Natural gas natural alternative for oil giants

The bad news is we didn't hit oil," ran the old wildcatter's joke. "The good news is we didn't find gas."

Potentially dangerous and always more difficult to manage than pouring liquid into a barrel, natural gas used to give oil companies a headache. Now gas is dominating the thoughts of western oil bosses and, increasingly, their firms' portfolios.

Seven of the eight projects Exxon Mobil completed last year were for natural gas developments. Two of the three it has scheduled for this year are also gas-related. Royal Dutch Shell says that by 2012, half its output will come from gas.

The current high oil price still makes crude the prize for any self-respecting major. But the West's big oil companies are growing gassier.

In part, this is because oil is getting harder to find, for geological and political reasons. Global oil production will peak within a few decades, if not before. And the remaining "easy oil," which can be extracted without fuss or expense, is increasingly out of bounds for western firms.

Almost 90 per cent of it is in the hands of national oil companies which have, with few exceptions, blocked western giants from their riches. This is forcing Big Oil into trickier and pricier areas, notably deepwater fields such as those in the Gulf of Mexico and off Africa's west coast, and unconventional reserves such as Canada's tarsands. Hence the appeal of gas, and a string of deals in Australia and America.

In March, Shell joined PetroChina to buy the Australian assets of gas specialist Arrow Energy for AUS$3.5 billion ($3.2 billion). ConocoPhillips paid $5 billion in 2008 for another Australian gas firm, Origin Energy.

Chevron is spending almost $40 billion to build a liquefied natural gas (LNG) plant off the coast of Australia, one of more than a dozen such projects in the country. Almost all of them include a western major as a leading shareholder.

In America, meanwhile, the majors are being lured by the opening of vast new unconventional gas reserves, which have scarcely begun to be tapped.

In May, Shell said it would pay $4.7 billion to buy East Resources, a shale-gas firm with access to the Marcellus shale, a large deposit of gas close to the markets of the country's East Coast.

Total and BP have joined projects started by Chesapeake Energy, a shale-gas producer long on expertise and short on cash. And in December, Exxon Mobil offered $41 billion for XTO Energy, another shale-gas specialist. That deal, approved on June 25, will give rise to another wave of asset-buying in the sector, says accountancy firm Ernst & Young.

Gas is also getting cheaper to develop. The cost of gas developments has come down -- that of an offshore floating LNG terminal has fallen by half in the past two years, for example -- while the growing inaccessibility of easy oil has made oil projects more expensive.

Some of the majors' biggest oil developments look frighteningly complex. The Kashagan oilfield in the Caspian Sea, one of the biggest discoveries in decades, was due to enter production in 2005.

Now the target is 2012 and the cost could exceed $100 billion. The disaster at BP's well in the Gulf of Mexico may increase costs as regulations are tightened.

And although the national oil companies have mostly excluded the majors from their oil projects, foreign expertise and capital is needed for complex natural gas projects.

Qatar is now the world's dominant LNG exporter, but it got there through partnerships with the majors. Iran, by contrast, has failed to make a viable export business out of its reserves, the second-largest in the world, thanks to withdrawal of western money and know-how.

Russia's Gazprom needed Shell to get its LNG business started on Sakhalin Island. It selected Total, another LNG expert, to help develop the huge Shtokman field in the Barents Sea.

The costs of natural gas developments vary wildly. An LNG export plant can cost tens of billions of dollars, rivaling oil projects in expense and complexity. Eni, an Italian oil giant, has joined Russia's Gazprom in a project to pipe gas from Russia to Central Europe. Their investment could exceed $20 billion.

At the other end of the scale, new shale-gas fields expand incrementally, with the addition of small wells costing as little as $5 million each. But both kinds of investment are far less exposed to the vagaries of the commodity markets than big oil projects. LNG plants go ahead only after the developer secures enough long-term contracts, some lasting 20 years or more, to underpin the project.

Oil projects look increasingly pricey and risky and they will always depend on a volatile oil market. Natural gas offers long-term reserves growth, relatively stable returns and lower risk (though there are, to be fair, environmental concerns about possible contamination of water sources as a result of shale-gas extraction).

Most of all, however, the majors' dash for gas is a bet on demand and climate-change policy. The International Energy Agency says oil consumption has peaked in the West and could rise globally by just 0.5 per cent a year to 2030. But Exxon Mobil expects gas consumption to be 55 per cent higher in 2030 than it was in 2005.

Even this could be conservative. Philippe Boisseau, head of Total's gas and power division, says the potential for gas consumption in China, for example, is much bigger than assumed. Only a lack of import infrastructure is constraining demand growth there, he argues.

Industrialization and electrification in the developing world will require a lot of new power stations. If governments begin to punish the fuels that emit the most carbon dioxide, a good portion of that electricity will come from gas.

A $30-a-ton carbon tax would make gas, which is about half as polluting as coal when burned, the preferred fuel for new power stations. Double the tax, and gas would remain competitive with nuclear and wind power, too, says Exxon Mobil.

Efforts by the world's governments to cut carbon emissions have stalled, but the oil majors are voting with their drill bits. The future, they believe, will be less oily and a lot gassier.

Republished from the Winnipeg Free Press print edition July 5, 2010 B6