Exxon Mobil Corp's $30 billion takeover of XTO Energy Inc is a major vote of confidence in natural gas and the latest sign that the world's top oil companies are looking to invest more in the cleaner-burning fuel.
Gas prices across the world have slumped in 2009, largely due to a surge in U.S. output from unconventional gas companies like XTO. But global demand for natural gas is expected to surge back more than 50 percent by 2030, making it the fastest-growing major energy source of the next few decades and promising fat profits for reserve holders.
In anticipation of a demand surge, the oil majors have started opening their wallets for expensive gas projects like gas liquefaction plants and pricey gas shale wells.
This is about the next 10 to 20 to 30 years of what we believe has now emerged as a very important part of the global resource portfolio, Exxon Mobil CEO Rex Tillerson said on a conference call with investors on Monday.
It's going to be important to meeting energy supply, and that's the real value creation that we see.
Exxon said last week it sees gas demand rising by an average of 1.8 percent a year over the next two decades, compared with 0.8 percent for oil, largely because power generation is set to grow faster than any other energy type to 40 percent of total primary energy demand by 2030.
The takeover gives Exxon a major position in so-called unconventional gas assets in North America, which include shale plays, where gas trapped in underground rock formations requires expensive and complex drilling techniques.
Investment bankers in the energy industry said the deal could spur more investment by oil majors and national oil companies into these unconventional plays.
The capital needs for this industry, in particular the unconventional resources, we believe are in excess of $1 trillion. If you look at the independent oil sector there is not enough market capitalization to develop all these shale resources, said David Rockecharlie, co-head of energy investment banking at Jefferies, who advised XTO on the deal.
The capital markets clearly have provided a lot of capital, but these major oil companies are the right place financially for future development of these shale plays.
Credit Suisse analyst Jonathan Wolff said in a research note that possible sellers in the industry include Devon Energy, EOG Resources and Southwestern Energy Co. Investment bankers said bidders could include top oil firms such as Royal Dutch Shell, BP, Chevron and ENI.
NO LONGER A SIDESHOW
Oil companies used to flare off much of the gas they found lingering in oil fields around the world, often seeing it as a low-value sideshow to the black gold they craved.
But tighter controls on wasteful burning of carbon-emitting fuels and the increasing appetite for natural gas as a fuel for generating electricity and heating has seen most oil companies sniffing around the globe for more.
Already, 40 percent of Royal Dutch Shell's daily production is natural gas, with France's Total not far behind on 38 percent in 2008. Around 37 percent of BP's global production was gas.
Shell is increasingly focusing on natural gas, the cleanest-burning fossil fuel. By 2012, natural gas will likely make up around half of our production, Shell Chief Executive Peter Voser said in Washington in October.
Increasing natural gas production and transportation by liquefying it and shipping the LNG to global markets means that more natural gas will be available to displace coal as the fuel for power plants.
Many of the top international oil companies have already started to make blockbuster investments in liquefaction plants in order to be able to move gas more easily around the world.
The Rasgas 3 project in Qatar, being developed by Exxon Mobil and Qatar Petroleum, required an investment of about $14 billion, according to the Rasgas website.
Woodside Petroleum's Pluto LNG project in western Australia, expected to be making shipments in 2011, will cost about $11 billion. Shell's Qatargas 4 LNG project, planned for late 2010, is expected to cost about $8 billion.
BP estimates the 6,500 trillion cubic feet (tcf), or 1.2 trillion barrels of oil equivalent, of already proven gas reserves is enough to meet current demand levels for at least 60 years. Reserves of crude oil are widely expected to be exhausted in the latter half of this century.
The global hunt for gas from unexplored fields and within the world's vast coal deposits or sedimentary rocks could contribute another 4,000 tcf to gas resources over the next few years, taking the world total up to roughly 100 years of consumption at current rates, BP estimates.
(Editing by Lisa Shumaker, Gary Hill)