not just in energy but also in manufacturing sectors like chemicals and steel, which has such a vibrant and rich history, right here in the “Steel City.” And after years of preparing for increased reliance on imports, the U.S. has new opportunities to export natural gas and chemicals to the rest of the world.

This new-found abundance of natural gas is also having a significant domestic impact. The United States Conference of Mayors earlier this year published a report detailing the benefits that shale production brings to the domestic manufacturing sector and our nation’s metropolitan areas. In these areas, according to the report, shale production – led in part by the Marcellus – “ignited the nation’s steel, iron, fabricated metals, and machinery manufacturing,” with these sectors seeing real sales and employment jump by 17 percent and 10 percent, respectively, in 2011 and 2012. Moreover, the increase in available natural gas and oil resulted in a surge in plastic, rubber, and chemical manufacturing, thanks to lower costs and increased refining volume: As a result, these industries saw a combined employment increase across all metropolitan areas. All told, from 2010 to 2012, energy-intensive manufacturing sectors added 200,000 jobs and increased real sales by $124 billion in our nation’s metropolitan areas.

Simply put, shale gas is transforming the domestic and global energy landscape. And Appalachia is at the heart of that transformation.

Since 2005, U.S. natural gas production has risen by 35 percent. And the EIA sees it rising by another 60 percent over the next couple of decades. The Marcellus will be one of the biggest drivers of this growth, with production expected to more than double over the next 10 years. Further, the EIA has reported that Ohio’s Utica shale production in less than two years rivals that of initial natural gas production in the Eagle Ford Shale in south Texas. So, the future is bright on that front as well.

And as Marcellus and Utica production grows, so does this basin’s role as an energy producer.

XTO is proud to be part of that growth, producing natural gas and liquids right up the road in Butler County and elsewhere here in the western part of the state. We have over 550,000 acres under lease in Pennsylvania, and our current production is about 200 million cubic feet a day. We run a cryogenic plant to get those valuable liquids to the market. Across the state line in Ohio, we hold another 80,000 acres and we are increasing our Utica operations in Belmont County, where we’re very pleased with our results so far. And in West Virginia, we hold 170,000 acres, along with several midstream assets. I was in West Virginia just last month for the State Chamber of Commerce’s annual Business Summit, and the optimism they’re feeling about natural gas, and the abundant opportunities it makes possible, is contagious.

So, how do we keep this momentum going? As I mentioned earlier, in my mind it comes down to three key priorities: policy, responsibility and people.

The need for sound policy

So let me address the policy side first, because sound policies are a cornerstone of economic growth. As Margaret Thatcher once put it, “What government has to do is to set the framework for human talent to flourish.”

States with shale resources need tax and regulatory policies that enable capital to flow freely – not just to support energy production, but also to support other industries that rely on energy development for fuel, raw materials or feedstock.

As a company that operates in many states, regions, and internationally, XTO aims to ensure this region’s playing field is competitive with other areas. Many factors go into our decisions on whether to invest in one basin or another – including the nature of the resource, the extent of supporting infrastructure, workforce capabilities, and tax and regulatory costs.

We’ve found what we believe is a world-class resource right here in Appalachia, and for our mineral owners and investors, our employees and suppliers, and the communities in which we operate, our aim is to continue to responsibly develop natural gas and liquids in the region, allowing the Marcellus and Utica to maintain their leadership role in domestic shale production.

Here’s my quick run-down of the policy environments of the key Marcellus and Utica states:

In West Virginia, our industry is limited by outdated mineral development statutes, which do not allow for efficient and fair pooling of assets. Land and mineral owners, the state, and the industry would benefit from the modernization of these laws so they maximize effective energy production, and minimize disturbance to land surface and the environment.

In Ohio, where Utica production is just beginning to come into its own, we advocate a fair approach to taxation, as well as policies based on facts and sound science, balancing environmental protection with economic development. This means a collaborative, transparent approach to regulations impacting unconventional resource development.

And here in Pennsylvania, which struggles with an uncompetitive business tax structure overall, we support a system based on the principles of predictability, fairness, and simplicity. We also support a tax structure that provides adequate resources to the communities in which we operate. Now in 2013, XTO paid more than $7 million in local impact fees, most of which was returned to municipalities and counties. That’s in addition to the more than $6 million in taxes we paid to the state last year. These communities must not get caught in the political crossfire as tax discussions take place on the campaign trail and in Harrisburg.

Now one state that I’ve not yet mentioned is New York. XTO holds 43,000 acres in its southern tier counties, and while we support incremental improvements to the policy landscape in Pennsylvania, West Virginia, and Ohio, in New York we’re simply looking for the state to finally give mineral owners their right to develop their resources as they see fit. And I certainly hope we can see resolution on this long-standing issue soon.

We are transforming the way our nation approaches energy policy – and that’s particularly true in the Appalachian region. As I consider the many policy debates taking place today, I’m amazed at how fast this nation has gone from a policy debate of energy scarcity to one of energy abundance.

A focus on responsibility

As the policy discussions continue, we must continue to focus on our responsibility – and highest commitment – to operate in a safe and secure manner, while being good environmental stewards. In the end, the success of our business is driven not only by how well we’ve done our job, but by how successful we have been as a good corporate citizen and neighbor. We simply have to get this right – from planning and investment to construction and project completion.

We need to continue to reach out and educate the public. Our presence in local communities around the nation has given us the opportunity to engage with the public at a very local level. People in this part of the country have witnessed the development of the energy industry since the earliest days, but the pace of unconventional resource development today is unlike anything we or they have seen before. While policymakers have a responsibility to base their decisions on facts and sound science, we – industry - have an equal responsibility to listen to our communities’ questions, comments, and concerns – and be straightforward and responsive in return.

I think we as an industry have made progress on that front. XTO, for example, uses a community advisory model here in Appalachia to ensure that we have vibrant two-way dialogue between us and the stakeholders in the communities in which we operate. It helps to build trust and create a sense of partnership. If you look across the country, in areas where we are welcomed versus areas where we see resistance, local engagement is the common thread. Where it’s strong, we thrive. And where it’s weaker, we have difficulty.

And of course, this local engagement is contingent upon our industry employing good people – which I view as the other key priority for continued success and economic development.

Workforce development

The success of unconventional natural gas resource development is a tribute to the ingenuity and hard work of countless American men and women. Millions today are working in jobs related to natural gas production. We will need many more of them as shale gas production continues to grow.

Consulting firm McKinsey and Company has estimated that by 2020, the shale gas revolution could create nearly 3 million new American jobs, including 1.7 million permanent jobs.

But the fact is that today, there is a growing gap between the jobs being created and the available pool of skilled workers. This gap is a lost opportunity for economic growth, and a better quality of life for many families.

We know America lags other countries in terms of the number of college graduates with degrees in science, technology, engineering and math. But we also face a shortage of young people capable of performing technical jobs, such as pipefitters, welders and instrument technicians. These jobs also require solid math and science skills, especially in today’s highly computerized work environments.

In this region, as in the rest of the country, business must collaborate with government and educators to improve math and science education, and create more opportunities for young people to receive technical training.

ExxonMobil’s already doing a lot in this area. We helped launch the National Math and Science Initiative back in 2007. Now one of the key goals of this initiative was to increase the number of highly qualified U.S. math and science teachers at the high school level. So far, more than 60,000 high school teachers have completed this teacher training.

We’re involved in the Pennsylvania-based ShaleNET program, where we provide funding to facilitate training for some of the highest-demand natural gas jobs in the region, through a system of community colleges across several states.

We also support the work of Butler County Community College and Westmoreland County Community College to prepare students for careers in the oil and gas industry. At the K through 12 level, we support the Careers in Energy program, developed by Junior Achievement of Western Pennsylvania. This program seeks to make the connection between math and science in the classroom and future careers. There are many more examples, but the point is clear: As our industry continues to expand, we must provide our young people with the skills to take advantage of the opportunities that growth brings.

Regulator training program

That leads me to my final point. In terms of people, one other group we need to focus on is state regulators. As unconventional production continues to grow, the U.S. will need more regulators at the state level who have an understanding of oil and gas operations.

For this reason, we partnered with General Electric to contribute almost $3 million to three universities, to develop a training program for state regulators. The curriculum includes sessions on geology, petroleum engineering, environmental management and best practices.

The goal is to provide regulators with access to the latest technology, and operational expertise, to support their oversight of unconventional resource development.

These universities – the University of Texas, the Colorado School of Mines, and Penn State – have started their training sessions already.

We need to make sure that energy development is regulated effectively. This ensures that development is being pursued according to industry best practices, and also strengthens public confidence in energy production across the U.S., and here in Appalachia.


This region has a long history of contributing to our nation's energy and economic security. This is the site of Drake’s Well, which sparked the U.S.’ first oil boom. It planted the seeds of our Industrial Revolution, has seen its economy transform to one based more on technology and innovation, and now is leading the transformation from energy scarcity to energy abundance.

We should all be very proud of what we’ve accomplished here, but not satisfied. We are at the very beginning of a very long journey. We must be advocates for policies that encourage a fair and competitive business climate, effective regulations, and ongoing development of the region's workforce. And we must be responsible and trusted stewards of the communities in which we operate.

We at XTO look forward to continuing to be a part of this journey, as we work together to ensure Appalachia’s continuing leadership position in shale development, and all of the benefits that it brings.

Thank you very much.