Natural Gas Is Likely to Change Big Oil's Focus

HOUSTON (Dow Jones), Mar. 11, 2010

Big Oil is bent on making natural gas the core of its business, arguing that its abundance, cheapness and environmental friendliness will change the energy landscape forever. The fuel seems bound to reshape an industry known for its booms and busts into a more predictable, staid creature.

Companies such as Exxon Mobil Corp. (XOM), Royal Dutch Shell PLC (RDSB, RDSA, RDSB.LN) and ConocoPhillips (COP) are making the transition from dealing mostly in oil, a commodity that's increasingly scarce and difficult to produce, to natural gas, a fuel that's suddenly become ubiquitous. Their profits, which can reach unfathomably high levels during good times, are likely to go down accordingly, executives and analysts say. So will the companies' adventurous ventures in the deep waters and in dangerous regions of the globe.

The industry now needs to learn the shale gas business, which has played a major role in spurring the transition and which can only be profitable if it runs like an assembly line.

"It's a manufacturing industry, and it's not at all what we're doing at Total," said Patrick Pouyanne, senior vice president for strategy business development at Total S.A. (TOT, FP.FR), which recently entered into a shale gas joint venture in the U.S. and is acquiring shale positions in France, Denmark, Argentina and North Africa. Until now, Total's focus has been on projects such as wells in deep waters in Africa and in the North Sea, each worth $50 million and each project unique.

"Here in this (shale) business you have to be more like a Ford (Motor Co.). ... This is what we want to understand and obviously we do not have these types for oil, but it's maybe the future of the industry," he said in an interview on the sidelines of the IHS Cambridge Energy Research Associates conference in Houston.

The unexpected bounty of natural gas became evident in recent years as independent U.S. energy companies found profitable ways to tap tight rock formations known as shales. U.S. gas reserves, once in seemingly permanent decline, doubled in the past few years, according to IHS CERA. Since 2008, several Big Oil companies have plunged into North American shale gas -- culminating with the announcement last December of ExxonMobil's agreement to buy energy independent XTO Energy Inc. (XTO) for $31 billion.

Exxon's move "signals that gas is the way to go," said Fadel Gheit, a New York-based analyst with Oppenheimer & Co. In a way, international oil companies are changing their business model "because they have no choice," Gheit said.

National oil companies such as Brazil's Petroleo Brasileiro S.A. (PBR, PETR4.BR), or Petrobras, and Saudi Aramco, which control access to some of the best crude oil deposits, increasingly call the shots there, relegating Western companies to a minor role. In the gas business, which requires big investments in infrastructure while returning more moderate profits, the larger companies can use their size and deep pockets to gain an edge.

Big Oil's venture into the gas business could also enable utilities and power providers to engage in longer-term contracts for the commodity with full knowledge that a powerful, reliable company is in charge of securing supply.

Major oil companies, which posted some of the largest corporate profits in history during the recent oil price boom, will have to get used to a more moderate lifestyle amid a perpetual glut of supplies, though. "It's almost a Pandora's box that opened up," said Gheit.

Copyright (c) 2010 Dow Jones & Company, Inc.

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