A few weeks ago, Energy behemoth Exxon/Mobil purchased domestic natural gas supplier XTO, a company heavily invested in the Pennsylvania shale gas business.

On Wall Street, XTO share prices rose following the merger announcement. Indeed, the value of many companies involved in domestic shale exploration surged on the news of the purchase. The XTO purchase is the most significant acquisition Exxon has made since they purchased Mobil back in 1999. What does this thirty-one billion-dollar mega-merger mean for Pennsylvanians?

First and foremost, Exxon’s buy-in to the natural gas business it is a strong indication that the biggest energy company on the planet believes that in the near future, America will be powered by domestically produced natural gas. But if the future of Marcellus shale exploration looked so bright to Exxon executives, why were XTO executives willing to sell their company?

Times are tough in the energy industry. Low natural gas prices, a continuing tight credit market for businesses and --- most important of all ---- unanswered environmental questions, have conspired to make Marcellus shale production a financially risky venture for smallish gas companies.

Prices of natural gas have plunged to less than $6 per million BTU from a 2008 high of $13. The original business plan of smaller gas companies like XTO and others such as Devon Energy, Chesapeake, Anadarko Petroleum and Petrohawk, assumed that gas prices would remain high, providing them a generous stream of working capital to further develop shale gas fields. With natural gas prices now much lower, and expected to remain depressed for years, the companies don’t have the cashflow needed to fully develop and exploit the gas fields.

An additional problem for the smaller companies is credit. Business credit markets remain morbid following the financial crash of 2008 and gas companies are hard-pressed to find lenders willing to cough-up the large sums of cash needed to develop the shale fields.

Exxon’s situation is very different. The company is sitting on billions of dollars of cash and is more than able to ride-out the current economic downturn while continuing to make the capital investment needed to finance the expensive infrastructure that will be needed to produce and bring Pennsylvania shale gas to market.

Exxon is not the only big multinational energy company sniffing around Pennsylvania gas fields. French energy giant Total SA announced they are interested in acquiring companies involved in Marcellus shale exploration.

With the entrance of the energy giants into Marcellus gas development, the future of natural gas production in Pennsylvania seems assured, right? Well, maybe.

There remains one significant hurdle to large-scale Marcellus Shale gas production: determining the environmental cost of shale gas production. In Pennsylvania, that means making sure the state's water resources are not at risk.

Since early November, when Chesapeake Gas withdrew from drilling test wells on New York watershed lands, an awareness has begun to emerge that any gas exploration in the Northeast will be subject to increasing environmental scrutiny that will surpass what domestic drillers in Texas and other western states previously faced. Thus far, preliminary research into the long-term impact of extracting natural gas using hydraulic fracturing (fracting) on regional water quality is raising alarms among regulatory and environmental watchdog groups.

The energy industry successfully argued that the federal law protecting drinking water should not be applied to hydraulic fracturing. In 2005, Congress passed a law prohibiting such regulation. However, if ongoing environmental studies detect deterioration of water quality caused by the fracting process, expect Congress to revisit the issue.

Because of unanswered environmental questions, Exxon is hedging their bet on Marcellus gas exploration. Within the 76 page agreement that outlines the terms of the Exxon-XTO merger is a clause that allows Exxon to pull out of the deal “…if Congress changes a law that makes “hydraulic fracturing or similar processes ... illegal or commercially impracticable.”

The impact of fracting on regional water resources, and the subsequent cost of any mitigation, will determine the dollar cost per million BTU of Marcellus gas. Until that cost is determined, the financial viability of Marcellus gas production remains uncertain.

Perhaps it’s no wonder that the day after the proposed merger was publicly announced, Exxon’s stock fell almost 5%.