For Big Oil, Future Profits Lie in Big Gas Business
As competition for scarce petroleum resources intensifies and as oil-rich nations limit access to reserves, the multinational integrated majors are beginning to evolve from Big Oil into Big Gas.
Companies like Chevron Corp. (CVX), Exxon Mobil Corp. (XOM), ConocoPhillips (COP) and Marathon Oil Corp. (MRO) are positioning themselves through multibillion-dollar investments in the Middle East, West Africa and Alaska to dominate an emerging gas market. New techniques in natural gas liquefaction - necessary to transport seaborne cargoes - and control over distribution in developed world markets still give these companies an edge over Asian competitors and budding national oil champions. In the short term, Western companies can also extract handsome profits from U.S. gas operations, taxed at relatively low rates compared to production in places like Venezuela and Russia, where nationalist governments are getting a bigger share of the revenue pie.
But challenges remain, especially from state-owned competitors such as OAO Gazprom, which enjoys a virtual monopoly over Russia's immense gas reserves and has thumbed its nose at Western overtures for the joint development of an enormous gas and condensate field in the Barents sea. The creation of an effective gas cartel along the lines of the Organization of Petroleum Exporting Countries could also tilt the balance in favor of producing nations. Rising costs are making the development of complex LNG infrastructure pricier.
"We have a total of 140 trillion cubic feet of unrisked natural gas resources," said George Kirkland, Chevron's head of exploration, production and gas activities, at the company's annual analyst meeting in March. "With such a significant resource development opportunity, natural gas will play a larger role in our future production. Over the next 20 years natural gas will grow from 30% to nearly 45% of our daily production."
In 2005, 94% of the 1.7 billion barrels of oil equivalent that Exxon added to its reserve base came from its natural gas reserves in Qatar.
A New, Profitable Ball Game
Natural gas is becoming an increasingly important supply source, with demand growing at 1.7% annually through 2030, compared to 1.4% for oil, according to Exxon Mobil's 2006 energy outlook. Most of the demand will be driven by power generation, and the growth rate will be the fastest - 2.5% per year - in developing countries rapidly catching up with Western living standards. The international market for liquefied natural gas will expand to 70 billion cubic feet per day in 2030 from 15 billion cubic feet per day in 2000, Exxon says.
Large integrated oil companies are well positioned to lead the titanic effort of creating of a global gas market, with all that it implies - new tankers, expensive liquefaction infrastructure in producing countries, re-gasification plants and pipelines in consuming regions. "This is a new ball game," says Fadel Gheit, a New York-based analyst with Oppenheimer & Co.
Marathon, Exxon, Chevron and Conoco are currently investing billions in LNG trains in Equatorial Guinea, Angola, Nigeria and Qatar, as national oil companies lack "the expertise, the money or the patience to develop these projects," says Gheit. "This is one of the exclusive clubs that large integrated oil companies continue to rule."
But the building of all this infrastructure will take decades. In the meantime, growing demand will translate into rising prices in isolated markets like the U.S. - boosting profits for companies like ConocoPhillips, the largest natural gas producer in North America after its 2005 acquisition of Burlington Resources. "That was a very smart strategic acquisition," says Gheit.
Foreign governments' attempts to capture more hydrocarbon revenue by raising taxes and royalties will also help North American gas operations remain more profitable than oil exploitation abroad, and companies are recognizing that, says Gheit.
Geopolitics, Cost Issues
Western majors, however, have to tread carefully in some gas-rich countries. Qatar, which has become the world's largest LNG exporter, is keen on allowing the likes of Exxon and Chevron exploit its gas fields, but other countries are not so open. State-owned OAO Gazprom lords over Russia's massive gas reserves and has recently chosen to develop some of the most attractive areas by itself, rejecting bids by Chevron, Statoil ASA (STO) and ConocoPhillips to partner in the technically-complex Shtokman project. The companies remain in discussion with Gazprom, however, to sign a contract that will allow them some participation.
Also, geopolitical instability makes investment difficult in Iran, which has about 15% of the world's gas reserves, yet fails to meet its export commitments.
Even Alaska, potentially a rich source of Arctic gas for the contiguous U.S., remains an issue, as Big Oil has been unable to reach an agreement with state authorities for the development of a long-delayed gas pipeline to the lower 48 states.
There's also the future danger of more cartels being formed. Iran and other countries have hinted strongly at the creation of an OPEC-like organization to control natural gas production and prices. While that organization is unlikely to materialize while export capacity remains insufficient, it could have a small impact on production for the majors "down the road," said John S. Herold analyst John Parry.
Costs, driven up by high worldwide demand in labor and materials, also worry analysts. "LNG facilities cost a lot more money than only a few years ago because cost inflation in the oil business," Gheit says.
Copyright (c) 2007 Dow Jones & Company, Inc.