There’s one thing that major oil companies can’t get enough of these days–unconventional gas.
Virtually every deal that big oil has cut in recent months focused on resources of this type. ExxonMobil agreed in December to pay around $30 billion for XTO Energy, which specializes in extracting gas trapped in shale rock in the U.S. France’s Total agreed in January to acquire a quarter of Chesapeake Energy’s huge shale gas resource in Texas for $2.25 billion. Last week, BP cut a much smaller deal with Lewis Energy for half of its Texas shale territory.
In the latest deal, announced yesterday, Royal Dutch Shell and Petrochina have jointly offered A$3.26 billion for Arrow Energy, a producer of natural gas from coal seams in Australia. [Read our coverage here.]
There are several good reasons for this to be happening.
- Getty Images
- A BP oil refinery
A big increase in unconventional gas production is likely to be a “game-changer”, according to BP Chief Executive Tony Hayward. The U.S. shale gas boom has already dramatically altered the energy supply picture for North America, cutting the need for domestic gas imports, driving a surplus of sea borne liquefied natural gas cargoes to Europe and weakening the dominance of Europe’s largest gas supplier, Russia’s Gazprom. The major oil companies don’t want to be sitting on the sidelines as this dramatic change sweeps through energy markets creating new opportunities.
Secondly, a big increase in natural gas supplies, which are less carbon intensive than oil and coal, could provide big oil a vital bridge to a low carbon future. The growing likelihood of ever-tighter emissions caps in the developed world will make carbon-intensive parts of their businesses, such as oil refining or tar sands, less competitive. This threat could be offset by increasing their gas output. Natural gas already makes up just over half the hydrocarbon production of Shell and other companies are moving in the same direction.
Third, the method of producing these reserves plays to the strengths of major oil companies. Releasing gas trapped in shale rock or coal seams requires the drilling of thousands of wells, the management of large water resources and constant incremental improvements in technology and economies of scale to maintain competitiveness. This is the kind of thing that modern oil companies excel at.
Finally, unconventional gas is one of the few new resources that is actually open to the major oil companies. They are largely shut out of the greatest prizes in the Middle East and have missed the boat in up and coming oil provinces like offshore Brazil or Ghana. The largest unconventional gas resources are located in areas that are open for business–North America, Australia and possibly Latin American and Europe. They may be less profitable than a big new oil discovery, but nevertheless are tempting targets for companies struggling to maintain their resource base.
This shopping spree may just be getting going.
